<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
[X] For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ............... to...................
Commission File No. 0-27894
COMMERCIAL BANCSHARES, INC.
(Name of small business issuer in its charter)
OHIO ............34-1787239................
--------------------------------------
(State or other jurisdiction of (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, 1998 were: $16,047,622.
At March 9, 1999, there were issued and outstanding 1,049,999 of the Issuer's
Common Shares.
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of March 9, 1999 was $29,132,940.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Issuer's Definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held April 14, 1999 are incorporated by reference into Part
III.
Transitional Small Business Disclosure Form (check one):
Yes [ ] No. [X]
1.
<PAGE> 2
INDEX
FORM 10-KSB
<TABLE>
<CAPTION>
PAGE(S)
--------
PART I
<S> <C> <C>
ITEM 1. Description of Business 3-9
ITEM 2. Description of Property 9
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters 10
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation 10
ITEM 7. Financial Statements 10
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons -
Compliance with Section 16(a) of the Exchange Act 11
ITEM 10. Executive Compensation 11
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 11
ITEM 12. Certain Relationships and Related Transactions 11
ITEM 13. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBITS 14-18
</TABLE>
2.
<PAGE> 3
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS
- --------
In February 1995, Commercial Bancshares, Inc. (the "Corporation") received
approval from the Board of Governors of the Federal Reserve System to become a
bank holding corporation by acquiring all the voting shares of common stock of
The Commercial Savings Bank (the "Bank"). The principal business of the
Corporation presently is to operate the Bank, which is a wholly-owned
subsidiary, and its principal asset. The Corporation and the main office of the
Bank are located at 118 South Sandusky Avenue, Upper Sandusky, Ohio 43351. The
Corporation's telephone number is (419) 294-5781. 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. (the "Finance Company"). On
December 24, 1997, approval was granted by the Ohio Division of Financial
Institutions for Advantage Finance, Inc. to do business. On April 13, 1998, the
Finance Company opened for business at 117 North Greenwood, Suite 7, Marion,
Ohio providing finance company services to customers in the Marion area.
Although wholly owned by the Corporation, the Bank functions as an independent
community bank. The Bank was organized on April 20, 1920 as a state-chartered
Bank and incorporated as "The Lewis Bank & Trust Corporation" under the laws and
statutes of the State of Ohio. An amendment to the articles of incorporation on
February 8, 1929 changed the name of the Bank to The Commercial Savings Bank.
The Bank provides customary retail and commercial banking services to its
customers, including acceptance of deposits for demand, savings and time
accounts and servicing of such accounts; commercial, consumer and real estate
lending, including installment loans; Individual Retirement Accounts (IRA's);
safe deposit facilities and night depository facilities. The Bank is a nonmember
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 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 based on 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 dependent on the ability of the related business to generate
adequate cash flow to service the debt. Such loans primarily carry adjustable
interest rates. Residential real estate loans are made with primarily fixed
rates and are secured by the borrower's residence. Such loans are made based on
the borrower's ability to make repayment from employment and other income. The
Bank generally makes these loans in amounts of 95% or less of the value of
collateral. An appraisal is obtained from a qualified real estate appraiser for
substantially all loans secured by real estate. Construction loans are secured
by residential and business real estate that primarily will be borrower-occupied
upon completion. The Bank usually makes the permanent loan at
3.
<PAGE> 4
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
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 Finance Company specializes in direct and indirect lending for
consumer goods, 90-day and six-month same-as-cash loans, second mortgage and
home equity loans, and installment loans.
Both the Bank and the Finance Company compete for business in the tri-county
market of Wyandot, Hancock and Marion Counties, Ohio. The Company's competitors
for business come from two primary sources: large regional firms such as
BankOne, National City BancCorp, Fifth Third BancCorp, Associates Finance,
Beneficial Finance and Sky Financial; and independent community banks and
thrifts such as First Citizen's National Bank, Fahey Bank and Industrial Savings
& Loan. The Bank finds that it competes favorably with the large regional banks
by its ability to maintain decision-making officers within branch locations
rather than centralizing decision-making in a corporate headquarters.
Competition with the independent community banks is enhanced by creating product
niches so as not to resort solely to pricing as a means to attract business.
Examples of the Bank's product niches include horse and cargo trailer financing,
small-business lending and low-fee demand deposit accounts. The Finance Company
has found a niche in indirect financing of retail consumer goods from regional
retailers such as Quality Farm and Fleet and Simplicity Tractors.
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 before 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 deposits are
insured, within established limits, 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.
4.
<PAGE> 5
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
REGULATION OF THE FINANCE COMPANY: The Finance Company is chartered in the State
of Ohio and regulated by the Ohio Division of Financial Institutions and the
Federal Reserve Board. These regulatory agencies have the authority to examine
the books and records of the Finance Company and the Finance Company is subject
to their rules and regulations.
EMPLOYEES
- ---------
Currently, the Bank has 88 full-time employees and 14 part-time employees and
Advantage Finance, Inc. has two full-time employees and no part-time employees.
The Corporation does not have any full- or part-time employees.
STATISTICAL DISCLOSURES
- -----------------------
The following statistical information for 1998 and 1997, which is included in
the Corporation's 1998 Annual Report to Shareholders, is incorporated herein by
reference (Exhibit 13).
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential 5-6
Investment Portfolio 12
Loan Portfolio 7-11,28
Summary of Loan Loss Experience 7-8
Deposits 12-13
Return on Equity and Assets 2
Short-term Borrowings N/A
</TABLE>
In addition, statistical information for other applicable periods is shown
below.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL: The following table illustrates the impact on net
interest income of changes in average balances and yields of the Corporation's
assets and liabilities for 1996.
<TABLE>
<CAPTION>
Average Income/ Average
Balance (4) Expense Yield
----------- ------- -----
<S> <C> <C> <C>
Short-term investments $ 2,516,161 $ 126,521 5.03%
Securities
Taxable (1) 30,940,921 1,976,743 6.27
Tax exempt (1 and 2) 14,112,634 1,149,061 8.17
Loans (3) 108,816,451 9,969,926 9.16
---------------- --------------- ----
Total earning assets 156,386,167 13,222,251 8.43%
--------------- ====
Other assets 11,823,200
----------------
Total assets $ 168,209,367
================
</TABLE>
5.
<PAGE> 6
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
<TABLE>
<CAPTION>
Average Income/ Average
Balance (4) Expense Yield
----------- ------- -----
<S> <C> <C> <C>
Deposits
Interest-bearing demand deposits $ 35,860,502 977,788 2.73%
Savings deposits 20,679,680 561,395 2.71
Time deposits 82,724,379 4,749,173 5.74
Short-term borrowed funds 807,820 47,157 5.84
---------------- --------------- ----
Total interest bearing liabilities 140,072,381 6,335,513 4.52%
--------------- ====
Noninterest bearing demand 13,267,940
Other liabilities 822,670
Shareholders' equity 14,046,376
----------------
Total liabilities and
shareholders' equity $ 168,209,367
================
Net interest income $ 6,886,738
===============
As a percentage of earning assets:
Interest income 8.43%
Interest expense 4.04
-----
Net interest income 4.39%
=====
</TABLE>
(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 $390,682 for
1996.
(3) Nonaccrual loans are included in the average balances
presented.
(4) Average is a daily average balance.
INVESTMENT PORTFOLIO: The carrying value of available-for-sale and
held-to-maturity securities as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available for sale
U.S. Government obligations $ 509,206 $ 494,940
Obligations of federal agencies 8,426,243 8,293,344
Obligations of state and political subdivisions 14,559,081 14,628,535
Corporate bonds 502,500 499,570
Mortgage-backed securities 24,346,113 23,945,623
--------------- ---------------
Total debt securities available for sale 48,343,143 47,862,012
Equity investments 530,260 530,260
--------------- ---------------
Total securities available for sale $ 48,873,403 $ 48,392,272
=============== ===============
Securities held to maturity
Obligations of federal agencies $ 2,723,488 $ 2,917,390
=============== ===============
</TABLE>
6.
<PAGE> 7
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
LOAN PORTFOLIO: Year-end loans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial and other loans $ 51,021,307 $ 53,708,832 $ 55,044,335
Real estate loans 22,979,126 21,376,721 24,332,310
Consumer and credit card loans 37,344,109 20,386,106 12,284,219
Home equity loans 4,810,246 3,259,872 3,467,645
---------------- --------------- ----------------
Total loans $ 116,154,788 $ 98,731,531 $ 95,128,509
================ =============== ================
</TABLE>
The following schedule summarizes nonperforming and impaired loans as of
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
------------
(In thousands of dollars) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Impaired loans $ 45 $ 257 N/A
=========== =========== ===========
Loans accounted for on a nonaccrual basis $ 45 $ 0 $ 176
Accruing loans which are contractually past due
90 days or more as to interest or principal
payments 0 0 69
Loans which are "troubled debt restructurings" as
defined in Statement of Financial Accounting
Standard No. 15 (exclusive of loans listed above) 0 0 --
----------- ----------- -----------
Total nonperforming loans $ 45 $ 0 $ 245
=========== =========== ===========
</TABLE>
At December 31, 1998, loans totaling $457,750 were identified as potential
problem loans. Management has doubts about the borrowers' future ability to
comply with present loan-repayment terms. These loans are not included as
impaired, nonaccrual or troubled debt restructuring loans as disclosed in the
Corporation's 1998 Annual Report to Shareholders.
7.
<PAGE> 8
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
SUMMARY OF LOAN LOSS EXPERIENCE: The following schedule presents an analysis of
the allowance for loan losses, average loan data and related ratios for the
years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 996 $ 960 $ 1,150
Loans charged off:
Commercial (72) (147) (517)
Real estate (0) (1) --
Installment (196) (47) (85)
----------- ---------- -----------
Total loans charged off (268) (195) (602)
----------- ---------- -----------
Recoveries of loans previously charged off:
Commercial 60 117 150
Real estate 0 -- 2
Installment 25 14 25
----------- ---------- -----------
Total loan recoveries 85 131 177
----------- ---------- -----------
Net loans charged off (183) (64) (425)
Provision charged to operating expense 206 100 235
----------- ---------- -----------
Balance at end of period $ 1,019 $ 996 $ 960
=========== ========== ===========
Ratio of net charge-offs to average loans
outstanding for period 0.17% 0.07% 0.43%
</TABLE>
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan and related ratios.
<TABLE>
<CAPTION>
Allocation Of The Allowance For Loan Losses
-------------------------------------------
Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- --------- ----------- --------- ------------
(In Thousands Of Dollars) December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 424 43.93% $ 448 54.40% $ 501 57.87%
Real estate 8 23.92 59 20.65 30 29.22
Consumer 445 32.15 340 24.95 179 12.91
Unallocated 142 N/A 149 N/A 250 N/A
---------- -------- ---------- -------- ---------- ------
Total $ 1,019 100.00% $ 996 100.00% $ 960 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
DEPOSITS: Information required for 1996 is included under the caption
"Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates
and Interest Differential" above.
RETURN ON EQUITY AND ASSETS: Information required for 1996 is included on page 2
of the Corporation's 1998 Annual Report.
SHORT-TERM BORROWINGS: No information is required to be reported, since the
average balance of such borrowings for each applicable period was less than 30%
of period-end shareholders' equity.
8.
<PAGE> 9
ITEM 2 - DESCRIPTION OF PROPERTY
The Corporation's headquarters and the Bank's main office are 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 below are owned by the Bank and are free and clear of
any encumbrances.
<TABLE>
<CAPTION>
Location Description
-------- -----------
<S> <C>
1. Main Office Two-story building built in the early 1900's
118 S. Sandusky Ave. and remodeled in 1991.
Upper Sandusky, OH 43351
2. North Drive-In One story drive in office opened in 1981
400 N. Sandusky Ave.
Upper Sandusky, OH 43351
3. Carey Office One story building built and opened in
128 S. Vance St. 1973.
Carey, OH 43316
4. Harpster Office One-story building purchased in 1978.
17480 Cherokee St.
Harpster, OH 43323
5. Marion Barks Road Office One story building purchased, renovated
170 Barks Road East and opened in 1988.
Marion, OH 43302
6. Marion Jamesway Office One story building constructed and opened
279 Jamesway in June 1997.
Marion, OH 43302
7. Findlay Office One story building purchased from Savings
1660 Tiffin Ave. of America in 1992.
Findlay, OH 45840
</TABLE>
The Bank also operates an intermittent office inside the Rotary Towers Nursing
Facility in Marion opened in June 1991. The Finance Company leases its office
location at 177 North Greenwood, Suite 7, Marion, Ohio on a 2-year lease with
two 2-year options to renew. The Corporation neither owns nor leases any
properties related to these two operations.
9.
<PAGE> 10
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, 1998.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The information set forth under the heading "Shareholder Information" on page 41
of the Corporation's 1998 Annual Report to Shareholder's is incorporated herein
by reference (Exhibit 13).
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The information set forth under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 3 through 15
of the Corporation's 1998 Annual Report to Shareholders is incorporated herein
by reference (Exhibit 13).
ITEM 7 - FINANCIAL STATEMENTS
The information set forth under the headings listed below on pages 16 through 40
of the Corporation's 1998 Annual Report to Shareholders is incorporated herein
by reference (Exhibit 13).
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity - Years
Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998
and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
10.
<PAGE> 11
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 4 through 9 under the captions "Election of Directors " and
"Executive Officers" in the Corporation's Definitive Proxy Statement dated March
12, 1999 for the Annual Meeting of Shareholders to be held on April 14, 1999 and
is incorporated herein by reference.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation appears on page 10 under the
captions "Executive Compensation" and "Supplementary Executive Retirement Plan"
in the Corporation's Definitive Proxy Statement dated March 12, 1999 for the
Annual Meeting of Shareholders to be held on April 14, 1999 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 2 and 4 under the captions "Voting Securities
and Principal Holders Thereof" and "Election of Directors" in the Corporation's
Definitive Proxy Statement dated March 12, 1999 for the Annual Meeting of
Shareholders to be held April 14, 1999 and is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on page 3 under the caption "Family Relationships" and "Related
Transactions" in the Corporation's Definitive Proxy Statement dated March 12,
1999 for the Annual Meeting of Shareholders to be held on April 14, 1999 and is
incorporated herein by reference.
11.
<PAGE> 12
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Page
Reference to Number in
Regulation S-B Prior Filing or This
Exhibit Exhibit Number Form 10-KSB
Number Description Of Document Attached Hereto Report
------ ----------------------- --------------- ------
<S> <C> <C> <C> <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 Material Contracts ** 4 Not Applicable
13 Annual Report to Shareholders for
the Year Ended 1998 5 14
21 Subsidiaries of the Registrant 6 15
23 Consent of Crowe, Chizek and
Company LLP 7 16
27 Financial Data Schedule 8 17
</TABLE>
* 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 documents which have been previously filed as part of the Issuer's
Reports on Form S-8 dated August 1, 1997 and Form S-8 dated March 17, 1999.
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.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
12.
<PAGE> 13
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.
March 26, 1999 COMMERCIAL BANCSHARES, INC.
-------------------
Date By: /s/ RAYMOND E. GRAVES
------------------------------
Raymond E. Graves, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 26, 1999.
- ---------------
<TABLE>
<CAPTION>
Signatures Signatures
---------- ----------
<S> <C>
/S/ RAYMOND E. GRAVES /S/ EDWIN G. EMERSON
- ---------------------------------------------- ----------------------------------------------
Raymond E. Graves Edwin G. Emerson
President (Principal Executive Officer) and Director
Director
/S/ HAZEL FRANKS
/S/ JAMES A. DEER ----------------------------------------------
- ---------------------------------------------- Hazel Franks
James A. Deer Director
Executive Vice President, Principal Financial
Officer, Principal Accounting Officer and
Director /S/ DEBORAH J. GRAFMILLER
----------------------------------------------
Deborah J. Grafmiller
/S/ RICHARD SHEAFFER Director
- ----------------------------------------------
Richard Sheaffer
Director, Chairman of the Board /S/ MICHAEL A. MASTRO
----------------------------------------------
Michael A. Mastro
/S/ DANIEL E. BERG Director
- ----------------------------------------------
Daniel E. Berg
Director /S/ WILLIAM E. RUSE
----------------------------------------------
William E. Ruse
/S/ LOREN H. DILLON Director
- ----------------------------------------------
Loren H. Dillon /S/ DOUGLAS C. SMITH
Director ----------------------------------------------
Douglas C. Smith
/S/ MARK DILLON Director
- ----------------------------------------------
Mark Dillon
Director
</TABLE>
13.
<PAGE> 1
EXHIBIT 13
COMMERCIAL BANCSHARES, INC.
Upper Sandusky, Ohio
ANNUAL REPORT
December 31, 1998
CONTENTS
Comparative Summary of Selected Financial Data......................... 1
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 3
Independent Auditors' Report........................................... 16
Consolidated Financial Statements...................................... 17
Notes to Consolidated Financial Statements............................. 21
Shareholder Information................................................ 41
Board of Directors ................................................... 42
Officers............................................................... 43
<PAGE> 2
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR END BALANCES 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 210,403,732 $ 181,366,767 $ 180,960,972 $ 166,296,169 $ 160,720,897
Total deposits 173,097,795 161,801,162 165,891,962 151,622,166 148,706,484
Loans, net 157,454,266 124,884,537 115,136,180 97,735,400 94,168,905
Total securities 38,256,547 38,264,931 51,115,760 54,780,151 49,253,011
Total shareholders'
equity 17,047,628 15,688,343 14,313,245 14,095,728 11,512,387
Book value per
outstanding share* 16.24 15.06 13.74 13.53 11.05
Outstanding shares
at year end* 1,049,431 1,041,456 1,041,456 1,041,456 1,041,456
RESULTS OF OPERATIONS
Interest income $ 14,026,017 $ 14,021,102 $ 12,831,570 $ 12,466,360 $ 11,059,292
Interest expense 7,237,385 7,323,797 6,335,513 6,118,156 4,794,658
------------- ------------- ------------- ------------- -------------
Net interest income 6,788,632 6,697,305 6,496,057 6,348,204 6,264,634
Provision for
possible loan
losses (472,073) (613,000) (205,800) (100,000) (234,725)
Other income 2,021,605 2,006,696 1,117,620 1,076,972 728,174
Salaries and
employee benefits (2,979,289) (2,600,750) (2,525,990) (2,287,775) (2,127,051)
Other expenses (3,315,757) (3,046,170) (3,129,591) (2,788,217) (2,683,006)
------------- ------------- ------------- ------------- -------------
Income before
income taxes 2,043,118 2,444,081 1,752,296 2,249,184 1,948,026
Applicable
income taxes (426,210) (605,024) (371,515) (561,695) (489,517)
------------- ------------- ------------- ------------- -------------
NET INCOME $ 1,616,908 $ 1,839,057 $ 1,380,781 $ 1,687,489 $ 1,458,509
============= ============= ============= ============= =============
PER SHARE DATA*
Net income
Basic $ 1.55 $ 1.77 $ 1.33 $ 1.62 $ 1.40
============= ============= ============= ============= =============
Diluted $ 1.53 $ 1.76 $ 1.33 $ 1.62 $ 1.40
============= ============= ============= ============= =============
Cash dividend paid $ 0.74 $ 0.70 $ 0.67 $ 0.53 $ 0.53
============= ============= ============= ============= =============
</TABLE>
* Per share data is based on the weighted average number of shares outstanding
during the year. Prior periods have been restated to reflect the 3-for-1
stock split in 1997 and the 25% stock split in 1996.
- -------------------------------------------------------------------------------
(Continued)
1.
<PAGE> 3
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
FINANCIAL RATIOS 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average total assets 0.86% 1.00% 0.82% 1.05% 0.94%
Return on average
shareholders' equity 9.98% 12.49% 9.83% 13.31% 11.99%
Average shareholders' equity
to average total assets 8.63% 7.98% 8.35% 7.88% 7.84%
Dividend payout 47.94% 39.64% 50.28% 32.96% 38.13%
</TABLE>
HISTORY OF STOCK SPLITS EFFECTED AS DIVIDENDS
February 1973 2-for-1 Stock Split
March 1975 2-for-1 Stock Split
February 1977 25% Stock Split
March 1980 25% Stock Split
March 1982 25% Stock Split
March 1983 25% Stock Split
May 1986 25% Stock Split
May 1990 25% Stock Split
March 1996 25% Stock Split
June 1997 3-for-1 Stock Split
- -------------------------------------------------------------------------------
(Continued)
2.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes" and
similar expressions as they relate to the Corporation or its management are
intended to identify such forward-looking statements. The Corporation's actual
results, performance or achievements may materially differ from those expressed
or implied in the forward-looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, unforeseen
business risks related to Year 2000 computer systems issues, government policies
and regulations and rapidly changing technology affecting financial services.
RESULTS OF OPERATIONS
Net income of $1,616,908 in 1998 represents a 12.1% decrease from the net income
of $1,839,057 in 1997. Diluted earnings per share decreased proportionately from
$1.76 in 1997 to $1.53 in 1998. The major factors that have influenced these
results are discussed below.
NET INTEREST INCOME
Net interest income, the primary source of earnings for the Commercial
Bancshares, Inc. (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 on the next page indicates that,
as of December 31, 1998, rate sensitive assets exceed rate sensitive liabilities
in the one year or less time horizon by approximately $1,486,000. Management
believes this places the Corporation in a desirable position for 1999 as the
Company's interest margin should not be significantly impacted by moderate
fluctuations in interest rates. For purposes of the GAP table, management has
included passbook savings and NOW checking accounts in the one through five-year
and over-five-year periods. These deposits were not historically considered rate
sensitive, however, with the dramatic decrease in rates in 1992 and 1993
management did adjust the rates paid on these accounts and began to include
these deposits in the one year time window which has a significant impact on the
GAP position. If rates rise in the future these deposit products will rise but
only to historical levels which have been among the most inexpensive products
offered by the Bank. In addition, these deposit products are not tied to an
external index, which gives management flexibility in timing future rates
increases to these products.
- -------------------------------------------------------------------------------
(Continued)
3.
<PAGE> 5
NET INTEREST INCOME (Continued)
INTEREST RATE SENSITIVITY GAPS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
One Over
One Year through five
Or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Assets
Loans (a) $ 64,658 $ 41,382 $ 52,735 $ 158,775
Securities (a) 11,676 1,220 25,366 38,262
------------ ------------ ------------ ------------
Rate-sensitive assets (RSA) 76,334 42,602 78,101 197,037
Liabilities
Interest-bearing demand (b) 3,031 32,694 7,416 43,141
Savings (b) 15,679 3,920 19,599
Interest-bearing time 64,097 30,245 219 94,561
Federal funds purchased 7,720 11,500 19,220
------------ ------------ ------------ ------------
Rate sensitive liabilities (RSL) 74,848 90,118 11,555 176,521
------------ ------------ ------------ ------------
Period GAP (c) $ 1,486 $ (47,516) $ 66,546 $ 20,516
============ ============ ============ ============
Cumulative GAP $ 1,486 $ (46,030) $ 20,516
============ ============ ============
% of total assets 0.71% (22.58)% 31.63%
============ ============ ============
% rate sensitive assets/rate sensitive
liabilities 101.99% 47.27% 675.91%
============ ========== ============
</TABLE>
(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 through five and over
five years time horizons 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.
While the volume of both earning assets and interest-bearing liabilities
increased in 1998, differences in rates and deposit mix served to offset the
impact to net interest income. The average yield on earning assets decreased
from 8.33% in 1997 to 8.26% in 1998. The major factors were a decrease in the
yield on securities and a slight decrease in the yields on loans. Management
continued its emphasis on commercial loans, which is reflected in the portfolio
growth of approximately $18,491,000. To remain competitive, loans were priced
very aggressively and an overall decline in loan pricing was seen in 1998. In
addition, the installment loan portfolio increased $7,863,000 in 1998. The
increase was primarily in the indirect loan portfolio. This increase is due to a
change in management's focus from lower-yielding automobile loans to loans on
horse trailers, which generally have higher yields and longer maturities. Charge
offs on installment loans have been high in the past; however, management does
not anticipate an increased level of charge offs to continue. The Bank has
strategically targeted managed growth in the commercial and indirect areas for
1999. Alternative lower cost sources of funds such as Federal Home Loan Bank
advances and federal funds purchased are available, if needed, to fund this
growth.
- -------------------------------------------------------------------------------
(Continued)
4.
<PAGE> 6
NET INTEREST INCOME (Continued)
Management continues to closely monitor net interest income, while maintaining
competitive loan and deposit rates in the markets served. Although no one can
accurately predict future movement in interest rates, management expects a
continued stable to slightly lower rate environment for 1999.
- -------------------------------------------------------------------------------
(Continued)
5.
<PAGE> 7
NET INTEREST INCOME (Continued)
The following tables further illustrate the impact on net interest income of
changes in average balances and yields of the Corporation's assets and
liabilities.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
-------------------1998----------------- -------------------1997------------------
---- ----
Average Income/ Average Average Income/ Average
Balance (4) Expense Yield Balance (4) Expense Yield
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 2,231,342 $ 117,104 5.25% $ 1,484,288 $ 77,472 5.22%
Securities
Taxable (1) 23,921,057 1,337,496 5.53 32,585,903 2,072,713 6.28
Tax exempt (1 and 2) 17,837,730 1,284,859 7.08 14,890,047 1,142,958 7.68
Loans (3) 130,470,193 11,723,410 8.99 123,577,448 11,116,565 9.00
------------- ------------ ---- ------------- ------------- ----
Total earning assets 174,460,322 14,462,869 8.26% 172,537,686 14,409,708 8.33%
------------ ==== ------------- ====
Other assets 13,235,640 11,970,957
------------- -------------
Total assets $ 187,695,962 $ 184,508,643
============= =============
Deposits
Interest-bearing demand deposits $ 39,985,521 $ 1,100,019 2.75% $ 35,508,530 963,126 2.71%
Savings deposits 19,246,791 491,928 2.56 19,900,106 534,422 2.69
Time deposits 94,662,246 5,418,913 5.72 98,642,740 5,735,511 5.81
Borrowed funds 5,668,847 226,525 4.00 1,587,509 90,738 5.72
------------- ------------ ---- ------------- ------------- ----
Total interest bearing
liabilities 159,563,405 7,237,385 4.54% 155,638,885 7,323,797 4.71%
------------- ------------ ==== ------------- ------------- ====
Noninterest bearing demand 11,744,718 13,176,789
Other liabilities 192,285 974,417
Shareholders' equity 16,194,854 14,718,552
------------- -------------
Total liabilities and
shareholders' equity $ 187,695,962 $ 184,508,643
============= =============
Net interest income $ 7,225,484 $ 7,085,911
============ =============
As a percentage of earning assets:
Interest income 8.26% 8 33%
Interest expense 4.13 4.23
---- ----
Net interest income 4.13% 4.10%
==== ====
</TABLE>
(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 $436,852 and $388,606 for 1998
and 1997, respectively.
(3) Nonaccrual loans are included in the average balances presented.
(4) Average is a daily average balance.
- -------------------------------------------------------------------------------
(Continued)
5.
<PAGE> 8
NET INTEREST INCOME (Continued)
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase/(Decrease) Increase/(Decrease)
------------------- -------------------
Change Change Change Change
Total due to due to Total due to due to
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 39,632 $ 39,204 $ 428 $ (49,049) $ (53,691) $ 4,642
Investment and mortgage-
backed securities
Taxable (735,217) (505,325) (229,892) 95,970 93,355 2,615
Tax exempt (1) 141,901 215,632 (73,731) (6,103) 64,310 (70,413)
Loans (2) 606,845 619,362 (12,517) 1,146,639 1,330,748 (184,109)
---------- ---------- ---------- ---------- ------------ -----------
Total earning assets 53,161 368,873 (315,712) 1,187,457 1,434,722 (247,265)
---------- ---------- ---------- ---------- ------------ -----------
Deposits
Interest-bearing demand deposits 136,893 122,988 13,905 (14,662) (9,564) (5,098)
Savings deposits (42,494) (17,202) (25,292) (26,973) (20,986) (5,987)
Time deposits (316,598) (228,855) (87,743) 986,338 924,832 61,506
Short-term borrowed funds 135,787 170,443 (34,656) 43,581 44,585 (1,004)
---------- ---------- ---------- ---------- ------------ -----------
Total interest bearing
liabilities (86,412) 47,374 (133,786) 988,284 938,867 49,417
---------- --------- ---------- ---------- ------------ -----------
Net interest income $ 139,573 $ 321,499 $ (181,926) $ 199,173 $ 495,855 $ (296,682)
========== ========== ========== ========== ============ ===========
</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 using a
34% tax rate.
(2) Nonaccrual loan balances are included for purposes of computing the
rate and volume effects although interest on these balances has been
excluded.
- ------------------------------------------------------------------------------
(Continued)
6.
<PAGE> 9
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS
The allowance for possible loan losses on December 31, 1998 was $1,182,848 or
0.75% of total loans. This compares to $1,075,385 or .85% of total loans in
1997. 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 $472,000 to the allowance for loan losses in 1998 to
maintain the allowance balance at an adequate level following charge-offs of
$467,000 and recoveries of $103,000. The provision for allowance for loan losses
was $141,000 lower than 1997 due to management's decreased activity in the
riskier, indirect automobile market.
The following schedule presents analysis of the allowance for loan losses,
average loan data, and related ratios for the years ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,075 $ 1,019
Loans changed off:
Commercial (45) (42)
Real estate (0) (0)
Installment (422) (601)
------- -------
Total loans charged off (467) (643)
------- -------
Recoveries of loans previously charged off:
Commercial 5 30
Real estate 0 0
Installment 98 56
------- -------
Total loan recoveries 103 86
------- -------
Net loans charged off (364) (557)
Provision charged to operating expense 472 613
------- -------
Balance at end of period $ 1,183 $ 1,075
======= =======
Ratio of net charge-offs to average loans outstanding for period 0.28% 0.45%
</TABLE>
The allowance for possible loan losses is maintained by management at a level
considered adequate to cover probable 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.
- -------------------------------------------------------------------------------
7.
<PAGE> 10
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS (Continued)
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan and related ratios.
<TABLE>
<CAPTION>
Allocation Of The Allowance For Loan Losses
-------------------------------------------
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(In Thousands Of Dollars) December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 509 49.91% $ 530 48.17%
Real estate 93 23.61 95 24.72
Consumer 559 26.48 442 27.11
Unallocated 22 N/A 8 N/A
----------- ------ ----------- -------
Total $ 1,183 100.00% $ 1,075 100.00%
=========== ====== =========== =======
</TABLE>
Nonaccrual loans totaled $1,168,537 at December 31, 1998 as compared to
$1,073,000 at December 31, 1997. Management believes nonaccrual loans are
adequately reserved for 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.
- -------------------------------------------------------------------------------
8.
<PAGE> 11
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSS (Continued)
The following schedule summarizes nonperforming and impaired loans as of
December 31, 1997 and 1998.
<TABLE>
<CAPTION>
December 31
-----------
(In thousands of dollars) 1998 1997
---- ----
<S> <C> <C>
Impaired loans $ 1,068 $ 1,405
=========== ===========
Loans accounted for on a nonaccrual basis (most of which are also
impaired) $ 1,169 $ 1,073
Accruing loans which are contractually past due 90 days or more as
to interest or principal payments 91 289
Loans which are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standard No. 15 (exclusive of loans
listed above) -- --
----------- -----------
Total nonperforming loans $ 1,260 $ 1,362
=========== ===========
</TABLE>
No interest income was recognized on impaired loans in 1998 and 1997.
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, 1998, the balance in OREO was $921,500,
representing the acceptance of a deed in lieu of foreclosure in late 1994. Other
real estate is carried at the lower of cost or estimated fair market value less
estimated expenses to be incurred to sell the property.
NONINTEREST INCOME
Total noninterest income of $2,021,605 was 0.74% higher than the 1997 figure of
$2,006,696. Noninterest income for 1997 included a gain on the sale of the
property, equipment and deposits of the Kenton branch. This was offset in 1998
by an increase in overdraft fees and loan servicing income for loans sold. An
additional contributor to noninterest income was a $184,709 increase in net
gains on sale of securities and an increase of $360,871 in net gains on loan
sales due to increased activity in this area.
NONINTEREST EXPENSE
Total noninterest expense increased $648,126 in 1998. Customary merit increases
of employee salaries; the addition of three executive officers; and increases in
professional fees were offset by a reduction in data processing expense.
- -------------------------------------------------------------------------------
9.
<PAGE> 12
INCOME TAXES
Income tax expense of $426,210 in 1998 represents 20.9% of income before taxes
compared to 24.8% in 1997. These effective tax rates are both lower than the
statutory rate of 34%, primarily resulting from the Bank's investment in
tax-exempt obligations from states and political subdivisions. Tax exempt income
from securities represented 6.05% and 5.38% of total interest income in 1998 and
1997.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $210,403,732, or 16.01%, at December 31, 1998 from
$181,366,767 at December 31, 1997. Net loans increased $32,569,729 or 26.08%
while securities did not significantly change. Cash and cash equivalents
decreased 5.89% from 1997.
The Corporation received approval from the appropriate regulatory agencies in
1997 to form a finance company, Advantage Finance, Inc. (Advantage), in Marion,
Ohio. The purpose of Advantage is to provide financing for higher-risk borrowers
not meeting the more stringent underwriting criteria of the Bank. Operations
began in the second quarter of 1998, with Advantage operating as a subsidiary of
the Corporation. In January 1999, the Corporation received regulatory approval
to establish Advantage as a subsidiary of the Bank to facilitate its future
operations. At December 31, 1998, Advantage had loans made to customers of
$496,000.
Management has purchased a building to establish an additional branch in Marion,
Ohio and has plans to expand and remodel several existing branches in 1999.
Capital expenditures are expected to approximate $500,000 related to these
projects. As these projects are completed and staffed, management expects that
occupancy expense, salaries and benefits and other expenses related to
operations will increase.
LOANS
Consumer and credit card loans increased $7,862,730 or 23.02% from 1997 levels.
The Corporation was active in the indirect loan business, specifically loans for
horse trailers, which accounted for substantial consumer loan growth in 1998.
Commercial loans were increased 30.47% in 1998 through the Corporation's
Business Development Team and strategically lower interest rates. Management is
committed to strengthening business relationships and providing incentives for
loan growth.
- -------------------------------------------------------------------------------
10.
<PAGE> 13
LOANS (Continued)
Real estate loans showed an increase of $5,657,954, or 22.56%, which primarily
represents one-to four-family loans. Loans originated for sale in the secondary
market and still retained by the Bank at year end are classified as loans held
for sale and are carried at the lower of cost or fair value and were
approximately $2,276,000 and $5,191,000 at December 31, 1998 and 1997. 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 $46,931,540 as of December 31, 1998, compared to $23,411,756 as of
December 31, 1997. At December 31, 1997, other assets include a receivable of
approximately $3,508,000 for loans sold.
The Bank's loan portfolio represents it largest and highest yielding earning
assets. It also contains the most risk of loss. This risk is due primarily to
changes in borrowers' primary repayment capacity, and to collateral values that
are subject to change over time. These risks are managed with specific
underwriting guidelines, loan review procedures and training of personnel.
The following is a schedule of maturities of fixed rate loans based on contract
terms, excluding real estate mortgage and installment loans, rounded to the
nearest thousand, as of December 31, 1998.
<TABLE>
<CAPTION>
One Year One Through Over
Or Less Five Years Five Years
------- ---------- ----------
<S> <C> <C> <C>
Total fixed rate Commercial Loans $ 3,223,000 $ 5,720,000 $ 26,971,000
</TABLE>
The following is a schedule of the repricing frequency of variable rate loans,
excluding real estate mortgage and installment loans, rounded to the nearest
thousand, as of December 31, 1998.
<TABLE>
<CAPTION>
Three Months Over
Or Less Three Months
------- ------------
<S> <C> <C>
Total variable rate Commercial Loans $ 25,855,000 $ 17,400,000
</TABLE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Mortgage-backed securities increased $556,000 or 2.99%; obligations of federal
agencies decreased $1,600,000 or 37.83%; and obligations of state and political
subdivisions increased $2,469,000 or 22.30% in 1998. Securities were sold to
fund the Bank's increased loan demand.
In order to provide additional liquidity for loan growth in 1998, management
sold its remaining obligations of federal agencies classified as held to
maturity. Management does not anticipate classifying securities as held to
maturity in the foreseeable future.
- -------------------------------------------------------------------------------
11.
<PAGE> 14
INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
As of December 31, 1998, there are no concentrations of securities of any one
issuer, other than U.S. Government and Government Agencies, whose carrying value
exceeds 10% of shareholders' equity.
The following is a schedule, by carrying value, of maturities for each category
of debt securities and the related weighted average yield of such securities as
of December 31, 1998:
<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>
Available for sale
Obligations of
federal
agencies $ 2,686,644 5.98%
Obligations of
state and
political
subdivisions 1,053,306 4.99 $ 12,428,325 4.73%
Corporate bonds $ 928,931 5.64% 1,027,981 6.30
Mortgage-
backed
securities 3,573,327 5.50 15,612,073 5.35
-------- ------- ----------- ---- -------------- ---- ------------- ----
Total $ -- --% $ 928,931 5.64% $ 8,341,258 5.69% $ 28,040,398 5.04%
======== ====== =========== ==== ============== ==== ============= ====
</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 Home Loan Bank stock that
bears no stated maturity or yield and is not included in this analysis.
Maturities are reported based on stated maturities and do not reflect principal
prepayment assumptions. Available-for-sale yields are based on amortized cost
balances.
DEPOSITS
Total deposits increased $11,297,000, or 6.98%. Management concentrated on
producing a sales culture in the Corporation during 1998. The increase in
deposits is primarily the result of sales goals and incentives at the branches
instead of rate specials.
- -------------------------------------------------------------------------------
12.
<PAGE> 15
DEPOSITS (Continued)
The following is a schedule of maturities of time certificates of deposit in
amounts of $100,000 or more as of December 31, 1998:
(In thousands of dollars)
<TABLE>
<S> <C>
Three months or less $ 3,018,294
Over three months through six months 4,325,030
Over six through twelve months 9,442,871
Over twelve months 5,347,267
----------------
Total $ 22,133,462
================
</TABLE>
CAPITAL RESOURCES
Total shareholders' equity at December 31, 1998 was $17,047,628 an increase of
$1,359,285 or 8.66% from total shareholders equity of $15,688,343 at December
31, 1997. The increase is primarily due to 1998 net income of $1,616,908 offset
by the Corporation's dividend payout which amounted to $775,173 for the year
ended December 31, 1998. An additional contributor to the increase in
shareholders' equity was the higher market value of the Bank's
available-for-sale investment portfolio, which shows an unrealized gain of
$142,983 (net of tax) at December 31, 1998 compared to an unrealized loss of
$226,210 (net of tax) at December 31, 1997.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. As of December 31,
1998, 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, 1998, the Bank's total risk-based capital ratio and leverage
ratio were 11.6% and 8.1%, thus exceeding the minimum regulatory requirements.
At December 31, 1997, the ratios were 13.2% and 8.4%.
The Corporation has similar capital requirements on a consolidated basis as
described in Note 12 of the consolidated financial statements.
- -------------------------------------------------------------------------------
13.
<PAGE> 16
CAPITAL RESOURCES (Continued)
The Corporation's Board of Directors declared cash dividends of $.37 per share
in May, $.18 per share in August and $.19 per share in November of 1998, paying
a total of $775,173. The Corporation's 1998 return on average shareholder equity
was 10.62% compared to 12.49% in 1997. Total cash dividends paid in 1998
represented 47.94% of 1998 net income. This compares to a dividend payout ratio
of 39.64% in 1997.
LIQUIDITY
Liquidity management for the Bank centers around the assurance funds are
available to meet the loan and deposit needs of its customers and the Bank's
other financial commitments.
Cash and noninterest bearing deposits with banks, federal funds sold and other
short-term investments totaled $6,692,802 at December 31, 1998 and $7,111,986 at
December 31, 1997. These assets provide the primary source of liquidity for the
Bank. In addition, the Bank has designated 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, 1998 and 1997,
the ratio of loans (net of unearned income) to deposits and borrowed funds was
82.49% and 76.42%, 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.
- -------------------------------------------------------------------------------
14.
<PAGE> 17
YEAR 2000
The Corporation uses a third-party data processing center, which also provides
data processing services to other financial institutions. The Corporation's
lending and deposit activities are almost entirely dependent on computer systems
which process and record transactions, although the Corporation can effectively
operate with manual systems for brief periods when its electronic systems
malfunction or cannot be accessed. In addition to its basic operating
activities, the Corporation's facilities and infrastructure, such as security
systems and communications equipment, are dependent, to varying degrees, on
computer systems.
The Corporation is aware of the potential Year 2000 related problems that may
affect the computers that control or operate the Corporation's operating
systems, facilities and infrastructure. In 1997, the Corporation began a process
of identifying any Year 2000 related problems that may be experienced by its
computer-operated or computer-dependent systems. Each application has been
identified as "Mission Critical" or "Nonmission Critical." The Corporation has
contacted the companies that supply or service the Corporation's
computer-operated or computer-dependent systems to obtain confirmation that each
system that is material to the operations of the Corporation is either currently
Year 2000 compliant or is expected to be Year 2000 compliant. With respect to
systems that cannot presently be confirmed as Year 2000 compliant, the
Corporation will continue to work with the appropriate supplier or servicer to
ensure all such systems will be rendered compliant in a timely manner, with
minimal expense to the Corporation or disruption of the Corporation's
operations. All of the identified computer systems affected by the Year 2000
issue are currently in the renovation, validation or implementation phase of the
process of becoming Year 2000 compliant. As a contingency plan, however, the
Corporation has determined that if the Corporation's systems fail the
Corporation would implement manual systems until such systems could be
re-established. The Corporation does not anticipate that such short-term manual
systems would have a material adverse effect on the Corporation's operations. At
this time, however, the expense that may be incurred by the Corporation in
connection with system failure related to the Year 2000 issue cannot be
determined.
In addition to the possible issues related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significant dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow. At this time, the expense
that may be incurred by the Corporation in connection with Year 2000 issues
confronting its customers cannot be determined.
- -------------------------------------------------------------------------------
15.
<PAGE> 18
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, 1998 and 1997, 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, 1998 and 1997, and the results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 22, 1999
- -------------------------------------------------------------------------------
16.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,692,802 $ 7,111,986
Securities available for sale 38,256,547 35,508,713
Securities held to maturity (Fair value - $2,974,830) 2,756,218
Total loans 158,637,114 125,959,922
Allowance for possible loan loss (1,182,848) (1,075,385)
------------- -------------
Loans - net 157,454,266 124,884,537
Premises and equipment, net 3,957,927 3,655,643
Other real estate, net 921,500 1,065,000
Accrued interest receivable 1,054,578 1,164,985
Other assets 2,066,112 5,219,685
------------- -------------
Total assets $ 210,403,732 $ 181,366,767
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand $ 16,800,775 $ 14,624,943
Interest-bearing demand 39,985,521 34,457,007
Savings and time deposits 94,178,037 91,673,757
Time deposits $100,000 and greater 22,133,462 21,045,455
------------- -------------
Total deposits 173,097,795 161,801,162
Accrued interest payable 422,085 440,260
Borrowed funds 19,220,000 3,030,000
Other liabilities 616,224 407,002
------------- -------------
Total liabilities 193,356,104 165,678,424
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, no par value, 4,000,000 shares
authorized, 1,049,431 and 1,041,456 issued and
outstanding in 1998 and 1997 7,963,870 7,815,513
Retained earnings 8,940,775 8,099,040
Unrealized gain (loss) on securities available for sale 142,983 (226,210)
------------- -------------
Total shareholders' equity 17,047,628 15,688,343
------------- -------------
Total liabilities and shareholders' equity $ 210,403,732 $ 181,366,767
============= =============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17.
<PAGE> 20
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $11,723,410 $11,116,565
Securities
Taxable 1,337,496 2,072,713
Tax exempt 848,007 754,352
Other and dividends 117,104 77,472
----------- -----------
Total interest income 14,026,017 14,021,102
INTEREST EXPENSE
Deposits 7,010,860 7,233,059
Other borrowings 226,525 90,738
----------- -----------
Total interest expense 7,237,385 7,323,797
NET INTEREST INCOME 6,788,632 6,697,305
Provision for possible loan loss 472,073 613,000
----------- -----------
Net interest income after provision for possible loan loss 6,316,559 6,084,305
----------- -----------
NONINTEREST INCOME
Service fees and overdraft charges 856,789 769,083
Security gains, net 335,874 151,165
Loan sale gains, net 585,096 224,225
Gain on branch sale 656,300
Other income 243,846 205,923
----------- -----------
Total noninterest income 2,021,605 2,006,696
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 2,979,289 2,600,750
Occupancy, furniture and equipment 569,017 559,832
State taxes 289,225 278,123
Data processing 552,386 603,846
FDIC deposit insurance 28,989 28,694
Professional fees 162,419 86,909
Other operating expenses 1,713,721 1,488,766
----------- -----------
Total noninterest expenses 6,295,046 5,646,920
Income before income taxes 2,043,118 2,444,081
Income tax expense 426,210 605,024
----------- -----------
NET INCOME $ 1,616,908 $ 1,839,057
=========== ===========
Basic earnings per common share $ 1.55 $ 1.77
=========== ===========
Diluted earnings per common share $ 1.53 $ 1.76
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18.
<PAGE> 21
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities Total
Common Paid-in Retained Available Shareholders'
Stock Capital Earnings For Sale Equity
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1997 $ 4,339,400 $ 3,476,113 $ 6,989,002 $ (491,270) $ 14,313,245
Comprehensive income:
Net income 1,839,057 1,839,057
Change in net
unrealized gain (loss)
on securities available
for sale, net of
reclassification and
tax effects 265,060 265,060
----------------
Total comprehensive
income 2,104,117
Cash dividends
declared ($0.70 per
common share) (729,019) (729,019)
Change to no par
common stock 3,476,113 (3,476,113)
------------- --------------- -------------- -------------- ----------------
Balance,
December 31, 1997 7,815,513 0 8,099,040 (226,210) 15,688,343
Comprehensive income:
Net income 1,616,908 1,616,908
Change in net
unrealized gain (loss)
on securities available
for sale, net of
reclassification and
tax effects 369,193 369,193
----------------
Total comprehensive
income 1,986,101
Cash dividends
declared ($.74 per
common share) (775,173) (775,173)
Stock Options Exercised
(7,675 shares) 148,357 148,357
------------- --------------- -------------- -------------- ----------------
Balance,
December 31, 1998 $ 7,963,870 $ 0 $ 8,940,775 $ 142,983 $ 17,047,628
============= =============== ============== ============== ================
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
19.
<PAGE> 22
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,616,908 $ 1,839,057
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 305,563 349,060
Provision for loan loss 472,073 613,000
Deferred income taxes 219,015 (22,762)
Gain on sale of securities (335,874) (151,165)
Gain on sale of loans (585,096) (224,225)
Gain on sale of branch premises
and equipment (29,167)
Gain on sale of branch deposits (627,133)
Loss on other real estate owned 143,500 85,000
Stock dividends on FHLB stock (33,600) (38,900)
Net amortization on investments 350,071 142,996
Amortization of intangible assets 31,031 67,028
Changes in
Loans held for sale 3,499,538 (5,888,380)
Interest receivable 110,407 180,632
Interest payable (18,175) (17,425)
Other assets and liabilities 3,000,145 (156,439)
--------------- ----------------
Net cash from operating activities 8,775,506 (3,878,823)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Sales 3,000,000
Securities available for sale
Purchases (48,794,196) (31,414,262)
Maturities and repayments 6,516,889 5,947,196
Sales 39,786,890 38,754,663
Net change in loans (35,956,243) (7,759,099)
Proceeds from sale of premises and equipment 274,387
Bank premises and equipment expenditures (607,847) (90,169)
--------------- ----------------
Net cash from investing activities (36,054,507) 5,712,716
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 11,296,633 5,808,585
Sale of branch deposits, net (9,130,923)
Net change in borrowed funds 16,190,000 3,030,000
Cash dividends paid (775,173) (729,019)
Options exercised 148,357
--------------- ----------------
Net cash from financing activities 26,859,817 (1,021,357)
--------------- ----------------
Net change in cash and cash equivalents (419,184) 812,536
Cash and cash equivalents at beginning of year 7,111,986 6,299,450
--------------- ----------------
Cash and cash equivalents at end of year $ 6,692,802 $ 7,111,986
=============== ================
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20.
<PAGE> 23
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
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 whose banking subsidiary, The Commercial Savings Bank, is 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. Advantage Finance, Inc. is a consumer finance company operating in
Marion, Ohio. These market areas provide the source of substantially all of the
Corporation's deposit and loan activities, although some indirect loans are made
to borrowers outside the Corporation's immediate market area. Substantially all
of the Corporation's income is derived from commercial and retail lending and
investments activities.
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 1998 and 1997, the
Corporation paid $7,275,410 and $7,370,171 in interest and $400,000 and $445,000
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 1998 and 1997, 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.
- -------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 24
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS HELD FOR SALE: Certain residential mortgage loans are originated for sale
in the secondary-mortgage loan market. These loans are included in real estate
loans and are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income. To mitigate 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.
- -------------------------------------------------------------------------------
(Continued)
22.
<PAGE> 25
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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 50% and 48% of the loan
portfolio at year-end 1998 and 1997 and the loans are expected to be repaid from
cash flow from operations of the borrower. Real estate mortgages make up
approximately 23% and 25% of the loan portfolio at year-end 1998 and 1997 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% of total loans at year-end 1998 and 1997.
Consumer loans include new and used automobile and other consumer purpose loans.
Consumer loans make up approximately 25% and 26% of total loans at year-end 1998
and 1997. The Bank also originates consumer-oriented purchase-money loans
indirectly through various automobile, motorcycle, boat, horse trailer,
recreational vehicle and other dealerships. Indirect loans represented 77% and
92% of consumer loans and 20% and 24% of total loans at year-end 1998 and 1997.
Unsecured loans represented 1% and 2% of total loans at year-end 1998 and 1997.
At year-end 1998 and 1997, the Bank had due from bank balances and overnight
federal funds sold to National City Bank totaling $3,975,000 and $4,680,000,
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. 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.
- -------------------------------------------------------------------------------
(Continued)
23.
<PAGE> 26
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and identified intangibles are included in other assets and are
summarized as follows at year-end 1998 and 1997, net of accumulated
amortization:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Core deposit intangible $ 69,982 $ 80,065
Goodwill 70,816 79,426
------------ ------------
Total intangible assets $ 140,798 $ 159,491
============ ============
</TABLE>
Amortization expenses totaled $18,693 in 1998 and $54,680 in 1997. 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 in 1997.
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.
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. Mortgage servicing rights
totaled $534,069 at year-end 1998 and $193,417 at year-end 1997, 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.
- -------------------------------------------------------------------------------
(Continued)
24.
<PAGE> 27
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
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 1,045,973 and 1,041,456 weighted average shares
outstanding during the years ended December 31, 1998 and 1997. Diluted earning
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 1,056,939 in 1998 and
1,043,391 in 1997.
In May 1997, the Board of Directors declared a three-for-one stock split,
resulting in the issuance of 694,304 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 to the current presentation.
- -------------------------------------------------------------------------------
(Continued)
25.
<PAGE> 28
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
-------------------------------1 9 9 8------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale
Obligations of federal agencies $ 2,618,533 $ 10,552 $ 2,629,085
Obligations of state and political
subdivisions 13,163,346 380,141 $ (4,297) 13,539,190
Corporate bonds 1,956,732 3,281 (3,100) 1,956,913
Mortgage-backed securities 19,355,335 25,084 (195,020) 19,185,399
--------------- ------------ ------------ ----------------
Total debt securities available
for sale 37,093,946 419,058 (202,417) 37,310,587
Equity investments 945,960 945,960
--------------- ------------ ------------ ----------------
Total securities available for
sale $ 38,039,906 $ 419,058 $ (202,417) $ 38,256,547
=============== ============ ============= ================
</TABLE>
<TABLE>
<CAPTION>
-------------------------------1 9 9 7------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <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>
- -------------------------------------------------------------------------------
(Continued)
26.
<PAGE> 29
<PAGE> 30
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Mortgage-backed securities available for sale at year-end 1998 and 1997 are
summarized below. At year-end 1998, the fair value of fixed and variable rate
mortgage-backed securities available for sale totaled $6,495,883 and
$12,689,516.
<TABLE>
<CAPTION>
---------------1998---------------- ----------------1997---------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
FHLMC REMICS $ 1,523,584 $ 1,509,013 $ 3,269,307 $ 3,222,783
FNMA REMICS 1,067,387 1,049,120 2,980,761 2,944,606
FNMA certificates 7,093,041 7,021,452 5,807,483 5,766,414
FHLMC certificates 3,154,345 3,130,760 2,233,770 2,223,472
GNMA certificates 6,516,978 6,475,054 4,490,238 4,471,834
--------------- ---------------- --------------- ---------------
$ 19,355,335 $ 19,185,399 $ 18,781,559 $ 18,629,109
=============== ================ =============== ===============
</TABLE>
The amortized cost and approximate fair value of debt securities available for
sale at year-end 1998, 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>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available for sale
Due after one year through five years $ 5,087,302 $ 5,107,875
Due after five years through ten years 5,787,912 5,928,795
Due after ten years 6,863,397 7,088,518
Mortgage-backed securities 19,355,335 19,185,399
--------------- ----------------
$ 37,093,946 $ 37,310,587
=============== ================
</TABLE>
Sales of available for sale securities were:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Proceeds $ 39,786,890 $ 38,754,663
Gross gains 403,741 194,535
Gross losses 67,867 43,370
</TABLE>
In order to provide additional liquidity for loan growth, management sold its
remaining obligations of federal agencies classified as held to maturity. The
Corporation currently has no securities classified as held to maturity and
management does not anticipate classifying securities as held to maturity in the
foreseeable future.
- -------------------------------------------------------------------------------
(Continued)
27.
<PAGE> 31
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
At year-end 1998 and 1997, debt securities with a carrying value of $9,731,000
and $15,888,000 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>
1998 1997
---- ----
<S> <C> <C>
Commercial and other loans $ 79,168,621 $ 60,677,339
Real estate loans 30,739,831 25,081,877
Consumer and credit card loans 42,012,388 34,149,658
Home equity loans 6,716,274 6,051,048
---------------- -----------------
Total loans $ 158,637,114 $ 125,959,922
================ =================
</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 $46,931,540 and $23,411,756 at year-end 1998 and 1997. Real
estate loans originated and held for sale at year-end 1998 and 1997 totaled
approximately $2,276,000 and $5,191,000.
At December 31, 1998 and 1997, total loans included loans to farmers for
agricultural purposes of approximately $14,440,000 and $11,878,000.
The balance of impaired loans was $1,068,036 and $1,404,983 at year-end 1998 and
1997. Of this amount, $0 and $37,006 in impaired loans required no allowance for
loan loss allocation. The remaining impaired loans of $1,068,036 and $1,367,977
had $213,607 and $307,323 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 $1,237,532 for 1998 and $440,744 for
1997. No interest income was recognized on impaired loans during 1998 and 1997.
- -------------------------------------------------------------------------------
(Continued)
28.
<PAGE> 32
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSS
Activity in the allowance for possible loan loss was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 1,075,385 $ 1,018,608
Provision for possible loan loss 472,073 613,000
Loans charged off (467,574) (642,813)
Recoveries of previous charge-offs 102,964 86,590
-------------- ------------
Ending balance $ 1,182,848 $ 1,075,385
============== ============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 673,336 $ 661,033
Buildings 3,754,064 3,748,089
Furniture and equipment 2,241,675 1,629,041
-------------- --------------
Total 6,669,075 6,038,163
Accumulated depreciation 2,711,148 2,382,520
-------------- --------------
Premises and equipment, net $ 3,957,927 $ 3,655,643
============== ==============
</TABLE>
NOTE 6 - DEPOSITS
At year-end 1998, scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C> <C>
1999 $ 64,097,681
2000 16,220,720
2001 14,894,450
2002 934,207
2003 336,120
Thereafter 219,431
---------------
$ 96,702,609
===============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
29.
<PAGE> 33
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 7 - FHLB ADVANCES AND FEDERAL FUNDS PURCHASED
Borrowed funds consisted of the following at year-end:
<TABLE>
<CAPTION>
Current
Interest
Rate 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal Home Loan Bank (FHLB)
variable rate advances; due on or before
February 1999 and March 1998,
respectively 5.02% $ 7,320,000 $ 2,500,000
FHLB fixed rate advance, with monthly
interest payments; due October 2008 4.59 6,500,000
FHLB fixed rate advanced, with monthly
interest payments; due October 2008 4.62 5,000,000
Federal funds purchased; due January
1999 and January 1998, respectively 5.75 400,000 530,000
-------------- --------------
Total borrowed funds $ 19,220,000 $ 3,030,000
============== ==============
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by the Bank
and by the Bank's qualified mortgage loan portfolio.
NOTE 8 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current provision $ 207,195 $ 627,786
Deferred provision 219,015 (22,762)
------------ ------------
Total income tax expense $ 426,210 $ 605,024
============ ============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
30.
<PAGE> 34
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Allowance for loan losses in excess of tax reserve $ 69,371 $ 32,569
Basis reduction of other real estate owned 48,790 45,900
Unrealized loss on investment securities available
for sale 116,532
Deferred tax credits and other 63,281 26,066
------------ ------------
Total 181,442 221,067
Items giving rise to deferred tax liabilities
Depreciation (91,793) (85,254)
Mortgage servicing rights (181,583) (65,762)
Deferred loan fees and costs (345,258) (176,170)
FHLB stock dividend (38,114) (26,622)
Unrealized gain on investment securities
available for sale (73,657)
Other (3,131) (1,951)
------------ -------------
Total (733,536) (363,957)
------------ ------------
Net deferred tax liability $ (552,094) $ (142,890)
============ ============
</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>
1998 1997
---- ----
<S> <C> <C>
Tax at statutory rates $ 694,660 $ 830,988
Increase (decrease) in tax resulting from:
Tax-exempt interest (240,746) (214,909)
Other (27,704) (11,055)
------------ ---------------
Total income tax expense $ 426,210 $ 605,024
============ ===============
</TABLE>
The income tax expense related to investment security gains totaled $173,026 and
$51,396 for 1998 and 1997.
- -------------------------------------------------------------------------------
(Continued)
31.
<PAGE> 35
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION PLAN
The Commercial Bancshares, Inc. Incentive Stock Option Plan was approved by
shareholders in April 1997. The plan enables 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. 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 based on financial performance
can operate to shorten the vesting time and were approved by the Board of
Directors with the initial grant in June 1997. 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Risk-free interest rate 4.73% 6.42%
Dividend yield 3.00 3.50
Market price volatility factor 18.10 16.05
Weighted average expected life of options 8 years 10 years
</TABLE>
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 for the year ended December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income as reported $ 1,616,908 $ 1,839,057
Pro forma net income 1,586,416 1,821,316
Pro forma earnings per share
Basic 1.52 1.75
Diluted 1.50 1.74
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
32.
<PAGE> 36
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION PLAN (Continued)
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ------------------------------
Average Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 60,000 $22.67 0 $22.67
Granted 36,500 31.50 60,000
Forfeited
Exercised (7,675) 19.33
----------- ------ ----------- ------
Outstanding - end of year 88,825 $26.58 60,000 $22.67
=========== ====== =========== ======
Exercisable - end of year 7,325 15,000
=========== ===========
Weighted average fair value
of options granted during
the year $6.45 $4.97
</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 shares 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 thirty days 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 $96,124 and $66,646 for the years ended
December 31, 1998 and 1997.
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.
- -------------------------------------------------------------------------------
(Continued)
33.
<PAGE> 37
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit and standby letters of credit which involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. Each customer's credit worthiness is evaluated on a case-by-case basis.
The same credit policies are used for commitments and conditional obligations as
are used for loans. The amount of collateral obtained, if deemed necessary, upon
extension of credit is based on management's credit evaluation. Collateral
varies but may include accounts receivable, inventory, property, equipment,
income-producing commercial properties, residential real estate and consumer
assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
to guarantee a customer's performance to a third party.
The following is a summary of commitments to extend credit at year-end 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fixed rate $ 2,517,671 $ 410,889
Variable rate 29,107,375 16,062,897
--------------- --------------
$ 31,625,046 $ 16,473,786
=============== ==============
</TABLE>
At year-end 1998 and 1997, reserves of $901,000 and $718,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
- -------------------------------------------------------------------------------
(Continued)
34.
<PAGE> 38
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
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 undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Tier 1 capital
--------------- --------------
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year-end 1998, actual capital levels (in thousands) and minimum required
levels for the Corporation and the Bank were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Corporation $ 17,933 11.7% $ 12,234 8.0% $ 15,292 10.0%
Bank $ 17,723 11.6% $ 12,225 8.0% $ 15,281 10.0%
Tier 1 capital (to risk weighted assets)
Corporation $ 16,750 11.0% $ 6,117 4.0% $ 9,175 6.0%
Bank $ 16,560 10.8% $ 6,112 4.0% $ 9,169 6.0%
Tier 1 capital (to average assets)
Corporation $ 16,750 8.2% $ 8,211 4.0% $ 10,263 5.0%
Bank $ 16,560 8.1% $ 8,192 4.0% $ 10,241 5.0%
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
35.
<PAGE> 39
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
At year-end 1997, actual capital levels (in thousands) and minimum required
levels for the Corporation and the Bank were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Corporation $ 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)
Corporation $ 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)
Corporation $ 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>
The Corporation and Bank at year-end 1998 and 1997 were categorized as well
capitalized. Management believes that no events have occurred since the last
regulatory determination that would change the capital category at December 31,
1998.
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 1998, approximately $2,638,000
of the Bank's retained earnings was 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 1998 and 1997.
- -------------------------------------------------------------------------------
(Continued)
36.
<PAGE> 40
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)
A summary of activity on these borrower relationships with aggregate debt
greater than $60,000 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 1,425,310 $ 1,778,981
New loans and advances 473,200 261,000
Payments (536,466) (614,671)
-------------- --------------
Ending balance $ 1,362,044 $ 1,425,310
============== ==============
</TABLE>
A director of the Corporation is a partner with a law firm that rendered various
legal services for the Corporation. Another director of the Corporation is
co-owner of an appraisal company that performs real estate appraisals for the
Corporation. Legal and appraisal fees paid in 1998 were not significant.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year-end fair values of financial instruments were:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and equivalents $ 6,692,802 $ 6,693,000 $ 7,111,986 $ 7,112,000
Securities available
for sale 38,256,547 38,257,000 35,508,713 35,509,000
Securities held to maturity 2,756,218 2,975,000
Loans, net of allowance for
possible loan losses 157,454,266 158,919,000 124,884,537 124,006,000
Accrued interest receivable 1,054,578 1,055,000 1,164,985 1,165,000
Cash surrender value of
life insurance 1,013,696 1,014,000 987,603 988,000
Mortgage servicing rights 534,069 534,000 193,417 193,000
Financial liabilities
Demand and savings
deposits (76,395,186) (76,395,000) (68,348,715) (68,349,000)
Time deposits (96,702,609) (97,883,000) (93,452,447) (94,000,000)
Borrowed funds (19,220,000) (18,050,000) (3,030,000) (3,030,000)
Accrued interest payable (422,085) (422,000) (440,260) (440,000)
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
37.
<PAGE> 41
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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 1998 or 1997, 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, 1998
and 1997 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.
NOTE 15 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized holding gains and losses on available-for-
sale securities $ 895,258 $ 552,771
Less reclassification adjustments for gains and losses
later recognized in income (335,874) (151,165)
------------ ------------
Net unrealized gains and losses 559,384 401,606
Tax effect (190,191) (136,546)
------------ ------------
Other comprehensive income $ 369,193 $ 265,060
============ ============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
38.
<PAGE> 42
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 16- PARENT CORPORATION STATEMENTS
The following are condensed financial statements of Commercial Bancshares, Inc.:
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 46,885 $ 34,323
Investment in common stock of subsidiaries 16,888,501 15,629,429
Other assets 113,708 26,057
----------- -----------
Total assets $17,049,094 $15,689,809
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 1,466 $ 1,466
Shareholders' equity 17,047,628 15,688,343
----------- -----------
Total liabilities and shareholders' equity $17,049,094 $15,689,809
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INCOME
Dividends from bank subsidiary $ 820,173 $ 874,019
Other income 1,238
----------- -----------
Total income 820,173 875,257
EXPENSES
Amortization 12,348 12,348
Other 36,245 65,732
----------- -----------
Total expenses 48,593 78,080
----------- -----------
Income before equity in undistributed
earnings of subsidiaries 771,580 797,177
Equity in undistributed earnings of subsidiaries 845,328 1,041,880
----------- -----------
NET INCOME $ 1,616,908 $ 1,839,057
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
39.
<PAGE> 43
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOW
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,616,908 $ 1,839,057
Adjustments to reconcile net income to net cash
from operating activities
Equity in undistributed earnings of subsidiaries (845,328) (1,041,880)
Amortization and other 12,798 12,348
----------- -----------
Net cash from operating activities 784,378 809,525
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to new subsidiary (45,000) (55,000)
Purchase of certificate of deposit (100,000)
----------- -----------
Net cash from investing activities (145,000) (55,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised 148,357
Cash dividends paid (775,173) (729,019)
----------- -----------
Net cash from financing activities (626,816) (729,019)
----------- -----------
Net change in cash 12,562 25,506
Cash at beginning of period 34,323 8,817
----------- -----------
CASH AT END OF PERIOD $ 46,885 $ 34,323
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
40.
<PAGE> 44
SHAREHOLDER INFORMATION
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).
For 1998 and 1997, bid and ask quotations were obtained and compared from CBI
and Sweney. The quotations are inter-dealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Dividends
1998 Declared Low Bid High Bid Low Ask High Ask
---- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1st Qtr. $25.00 $26.00 $27.00 $28.00
2nd Qtr. $ .37 25.50 28.25 28.00 31.00
3rd Qtr. .18 27.75 30.00 29.00 33.00
4th Qtr. .19 29.00 31.50 31.00 33.00
</TABLE>
<TABLE>
<CAPTION>
Dividends
1997 (1) Declared Low Bid High Bid Low Ask High Ask
---- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1st Qtr. $18.33 $19.17 $19.33 $19.67
2nd Qtr. $ .35 19.17 20.00 20.00 20.00
3rd Qtr. 20.00 23.75 21.00 28.00
4th Qtr. .35 23.75 26.00 25.25 29.00
</TABLE>
(1) Amounts have been restated for the effect of the 3-for-1 stock
split paid on June 30, 1997.
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 1,049,431 outstanding shares of common stock held by
approximately 1,417 shareholders as of December 31, 1998. In 1997, the
Corporation paid cash dividends in June and December resulting in a total amount
of $0.70 per share. In 1998, the Corporation paid cash dividends in June,
September and December totaling $0.74 per share.
- -------------------------------------------------------------------------------
41.
<PAGE> 45
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ------------------
<S> <C>
Richard Sheaffer - Chairman (1)................................ President of R. A. Sheaffer, Inc.
Morral, Ohio
Raymond E. Graves (1)(2)....................................... President and CEO of Commercial
Bancshares, Inc. and The Commercial
Savings Bank
Upper Sandusky, Ohio
Daniel E. Berg(1)(2)........................................... Ohio Business Leader of Tower Automotive
Upper Sandusky/Bluffton, Ohio
James A. Deer (1)(2)........................................... Secretary/Treasurer of Commercial
Bancshares, Inc. and Executive Vice
President of The Commercial Savings Bank
Upper Sandusky, Ohio
Loren H. Dillon (1)............................................ President and General Manager, of Crow
Motor Sales, Inc.
Upper Sandusky, Ohio
Mark Dillon (1)................................................ President and CEO of Fairborn U.S.A., Inc.
Upper Sandusky, Ohio
Edwin G. Emerson (1)........................................... Partner, Shumaker, Loop & Kendrick, LLP
Toledo, Ohio
Hazel Franks (1)............................................... Retired, Trucking Firm Owner
Upper Sandusky, Ohio
Deborah J. Grafmiller (1)...................................... Executive Vice President of Bill Gillen
Realty, Inc. Co-owner of Certified
Appraisal Service
Upper Sandusky, Ohio
Philip W. Kinley (2)........................................... Vice President of Commercial
Bancshares, Inc. and Vice President/
Chief Operations Officer of The
Commercial Savings Bank
Upper Sandusky, Ohio
Michael A. Mastro (1)(2)....................................... President, TLM Management, Inc.
Marion, Ohio
Tracy L. Morgan (2)............................................ Managing Officer, Advantage
Finance, Inc.
Marion, Ohio
William E. Ruse (1)............................................ President of Blanchard Valley
Health Services
Findlay, Ohio
Douglas C. Smith (1)........................................... Senior Executive of Baja Marine Corporation
Bucyrus, Ohio
</TABLE>
(1) Directors of Commercial Bancshares, Inc. and The Commercial Savings Bank
(2) Directors of Advantage Finance, Inc.
- -------------------------------------------------------------------------------
42.
<PAGE> 46
DIRECTORS EMERITUS
B. E. Beaston
David Crow
William T. Gillen
Jack Griffith
Harmon Nickless
Frederick Reid
COMMERCIAL BANCSHARES, INC.
EXECUTIVE OFFICERS
Richard Sheaffer, Chairman of the Board
Raymond E. Graves, President and Chief Executive Officer
James A. Deer, Secretary/Treasurer
Philip W. Kinley, Vice President
COMMERCIAL SAVINGS BANK OFFICERS
EXECUTIVE OFFICERS
Raymond E. Graves, President and Chief Executive Officer
James A. Deer, Executive Vice President
Ronald M. Wilson, Senior Vice President
Philip W. Kinley, Vice President/Chief Operations Officer
Alicia A. Wagenblast, Vice President/Chief Financial Officer
Bruce J. Beck, Vice-President/Lending
Susan E. Brown, Vice-President/Retail
ADVANTAGE FINANCE, INC.
EXECUTIVE OFFICERS
Raymond E. Graves, President and Chief Executive Officer
James A. Deer, Executive Vice President
Philip W. Kinley, Vice President/Chief Operations Officer
Tracy L. Morgan, Managing Officer
TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSING AGENT
The Commercial Savings Bank
118 South Sandusky Avenue
P.O. Box 90
Upper Sandusky, Ohio 43351
(419) 294-5781
E-Mail: [email protected]
Mr. David J. Browne, Esq., Staff Counsel
ANNUAL MEETING
The annual shareholder's meeting will be held Wednesday, April 14, 1999 at 4:30
p.m. in the main office of The Commercial Savings Bank, 118 South Sandusky
Avenue, Upper Sandusky, Ohio.
- -------------------------------------------------------------------------------
43.
<PAGE> 1
EXHIBIT 21
COMMERCIAL BANCSHARES, INC.
---------------------------
<TABLE>
<CAPTION>
State of Percentage of
Subsidiary Incorporation Securities Owned
---------- ------------- ----------------
<S> <C> <C>
The Commercial Savings Bank (1) Ohio 100%
Advantage Finance, Inc. (2) Ohio 100%
</TABLE>
(1) The subsidiary's principal office is located in Upper Sandusky, Ohio.
(2) The subsidiary's principal office is located in Marion, Ohio.
- -------------------------------------------------------------------------------
15.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Forms S-8 (No. 333-32599 and No. 333-74611) of Commercial Bancshares, Inc. of
our report dated January 22, 1999 relating to the consolidated balance sheets of
Commercial Bancshares, Inc. as of December 31, 1998 and 1997, and the related
statements of income, shareholders' equity and cash flows for the years then
ended, which report is included in this Annual Report on Form 10-KSB of
Commercial Bancshares, Inc. for the year ended December 31, 1998.
/s/ Crowe, Chizek And Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 26, 1999
- ------------------------------------------------------------------------------
16.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,692,802
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,256,547
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 158,637,114
<ALLOWANCE> 1,182,848
<TOTAL-ASSETS> 210,403,732
<DEPOSITS> 173,097,795
<SHORT-TERM> 7,720,000
<LIABILITIES-OTHER> 1,038,309
<LONG-TERM> 11,500,000
0
0
<COMMON> 7,963,870
<OTHER-SE> 9,083,758
<TOTAL-LIABILITIES-AND-EQUITY> 210,403,732
<INTEREST-LOAN> 11,723,410
<INTEREST-INVEST> 2,185,503
<INTEREST-OTHER> 117,104
<INTEREST-TOTAL> 14,026,017
<INTEREST-DEPOSIT> 7,010,860
<INTEREST-EXPENSE> 7,237,385
<INTEREST-INCOME-NET> 6,788,632
<LOAN-LOSSES> 472,073
<SECURITIES-GAINS> 335,874
<EXPENSE-OTHER> 6,295,046
<INCOME-PRETAX> 2,043,118
<INCOME-PRE-EXTRAORDINARY> 1,616,908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,616,908
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.53
<YIELD-ACTUAL> 4.13
<LOANS-NON> 1,168,537
<LOANS-PAST> 91,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 457,750
<ALLOWANCE-OPEN> 1,075,385
<CHARGE-OFFS> 467,574
<RECOVERIES> 102,964
<ALLOWANCE-CLOSE> 1,182,848
<ALLOWANCE-DOMESTIC> 1,161,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21,848
</TABLE>
