<PAGE> 1
COMMERCIAL BANCSHARES, INC.
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FORM 10-KSB
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[XX] 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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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, no 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. X
-----
Issuer's revenues for the year ended December 31, 1997 were: $16,027,789
At February, 1998, there were issued and outstanding 1,043,481 of the Issuer's
Common Shares.
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of January 29, 1998 was $26,036,400.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Issuer's Definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held April 8, 1998 are incorporated by reference into Part
III.
Transitional Small Business Disclosure Form (check one):
Yes No X
---- ----
This document, including exhibits, contains 30 pages.
The Exhibit Index is on page 31.
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4
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COMMERCIAL BANCSHARES, INC.
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FORM 10-KSB
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INDEX
FORM 10-KSB
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1 Description of Business 6
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Common Equity and Related Shareholder Matters 8
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operation 9
Item 7 Independent Auditors' Report 17
Consolidated Financial Statements 18
Notes to Consolidated Financial Statements 22
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 31
PART III
Item 9 Directors, Executive Officers, Promoters
and Control Persons-Compliance with
Section 16(a) of the Exchange Act 31
Item 10 Executive Compensation 31
Item 11 Security Ownership of Certain Beneficial
Owners and Management 31
Item 12 Certain Relationships and Related Transactions 31
Item 13 Exhibits List and Reports on Form 8-K 31
Signatures 32
Exhibits 33
</TABLE>
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5
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
===============================================================================
PART I
ITEM 1
DESCRIPTION OF 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. In May 1997, the Board of
Directors approved the establishment of the Corporation's second wholly owned
subsidiary, a consumer finance company, and thereby chartered a new Ohio
corporation by the name of "Advantage Finance, Inc." On December 24, 1997
approval was granted by the Ohio Division of Financial Institutions for
Advantage Finance, Inc. to do business and the new finance company is expected
to become fully operational providing finance company services to customers in
Marion, Ohio during 1998.
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 the acceptance of deposits for demand, savings and time
accounts and the 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
non-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 primarily fixed rates 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 the 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.
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 87 full-time employees and 13 part-time employees. The
Corporation does not have any full- or part-time employees.
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6
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COMMERCIAL BANCSHARES, INC.
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ITEM2
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.
All of the offices listed are owned by the Bank and are free and clear of any
encumbrances.
The Bank also operates an intermittent office inside the Rotary Towers Nursing
Facility in Marion opened in June 1991. The Corporation neither owns or leases
any properties. During 1997, the Corporation closed an intermittent office
inside the Marion Steel Corporation in Marion and sold a full service banking
office in Kenton.
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 10% 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, 1997.
Commercial Savings Bank Executive Officers
[PHOTO]
left to right
BRUCE J. BECK
Sr. Vice President and Loan Department Manager
JAMES W. JUNE
Vice President Retail Banking
RAYMOND E. GRAVES
President and Chief Executive Officer
JAMES A. DEER
Executive Vice President
PHILIP W. KINLEY
Vice President and Chief Financial Officer
DESCRIPTION OF PROPERTY
LOCATION DESCRIPTION
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 1973.
128 S. Vance St.
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
279 Jamesway opened in 1996.
Marion, OH 43302
7. Findlay Office One story building purchased from
1660 Tiffin Ave. Savings of America in 1992.
Findlay, OH 45840
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7
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COMMERCIAL BANCSHARES, INC.
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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) or
Sweney Cartwright & Co., Columbus, Ohio (Sweney) who took an active position in
the Corporation's stock during the fourth quarter of 1996.
For 1997, bid and ask quotations were obtained and compared from CBI and Sweney;
and for 1996, bid and ask quotations were obtained from CBI which make 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.
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 May 14, 1997 the Board of Directors of Commercial Bancshares, Inc. approved a
3-for-1 stock split, effected as a dividend, payable on June 30, 1997 to
shareholders of record on June 15, 1997, issuable from the Corporation's
authorized shares.
The Corporation has 1,041,456 authorized and outstanding shares of common stock
held by approximately 1,300 shareholders as of December 31, 1997. The
Corporation has paid cash dividends in June and December of each year, resulting
in a total amount of $0.70 per share for 1997 and $0.6666 per share for 1996,
restated for the stock split.
BID AND ASK QUOTATIONS
<TABLE>
<CAPTION>
1997 (1) LOW BID HIGH BID LOW ASK HIGH ASK
<S> <C> <C> <C> <C>
1st Qtr. $18.33 $19.17 $19.33 $19.67
2nd Qtr. 19.17 20.00 20.00 21.00
3rd Qtr. 20.00 23.75 21.00 28.00
4th Qtr. 23.75 26.00 25.25 29.00
</TABLE>
<TABLE>
<CAPTION>
1996 (1) LOW BID HIGH BID LOW ASK HIGH ASK
<S> <C> <C> <C> <C>
1st Qtr. $15.20 $15.67 $16.27 $17.00
2nd Qtr. 15.67 16.67 17.00 17.33
3rd Qtr. 16.67 17.00 17.33 17.67
4th Qtr. 17.00 18.67 17.67 19.33
<FN>
- --------------------
(1) Amounts have been restated for the effect of the 3-for-1 stock split paid
on June 30, 1997.
</TABLE>
[PHOTO]
BRUCE J. BECK
Sr. Vice President and Loan Department Manager
of The Commercial Savings Bank
Upper Sanduksky, Ohio
"A new division was formed, the Corporation's Business Development Team, made up
of qualified commercial lenders whose area of expertise has been expanded to
provide for a total banking relationship for the Corporation's business
clients."
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8
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COMMERCIAL BANCSHARES, INC.
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ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
RESULTS OF OPERATION
Net income in 1997 of $1,839,057 represents a 33.2% increase from the net income
of $1,380,781 in 1996. Diluted earnings per share increased proportionately from
$1.33 in 1996 to $1.76 in 1997. The major factors that 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 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 Corporate investment
securities classified as available for sale.
The interest rate sensitivity gap (GAP) table below indicates that, as of
December 31, 1997, rate sensitive liabilities exceed rate sensitive assets in
the one year or less time horizon by approximately $3,368,000. Management
believes this places the Corporation in a desirable position for 1998 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
excluded passbook savings and NOW checking accounts from the one year period.
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 had 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 rate increases to these products.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS AS OF DECEMBER 31, 1997
ONE YEAR OR LESS ONE THROUGH FIVE YEARS OVER FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
ASSETS
Loans (a) $ 54,225 $ 48,595 $ 31,140 $ 125,960
Securities (a) 9,799 7,170 21,296 38,265
----------- ----------- ----------- -----------
RATE SENSITIVE ASSETS (RSA) 64,024 47,765 52,436 164,225
LIABILITIES
Interest-bearing demand (b) 1,462 26,688 6,307 34,457
Savings (b) 15,237 3,809 19,046
Interest-bearing time 62,900 30,451 322 93,673
Federal funds purchased 3,030 3,030
----------- ----------- ----------- -----------
RATE SENSITIVE LIABILITIES (RSL) 67,392 72,376 10,438 150,206
----------- ----------- ----------- -----------
PERIOD GAP (c) $ (3,368) $ (24,611) $ 41,998 $ 14,019
=========== =========== =========== ===========
CUMULATIVE GAP $ (3,368) $ (27,979) $ 14,019
=========== =========== ===========
% OF TOTAL ASSETS (1.86)% (13.57)% 23.16%
=========== =========== ===========
% RATE SENSITIVE ASSETS/RATE SENSITIVE
LIABILITIES 95.00% 66.00% 502.37%
========== =========== ===========
<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 thru five year 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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9
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COMMERCIAL BANCSHARES, INC.,
================================================================================
NET INTEREST INCOME (Continued)
While the volume of both earning assets and interest bearing liabilities
increased in 1997, differences in rates and deposit mix served to somewhat
offset the impact to net interest income. The average yield on earning assets
declined from 8.43% in 1996 to 8.33% in 1997. The major factors were a decrease
in the yield on loans and tax exempt securities. Management continued its
emphasis on commercial loans which is reflected in the growth in this portfolio
of approximately $9,656,000. To remain competitive, loans were priced very
aggressively and an overall decline in loan pricing was seen in 1997. In
addition, a decrease did occur in the installment loan portfolio in 1997 in the
amount of $3,194,000. The decrease was primarily in the indirect loan portfolio
due to runoff and larger than expected charge-offs. Management has reduced
funding for these loans and centralized the underwriting process. Management
does not anticipate the increased level of charge-offs experienced to continue.
The Bank has strategically targeted managed growth in the commercial and home
equity loan areas for 1998. The yield decline in earning assets was exacerbated
by an increase in the yield on interest bearing liabilities, from 4.52% in 1996
to 4.71% in 1997. The increase in the yield on interest bearing liabilities is
due to the higher rate the Bank must pay on time deposits as it competes with
non-deposit alternatives such as mutual funds and stocks. Management has
alternative lower cost sources of funds such as Federal Home Loan Bank advances
and federal funds purchased to utilize if needed.
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 to slightly lower rate environment for 1998.
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.
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
AVERAGE BALANCE (4)INCOME/EXPENSE AVERAGE YIELD AVERAGE BALANCE (4) INCOME/EXPENSE AVERAGE YIELD
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 1,484,288 $ 77,472 5.22% $ 2,516,161 $ 126,521 5.03%
Securities
Taxable (1) 32,585,903 2,072,713 6.28 30,940,921 1,976,743 6.27
Tax exempt (1 and 2) 14,890,047 1,142,958 7.68 14,112,634 1,149,061 8.17
Loans (3) 123,577,448 11,116,565 9.00 108,816,451 9,969,926 9.16
--------------- ------------- ------- ------------- ------------- ------
TOTAL EARNING ASSETS 172,537,686 14,409,708 8.33% 156,386,167 13,222,251 8.43%
=============== ============= ======= ============= ============= ======
Other assets 11,970,957 11,823,200
--------------- -------------
TOTAL ASSETS $ 184,508,643 $ 168,209,367
=============== =============
Deposits
Interest bearing demand
deposits $ 35,508,530 963,126 2.71% $ 35,860,502 977,788 2.73%
Savings deposits 19,900,106 534,422 2.69 20,679,680 561,395 2.71
Time deposits 98,642,740 5,735,511 5.81 82,724,379 4,749,173 5.74
Short-term borrowed funds 1,587,509 90,738 5.72 807,820 47,157 5.84
--------------- --------- ------- ------------- ------------- ------
TOTAL INTEREST
BEARING LIABILITIES 155,638,885 7,323,797 4.71% 140,072,381 6,335,513 4.52%
--------------- --------- ======= ------------- ------------- ------
Noninterest bearing demand 13,176,789 13,267,940
Other liabilities 974,417 822,670
Shareholders' equity 14,718,552 14,046,376
--------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 184,508,643 $ 168,209,367
=============== =============
NET INTEREST INCOME $ 7,296,754 $ 6,886,738
============= =============
As a percentage of earning assets:
Interest income 8.33% 8.43%
Interest expense 4.23 4.04
------- ------
NET INTEREST INCOME 4.10% 4.39%
======= ======
<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 using a 34% tax rate.
The amount of such adjustments was $388,606 and $390,682 for 1997 and 1996,
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> 8
COMMERCIAL BANCSHARES, INC.
===============================================================================
"Total noninterest income was 79.6% higher
than the 1996 figure. This increase occurred due to
the gain on the sale of the property, equipment and
deposits of the Kenton branch in December 1997."
[PHOTO]
JAMES A. DEER
Secretary/Treasurer of Commercial Bancshares, Inc.
and Executive Vice President of The Commercial Savings Bank
Upper Sandusky, Ohio
NET INTEREST INCOME (continued)
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST DIFFERENTIAL
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------------------- ---------------------------------------------
Total Change due Change due Total Change due Change due
Change to Volume to Rate Change to Volume to Rate
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ (49,049) $ (53,691) $ 4,642 $ (61,214) $ (38,131) $ (23,083)
Investment and mortgage-
backed securities
Taxable 95,970 93,355 (2,615) (874,206) (667,848) (206,358)
Tax exempt (1) (6,103) 64,310 (70,413) 171,990 304,597 (132,607)
Loans (2) 1,146,639 1,330,748 (184,109) 1,187,117 1,307,770 (120,653)
---------- ---------- ---------- ---------- ----------- -----------
Total earning assets 1,187,457 1,434,722 (247,265) 423,687 906,388 (482,701)
---------- ---------- ---------- ---------- ----------- -----------
Deposits
Interest-bearing demand
deposits (14,662) (9,564) (5,098) (159,712) 12,268 (171,980)
Savings deposits (26,973) (20,986) (5,987) (38,257) 9,772 (48,029)
Time deposits 986,338 924,832 61,506 368,169 300,909 67,260
Short-term borrowed funds 43,581 44,585 (1,004) 47,157 47,157
---------- ---------- ---------- ---------- ----------- -----------
Total interest bearing
liabilities 988,284 938,867 49,417 217,357 370,106 (152,749)
---------- ---------- ---------- ---------- ----------- -----------
NET INTEREST INCOME $ 199,173 $ 495,855 $ (296,682) $ 206,330 $ 536,282 $ (329,952)
========== ========== ========== ========== =========== ===========
</TABLE>
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) Non-accrual loan balances are included for purposes of computing the rate
and volume effects although interest on these balances has been excluded.
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11
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
================================================================================
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS
The allowance for possible loan losses on December 31, 1997 was .85% or
$1,075,384 of total loans. This compares to .88% or $1,018,608 of total loans in
1996. 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 $613,000 to the allowance for loan losses in 1997, to
maintain the provision at an adequate level following charge-offs of $642,813
and recoveries of $86,589 and to adjust for the larger than expected charge-offs
of indirect loans discussed earlier.
The schedule to the right presents analysis of the allowance for loan losses,
average loan data and related ratios for the years ended December 31, 1997 and
1996.
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 provision for loan losses charged to expense in
1998 is expected to be at least 1% of gross loan growth of the loan portfolio.
ALLOWANCE FOR LOAN LOSSES, AVERAGE LOAN DATA,
AND RELATED RATIOS
(In thousands of dollars) 1997 1996
- ----------------------------------------------------------------
Balance at beginning of period $ 1,019 $ 996
Loans charged-off:
Commercial (42) (72)
Real estate (0) (0)
Installment (601) (196)
--------- ------------
Total loans charged-off (643) (268)
--------- ------------
Recoveries of loans previously
charged-off:
Commercial 30 60
Real estate 0 0
Installment 56 25
--------- ------------
Total loan recoveries 86 85
--------- ------------
Net loans charged-off (557) (183)
Provision charged to operating
expense 613 206
--------- ------------
BALANCE AT END OF PERIOD $ 1,075 $ 1,019
========= ============
Ratio of net charge-offs to
average loans outstanding for
period 0.45% 0.17%
" The Bank has strategically
targeted managed growth in the commercial
and home equity loan areas for 1998."
[PHOTO]
JAMES W. JUNE
Vice President Retail Banking
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12
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
================================================================================
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF LOANS PERCENTAGE OF LOANS
ALLOWANCE IN EACH Category ALLOWANCE IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
(IN THOUSANDS OF DOLLARS) DECEMBER 31, 1997 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 530 46.88% $ 424 43.93%
Real estate 95 22.06 8 23.92
Consumer 442 31.06 445 32.15
Unallocated 8 N/A 142 N/A
-------- ------ --------- ------
Total $ 1,075 100.00% $ 1,019 100.00%
======== ====== ========= ======
</TABLE>
Nonaccrual loans totaled $1,073,000 at December 31, 1997 as compared to $237,000
at December 31, 1996. The increase is primarily due to commercial loan
relationships. Nonaccrual loans are adequately reserved for, if necessary, and
no additional loss is expected. 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.
The Corporation considers loans impaired if full principal and interest payments
are not anticipated. Impaired loans are 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 of 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.
The following schedule summarizes impaired loans as of December 31, 1996 and
December 31, 1996.
<TABLE>
<CAPTION>
December 31,
(In thousands of dollars) 1997 1996
<S> <C> <C>
Impaired loans $1,405 $ 45
------ ------
Loans accounted for on a nonaccrual basis 1,073 45
Accruing loans which are contractually past
due 90 days or more as
to interest or principal payments 289
Loans which are "troubled debt restructurings"
as defined in Statement of Financial
Accounting Standard No. 15
(exclusive of loans listed above)
------ ------
Total $1,362 $ 45
====== ======
</TABLE>
No interest income recognized on impaired loans in 1997 and 1996.
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, 1997, the balance in OREO stood at
$1,065,000, 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.
================================================================================
13
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
===============================================================================
NONINTEREST INCOME
Total noninterest income of $2,006,696 was 79.6% higher than the 1996 figure
of $1,117,620. This increase occurred due to the gain on the sale of the
property, equipment and deposits of the Kenton branch in December 1997. An
additional contributor to noninterest income was an $81,470 increase in net
gains on sale of securities.
NONINTEREST EXPENSE
Total noninterest expense decreased $8,661 in 1997. Customary merit increases to
employees; increases in occupancy, furniture and equipment; and increases in
data processing were offset by the decrease in FDIC deposit insurance premiums
due to the one-time assessment of $154,011 in 1996.
INCOME TAXES
Income tax expense of $605,024 in 1997 represents 24.8% of income before taxes
as compared to 21% in 1996. 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 5.4% and 5.9% of total interest income in 1997 and
1996.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased slightly to $181,366,767 from $180,960,972. Net loans
increased 8.5% or $9,748,357 while securities decreased 25.1% or $12,850,829.
Cash and cash equivalents increased 12.9% from 1996.
The Corporation has received approval from the appropriate regulatory agency to
form a finance company, Advantage Finance, Inc. (Advantage), in Marion, Ohio.
The purpose of Advantage is to provide financing for higher risk borrowers that
do not meet the more stringent underwriting criteria of the Bank. Operations are
expected to begin in the first quarter of 1998.
LOANS
Consumer and credit card loans decreased 8.6% or $3,194,451 from 1996 levels.
The Corporation was active in the indirect loan business, which accounted for
substantial consumer loan growth in 1996. In 1997, management responded
to larger than expected charge-offs of the indirect loan portfolio by reducing
funding, revising the underwriting criteria to better represent the additional
inherent risk in these types of credits and centralized the underwriting
procedures. Commercial loans showed an increase of 18.9% in 1997. This is a
result of management's commitment to the business client. A new division was
formed, the Corporation's Business Development Team, made up of qualified
commercial lenders whose 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 9.2% or $2,102,751, which primarily
represents loans originated for sale in the secondary market. These loans are
carried at the lower of cost or fair value and were approximately $5,191,000 and
$2,586,000 at December 31, 1997 and 1996. 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 $23,411,756 as of
December 31, 1997, compared to $17,144,184 as of December 31, 1996. At December
31, 1997, other assets include a receivable of approximately $3,508,000 for
loans sold.
The Bank's loan portfolio represents its 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, 1997.
One Year One Through Over
or Less Five Years Five Years
------------- ---------- ------------
Total Fixed Commercial Loans $ 1,889,000 $4,685,000 $19,171,000
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, 1997.
Three Months Over
or Less Three Months
-------------- -------------
Total Variable Commercial Loans $ 26,086,000 $ 8,846,000
================================================================================
14
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
================================================================================
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Mortgage-backed securities decreased 22.2% or $5,316,514
in 1997; obligations of federal agencies decreased 36.6% or $4,031,870; and
obligations of state and political subdivisions decreased 24.3% or $3,557,890 in
1997. Securities were sold to fund the Bank's increased loan demand and to fund
the liability assumption from the sale of the Kenton branch in December 1997.
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.
[PHOTO]
Philip W. Kinley
Vice President and Chief Financial Officer
of The Commercial Savings Bank
Upper Sandusky, Ohio
"The Corporation has received
approval from the appropriate regulatory agency to form
a finance company,
Advantage Finance, Inc.
in Marion, Ohio."
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, 1997:
<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 $ 2,756,218 7.70%
Available for sale
U.S. Government obligation $ 500,780 5.21%
Obligations of federal agencies 4,228,744 6.50
Obligations of state and
political subdivisions 1,337,806 4.86 $ 9,732,839 5.00%
Corporate bonds 501,975 6.18
Mortgage-backed securities 1,626,554 6.45 17,002,555 5.93
--------- ----- ----------- ----- ---------- ---- ------------ -----
Total $ % $ 1,002,755 5.69% $9,949,322 8.77% $ 26,735.394 5.59%
========= ===== =========== ===== ========== ==== ============ =====
</TABLE>
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 consist 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.
================================================================================
15
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
===============================================================================
DEPOSITS
Total deposits decreased 2.5% or $4,090,800, net. The net decrease was
experienced due to the sale of the deposits at the Kenton branch approximating
$9,899,000. The gross increase in deposits was 3.5% or $5,808,405. Attractive
rates were offered throughout 1997 due to market forces and the need to fund the
loan demand.
The following is a schedule of maturities of time certificates of deposit in
amounts of $100,000 or more as of December 31, 1997:
(In thousands of dollars)
<TABLE>
<S> <C>
Three months or less $ 4,828
Over three months through six months 3,753
Over six through twelve months 7,196
Over twelve months 5,268
------------
Total $ 21,045
============
</TABLE>
CAPITAL RESOURCES
Total shareholders' equity at December 31, 1997 was $15,688,343 an increase
of 9.6% or $1,375,098 from total shareholders equity of $14,313,245 at December
31, 1996. The increase is modest in nature due to the Corporation's dividend
payout which amounted to $729,019 for the year ended December 31, 1997 and
higher market value of the Bank's investment portfolio available for sale which
shows an unrealized loss of $226,210, (net of tax), at December 31, 1997
compared to an unrealized loss of $491,270 (net of tax) at December 31, 1996.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. As of December 31,
1997, 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, 1997, the Bank's total risk-based capital ratio and leverage
ratio was 13.2% and 8.4%, thus exceeding the minimum regulatory requirements.
At December 31, 1996, the ratios were 10.2% and 8.6%.
The Corporation's Board of Directors declared a $0.35 per share cash dividend in
both May and November of 1997, paying a total of $729,019. In addition,
the previously mentioned 3-for-1 stock split resulted in the issuance of 694,304
additional shares of common stock, bringing the total shares outstanding to
1,041,456. The Corporation's 1997 return on average shareholder equity was
12.49% compared to 9.83% in 1996. The increase is attributed to the sale of the
Kenton branch in 1997. Total cash dividends paid in 1997 represented 39.64% of
total 1997 net income. This compares to a dividend payout ratio of 50.28% in
1996.
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 $7,111,986 at December 31, 1997 and $6,299,450 at
December 31, 1996. 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 measure of liquidity is the relationship of loans to deposits and borrowed
funds. Lower ratios indicate greater liquidity. At December 31, 1997 and 1996,
the ratio of loans (net of unearned income) to deposits and borrowed funds was
76.42% and 70.02%, respectively, considered an acceptable level of liquidity by
management.
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
period and to a similar degree.
================================================================================
16
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
===============================================================================
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, 1997 and 1996, 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, 1997 and 1996, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
January 23, 1998
================================================================================
17
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
================================================================================
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,111,986 $ 6,089,450
Federal funds sold 210,000
-------------- -------------
Cash and cash equivalents 7,111,986 6,299,450
Securities available for sale 35,508,713 48,392,272
Securities held to maturity (Fair value -
$2,974,830 in 1997, $2,917,390 in 1996) 2,756,218 2,723,488
Total loans 125,959,922 116,154,788
Allowance for possible loan loss (1,075,385) (1,018,608)
-------------- -------------
Loans-net 124,884,537 115,136,180
Premises and equipment, net 3,655,643 4,159,754
Other real estate, net 1,065,000 1,150,000
Accrued interest receivable 1,164,985 1,345,617
Other assets 5,219,685 1,754,211
-------------- -------------
TOTAL ASSETS $ 181,366,767 $ 180,960,972
============== =============
LIABILITIES
Deposits
Noninterest bearing demand $ 14,624,943 $ 14,140,221
Interest bearing demand 34,457,007 34,270,322
Savings and time deposits 91,673,757 96,808,428
Time deposits $100,000 and greater 21,045,455 20,672,991
-------------- -------------
Total deposits 161,801,162 165,891,962
Accrued interest payable 440,260 486,634
Borrowed funds 3,030,000
Other liabilities 407,002 269,131
-------------- -------------
Total liabilities 165,678,424 166,647,727
=========== ===========
SHAREHOLDERS' EQUITY
Common stock, no par value, 4,000,000 shares
authorized, 1,041,456 issued and
outstanding in 1997; $12.50 par value,
1,000,000 shares authorized, 347,152 shares
issued and outstanding in 1996 7,815,513 4,339,400
Paid in capital 3,476,113
Retained earnings 8,099,040 6,989,002
Unrealized loss on securities available for sale (226,210) (491,270)
-------------- -------------
Total shareholders' equity 15,688,343 14,313,245
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 181,366,767 $ 180,960,972
============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
18
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
===============================================================================
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $11,116,565 $ 9,969,926
Securities
Taxable 2,072,713 1,976,743
Tax exempt 754,352 758,380
Other and dividends 77,472 126,521
----------- -----------
Total interest income 14,021,102 12,831,570
INTEREST EXPENSE
Deposits 7,233,059 6,288,356
Other borrowings 90,738 47,157
----------- -----------
Total interest expense 7,323,797 6,335,513
NET INTEREST INCOME 6,697,305 6,496,057
Provision for possible loan loss 613,000 205,800
----------- -----------
Net interest income after provision for possible loan loss 6,084,305 6,290,257
----------- -----------
NONINTEREST INCOME
Service fees and overdraft charges 769,083 720,845
Security gains, net 151,165 69,425
Loan sale gains, net 224,225 198,598
Gain on branch sale 656,300
Other income 205,923 128,752
----------- -----------
Total noninterest income 2,006,696 1,117,620
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 2,600,750 2,525,990
Occupancy, furniture and equipment 559,832 511,997
State taxes 278,123 270,772
Data processing 603,846 553,425
FDIC deposit insurance 28,694 213,406
Professional fees 86,909 88,569
Other operating expenses 1,488,766 1,491,422
----------- -----------
Total noninterest expenses 5,646,920 5,655,581
----------- -----------
Income before income taxes 2,444,081 1,752,296
Income tax expense 605,024 371,515
----------- -----------
NET INCOME $ 1,839,057 $ 1,380,781
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 1.77 $ 1.33
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 1.76 $ 1.33
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
===============================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK PAID-IN CAPITAL RETAINED EARNINGS UNREALIZED GAIN (LOSS) TOTAL SHAREHOLDERS'
ON INVESTMENT SECURITIES EQUITY
AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance
January 1, 1996 $ 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 ($0.67
per common
share) (694,304) (694,304)
25% stock split 863,287 (863,287)
Cash paid in lieu of
fractional shares in
stock split (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
Net income 1,839,057 1,839,057
Cash dividends
declared ($0.70
per common
share) (729,019) (729,019)
Change to zero par
common stock 3,476,113 (3,476,113)
Change in unrealized
gain(loss) on
investment securities
available for sale 265,060 265,060
------------ ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1997 $ 7,815,513 $ 0 $ 8,099,040 $ (226,210) $ 15,688,343
============= ============== ============= ============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
20
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
===============================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,839,057 $ 1,380,781
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 349,060 316,237
Provision for loan loss 613,000 205,800
Deferred income taxes (22,762) 142,015
Gain on sale of securities (151,165) (69,425)
Gain on sale of premises and equipment (29,167) (37,422)
Gain on sale of branch deposits, net (627,133)
Loss on other real estate owned 85,000
Stock dividends on FHLB stock (38,900) (39,600)
Net amortization on investments 142,996 66,593
Amortization of intangible assets 54,680 46,224
Changes in
Loans held for sale (6,112,605) (1,919,153)
Interest receivable 180,632 (67,032)
Interest payable (17,425) 18,968
Other assets and liabilities (144,091) (77,636)
------------ ------------
Net cash from operating activities (3,878,823) (33,650)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (31,414,262) (31,117,583)
Maturities and repayments 5,947,604 2,666,403
Sales 38,754,663 31,487,288
Net change in loans (7,759,099) (15,754,427)
Proceeds from sale of premises and equipment 274,387 75,600
Proceeds from sale of other real estate 93,404
Bank premises and equipment expenditures (90,169) (618,339)
------------ ------------
Net cash from investing activities 5,712,716 (13,167,654)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,808,585 14,269,796
Sale of branch deposits, net (9,130,923)
FHLB borrowings 3,030,000 (694,304)
Cash dividends paid (729,019) (26,288)
------------ ------------
Cash paid in lieu of fractional shares for stock split (1,021,357) 13,549,204
------------ ------------
Net cash from financing activities
Net change in cash and cash equivalents 812,536 347,900
Cash and cash equivalents at beginning of year 6,299,450 5,951,550
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,111,986 $ 6,299,450
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
===============================================================================
21
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 1997 AND 1996
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
subsidiaries, The Commercial Savings Bank (Bank) and Advantage Finance, Inc.
(Advantage). 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 1997 and 1996, the
Corporation paid $7,370,171 and $6,316,545 in interest and $445,000 and $191,000
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 1997 and 1996, 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 taken
together. 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.
LOANS RECEIVABLE: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs, 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.
A loan is considered impaired when management believes full collection of
principal and interest is not probable. Often this is associated with a
significant delay or shortfall in payments. 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.
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, such
increase is reported as bad debt expense.
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 48% and 44% of the loan
portfolio at year end 1997 and 1996 and the loans are expected to be repaid from
cash flow from operations of the borrower. Real estate mortgages make up
approximately 25% and 24% of the loan portfolio at year end 1997 and 1996 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 9% and 10% of total loans at year end 1997 and
1996. Consumer loans include new and used automobile and other consumer purpose
loans. Consumer loans make up approximately 27% and 32% of total loans at year
end 1997 and 1996. The Bank also originates consumer-oriented purchase-money
loans indirectly through various automobile, motorcycle, boat,
================================================================================
22
<PAGE> 20
COMMERCIAL BANCSHARES, INC.
================================================================================
recreational vehicle and other dealerships. Indirect loans represented 92% and
75% of consumer loans and 24% of total loans at year end 1997 and 1996.
Unsecured loans represented 2% of total loans at year end 1997 and 1996.
At year end 1997 and 1996, the Bank had due from bank balances and overnight
federal funds sold to National City Bank totaling $4,680,000 and $4,466,000,
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.
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 1997 and 1996, net of accumulated
amortization:
1997 1996
Core deposit intangible $ 80,065 $ 197,011
Goodwill 79,416 172,622
------------ ------------
TOTAL INTANGIBLE ASSETS $ 159,481 $ 369,633
============ ============
Amortization expenses totaled $54,680 in 1997 and $46,224 in 1996. Core deposit
intangible and goodwill related to the Kenton branch were considered in the
basis of the net liabilities sold as part of the sale of this branch.
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 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 are 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
$193,417 at year end 1997 and $102,473 at year end 1996, and are included in
"Other assets," on the accompanying balance sheet.
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: Basic and diluted earnings per share are computed under
a new accounting standard effective in the quarter ended December 31, 1997. All
prior amounts have been restated to be comparable. Basic earnings per share is
based on net income divided by 1,041,456 weighted average shares outstanding
during the years ended December 31, 1997 and 1996. Diluted earnings per share
reflects the effect of additional common shares issuable under stock options
using the treasury stock method. The weighted average number of shares used for
determining diluted earnings per share were 1,043,391 in 1997. There were no
stock options issuable in 1996. Diluted earnings per share was lower than basic
earnings per share by $0.01 in 1997. There was no difference between basic and
diluted earnings per share in 1996.
In May 1997, the Board of Directors declared a 3-for-1 stock split, resulting in
the issuance of 694,304 shares. 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.
================================================================================
23
<PAGE> 21
COMMERCIAL BANCSHARES, INC.
================================================================================
NOTE 2 - SECURITIES
Year end securities were as follows:
<TABLE>
<CAPTION>
1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale
U.S. Government obligations $ 506,963 $ (6,183) $ 500,780
Obligations of federal agencies 4,241,812 $ 7,286 (20,354) 4,228,744
Obligations of state and political subdivisions 11,013,697 142,579 (85,631)
11,070,645
Corporate bonds 501,766 675 (466) 501,975
Mortgage-backed securities 18,781,559 26,592 (179,042) 18,629,109
----------- ----------- ----------- -----------
Total debt securities available for sale 35,045,797 177,132 (291,676)
34,931,253
Equity investments 577,460 577,460
----------- ----------- ----------- -----------
TOTAL SECURITIES AVAILABLE FOR SALE $35,623,257 $ 177,132 $ (291,676) $35,508,713
=========== =========== =========== ===========
Securities held to maturity
OBLIGATIONS OF FEDERAL AGENCIES $ 2,756,218 $ 218,612 $ 0 $ 2,974,830
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
<S> <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
=========== =========== =========== ===========
</TABLE>
(CONTINUED)
================================================================================
24
<PAGE> 22
COMMERCIAL BANCSHARES, INC.
===============================================================================
NOTE 2 - SECURITIES (Continued)
Mortgage-backed securities available for sale at year end 1997 and 1996 are
summarized below. At year end 1997, the fair value of fixed and variable rate
mortgage-backed securities available for sale totaled $3,815,565 and
$14,813,544.
<TABLE>
<CAPTION>
1997
AMORTIZED FAIR
COST VALUE
---------------------------------
<S> <C> <C>
FHLMC REMICS $ 3,269,307 $ 3,222,783
FNMA REMICS 2,980,761 2,944,606
FNMA certificates 5,807,483 5,766,414
FHLMC certificates 2,233,770 2,223,472
GNMA certificates $ 4,490,238 4,471,834
------------- --------------
$ 18,781,559 $ 18,629,109
============= ==============
</TABLE>
<TABLE>
<CAPTION>
1996
<S> <C> <C>
FHLMC REMICS $ 8,923,034 $ 8,770,834
FNMA REMICS 6,776,293 6,698,915
FNMA certificates 7,143,139 6,968,255
FHLMC certificates
GNMA certificates 1,503,647 1,507,619
------------- --------------
$ 24,346,113 $ 23,945,623
============= ==============
</TABLE>
The amortized cost and approximate fair value of debt securities available for
sale and held to maturity at year end 1997, 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
----------------------------
Securities available for sale
<S> <C> <C>
Due after one year through five years $ 1,008,729 $ 1,002,755
Due after five years through ten years 5,545,359 5,566,550
Due after ten years 9,710,150 9,732,839
Mortgage-backed securities 18,781,559 18,629,109
$35,045,797 $34,931,253
=========== ===========
Securities held to maturity
Due after five years through ten year $ 2,756,218 $ 2,974,830
=========== ===========
Sales of available for sale securities were:
1997 1996
----------------------------
Proceeds $38,754,663 $31,487,288
Gross gains 194,535 374,032
Gross losses 43,370 304,607
</TABLE>
At year end 1997 and 1996, debt securities with a carrying value of $15,888,000
and $11,201,000 were pledged to secure public deposits and other deposits and
liabilities as required or permitted by law.
NOTE 3 - LOANS Year end loans were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Commercial and other loans $ 60,677,339 $ 51,021,307
Real estate loans 25,081,877 22,979,126
Consumer and credit card loans 34,149,658 37,344,109
Home equity loans 6,051,048 4,810,246
------------ ------------
TOTAL LOANS $125,959,922 $116,154,788
============ ============
</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 $23,411,756 and $17,144,184 at year end 1997 and 1996. Real
estate loans originated and held for sale at year end 1997 and 1996 totaled
approximately $5,191,000 and $2,586,000.
At December 31, 1997 and 1996, total loans included loans to farmers for
agricultural purposes of approximately $11,878,000 and $11,759,000.
The balance of impaired loans was $1,404,983 and $45,391 at year end 1997 and
1996. Of this amount, $37,006 and $10,361 in impaired loans required no
allowance for loan loss allocation. The remaining impaired loans of $1,367,977
and $35,030 had $307,323 and $35,030 of the allowance for loan losses allocated
to them, although the entire allowance remains available for charge-offs of any
loan.
The average balance of impaired loans was $440,744 for 1997 and $96,475 for
1996. No interest income was recognized on impaired loans during 1997 and 1996.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSS
Activity in the allowance for possible loan loss was as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Beginning balance $ 1,018,608 $ 996,131
Provision for possible loan loss 613,000 205,800
Loans charged-off (642,812) (268,415)
Recoveries of previous charge-offs 86,590 85,092
------------ -----------
ENDING BALANCE $ 1,075,385 $ 1,018,608
============ ===========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Land $ 661,033 $ 711,970
Buildings 3,748,089 3,915,521
Furniture and equipment 1,629,041 1,649,617
------------ -----------
Total 6,038,163 6,277,108
Accumulated depreciation 2,382,520 2,117,354
----------- -----------
PREMISES AND EQUIPMENT, NET $ 3,655,643 $ 4,159,754
=========== ===========
</TABLE>
(CONTINUED)
===============================================================================
25
<PAGE> 23
COMMERCIAL BANCSHARES, INC.
===============================================================================
NOTE 6 - DEPOSITS
At year end 1997, scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C>
1998 $ 62,769,473
1999 21,550,741
2000 7,159,473
2001 1,069,361
2002 671,228
Thereafter 232,171
-------------
$ 93,452,447
=============
</TABLE>
NOTE 7 - FHLB ADVANCES AND FEDERAL FUNDS PURCHASED
Borrowed funds at December 31, 1997 consist of FHLB advances and federal funds
purchased. The $2,500,000 of variable rate FHLB advances were at a current rate
of 5.87%. FHLB advances are collateralized by all shares of FHLB stock owned by
the Bank and by 100% of the Bank's qualified mortgage loan portfolio. The
$530,000 of federal funds purchased from National City Bank were at a rate of
7.00%. The average amount outstanding during 1997 was $400,000 at a weighted
average interest rate of 5.76%.
- -------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Current provision $ 627,786 $ 229,500
Deferred provision (22,762) 142,015
--------- ---------
TOTAL INCOME TAX EXPENSE $ 605,024 $ 371,515
========= =========
Year end deferred tax assets and liabilities consist of:
1997 1996
Items giving rise to deferred tax assets
Allowance for loan losses in excess of tax reserve $ 32,569 $ 13,530
Basis reduction of other real estate owned 45,900 17,000
Unrealized loss on investment securities available for sale 116,532 253,078
Other 26,066 32,438
--------- ---------
Total 221,067 316,046
Items giving rise to deferred tax liabilities
Depreciation (85,254) (86,111)
Mortgage servicing rights (65,762) (34,841)
Deferred loan fees and costs (176,170) (197,929)
Intangible assets amortization (8,198)
FHLB stock dividend (26,622) (13,464)
Other (1,951) (12,796)
--------- ---------
Total (363,957) (345,141)
--------- ---------
NET DEFERRED TAX LIABILITY $(142,890) $ (29,095)
========= =========
</TABLE>
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>
1997 1996
<S> <C> <C>
Tax at statutory rates $ 830,988 $ 595,781
Increase (decrease) in tax resulting from:
Tax-exempt interest (214,909) (216,056)
Other (11,055) (8,210)
--------- ---------
TOTAL INCOME TAX EXPENSE $ 605,024 $ 371,515
========= =========
</TABLE>
The income tax expense related to investment security gains totaled $51,396 and
$23,605 for 1997 and 1996.
(CONTINUED)
===============================================================================
26
<PAGE> 24
COMMERCIAL BANCSHARES, INC.
===============================================================================
NOTE 9 - STOCK OPTION PLAN
The Commercial Bancshares, Inc. Incentive Stock Option Plan was approved by
shareholders in April 1997. The plan enables a committee of the Board of
Directors to grant stock options to executive officers of the Corporation and
its subsidiaries. A total of 150,000 options on common shares are available to
be granted pursuant to the plan, after giving effect to the stock split
discussed in Note 1. Stock options may be granted at a price not less than the
fair market value of the Corporation's common shares at the date of grant for
terms up to, but not exceeding ten years from the grant date. Vesting occurs
after five years. Exceptions to the vesting schedule can operate to shorten the
vesting time. In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-based Compensation," which encourages the
use of a fair value-based method to account for stock-based compensation plans
such as the Corporation's stock option plan. As allowed by SFAS No. 123,
however, the Corporation has elected to continue to follow prior standards in
accounting for its stock options. Under these standards, because the exercise
price of the Corporation's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
If compensation expense is not recorded, pro forma information regarding net
income and earnings per share is required by SFAS No. 123, and has been
determined as if the Corporation had accounted for its stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using an option pricing model with the following
assumptions for 1997: risk-free interest rate of 6.42%; dividend yield of 3.50%;
volatility factor of the expected market price of the Corporation's common stock
of 16.05%; and a weighted average expected life of the options of ten years.
There were no stock options granted or outstanding in 1996. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' five-year vesting period.
The Corporation's pro forma information follows:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Income as reported $ 1,839,057
Pro forma net income 1,821,316
Pro forma earnings per share
Basic 1.75
Diluted 1.74
</TABLE>
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1997
Average
Options Exercise Price
-----------------------------
Outstanding - beginning of year 0
<S> <C> <C>
Granted 60,000 $ 23.67
Forfeited -- --
Exercised -- --
------ ---------
OUTSTANDING - END OF YEAR 60,000 $ 23.67
====== =========
EXERCISABLE - END OF YEAR 15,000
======
Weighted average fair value of
options granted during the year $ 23.67
</TABLE>
During 1997, the Corporation met one of the exceptions to the vesting schedule
resulting in 15,000 options from the initial grant of 30,000 options becoming
exercisable.
NOTE 10 - 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 $66,646 and $68,718 for the years ended
December 31, 1997 and 1996.
NOTE 11 - 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.
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 do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
(CONTINUED)
===============================================================================
27
<PAGE> 25
COMMERCIAL BANCSHARES, INC.
===============================================================================
NOTE 11 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (continued) The
following is a summary of commitments to extend credit at year end 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Fixed rate $ 411,000 $ 265,000
Variable rate 16,063,000 13,339,000
------------ -----------
$ 16,474,000 $13,584,000
============ ===========
</TABLE>
At year end 1997 and 1996, reserves of $718,000 and $708,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
NOTE 12 - 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 under-capitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
under-capitalized, 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 1997, consolidated actual capital levels (in millions) and minimum
required levels for the Bank were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total capital (to risk-weighted assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 16,763 13.3% $ 10,072 8.0% $ 12,589 10.0%
Bank $ 16,650 13.2% $ 10,069 8.0% $ 12,587 10.0%
Tier 1 capital (to risk-weighted assets)
Consolidated $ 15,688 12.5% $ 5,036 4.0% $ 7,554 6.0%
Bank $ 15,574 12.4% $ 5,035 4.0% $ 7,552 6.0%
Tier 1 capital (to average assets)
Consolidated $ 15,688 8.5% $ 7,398 4.0% $ 9,247 5.0%
Bank $ 15,574 8.4% $ 7,385 4.0% $ 9,231 5.0%
</TABLE>
At year end 1996, consolidated actual capital levels (in millions) and minimum
required levels for the Bank were:
<TABLE>
<CAPTION>
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% $ 9,195 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 1997 and 1996 were categorized as well
capitalized. Management believes that no events have occurred since December 31,
1997 that would change the capital category.
CONTINUED
===============================================================================
28
<PAGE> 26
COMMERCIAL BANCSHARES, INC.
===============================================================================
COMMERCIAL BANCSHARES, INC.
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 1997, approximately $3,203,000
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 13 - 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 1997 and 1996
A summary of activity on these borrower relationships with aggregate debt
greater than $60,000 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Beginning balance $ 1,778,981 $ 1,796,604
New loans and advances 261,000 590,781
Payments (614,671) (608,404)
------------- -------------
ENDING BALANCE $ 1,425,310 $ 1,778,981
============= =============
</TABLE>
A director of the Corporation is a partner with a law firm that rendered various
legal services for the Corporation. Legal fees paid in 1997 were not
significant.
- -------------------------------------------------------------------------------
NOTE 14- FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year end fair values of financial instruments were:
<TABLE>
<CAPTION>
1997 1996
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------------------------------------------------
Financial assets
<S> <C> <C> <C> <C>
Cash and equivalents $ 7,111,986 $ 7,112,000 $ 6,299,450 $ 6,299,000
Securities available for sale 35,508,713 35,509,000 48,392,272 48,392,000
Securities held to maturity 2,756,218 2,975,000 2,723,488 2,917,000
Loans, net of allowance for possible loan losses 124,884,537 124,006,000 115,136,180 114,667,000
Accrued interest receivable 1,164,985 1,165,000 1,345,617 1,346,000
Cash surrender value of life insurance 987,603 988,000 927,601 928,000
Mortgage servicing rights 193,417 193,000 102,473 102,000
Financial liabilities
Demand and savings deposits (68,348,715) (68,349,000) (68,318,250) (68,318,000)
Time deposits (93,452,447) (97,573,712) (97,624,000)
Borrowed funds (3,030,000) (3,030,000)
Accrued interest payable (440,260) (440,000) (486,634) (487,000)
</TABLE>
The following assumptions were used for purposes of the previous 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 twelve months, for demand and savings deposits, borrowed funds 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 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 1997 or 1996, 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 1997
and 1996 should not necessarily be considered to apply at subsequent dates.
Nonfinancial instruments may have value but are not included in the above
disclosures, such as property and equipment. In addition, 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.
CONTINUED
===============================================================================
29
<PAGE> 27
COMMERCIAL BANCSHARES, INC.
===============================================================================
NOTE 15- PARENT CORPORATION STATEMENTS
The following are condensed financial statements of Commercial Bancshares, Inc.:
CONDENSED BALANCE SHEET
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS
<S> <C> <C>
Cash on deposit with subsidiary $ 34,323 $ 8,817
Investment in common stock of subsidiary 15,629,429 14,267,491
Other assets 26,057 38,403
----------- -----------
TOTAL ASSETS $15,689,809 $14,314,711
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 1,466 $ 1,466
Shareholders' equity 15,688,343 14,313,245
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,689,809 $14,314,711
=========== ===========
</TABLE>
CONDENSED STATEMENT OF INCOME
Year ended December 31, 1997 and 1996
1997 1996
INCOME
Dividends from subsidiary $ 874,019 $ 735,481
Other income 1,238
Total income 875,257 735,481
EXPENSES
Amortization 12,348 12,348
Other 65,732 27,786
---------- ----------
Total Expenses 78,080 40,134
---------- ----------
Income before equity in undistributed earnings
of subsidiary 797,177 695,347
Equity in undistributed earnings of subsidiary 1,041,880 685,434
---------- ----------
NET INCOME $1,839,057 $1,380,781
========== ==========
CONDENSED STATEMENT OF CASH FLOW
Year ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,839,057 $ 1,380,781
Adjustments to reconcile net income to net cash
from operating activities
Amortization 12,348 12,348
Equity in undistributed earnings of subsidiary (1,041,880) (685,434)
Change in other assets and liabilities 7,643
----------- -----------
Net cash from operating activities 809,525 715,338
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to new subsidiary (55,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (729,019) (694,304)
Cash paid in lieu of fractional shares in stock split (26,288)
----------- -----------
Net cash from financing activities (729,019) (720,592)
----------- -----------
Net change in cash 25,506 (5,254)
Cash at beginning of period 8,817 14,071
----------- -----------
CASH AT END OF PERIOD $ 34,323 $ 8,817
=========== ===========
</TABLE>
===============================================================================
30
<PAGE> 28
COMMERCIAL BANCSHARES, INC.
===============================================================================
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 7 under the captions "Election of Directors" and
"Executive Officers" in the Corporation's Definitive Proxy Statement dated March
5, 1998 for the Annual Meeting of Shareholders to be held on April 8, 1998 and
is incorporated herein by reference.
ITEM 10
EXECUTIVE COMPENSATION
Information concerning executive compensation appears on pages 8 and 9 under the
captions "Executive Compensation", "Supplementary Executive Retirement Plan" and
"Executive Incentive Stock Option Plan" in the Corporation's Definitive Proxy
Statement dated March 5, 1998 for the Annual Meeting of Shareholders to be held
on April 8, 1998 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 5, 1998 for the Annual Meeting of
Shareholders to be held April 8, 1998 and is incorporated herein by reference.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on page 11 under the caption "Indebtedness of and Transactions with
Officers and Directors" in the Corporation's Definitive Proxy Statement dated
March 5, 1998 for the Annual Meeting of Shareholders to be held on April 8, 1998
and is incorporated herein by reference.
- -------------------------------------------------------------------------------
ITEM 13
EXHIBITS LIST AND REPORT ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
REFERENCE TO PAGE NUMBER
REGULATION S-B PRIOR FILING OR IN THIS
EXHIBIT EXHIBIT NUMBER FORM 10-KSB
NUMBER DESCRIPTION OF DOCUMENT ATTACHED HERETO REPORT
<S> <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
10 Commercial Bancshares, Inc. 1997 Stock Option Plan ** 4 Not Applicable
21 Subsidiaries of the Registrant 5 33
27 Financial Data Schedule 6 33
<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.
** Indicates document previously filed as Appendix II to the Issuer's Proxy
Statement dated March 13, 1997. 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
On December 15, 1997, Form 8-K was filed with the Securities and Exchange
Commission. It announced the approval from the Office of the Comptroller of the
Currency for Liberty National Bank of Ada, Ohio to purchase the assets and
deposit liabilities of the Corporation's branch in Kenton, Ohio.
On December 31, 1997, Form 8-K was filed with the Securities and Exchange
Commission. It announced the consummation of the sale of the assets and deposit
liabilities of the Corporation's branch in Kenton, Ohio to Liberty National Bank
of Ada, Ohio on December 26, 1997. The Form 8-K also reported Advantage Finance,
Inc., a wholly owned subsidiary of the Corporation, obtained approval from the
Ohio Department of Commerce, Ohio Division of Financial Institutions for the
issuance of a Certificate of Registration under the Ohio Mortgage Loan Act.
Advantage Finance will commence operations as a finance company in 1998 in the
city of Marion, Ohio.
===============================================================================
31
<PAGE> 29
COMMERCIAL BANCSHARES, INC.
===============================================================================
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.
COMMERCIAL BANCSHARES, INC.
Date February 12, 1998
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 12, 1998.
/s/ RAYMOND E. GRAVES /s/ EDWIN G. EMERSON
- -------------------------------------- ------------------------------
Raymond E. Graves Edwin G. Emerson
President (Principal Executive Officer) Director
and Director
/s/ JAMES A. DEER /s/ HAZEL FRANKS
- -------------------------------------- ------------------------------
James A. Deer Hazel Franks
Executive Vice President, Principal Director
Financial Officer,
Principal Accounting Officer and Director
/s/ RICHARD SHEAFFER /s/ DEBORAH J. GRAFMILLER
- --------------------------------------- ------------------------------
Richard Sheaffer Deborah J. Grafmiller
Director, Chairman of the Board Director
/s/ DANIEL E. BERG /s/ MICHAEL A. MASTRO
- ----------------------------------------- ------------------------------
Daniel E. Berg Michael A. Mastro
Director Director
/s/ LOREN H. DILLON /s/ WILLIAM E. RUSE
- ------------------------------------------ ------------------------------
Loren H. Dillon William E. Ruse
Director Director
/s/ MARK DILLON /s/ DOUGLAS C. SMITH
- ------------------------------------------- ------------------------------
Mark Dillon Douglas C. Smith
Director Director
===============================================================================
32
<PAGE> 1
EXHIBIT 21
COMMERCIAL BANCSHARES, INC.
STATE OF PERCENTAGE OF
SUBSIDIARY INCORPORATION SECURITIES OWNED
The Commercial Savings Bank(1) Ohio 100%
Advantage Finance, Inc.(1) Ohio 100%
(1) The subsidiary's principal office is located in Upper Sandusky, Ohio.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,111,986
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,508,713
<INVESTMENTS-CARRYING> 2,756,218
<INVESTMENTS-MARKET> 2,974,830
<LOANS> 124,884,537
<ALLOWANCE> 1,075,385
<TOTAL-ASSETS> 181,366,767
<DEPOSITS> 161,801,162
<SHORT-TERM> 3,030,000
<LIABILITIES-OTHER> 847,262
<LONG-TERM> 0
0
0
<COMMON> 7,815,513
<OTHER-SE> 7,872,830
<TOTAL-LIABILITIES-AND-EQUITY> 181,366,767
<INTEREST-LOAN> 11,116,565
<INTEREST-INVEST> 2,827,065
<INTEREST-OTHER> 77,472
<INTEREST-TOTAL> 14,021,102
<INTEREST-DEPOSIT> 7,233,059
<INTEREST-EXPENSE> 7,323,797
<INTEREST-INCOME-NET> 6,697,305
<LOAN-LOSSES> 613,000
<SECURITIES-GAINS> 151,165
<EXPENSE-OTHER> 5,646,920
<INCOME-PRETAX> 2,444,081
<INCOME-PRE-EXTRAORDINARY> 1,839,057
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,839,057
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 4.10
<LOANS-NON> 1,073,000
<LOANS-PAST> 288,514
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,018,608
<CHARGE-OFFS> 642,842
<RECOVERIES> 86,590
<ALLOWANCE-CLOSE> 1,075,385
<ALLOWANCE-DOMESTIC> 1,067,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,385
</TABLE>
