<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ................ to..................
Commission File No. 0-27894
COMMERCIAL BANCSHARES, INC.
(Name of small business issuer in its charter)
OHIO ............34-1787239.............
(State or other jurisdiction of -----------------------------------
incorporation or organization) (I.R.S. Employer Identification No.)
118 S. SANDUSKY STREET
Upper Sandusky, Ohio 43351
(Address of principal executive offices) (Zip code)
(419) 294-5781
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $12.50 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1996 were: $13,949,190
At February 1, 1997, there were issued and outstanding 347,152 of the Issuer's
Common Shares.
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of February 1, 1997 was $18,999,002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Issuer's Definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held April 9, 1997 are incorporated by reference into Part
III.
Transitional Small Business Disclosure Form (check one):
Yes [ ] No [X]
This document, including exhibits, contains 49 pages.
The Exhibit Index is on page 45.
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1.
<PAGE> 2
INDEX
FORM 10-KSB
<TABLE>
<CAPTION>
Page(s)
-------
PART I
- ------
<S> <C> <C>
ITEM 1. Description of Business 3-4
ITEM 2. Description of Property 4-5
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
- -------
ITEM 5. Market for Common Equity and Related Shareholder Matters 6-7
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation 7-20
ITEM 7. Financial Statements 21-43
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 44
PART III
- --------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons -
Compliance with Section 16(a) of the Exchange Act 44
ITEM 10. Executive Compensation 44
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 44
ITEM 12. Certain Relationships and Related Transactions 44
ITEM 13. Exhibits List and Reports on Form 8-K 45
SIGNATURES 46
EXHIBITS 47-49
</TABLE>
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2.
<PAGE> 3
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS
- --------
In February 1995, Commercial Bancshares, Inc. (The "Corporation") received
approval from the Board of Governors of the Federal Reserve System to become a
bank holding corporation by acquiring all the voting shares of common stock of
The Commercial Savings Bank (the "Bank"). The principal business of the
Corporation presently is to operate the Bank, which is a wholly owned
subsidiary, and its principal asset. The Corporation and the main office of the
Bank are located at 118 South Sandusky Avenue, Upper Sandusky, Ohio 43351. The
Corporation's telephone number is (419) 294-5781.
Although wholly owned by the Corporation, the Bank functions as an independent
community bank. The Bank was organized on April 20, 1920 as a state-chartered
Bank and incorporated as "The Lewis Bank & Trust Corporation" under the laws and
statutes of the State of Ohio. An amendment to the articles of incorporation on
February 8, 1929 changed the name of the Bank to The Commercial Savings Bank.
The Bank provides customary retail and commercial banking services to its
customers, including acceptance of deposits for demand, savings and time
accounts and servicing of such accounts; commercial, consumer and real estate
lending, including installment loans; Individual Retirement Accounts (IRA's);
safe deposit facilities and night depository facilities. The Bank is a member of
the Federal Reserve System, is insured by the Federal Deposit Insurance
Corporation and is regulated by the Ohio Division of Financial Institutions.
The Bank grants residential, installment and commercial loans to customers
located primarily in Wyandot, Marion, Hardin and Hancock counties and the
surrounding area. Commercial loans are primarily variable rate and include
operating lines of credit and term loans made to small businesses primarily on
the basis of the ability to repay the loan from the cash flow of the business.
Such loans are typically secured by business assets, such as equipment and
inventory, and occasionally by the business owner's personal residence. When the
borrower is not an individual, the Bank generally obtains personal guarantees of
the business owner. Commercial real estate loans are primarily secured by
borrower-occupied business real estate, and are also dependent on the ability of
the related business to generate adequate cash flow to service the debt. Such
loans primarily carry adjustable interest rates. Residential real estate loans
are made with primarily fixed rates and are secured by the borrower's residence.
Such loans are made on the basis of the borrower's ability to make repayment
from employment and other income. The Bank generally makes these loans in
amounts of 95% or less of the value of collateral. An appraisal is obtained from
a qualified real estate appraiser for substantially all loans secured by real
estate. Construction loans are secured by residential and business real estate
that primarily will be borrower-occupied upon completion. The Bank usually makes
the permanent loan at the end of the construction phase. Installment loans to
individuals include loans secured by automobiles and other consumer assets,
including second mortgages on personal residences. Loans secured by automobiles
are generated both by direct application from the customer and from the Bank's
purchase of indirect retail installment contracts from the dealers. Credit card
and overdraft protection loans are unsecured personal lines of credit to
individuals.
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3.
<PAGE> 4
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
The Corporation is not aware of any exposure to material costs associated with
environmental hazardous waste cleanup. Bank loan procedures require EPA studies
be obtained by Bank management prior to approving any commercial real estate
loan with such potential risk.
SUPERVISION AND REGULATION
- --------------------------
REGULATION OF THE CORPORATION: The Corporation is a registered bank holding
company organized under the laws of the State of Ohio on March 22, 1994. As
such, the Corporation is subject to the laws of the State of Ohio and is under
the jurisdiction of the Securities Act of 1933, as amended, and various
Securities and Exchange Commission rules and regulations relating to the
offering and sale of its securities. Commercial Bancshares, Inc. is also subject
to regulation under the Bank Holding Company Act of 1956, as amended. The
Federal Reserve Board regulates bank holding companies and may examine or
inspect the books and records of the Corporation and the Bank.
Commercial Bancshares, Inc. is not aware of any current recommendations by
regulatory authorities that, if they were to be implemented, would have a
material effect on the Corporation.
REGULATION OF THE BANK: The Bank is chartered in the State of Ohio and regulated
by the Ohio Division of Financial Institutions. Further, the Bank's depositors
are insured by the Federal Deposit Insurance Corporation. These regulatory
agencies have the authority to examine the books and records of the Bank, and
the Bank is subject to their rules and regulations.
EMPLOYEES
- ---------
Currently the Bank has 93 full-time employees and 17 part-time employees. The
Corporation does not have any full- or part-time employees.
ITEM 2 - DESCRIPTION OF PROPERTY
The Corporation's headquarters and the Bank's main office is located at 118
South Sandusky Avenue, Upper Sandusky, Ohio, in Wyandot County. The building is
used exclusively by the Corporation and the Bank.
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4.
<PAGE> 5
ITEM 2 - DESCRIPTION OF PROPERTY (Continued)
All of the offices listed below are owned by the Bank and are free and clear of
any encumbrances.
<TABLE>
<CAPTION>
Location Description
-------- -----------
<S> <C>
1. Main Office Two story building built in the early 1900's
118 S. Sandusky Ave. and remodeled in 1991.
Upper Sandusky, OH 43351
2. North Drive-In One story drive in office opened in 1981
400 N. Sandusky Ave.
Upper Sandusky, OH 43351
3. Carey Office One story building built and opened in
128 S. Vance St. 1973.
Carey, OH 43316
4. Harpster Office One story building purchased in 1978.
17480 Cherokee St.
Harpster, OH 43323
5. Marion Barks Road Office One story building purchased, renovated
170 Barks Road East and opened in 1988.
Marion, OH 43302
6. Marion Jamesway Office One story building constructed and opened
279 Jamesway in June, 1996.
Marion, OH 43302
7. Kenton Office One story building purchased from Savings
935 E. Columbus St. of America in 1992.
Kenton, OH 43326
8. Findlay Office One story building purchased from Savings
1660 Tiffin Ave. of America in 1992.
Findlay, OH 45840
</TABLE>
The Bank also operates an intermittent office inside The Marion Steel
Corporation in Marion opened in 1990 and an intermittent office inside the
Rotary Towers Nursing Facility in Marion opened in June 1991. The Corporation
neither owns or leases any properties.
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5.
<PAGE> 6
ITEM 3 - LEGAL PROCEEDINGS
Corporation management is aware of no pending or threatened litigation in which
the Corporation or its subsidiary Bank faces potential loss or exposure which
will materially affect the consolidated financial statements or involves a claim
for damages exceeding ten percent of the current assets of the Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the Corporation's fiscal year ended December 31, 1996.
PART II
ITEM 5- MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Corporation, and of the Bank preceding formation of the
Corporation, trades infrequently and is not traded on any established securities
market. Parties interested in buying or selling the Corporation's stock are
generally referred to Community Banc Investments, New Concord, Ohio (CBI).
During the fourth quarter of 1996, two additional market makers have taken
active positions in the Corporation's stock; those being Sweney Cartwright &
Co., Columbus, Ohio and The Ohio Company, Marion, Ohio.
For 1996 and 1995, bid and ask quotations were obtained from CBI which makes a
limited market in the Corporation's stock. The quotations are inter-dealer
prices, without retail markup, markdown, or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
1996 (1) (2) Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 45.60 $ 47.00 $ 48.80 $ 51.00
2nd Qtr. 47.00 50.00 51.00 52.00
3rd Qtr. 50.00 51.00 52.00 53.00
4th Qtr. 51.00 56.00 53.00 58.00
1995 (1) (2) Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
1st Qtr. $40.00 $ 40.00 $43.20 $ 43.20
2nd Qtr. 40.00 40.80 43.20 44.00
3rd Qtr. 40.80 41.60 44.00 44.80
4th Qtr. 44.00 45.60 47.20 48.80
<FN>
(1) All information presented above relates to the Corporation for the
period since its formation and to the Bank for the periods prior
to formation of the Corporation.
(2) Amounts have been restated for the effect of the 25% stock split
paid March 31, 1996.
</TABLE>
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6.
<PAGE> 7
ITEM 5- MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(Continued)
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for the Corporation's stock, these prices
may not reflect the prices at which the stock would trade in an active market.
On February 14, 1996, the Board of Directors of Commercial Bancshares, Inc.
approved a 1 for 4 stock split, effected as a dividend, payable on March 31,
1996 to shareholders of record on March 15, 1996, issuable from the
Corporation's authorized shares.
The Corporation has 347,152 authorized and outstanding shares of common stock
held by approximately 1,300 shareholders as of December 31, 1996. The
Corporation has paid cash dividends in June and December of each year, resulting
in a total amount of $2.00 per share for 1996 and $1.60 per share for 1995,
restated for the stock split.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
Net income in 1996 of $1,380,781 represents a 18.2% decrease from the net income
of $1,687,489 in 1995. Earnings per share decreased proportionately from $4.86
in 1995 to $3.98 in 1996. The major factors which have influenced these results
are discussed below.
NET INTEREST INCOME
Net interest income, the primary source of earnings for the Corporation, is the
amount by which interest and fees on loans and investments exceed the interest
cost of deposits and other borrowings to fund them. Changes in the mix and
volume of earning assets and interest bearing liabilities and their related
yields and interest rates have a major impact on earnings. Management attempts
to manage the repricing of assets and liabilities to achieve a stable level of
net interest income and minimize the effect of significant changes in the market
level of interest rates. Management is active in pricing and promotion of loan
and deposit products as well as closely monitoring the Corporation's investment
securities classified as available for sale.
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7.
<PAGE> 8
NET INTEREST INCOME (Continued)
The interest rate sensitivity gap (GAP) table below indicates that, as of
December 31, 1996, rate sensitive liabilities exceed rate sensitive assets in
the one year or less time horizon by approximately $33,138,000. Management
believes this places the Corporation in a desirable position for 1997 as rates
are projected to remain relatively flat and possibly decline slightly. With this
in mind management desires liabilities to reprice faster than rate sensitive
assets in this rate environment. For purposes of the GAP table, management has
included passbook savings and NOW checking accounts in the one year time frame.
These deposits were not historically considered rate sensitive, however, with
the dramatic decrease in rates in 1992 and 1993 management did adjust the rates
paid on these accounts and began to include these deposits in the one year time
window which has a significant impact on the GAP position. If rates rise in the
future these deposit products will rise but only to historical levels which have
been among the most inexpensive products offered by the Bank. In addition, these
deposit products are not tied to an external index which give management
flexibility in timing future rates increases to these products.
INTEREST RATE SENSITIVITY GAPS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
One Over
One Year through five
or less five years years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Assets
Loans (a) $ 49,986 $ 40,157 $ 26,012 $ 116,155
Securities (a) 20,072 995 30,049 51,116
Federal funds sold 210 210
------------ ------------ ------------ ------------
Rate-sensitive assets (RSA) 70,268 41,152 56,061 167,481
Liabilities
Interest-bearing demand (b) 34,270 34,270
Savings (b) 19,908 19,908
Interest-bearing time 49,228 48,101 245 97,574
------------ ------------ ------------ ------------
Rate sensitive liabilities (RSL) 103,406 48,101 245 151,752
------------ ------------ ------------ ------------
Period GAP (c) $ (33,138) $ (6,949) $ 55,816 $ 15,729
============ ============ ============ ============
Cumulative GAP $ (33,138) $ (40,087) $ 15,729
============ ============ ============
% of total assets (18.31)% (3.84)% 30.84%
============ =========== ============
% rate sensitive assets/rate sensitive
liabilities 67.95% 85.55% N/A
============ ========== ============
<FN>
(a) Loans and mortgage-backed securities are assumed to adjust based on their
contractual terms, with no assumptions as to repayments.
(b) Management has included these accounts in the one year or less time horizon
based on past experience with rate adjustments on these accounts.
(c) GAP is defined as rate sensitive assets less rate sensitive liabilities and
may be expressed in dollars or as a percentage.
</TABLE>
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8.
<PAGE> 9
NET INTEREST INCOME (Continued)
While net income for 1996 showed a decline, net interest income did show an
increase of $147,853 or 2.3%. While the volume of both earning assets and
interest-bearing liabilities increased in 1996, differences in rates and deposit
mix served to largely offset the impact to net interest income. The average
yield on earning assets declined from 8.52% in 1995 to 8.43% in 1996. The major
factors in this decrease were a decrease in the securities portfolio to fund
loans and a decrease in the yield on loans. Management continued its emphasis on
consumer loans which is reflected in the growth in this portfolio. To remain
competitive loans were priced very aggressively and an overall decline in loan
pricing was seen in 1996. In addition, runoff did occur in the commercial loan
portfolio in the fourth quarter of 1996 in the amount of $2,000,000. Management
does not anticipate further runoff in this portfolio and the Bank has
strategically targeted growth in the commercial area for 1997. As previously
mentioned, a decline was seen in the investment portfolio to fund loan growth
which caused a softening of the portfolio yield as bonds with higher yields than
the current rate environment were sold. The yield decline in earning assets was
offset to only a small degree by a further decline in the yield on interest
bearing liabilities, from 4.59% in 1995 to 4.52% in 1996.
Management continues to closely monitor net interest income, while maintaining
competitive loan and deposit rates in the markets we serve. Although no one can
accurately predict future movement in interest rates, management expects a
continued stable rate environment for 1997.
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9.
<PAGE> 10
NET INTEREST INCOME (Continued)
The following tables further illustrate the impact on net interest income of
changes in average balances and yields of the Corporation's assets and
liabilities.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------1996---------------- -----------------------1995---------------
Average Income/ Average Average Income/ Average
Balance (4) Expense Yield Balance (4) Expense Yield
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 2,516,161 $ 126,521 5.03% $ 3,232,625 $ 187,735 5.81%
Scurities
Taxable (1) 30,940,921 1,976,743 6.27 41,669,807 2,850,949 6.79
Tax exempt (1 and 2) 14,112,634 1,149,061 8.17 10,918,420 977,071 9.33
Loans (3) 108,816,451 9,969,926 9.16 94,559,029 8,782,809 9.29
-------------- ------------ ------ -------------- ------------ ------
Total earning assets 156,386,167 13,222,251 8.43% 150,379,881 12,798,564 8.52%
------------ ====== ------------ ====
Other assets 11,823,200 10,705,276
-------------- --------------
Total assets $ 168,209,367 $ 161,085,157
============== ==============
Deposits
Interest-bearing demand
deposits $ 35,860,502 977,788 2.73% $ 35,473,974 1,137,500 3.21%
Savings deposits 20,679,680 561,395 2.71 20,343,562 599,652 2.95
Time deposits 82,724,379 4,749,173 5.74 77,468,590 4,381,004 5.66
Short-term borrowed funds 807,820 47,157 5.84
-------------- ------------ ------ -------------- ------------ ----
Total interest bearing
liabilities 140,072,381 6,335,513 4.52% 133,286,126 6,118,156 4.59%
------------ ====== ------------ ====
Noninterest bearing demand 13,267,940 14,417,329
Other liabilities 822,670 702,702
Shareholders' equity 14,046,376 12,679,000
-------------- --------------
Total liabilities and
shareholders' equity $ 168,209,367 $ 161,085,157
============== ==============
Net interest income $ 6,886,738 $ 6,680,408
============ ============
As a percentage of earning
assets:
Interest income 8.43% 8.52%
Interest expense 4.04 4.07
------ -------
Net interest income 4.39% 4.45%
====== =======
<FN>
(1) Average balance is computed using the carrying value of securities. The
average yield has been computed using the historical amortized cost
average balance for available for sale securities.
(2) Income is computed on a fully taxable equivalent basis utilizing a 34% tax
rate. The amount of such adjustments was $390,682 and $332,204 for 1996
and 1995, respectively.
(3) Nonaccrual loans are included in the average balances presented.
(4) Average is a daily average balance.
</TABLE>
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10.
<PAGE> 11
NET INTEREST INCOME (Continued)
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase/(Decrease) Increase/(Decrease)
------------------- -------------------
Change Change Change Change
Total due to due to Total due to due to
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ (61,214) $ (38,131) $ (23,083) $ 88,145 $ 44,376 $ 43,769
Securities
Taxable (874,206) (667,848) (206,358) 763,930 444,030 319,900
Tax exempt (1) 171,990 304,597 (132,607) 27,456 38,676 (11,220)
Loans (2) 1,187,117 1,307,770 (120,653) 557,911 (376,717) 934,628
---------- ---------- ---------- ---------- ------------ -----------
Total earning assets 423,687 906,388 (482,701) 1,437,442 150,365 1,287,077
---------- ---------- ---------- ---------- ------------ -----------
Deposits
Interest-bearing demand deposits (159,712) 12,268 (171,980) (62,003) (111,131) 49,128
Savings deposits (38,257) 9,772 (48,029) (31,618) (17,583) (14,035)
Time deposits 368,169 300,909 67,260 1,416,197 393,344 1,022,853
Short-term borrowed funds 47,157 47,157
---------- ---------- ---------- ---------- ------------ -----------
Total interest bearing liabilities 217,357 370,106 (152,749) 1,322,576 264,630 1,057,946
---------- ---------- ---------- ---------- ------------ -----------
Net interest income $ 206,330 $ 536,282 $ (329,952) $ 114,866 $ (114,265) $ 229,131
========== ========== ========== ========== ============ ===========
<FN>
For purposes of these tables, the changes in interest due to both volume and
rate have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the changes in each.
(1) Tax exempt income is adjusted to a fully tax equivalent basis utilizing a
34% tax rate.
(2) Nonaccrual loan balances are included for purposes of computing the rate and
volume effects although interest on these balances has been excluded.
</TABLE>
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11.
<PAGE> 12
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS
The allowance for possible loan losses on December 31, 1996 was $1,018,608 or
.88% of total loans. This compares to $996,131 or 1.01% of total loans in 1995.
The Corporation's policy is to charge off loans when, in management's opinion,
collection is in doubt. All loans charged off are subject to continuing review
and concerted efforts are made to maximize recovery.
The Corporation provided $205,800 to the allowance for loan losses in 1996, to
maintain the provision at an adequate level following charge-offs of $268,000
and recoveries of $85,000.
The following schedule presents analysis of the allowance for loan losses,
average loan data, and related ratios for the years ended December 31, 1996 and
1995.
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 996 $ 960
Loans changed off:
Commercial (72) (147)
Real estate (0) (1)
Installment (196) (47)
------------ ------------
Total loans charged off (268) (195)
------------ ------------
Recoveries of loans previously charged off:
Commercial 60 117
Real estate 0 --
Installment 25 14
------------ ------------
Total loan recoveries 85 131
------------ ------------
Net loans charged off (183) (64)
Provision charged to operating expense 206 100
------------ ------------
Balance at end of period $ 1,019 $ 996
============ ============
Ratio of net charge-offs to average loans outstanding for period 0.17% 0.07%
</TABLE>
The allowance for possible loan losses is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about a
specific borrower including their financial position and collateral values, and
other factors and estimates which are subject to change over time. To maintain
an adequate allowance management also considers the historical trend of
delinquencies and nonperforming loans as well as changes in the composition and
mix of the loan portfolio. The Bank's strategic plan for 1997 calls for growth
in loans of $22 million, primarily in consumer loans, and management will
continue to maintain an adequate provision in light of this aggressive growth.
The provision for loan losses charged to expense in 1997 is expected to exceed
the provision for 1996 as a result of continued growth and change in mix of the
loan portfolio.
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12.
<PAGE> 13
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS (Continued)
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan and related ratios.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
-------------------------------------------
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(In thousands of dollars) December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 424 43.93% $ 448 54.40%
Real estate 8 23.92 59 20.65
Consumer 445 32.15 340 24.95
Unallocated 142 N/A 149 N/A
----------- -------- ----------- ----------
Total $ 1,019 100.00% $ 996 100.00%
=========== ======= =========== ==========
</TABLE>
Nonaccrual loans totaled $237,000 at December 31, 1996 as compared to $222,000
at December 31, 1995. The policy for placing loans on nonaccrual status is to
cease accruing interest on loans when management believes that the collection of
interest is doubtful, or when loans are past due as to principal and interest
ninety days or more, except that in certain circumstances interest accruals are
continued on loans deemed by management to be fully collectible. In such cases,
the loans are individually evaluated in order to determine whether to continue
income recognition after ninety days beyond the due dates. When loans are
charged off, any accrued interest recorded in the fiscal year is charged against
interest income. The remaining balance is treated as a loan charged-off.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Standards (SFAS) No. 114 and No. 118 which requires recognition of loan
impairment. Loans are considered impaired if full principal and interest
payments are not anticipated. Impaired loans are required to be carried at the
present value of expected cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral if the loan is collateral dependent.
A portion or the allowance for loan losses is allocated to impaired loans.
Commercial loans and commercial real estate loans that are classified as
substandard or doubtful through the internal loan review process, and loans that
have been placed on nonaccrual status are evaluated for impairment on a
loan-by-loan basis. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans included residential first mortgage loans, home
equity, automobile and credit card loans.
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13.
<PAGE> 14
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS (Continued)
The following schedule summarizes impaired loans as of December 31, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
December 31
-----------
(In thousands of dollars) 1996 1995
---- ----
<S> <C> <C>
Impaired loans $ 45 $ 257
=========== ===========
Loans accounted for on a nonaccrual basis $ 45 $ 0
Accruing loans which are contractually past due 90 days or more as
to interest or principal payments 0 0
Loans which are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standard No. 15 (exclusive of loans
listed above) 0 0
----------- -----------
Total nonperforming loans $ 45 $ 0
=========== ===========
</TABLE>
Interest income recognized on impaired loans was $0 and $2,484 in 1996 and 1995,
respectively, all of which was recognized on the cash basis.
Another factor associated with asset quality is Other Real Estate Owned
("OREO"). OREO represents properties acquired by the Corporation through loan
defaults by customers. At December 31, 1996 the balance in OREO stood at
$1,150,000, representing the acceptance of a deed in lieu of foreclosure in late
1994. Other real estate is carried at the lower of cost or estimated fair market
value less estimated expenses to be incurred to sell the property.
NONINTEREST INCOME
Total noninterest income of $1,117,620 was 3.8% higher than the 1995 figure of
$1,076,972. This increase occurred despite the decrease in security gains from
$292,132 in 1995 to $69,425 in 1996. Management carefully monitors the
investment portfolio and gains are prudently taken as opportunities arise in
bonds available for sale. An additional contributor to noninterest income was
$198,598 in gains on sale of loans into the secondary real estate market. Of
this increase, $117,334 was a result of the Bank changing its method of
accounting for loan servicing right assets in accordance with SFAS 122. Under
the new accounting standard the basis of loans originated for sale in the
secondary market is allocated to loans, and to servicing rights retained, based
on their relative fair values. Servicing rights assets are amortized over the
estimated period of service fee revenue and are periodically evaluated for
impairment in value.
- --------------------------------------------------------------------------------
14.
<PAGE> 15
NONINTEREST EXPENSE
Total noninterest expense rose 11.4% in 1996. Customary merit increases to
employees contributed to the increase, however, there were two other significant
factors affecting the increase. First, due to rapid growth in the Marion market,
the Corporation opened its second full service office in Marion on Jamesway
Road. The increased expenses associated with the Jamesway office are reflected
in the noninterest expense area, however, in only six months of operation this
office contributed in excess of $ 6 million in both loans and deposits to the
Corporation which enhances the long-term profitability of the Corporation.
The second area of additional expense was alluded to in last year's discussion.
Legislation was passed by Congress and signed by the President assessing a
one-time premium to institutions with Savings Association Insurance Fund (SAIF)
deposits to bolster the deposit insurance fund. As a result of the 1992
acquisitions of the Findlay and Kenton offices of Savings of America, the
Corporation had approximately $29,000,000 in SAIF deposits that were effected by
this assessment. This one time premium was assessed on September 30, 1996 and
amounted to $154,011.
Because the Corporation has the lowest risk classification calculated by the
FDIC, no regular deposit premiums will be assessed in 1997. However, as a result
of the Deposit Insurance Funds Act of 1996, the Corporation, along with other
banks, will be required to pay additional assessment not associated with risk
classification. This will amount to an assessment of slightly more than $8,000
per calendar quarter and will be applied to payment on bonds issued to help
resolve the savings and loan failures of several years ago.
INCOME TAXES
Income tax expense of $371,515 in 1996 represents 21% of income before taxes as
compared to 25% in 1995. These effective tax rates are both lower than the
statutory rate of 34%, primarily as a result of the Bank's investment in
tax-exempt obligations from states and political subdivisions. Tax exempt income
from securities represented 5.9% and 5.2% of total interest income in 1996 and
1995.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew 8.8% to $180,960,972. Net loans increased $17,400,780 or 17.8%
while securities decreased $3,664,391 or 6.7%. Cash and cash equivalents
increased 5.8% from 1995 levels.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
LOANS
Management made the decision to continue its efforts in retail lending and the
results were significant. Consumer and credit card loans increased $16,958,003
or 83.2% from 1995 levels. The Corporation is active in the indirect loan
business which accounted for a substantial majority of consumer loan growth.
These indirect loans are subject to the same underwriting standards as consumer
loans originated directly by the Corporation's salaried loan officers. In
addition, management closely monitors origination volume and delinquency trends
for individual participating dealers. Commercial loans showed a decline of 5% in
1996. The Corporation's Strategic Plan for 1997 calls for $22 million in net new
loans. While the majority of this growth is expected to be in the consumer loan
area, management has also developed a new division to bolster commercial loans.
This new division is the Corporation's Business Development Team. While the
individuals in this division are qualified commercial lenders, their area of
expertise has been expanded to provide for a total banking relationship for the
Corporation's business clients.
Real estate loans showed an increase of 7%, which primarily represents loans
originated for sale in the secondary market. These loans are carried at the
lower of cost or fair value in the aggregate. With the demand for mortgage loans
continuing to be in the fixed rate area, the Corporation will continue to sell
fixed rate mortgage loans to the Federal Home Loan Mortgage Corporation (FHLMC)
as the Bank is an authorized seller/servicer for the FHLMC. Management
anticipates the amount of fixed rate loans sold to FHLMC with servicing retained
by the Bank to continue with the low interest rate environment. Loans sold to
the FHLMC for which the Bank retains servicing rights totaled $17,144,184 as of
December 31, 1996, compared to $9,831,604 as of December 31, 1995.
The Bank's loan portfolio represents it largest and highest yielding earning
assets. It also contains the most risk of loss. This risk is due primarily to
changes in borrowers' primary repayment capacity, and to collateral values that
are subject to change over time. These risks are managed with specific
underwriting guidelines, loan review procedures and training of personnel.
The following is a schedule of maturities of fixed rate loans based on contract
terms, excluding real estate mortgage and installment loans, rounded to the
nearest thousand, as of December 31, 1996.
<TABLE>
<CAPTION>
One Year One Through Over
or less Five Years Five Years
------- ---------- ----------
<S> <C> <C> <C>
Total Fixed Commercial Loans $ 1,815,000 $ 4,088,000 $ 13,286,000
</TABLE>
The following is a schedule of the repricing frequency of variable rate loans,
excluding real estate mortgage and installment loans, rounded to the nearest
thousand, as of December 31, 1996.
<TABLE>
<CAPTION>
Three Months Over
Or Less Three Months
------- ------------
<S> <C> <C>
Total variable Commercial Loans $ 25,894,000 $ 5,938,000
</TABLE>
- --------------------------------------------------------------------------------
16.
<PAGE> 17
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Mortgage-backed securities decreased $1,446,847 in 1996 or 5.7%, while
obligations of federal agencies decreased $3,400,847 or 23.6%. Securities were
sold to fund the Bank's increased loan demand. Obligations of state and
political subdivisions increased $1,139,813 or 8.5% in 1996 as management
attempted to maximize its tax-free income, while balancing quality investments
with attractive yields.
At December 31, 1995, the Bank owned approximately $9 million in structured
notes. Structured notes are bonds whose interest rates periodically increase to
predetermined levels if not previously called by the issuer or whose interest
rates are tied to interest rate indices. Structured notes are thinly traded and
contain call features or interest rate indices that make their cash flows
difficult to evaluate, thus causing these securities to experience significant
fluctuations in market values. All structured notes held by the Bank are direct
obligations of U.S. Government agencies, making the risk of principal loss
remote. These securities have provided diversity and attractive yields to the
Bank's investment portfolio. As of December 31, 1996 the bank owned
approximately $3 million in structured notes.
As of December 31,1996, there are no concentrations of securities of any one
issuer, other than U.S. Government and Government Agencies, whose carrying value
exceeds 10% of shareholders' equity.
The following is a schedule, by carrying value, of maturities for each category
of debt securities and the related weight average yield of such securities as of
December 31, 1996:
<TABLE>
<CAPTION>
-----------------------------------------Maturing --------------------------------------------
(In thousands of dollars) After One After Five
One Year Year Through Years Through After
or Less Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
Obligations of
federal
agencies $ 2,723,488 7.70%
Available for sale
U.S. Government
obligation $ 494,940 5.21%
Obligations of
federal
agencies 8,293,344 6.45
Obligations of
state and
political
subdivisions 2,585,011 4.92 $ 12,043,524 5.26%
Corporate bonds 499,570 6.18
Mortgage-
backed
securities 3,392,351 6.28 20,553,272 6.45
-------- ------- ----------- ------- -------------- ------ ------------- ------
Total $ 0 0% $ 994,510 5.70% $ 16,994,194 6.38% $ 32,596,796 6.01%
======== ======= =========== ======= ============== ====== ============= ======
</TABLE>
- --------------------------------------------------------------------------------
17.
<PAGE> 18
INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
The weighted average interest rates are based on coupon rates for investment and
mortgage-backed securities purchased at par value and on effective interest
rates considering amortization or accretion if the investment and
mortgage-backed securities were purchased at a premium or discount. The weighted
average yield on tax exempt obligations has not been determined on a tax
equivalent basis. Equity securities consists of Federal Reserve Bank stock that
bears no stated maturity or yield and is not included in this analysis.
Maturities are reported based on stated maturities and do not reflect principal
prepayment assumptions. Available for sale yields are based on amortized cost
balances.
DEPOSITS
Total deposits increased $14,269,796 or 9.4%. Growth was experienced primarily
in the time deposits area. Attractive rates were offered throughout 1996 due to
market forces and the need to fund the high loan demand. As previously stated,
the new Jamesway office in Marion provided significant deposit growth since
opening June 3, 1996. Management expects continued growth from this office as
well as the Bank's other offices, all of whom have been given specific growth
goals as dictated by the Corporation's Strategic Plan for 1997.
The following is a schedule of maturities of time certificates of deposit in
amounts of $100,000 or more as of December 31, 1996:
<TABLE>
<CAPTION>
(In thousands of dollars)
<S> <C>
Three months or less $ 2,270,843
Over three months through six months 5,733,545
Over six months through twelve months 5,431,349
Over twelve months 7,237,254
----------------
Total $ 20,672,991
================
</TABLE>
CAPITAL RESOURCES
Total shareholders' equity at December 31, 1996 was $14,313,245 an increase of
$217,517 or 1.5% from total shareholders equity of $14,095,728 at December 31,
1995. The increase is modest in nature due to the Corporation's dividend payout
which amounted to $694,304 for the year ended December 31, 1996 and lower market
value of the Bank's investment portfolio available for sale which shows an
unrealized loss of $491,270, (net of tax), at December 31, 1996 compared to an
unrealized loss of $48,598 (net of tax) at December 31, 1995.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
CAPITAL RESOURCES (Continued)
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. As of December 31,
1996, risk-based capital regulations require all banks to have a minimum total
risk-based capital ratio of 8%, with half of the capital composed of core
capital. Minimum leverage ratios range from 3% to 5% of total assets.
Conceptually, risk-based capital requirements assess the riskiness of a
financial institution's balance sheet and off-balance sheet commitments in
relation to its capital. Core capital, or Tier 1 capital, includes common
equity, perpetual preferred stock and minority interests that are held by others
in consolidated subsidiaries minus intangible assets. Supplementary capital, or
Tier 2 capital, includes core capital and such items as mandatory convertible
securities, subordinated debt and the allowance for loans and lease losses,
subject to certain limitations. Qualified Tier 2 capital can equal up to 100% of
an institution's Tier 1 capital with certain limitations in meeting the total
risk-based capital requirements.
At December 31, 1996, the Bank's total risk-based capital ratios and leverage
ratio were 10.2% and 8.59%, thus exceeding the minimum regulatory requirements.
At December 31, 1995, the ratios were 13.25% and 8.41%.
The Corporation's Board of Directors declared a $1.00 per share cash dividend in
both June and December of 1996, paying a total of $694,304. In addition, the
previously mentioned 25% stock dividend resulted in the issuance of 69,063
additional shares of common stock, bringing the total shares outstanding to
347,152. The Corporation's 1996 return on average shareholder equity was 9.83%
compared to 13.31% in 1995. The decrease is attributed to the decrease in
earnings for 1996. Total cash dividends paid in 1996 represented 50.28% of total
1996 net income. This compares to a dividend payout ratio of 32.96% in 1995.
LIQUIDITY
Liquidity management for the Bank centers around the assurance funds are
available to meet the loan and deposit needs of its customers and the Bank's
other financial commitments.
Cash and noninterest bearing deposits with banks, federal funds sold and other
short-term investments totaled $6,299,450 at December 31, 1996 and $5,951,550 at
December 31, 1995. These assets provide the primary source of liquidity for the
Bank. In addition, the Bank has designated a substantial portion of its
investment portfolio as available for sale to provide an additional source of
liquidity.
A standard measure of liquidity is the relationship of loans to deposits. Lower
ratios indicate greater liquidity. At December 31, 1996 and 1995, the ratio of
loans (net of unearned income) to deposits was 70.02% and 65.12%, respectively,
considered an acceptable level of liquidity by management.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
IMPACT OF INFLATION
The financial data included herein has been prepared in accordance with
generally accepted accounting principals (GAAP), which generally does not
recognize changes in the relative value of money due to inflation or recession.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in
monetary and fiscal policy. A financial institution's ability to be relatively
unaffected by changes in interest rates is a good indicator of its capability to
perform in today's volatile economic environment. The Bank seeks to insulate
itself from interest rate volatility by ensuring that rate-sensitive assets and
rate-sensitive liabilities respond to changes in interest rates in a similar
time frame and to a similar degree.
- --------------------------------------------------------------------------------
20.
<PAGE> 21
ITEM 7 - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Commercial Bancshares, Inc.
Upper Sandusky, Ohio
We have audited the accompanying consolidated balance sheets of Commercial
Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Commercial
Bancshares, Inc. as of December 31, 1996 and 1995, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Corporation changed its
method of accounting for mortgage servicing rights in 1996 and for impaired
loans in 1995.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 10, 1997
- --------------------------------------------------------------------------------
21.
<PAGE> 22
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (Note 9) $ 6,089,450 $ 5,161,550
Federal funds sold 210,000 790,000
----------------- -----------------
Cash and cash equivalents 6,299,450 5,951,550
Securities available for sale (Note 2) 48,392,272 52,083,636
Securities held to maturity (Fair value - $2,917,390 in 1996,
$2,950,050 in 1995) (Note 2) 2,723,488 2,696,515
Total loans (Notes 3 and 11) 116,154,788 98,731,531
Allowance for possible loan loss (Note 4) (1,018,608) (996,131)
----------------- -----------------
Loans - net 115,136,180 97,735,400
Premises and equipment, net (Note 5) 4,159,754 3,895,830
Other real estate, net 1,150,000 1,180,000
Accrued interest receivable 1,345,617 1,278,585
Other assets 1,754,211 1,474,653
----------------- -----------------
Total assets $ 180,960,972 $ 166,296,169
================= =================
LIABILITIES
Deposits (Note 6)
Noninterest-bearing demand $ 14,140,221 $ 14,834,310
Interest-bearing demand 34,270,322 36,465,303
Savings and time deposits 96,808,428 87,356,433
Time deposits $100,000 and greater 20,672,991 12,966,120
----------------- -----------------
Total deposits 165,891,962 151,622,166
Accrued interest payable 486,634 467,666
Other liabilities 269,131 110,609
----------------- -----------------
Total liabilities 166,647,727 152,200,441
----------------- -----------------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY (Note 10)
Common stock, $12.50 par value; 1,000,000 shares authorized;
347,152 and 278,089 shares issued and outstanding in
1996 and 1995, respectively 4,339,400 3,476,113
Paid in capital 3,476,113 3,476,113
Retained earnings 6,989,002 7,192,100
Unrealized loss on securities available for sale (491,270) (48,598)
----------------- -----------------
Total shareholders' equity 14,313,245 14,095,728
----------------- -----------------
Total liabilities and shareholders' equity $ 180,960,972 $ 166,296,169
================= =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
22.
<PAGE> 23
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 9,969,926 $ 8,782,809
Securities
Taxable 1,976,743 2,850,949
Tax exempt 758,380 644,867
Other and dividends 126,521 187,735
--------------- ---------------
Total interest income 12,831,570 12,466,360
INTEREST EXPENSE
Deposits 6,288,356 6,118,156
Other borrowings 47,157
--------------- ---------------
Total interest expense 6,335,513 6,118,156
NET INTEREST INCOME 6,496,057 6,348,204
Provision for possible loan loss (Note 4) 205,800 100,000
--------------- ---------------
Net interest income after provision for
possible loan loss 6,290,257 6,248,204
--------------- ---------------
NONINTEREST INCOME
Service fees and overdraft charges 720,845 668,768
Security gains, net 69,425 292,132
Loan sale gains, net 198,598 39,663
Other income 128,752 76,409
--------------- ---------------
Total noninterest income 1,117,620 1,076,972
--------------- ---------------
NONINTEREST EXPENSES
Salaries and employee benefits 2,525,990 2,287,775
Occupancy, furniture and equipment 511,997 441,843
State taxes 270,772 209,889
Data processing 522,657 519,061
FDIC deposit insurance 213,406 200,727
Professional fees 88,569 155,305
Other operating expenses 1,522,190 1,261,392
--------------- ---------------
Total noninterest expenses 5,655,581 5,075,992
--------------- ---------------
Income before income taxes 1,752,296 2,249,184
Income tax expense (Note 7) 371,515 561,695
--------------- ---------------
NET INCOME $ 1,380,781 $ 1,687,489
=============== ===============
Earnings per common share (Note 1) $ 3.98 $ 4.86
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
23.
<PAGE> 24
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Investment
Securities Total
Common Paid-in Retained Available Shareholders'
Stock Capital Earnings for Sale Equity
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance
January 1, 1995 $ 3,476,113 $ 3,476,113 $ 6,060,789 $ (1,500,628) $ 11,512,387
Net income 1,687,489 1,687,489
Cash dividends
declared($1.60
per common
share) (Note 1) (556,178) (556,178)
Change in unrealized
gain(loss) on
investment
securities available
for sale 1,452,030 1,452,030
------------- --------------- -------------- -------------- ----------------
Balance
December 31, 1995 3,476,113 3,476,113 7,192,100 (48,598) 14,095,728
Net income 1,380,781 1,380,781
Cash dividends
declared ($2.00
per common
share) (Note 1) (694,304) (694,304)
25% stock split
(Note 1) 863,287 (863,287)
Cash paid in lieu of
fractional shares in
stock split (Note 1) (26,288) (26,288)
Change in unrealized
gain(loss) on
investment securities
available for sale (442,672) (442,672)
------------- --------------- -------------- -------------- ----------------
Balance,
December 31, 1996 $ 4,339,400 $ 3,476,113 $ 6,989,002 $ (491,270) $ 14,313,245
============= =============== ============== ============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24.
<PAGE> 25
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,380,781 $ 1,687,489
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 316,237 261,506
Provision for loan loss 205,800 100,000
Deferred income taxes 142,015 35,132
Gain on sale of securities (69,425) (292,132)
Gain on sale of premises and equipment (37,422) (3,169)
Stock dividends on FHLB stock (39,600)
Net amortization on investments 66,593 93,101
Amortization of intangible assets 46,224 46,458
Changes in
Loans held for sale (400,942) (637,336)
Interest receivable (67,032) (39,372)
Interest payable 18,968 51,875
Other assets and liabilities (77,636) 67,431
--------------- ----------------
Net cash from operating activities 1,484,561 1,370,983
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (31,117,583) (49,926,198)
Maturities and repayments 2,666,403 521,490
Sales 31,487,288 46,321,080
Securities held to maturity
Purchases (2,676,461)
Maturities and repayments 2,632,024
Net change in loans (17,272,638) (3,028,611)
Proceeds from sale of premises and equipment 75,600 4,900
Proceeds from sale of other real estate 93,404
Bank premises and equipment expenditures (618,339) (693,699)
Purchase of life insurance contracts (891,822)
--------------- ----------------
Net cash from investing activities (14,685,865) (7,737,297)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 14,269,796 2,915,682
Cash dividends paid (694,304) (556,178)
Cash paid in lieu of fractional shares for stock split (26,288)
--------------- ----------------
Net cash from financing activities 13,549,204 2,359,504
--------------- ----------------
Net change in cash and cash equivalents 347,900 (4,006,810)
Cash and cash equivalents at beginning of year 5,951,550 9,958,360
--------------- ----------------
Cash and cash equivalents at end of year $ 6,299,450 $ 5,951,550
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25.
<PAGE> 26
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Commercial Bancshares, Inc. (Corporation) and its wholly owned
subsidiary, The Commercial Savings Bank (Bank). All significant intercompany
balances and transactions have been eliminated in consolidation.
INDUSTRY SEGMENT INFORMATION: Commercial Bancshares, Inc. is a bank-holding
Corporation engaged in the business of commercial and retail banking, with
operations conducted through its main office and branches located in Upper
Sandusky, Ohio and neighboring communities. This market area provides the source
of substantially all of the Corporation's deposit and loan activities. The
majority of the Corporation's income is derived from commercial and retail
business lending activities and investments.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The collectibility of loans, fair values of financial
instruments, and status of contingencies are particularly subject to change.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, noninterest
bearing demand deposits with banks and federal funds sold. Net cash flows are
reported for customer loan and deposit transactions. During 1996 and 1995, the
Corporation paid $6,316,545 and $6,065,359 in interest and $191,000 and $490,000
for income taxes.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary. At year-end 1996 and 1995, no securities were classified as trading.
Realized gains and losses on sales are determined using the amortized cost of
the specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS HELD FOR SALE: Certain residential mortgage loans are originated for sale
in the secondary mortgage loan market. These loans are included in the real
estate loans and are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income. To mitigate the interest rate risk, fixed commitments may be
obtained at the time loans are originated or identified for sale.
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE> 27
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS RECEIVABLE: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs, the allowance for loan losses, and charge-offs.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Effective January 1, 1995, the Corporation adopted the provisions of Statement
of Financial Accounting Standard (SFAS) Nos. 114 and 118, which modify the
accounting for impaired loans. A loan is considered impaired when management
believes that full collection of principal and interest is not probable. The
Corporation reduces the carrying value of impaired loans to the present value of
expected future cash flows, or to the fair value of collateral if the loan is
collateral dependent, by allocating a portion of the allowance for loan losses
to such loans. If these allocations should require an increase to the allowance,
such increase is reported as bad debt expense. The effect of adopting and
applying these standards in 1996 and 1995 was not material.
Management analyzes commercial loans and other loans with balances greater than
$200,000 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 its debt service
requirements. Often this is associated with a delay or shortfall in payments of
30 days or more. Smaller-balance homogeneous loans are evaluated for impairment
in total. Such loans include residential first mortgage loans secured by
one-to-four family residences and consumer automobile, home equity and credit
card loans with balances less than $200,000. In addition, loans held for sale
are excluded from consideration of impairment.
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE> 28
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in future payments and due to the passage of time are reported as part
of the provision for loan losses.
CONCENTRATIONS OF CREDIT RISK: The Corporation, through its subsidiary Bank,
grants commercial, real estate, consumer and home equity loans to customers
mainly in Wyandot, Marion, Hardin and Hancock Counties of Ohio. Commercial loans
include loans secured by business assets and agricultural loans secured by crops
and equipment. Commercial loans make up approximately 44% and 54% of the loan
portfolio at year-end 1996 and 1995 and the loans are expected to be repaid from
cash flow from operations of the borrower. Real estate mortgages make up
approximately 24% and 25% of the loan portfolio at year-end 1996 and 1995 and
are secured primarily by first and second mortgages on residential real estate,
business real estate and agricultural real estate. Loans related to the
agricultural industry represented 10% and 11% of total loans at year-end 1996
and 1995. Consumer loans include new and used automobile and other consumer
purpose loans. Consumer loans make up approximately 32% and 21% of total loans
at year-end 1996 and 1995. The Bank also originates consumer-oriented
purchase-money loans indirectly through various automobile, motorcycle, boat,
recreational vehicle and other dealerships. Indirect loans represented 75% and
56% of consumer loans and 24% and 12% of total loans at year-end 1996 and 1995.
Unsecured loans represented 2% and 3% of total loans at year-end 1996 and 1995.
At year-end 1996 and 1995, the Bank had due from bank balances and overnight
federal funds sold to National City Bank totaling $4,466,000 and $3,901,000,
respectively.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses incurred are charged to operations as
incurred. Gains and losses on disposition, and changes in the valuation
allowance are reported in net gain or loss on other real estate.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE> 29
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL AND IDENTIFIED INTANGIBLES: Goodwill is the excess of purchase price
over identified net assets in business acquisitions. Goodwill is expensed on the
straight-line method over a period of 15 years. Identified intangibles represent
the value of depositor relationships purchased and is expensed on an accelerated
method over a period of 15 years. Goodwill and identified intangibles are
assessed for impairment based on estimated undiscounted cash flows, and written
down if necessary.
Goodwill and identified intangibles are included in other assets and are
summarized as follows at year-end 1996 and 1995, net of accumulated
amortization:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Core deposit intangible $ 197,011 $ 226,579
Goodwill 172,622 189,278
------------ ------------
Total intangible assets $ 369,633 $ 415,857
============ ============
</TABLE>
Amortization expenses totaled $46,224 in 1996 and $46,458 in 1995
LOAN SERVICING: The Company has sold various loans to the Federal Home Loan
Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and
losses on loan sales are recorded at the time of the cash sale.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was adopted on January
1, 1996. It requires entities to recognize, as separate assets, rights to
service mortgage loans for others, regardless of how these rights are acquired.
Mortgage servicing rights acquired through either the purchase or the
origination of mortgage loans which are subsequently sold with servicing rights
retained should be determined by allocating the total cost of the mortgage loans
to mortgage servicing rights and to loans (without the mortgage servicing
rights) based on their relative fair values. Mortgage servicing rights recorded
as a separate asset are amortized in proportion to, and over the period of,
estimated net servicing income. Impairment is evaluated based on the fair value
of the rights, using groupings of the underlying loans as to interest rates and
then, secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance. This
pronouncement was superseded by SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which extends
the accounting and disclosure rules for mortgage servicing rights to all
servicing rights including mortgage, consumer and commercial loans. Mortgage
servicing rights totaled $102,473 at year-end 1996, and are included in "Other
assets," on the accompanying balance sheet. SFAS 125 will be effective on
January 1, 1997 and is not expected to have a material impact on the Bank's
financial statements.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE> 30
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
EARNINGS PER SHARE: Earnings and dividends per share amounts reflected herein
have been computed based on the weighted average shares outstanding which is
347,152 in 1996 and 1995. In March 1996, the Board of Directors declared a 25%
stock split effected in the form of a dividend, resulting in the issuance of
69,063 shares. The weighted average number of shares outstanding and the per
share data for prior periods has been restated to retroactively reflect this
stock split.
FINANCIAL STATEMENT PRESENTATION: Some items in prior financial statements have
been reclassified to conform with the current presentation.
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE> 31
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
-------------------------------1 9 9 6------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Government obligations $ 509,206 $ (14,266) $ 494,940
Obligations of federal agencies 8,426,243 $ 1,017 (133,916) 8,293,344
Obligations of state and political
subdivisions 14,559,081 150,034 (80,580) 14,628,535
Corporate bonds 502,500 (2,930) 499,570
Mortgage-backed securities 24,346,113 41,479 (441,969) 23,945,623
--------------- ------------ ------------ ----------------
Total debt securities available
for sale 48,343,143 192,530 (673,661) 47,862,012
Equity investments 530,260 530,260
--------------- ------------ ------------ ----------------
Total securities available for
sale $ 48,873,403 $ 192,530 $ (673,661) $ 48,392,272
=============== ============ ============ ================
Securities held to maturity
Obligations of federal agencies $ 2,723,488 $ 193,902 $ 0 $ 2,917,390
=============== ============ ============ ================
-------------------------------1 9 9 5------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale
U.S. Government obligations $ 1,006,013 $ (3,793) $ 1,002,220
Obligations of federal agencies 11,649,339 $ 149,827 (78,002) 11,721,164
Obligations of state and political
subdivisions 13,057,868 458,592 (27,738) 13,488,722
Mortgage-backed securities 25,667,515 31,954 (306,999) 25,392,470
--------------- ------------ ------------ ----------------
Total debt securities available
for sale 51,380,735 640,373 (416,532) 51,604,576
Equity investments 479,060 479,060
--------------- ------------ ------------ ----------------
Total securities available for
sale $ 51,859,795 $ 640,373 $ (416,532) $ 52,083,636
=============== ============ ============ ================
Securities held to maturity
Obligations of federal agencies $ 2,696,515 $ 253,535 $ 0 $ 2,950,050
=============== ============ ============ ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE> 32
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Mortgage-backed securities available for sale at year-end 1996 and 1995 are
summarized below. At year-end 1996, the fair value of fixed and variable rate
mortgage-backed securities available for sale totaled $4,620,628 and
$19,324,995, respectively.
<TABLE>
<CAPTION>
---------------1996---------------- ----------------1995---------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
FHLMC REMICS $ 8,923,034 $ 8,770,834 $ 8,305,682 $ 8,264,665
FNMA REMICS 6,776,293 6,698,915 3,401,666 3,389,144
FNMA certificates 7,143,139 6,968,255 7,885,256 7,812,842
FHLMC certificates 5,172,586 5,031,234
GNMA certificates 1,503,647 1,507,619 902,325 894,585
--------------- ---------------- --------------- ---------------
$ 24,346,113 $ 23,945,623 $ 25,667,515 $ 25,392,470
=============== ================ =============== ===============
</TABLE>
The amortized cost and approximate fair value of debt securities available for
sale and held to maturity at year-end 1996, 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. Debt securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available for sale
Due after one year through five years $ 1,011,706 $ 994,510
Due after five years through ten years 10,977,618 10,878,355
Due after ten years 12,007,706 12,043,524
Mortgage-backed securities 24,346,113 23,945,623
--------------- ----------------
$ 48,343,143 $ 47,862,012
=============== ================
Securities held to maturity
Due after five through ten years $ 2,723,488 $ 2,917,390
=============== ================
Sales of available for sale securities were:
1996 1995
---- ----
Proceeds $ 31,487,288 $ 46,321,080
Gross gains 374,032 575,744
Gross losses 304,607 283,612
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE> 33
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
At year-end 1996 and 1995, debt securities with a carrying value of $11,201,000
and $13,108,000 were pledged to secure public deposits and other deposits and
liabilities as required or permitted by law.
During 1995, securities with an amortized cost of $17,275,000 were reclassified
from held to maturity to available for sale, based on new interpretations issued
for SFAS No. 115. At the time of the reclassification, the related unrealized
gain of $552,000 was recorded as an increase in shareholders' equity, net of tax
NOTE 3 - LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial and other loans $ 51,021,307 $ 53,708,832
Real estate loans 22,979,126 21,376,721
Consumer and credit card loans 37,344,109 20,386,106
Home equity loans 4,810,246 3,259,872
---------------- ----------------
Total loans $ 116,154,788 $ 98,731,531
================ ================
</TABLE>
The Bank is an authorized seller/servicer for the Federal Home Loan Mortgage
Corporation (FHLMC). Loans sold to FHLMC for which the Bank has retained
servicing totaled $17,144,184 and $9,831,604 at year-end 1996 and 1995. Real
estate loans originated and held for sale at year-end 1996 and 1995 totaled
$1,068,000 and $667,000.
At December 31, 1996 and 1995, total loans included loans to farmers for
agricultural purposes of approximately $11,759,000 and $10,664,000.
The balance of impaired loans was $45,391 and $256,563 at year-end 1996 and
1995. Of this amount, $10,361 and $132,278 in impaired loans required no
allowance for loan loss allocation. The remaining impaired loans of $35,030 and
$124,285 had $35,030 and $9,796 of the allowance for loan losses allocated to
them, although the entire allowance remains available for charge-offs of any
loan.
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE> 34
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
The average balance of impaired loans was $96,475 for 1996 and $276,216 for
1995. Interest income recognized on impaired loans during 1996 and 1995 was $0
and $9,796, all of which was recognized on a cash basis.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSS
Activity in the allowance for possible loan loss was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance $ 996,131 $ 959,604
Provision for possible loan loss 205,800 100,000
Loans charged off (268,415) (194,867)
Recoveries of previous charge-offs 85,092 131,394
-------------- ------------
Ending balance $ 1,018,608 $ 996,131
============== ============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 711,970 $ 686,727
Buildings 3,915,521 3,059,941
Furniture and equipment 1,649,617 1,414,933
Construction in progress 540,607
-------------- --------------
Total 6,277,108 5,702,208
Accumulated depreciation 2,117,354 1,806,378
-------------- --------------
Premises and equipment, net $ 4,159,754 $ 3,895,830
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
34.
<PAGE> 35
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
At year-end 1996, scheduled maturities of time deposit were as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 49,227,472
1998 38,047,964
1999 5,384,423
2000 3,807,156
2001 861,285
Thereafter 245,412
---------------
$ 97,573,712
===============
</TABLE>
NOTE 7 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current provision $ 229,500 $ 526,563
Deferred provision 142,015 35,132
------------ ------------
Total income tax expense $ 371,515 $ 561,695
============ ============
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Allowance for loan losses in excess of tax reserve $ 13,530 $ 5,887
Intangible assets amortization 14,685 10,981
Basis reduction of other real estate owned 17,000 6,800
Unrealized loss on investment securities available
for sale 253,078 24,385
Other 17,753
------------ ------------
Total 316,046 48,053
Items giving rise to deferred tax liabilities
Investment accretion (1,825) (7,590)
Depreciation (86,111) (81,600)
Mortgage servicing rights (34,841)
Deferred loan fees and costs (197,929) (74,636)
Other (24,435)
------------ ------------
Total (345,141) (163,826)
------------ ------------
Net deferred tax (liability) asset $ (29,095) $ (115,773)
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35.
<PAGE> 36
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
The Bank has sufficient taxes paid in prior years to support the recognition of
deferred tax assets without recording a valuation allowance.
Income tax expense attributable to continuing operations is reconciled between
the financial statement provision and amounts computed by applying the statutory
federal income tax rate of 34% to income before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax at statutory rates $ 595,781 $ 764,722
Increase (decrease) in tax resulting from:
Tax-exempt interest (216,056) (190,123)
Other (8,210) (12,904)
------------ ------------
Total income tax expense $ 371,515 $ 561,695
============ ============
</TABLE>
The income tax expense related to investment security gains totaled $23,605 and
$99,325 for 1996 and 1995.
NOTE 8 - SALARY DEFERRAL - 401(K) PLAN
The Corporation maintains a 401(k) plan covering substantially all employees who
have attained the age of 21 and have completed one year of service with the
Corporation. This is a salary deferral plan, which calls for matching
contributions by the Corporation based on a percentage (50%) of each
participant's voluntary contribution (limited to a maximum of six percent (6%)
of a covered employee's annual compensation). In addition to the Corporation's
required matching contribution, a contribution to the plan may be made at the
discretion of the Board of Directors. The Corporation's matching and
discretionary contributions were $68,718 and $71,700 for the years ended
December 31, 1996 and 1995.
NOTE 9 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
- --------------------------------------------------------------------------------
(Continued)
36.
<PAGE> 37
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit and standby letters of credit which involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. Each customer's credit worthiness is evaluated on a case-by-case basis.
The same credit policies are used for commitments and conditional obligations as
are used for loans. The amount of collateral obtained, if deemed necessary, upon
extension of credit is based on management's credit evaluation. Collateral
varies but may include accounts receivable, inventory, property, equipment,
income-producing commercial properties, residential real estate and consumer
assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
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 used, the total commitments does not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
The following is a summary of commitments to extend credit at year-end 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Fixed rate $ 245,000 $ 902,000
Variable rate 13,339,000 8,284,000
--------------- --------------
$ 13,584,000 $ 9,186,000
=============== ==============
</TABLE>
At year-end 1996 and 1995, reserves of $708,000 and $723,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
- --------------------------------------------------------------------------------
(Continued)
37.
<PAGE> 38
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets
---------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year end 1996, consolidated actual capital levels (in millions) and minimum
required levels for the Bank were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $ 15,451 10.2% $ 12,127 8.0% $ 15,159 10.0%
Bank $ 15,405 10.2% $ 12,127 8.0% $ 15,159 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 14,434 9.5% $ 6,063 4.0% $ 9,095 6.0%
Bank $ 14,388 9.5% $ 6,063 4.0% $ 9,095 6.0%
Tier 1 capital (to average assets)
Consolidated $ 14,434 8.6% $ 6,698 4.0% $ 8,372 5.0%
Bank $ 14,388 8.6% $ 6,698 4.0% $ 8,372 5.0%
</TABLE>
The Corporation and Bank at year-end 1996 was categorized as well capitalized.
- --------------------------------------------------------------------------------
(Continued)
38.
<PAGE> 39
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
Dividends paid by the Bank are the primary source of funds available to the
Corporation for payment of dividends to shareholders and for other working
capital needs. The payment of dividends by the Bank to the Corporation is
subject to restrictions by regulatory authorities. These restrictions generally
limit dividends by the Bank to the current and prior two year's retained
earnings as defined by regulations. At year-end 1996, approximately $2,588,834
of the Bank's retained earnings were available for dividends to the Corporation
under these guidelines. In addition to these restrictions, as a practical
matter, dividend payments cannot reduce regulatory capital levels below the
Corporation's regulatory capital requirements and minimum regulatory guidelines.
These restrictions do not presently limit the Corporation from paying normal
dividends.
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Corporation, including their immediate families and companies in which they are
principal owners, were loan customers during 1996 and 1995.
A summary of activity on these borrower relationships with aggregate debt
greater than $60,000 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance $ 1,796,604 $ 538,278
New loans and advances 590,781 315,135
Payments (608,404) (101,061)
Changes in persons included 1,044,252
-------------- --------------
Ending balance $ 1,778,981 $ 1,796,604
============== ==============
</TABLE>
A director of the Corporation is a partner with a law firm that rendered various
legal services for the Corporation. The Corporation paid the firm $67,000 during
1995 for legal services. Legal fees paid in 1996 were not significant.
- --------------------------------------------------------------------------------
(Continued)
39.
<PAGE> 40
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year-end fair values of financial instruments were;
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and equivalents $ 6,299,450 $ 6,299,000 $ 5,951,550 $ 5,952,000
Securities available
for sale 48,392,272 48,392,000 52,083,636 52,084,000
Securities held to maturity 2,723,488 2,917,000 2,696,515 2,950,000
Loans, net of allowance for
possible loan losses 115,136,180 114,667,000 97,735,400 98,102,000
Accrued interest receivable 1,345,617 1,346,000 1,278,585 1,279,000
Cash surrender value of
life insurance 927,601 928,000 897,288 897,000
Mortgage servicing rights 102,473 102,000
Financial liabilities
Demand and savings
deposits (68,318,250) (68,318,000) (71,334,711) (71,335,000)
Time deposits (97,573,712) (97,624,000) (80,287,455) (80,911,000)
Accrued interest payable (486,634) (487,000) (467,666) (468,000)
</TABLE>
The following assumptions were used for purposes of the above disclosures of
estimated fair value. The carrying amount is considered to estimate fair value
for cash and cash equivalents, for cash surrender value of life insurance, for
mortgage servicing rights, for loans that contractually reprice at intervals of
less than six months, for demand and savings deposits, and for accrued interest.
Securities fair values are based on quoted market prices for the individual
securities or for equivalent securities. The fair values of fixed-rate loans,
loans that reprice less frequently than each six months, and time deposits are
estimated using a discounted cash flow analysis utilizing using year-end market
interest rates for the estimated life and credit risk. The estimated fair value
of commitments is not material.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, no assurance can be given that, were the Bank to have
disposed of such items at year-end 1996 or 1995, the estimated fair values would
necessarily have been achieved at these dates, since market values may differ
depending on various circumstances. The estimated fair values at year-end, 1996
and 1995 should not necessarily be considered to apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
40.
<PAGE> 41
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Nonfinancial instruments may have value but are not included in the above
disclosures, such as property and equipment. Also, nonfinancial instruments
typically not recognized in these financial statements nevertheless may have
value, but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts, the earnings
potential of loan servicing rights, the value of a trained work force, customer
goodwill and similar items.
NOTE 13- PARENT CORPORATION STATEMENTS
The following are condensed financial statements of Commercial Bancshares, Inc.:
CONDENSED BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 8,817 $ 14,071
Investment in common stock of subsidiary 14,267,491 14,024,728
Other assets 38,403 58,395
----------------- -----------------
Total assets $ 14,314,711 $ 14,097,194
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 1,466 $ 1,466
Shareholders' equity 14,313,245 14,095,728
----------------- -----------------
Total liabilities and shareholders' equity $ 14,314,711 $ 14,097,194
================= =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
41.
<PAGE> 42
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13- PARENT CORPORATION STATEMENTS
CONDENSED STATEMENT OF INCOME
Year ended December 31, 1996 and period since
inception (April 13, 1995) to December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INCOME
Dividends from subsidiary $ 735,481 $ 641,178
EXPENSES
Amortization 12,348 9,261
Other 27,786 10,915
----------------- -----------------
Total expenses 40,134 20,176
----------------- -----------------
Income before income taxes and equity in
undistributed earnings of subsidiary 695,347 621,002
Income tax benefit 6,175
Income before equity in undistributed earnings ----------------- -----------------
of subsidiary 695,347 627,177
Equity in undistributed earnings of subsidiary 685,434 676,767
----------------- -----------------
NET INCOME $ 1,380,781 $ 1,303,944
================= =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
42.
<PAGE> 43
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13- PARENT CORPORATION STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOW
Year ended December 31, 1996 and period since
inception (April 13, 1995) to December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,380,781 $ 1,303,944
Adjustments to reconcile net income to net cash
from operating activities
Amortization 12,348 9,261
Equity in undistributed earnings of subsidiary (685,434) (676,767)
Change in other assets and liabilities 7,643 (66,189)
----------------- -----------------
Net cash from operating activities 715,338 570,249
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (694,304) (556,178)
Cash paid in lieu of fractional shares in stock split (26,288)
----------------- -----------------
Net cash from financing activities (720,592) (556,178)
----------------- -----------------
Net change in cash (5,254) 14,071
Cash at beginning of period 14,071
----------------- -----------------
CASH AT END OF PERIOD $ 8,817 $ 14,071
================= =================
</TABLE>
- --------------------------------------------------------------------------------
43.
<PAGE> 44
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the Corporation's independent accountants on
accounting and financial disclosure have occurred during the two most recent
fiscal years.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information concerning Directors and Executive Officers of the Corporation
appears on pages 2 through 11 under the captions "Election of Directors" and
"Executive Officers" in the Corporation's Definitive Proxy Statement dated March
10, 1997 for the Annual Meeting of Shareholders to be held on April 9, 1997 and
is incorporated herein by reference.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation appears on page 12 under the
captions "Executive Compensation" and "Supplementary Executive Retirement Plan"
in the Corporation's Definitive Proxy Statement dated March 10, 1997 for the
Annual Meeting of Shareholders to be held on April 9, 1997 and is incorporated
herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is contained on pages 1 and 2 under the captions "Voting Securities
and Principal Holders Thereof" and "Election of Directors" in the Corporation's
Definitive Proxy Statement dated March 10, 1997 for the Annual Meeting of
Shareholders to be held April 9, 1997 and is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on page 13 under the caption "Indebtedness of and Transactions with
Officers and Directors" in the Corporation's Definitive Proxy Statement dated
March 10, 1997 for the Annual Meeting of Shareholders to be held on April 9,
1997 and is incorporated herein by reference.
- --------------------------------------------------------------------------------
(Continued)
44.
<PAGE> 45
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Page
Reference to Number in
Regulation S-B Prior Filing or This
Exhibit Exhibit Number Form 10-KSB
Number Description of Document Attached Hereto Report
------ ----------------------- --------------- ------
<S> <C> <C> <C>
3.1 Amended Articles of Incorporation of the
Corporation * 1 Not Applicable
3.2 Code of Regulations of the Corporation * 2 Not Applicable
4 Form of Shares Certificate of Common Shares * 3 Not Applicable
21 Subsidiaries of the Registrant 4 51
27 Financial Data Schedule 5 52
<FN>
* Indicates documents which have been previously filed as part of the Issuer's
Report on Form 8-K dated April 27, 1995. All of such previously filed
documents are hereby incorporated by reference in accordance with Item 601
of Regulation S-B. Such documents are available to shareholders without
charge upon request from the Issuer.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
- --------------------------------------------------------------------------------
45.
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the under signed, thereunto
duly authorized.
February 13, 1997 COMMERCIAL BANCSHARES, INC.
- ----------------------------
Date
By: /s/RAYMOND E. GRAVES
------------------------------
Raymond E. Graves, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
February 13, 1997.
Signatures Signatures
---------- ----------
/s/RAYMOND E. GRAVES /s/MARK DILLON
- ----------------------------------- -----------------------------------
Raymond E. Graves Mark Dillon
President (Principal Executive Director
Officer) and Director
/s/JAMES A. DEER /s/EDWIN G. EMERSON
- ----------------------------------- -----------------------------------
James A. Deer Edwin G. Emerson
Executive Vice President, Principal Director
Financial Office, Principal
Accounting Officer and Director
/s/RICHARD SHEAFFER /s/HAZEL FRANKS
- ----------------------------------- -----------------------------------
Richard Sheaffer Hazel Franks
Director, Chairman of the Board Director
/s/B.E. BEASTON /s/WILLIAM GILLEN
- ----------------------------------- -----------------------------------
B.E. Beaston William Gillen
Director Director
/s/DANIEL E. BERG /s/MICHAEL A. MASTRO
- ----------------------------------- -----------------------------------
Daniel E. Berg Michael A. Mastro
Director Director
/s/LOREN H. DILLON /s/DOUGLAS C. SMITH
- ----------------------------------- -----------------------------------
Loren H. Dillon Douglas C. Smith
Director Director
- --------------------------------------------------------------------------------
46.
<PAGE> 1
EXHIBIT 21
- ----------
COMMERCIAL BANCSHARES, INC.
---------------------------
<TABLE>
<CAPTION>
State of Percentage of
Subsidiary Incorporation securities owned
---------- ------------- ----------------
<S> <C> <C>
The Commercial Savings Bank (1) Ohio 100%
<FN>
(1) The subsidiary's principal office is located in Upper Sandusky, Ohio.
</TABLE>
- --------------------------------------------------------------------------------
47.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,089,450
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 210,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,392,272
<INVESTMENTS-CARRYING> 2,723,488
<INVESTMENTS-MARKET> 2,917,390
<LOANS> 116,154,788
<ALLOWANCE> 1,018,608
<TOTAL-ASSETS> 180,960,972
<DEPOSITS> 165,891,962
<SHORT-TERM> 0
<LIABILITIES-OTHER> 755,765
<LONG-TERM> 0
<COMMON> 4,339,400
0
0
<OTHER-SE> 9,973,845
<TOTAL-LIABILITIES-AND-EQUITY> 180,960,977
<INTEREST-LOAN> 9,969,926
<INTEREST-INVEST> 2,735,123
<INTEREST-OTHER> 126,521
<INTEREST-TOTAL> 12,831,570
<INTEREST-DEPOSIT> 6,288,356
<INTEREST-EXPENSE> 6,335,513
<INTEREST-INCOME-NET> 6,496,057
<LOAN-LOSSES> 205,800
<SECURITIES-GAINS> 69,425
<EXPENSE-OTHER> 5,655,581
<INCOME-PRETAX> 1,752,296
<INCOME-PRE-EXTRAORDINARY> 1,752,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,380,781
<EPS-PRIMARY> 3.98
<EPS-DILUTED> 3.98
<YIELD-ACTUAL> 4.39
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 996,131
<CHARGE-OFFS> 268,415
<RECOVERIES> 85,092
<ALLOWANCE-CLOSE> 1,018,608
<ALLOWANCE-DOMESTIC> 1,018,608
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
