<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File No. 0-27894
COMMERCIAL BANCSHARES, INC.
---------------------------
(Name of Registrant in Its Charter)
OHIO 34-1787239
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
118 S. SANDUSKY AVENUE UPPER SANDUSKY, OHIO 43351
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(419) 294-5781
-------------------------------
(Registrant'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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 14, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on a share price of $26.75 per share
(such price being the average of the bid and asked prices on such date) was
$28,023,567.50.
At March 14, 2000, there were issued and outstanding 1,047,610 of the
registrant's Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1999 Annual Report to Shareholders is incorporated by
reference into Part I and Part II of this Form 10-K Portions of Registrant's
Definitive Proxy Statement for the April 12, 2000 Annual Meeting of Shareholders
is incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
INDEX
FORM 10-K
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I
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ITEM 1. Description of Business 3
ITEM 2. Properties 5
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
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ITEM 5. Market for Common Equity and Related Shareholder Matters 6
ITEM 6. Selected Financial Data 6
ITEM 7. Management's Discussion and Analysis of Financial Condition 6
and Results of Operation
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 7
ITEM 8. Financial Statements and Supplementary Data 7
ITEM 9. Changes in and Disagreements with Accountants on 7
Accounting and Financial Disclosure
PART III
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ITEM 10. Directors and Executive Officers of the Registrant 7
ITEM 11. Executive Compensation 7
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 7
ITEM 13. Certain Relationships and Related Transactions 8
PART IV
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ITEM 14. List of Exhibits and Reports on Form 8-K 8
SIGNATURES 9
EXHIBITS 10
</TABLE>
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2.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
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.
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 the Finance Company to do business
in Ohio. On April 13, 1998 the Finance Company opened for business at 117 North
Greenwood, Marion, Ohio providing finance company services to customers in the
Marion area. In January 1999, the Corporation received regulatory approval from
the Ohio Department of Financial Institutions to establish the Finance Company
as a subsidiary of the Bank to facilitate its future operations.
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 its present name. 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 the Ohio counties of Wyandot, Marion and Hancock 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 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.
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3.
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The general economic conditions in the Corporation's market area have been
sound. Unemployment statistics have generally been consistent with the State of
Ohio as a whole and real estate values have been stable to rising. The
Corporation is not aware of any exposure to material costs associated with
environmental hazardous waste cleanup. Bank loan procedures require state and
federal environmental regulatory studies be obtained by Bank management before
approving any commercial real estate loan with such potential risk.
The Corporation is anticipating pursuing opportunities to expand into other
areas of the financial services industry, including, but not limited to,
insurance underwriting, made available by the passage of the Financial
Modernization Act of 1999.
COMPETITION IN FINANCIAL SERVICES
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 and independent
community banks and thrifts. The Bank also competes, particularly for deposit
dollars, with insurance companies, brokerage firms and investment companies. 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.
EMPLOYEES
Currently the Bank has 101 full-time employees and 18 part-time employees and
the Finance Company has 7 full-time employees and 1 part-time employee.
Directors and Officers of the Corporation are also employees of the Bank and
have been included in these totals. The Corporation does not have any full- or
part-time employees.
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. The Corporation 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.
The Corporation 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 Federal Deposit
Insurance Corporation insures the Bank's depositors. 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.
REGULATION OF THE FINANCE COMPANY: The Finance Company is chartered in the State
of Ohio and regulated by the Ohio Division of Financial Institutions, the
Federal Deposit Insurance Corporation, 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.
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4.
<PAGE> 5
The following schedules present, for the periods indicated, certain financial
and statistical information of the Corporation as required under the Securities
and Exchange Commission's Industry Guide 3, or a specific reference as to the
location of required disclosures in the Corporation's 1999 Annual Report to
Shareholders (the "Annual Report"), which is included as Exhibit 13 to this
document and incorporated herein by reference.
STATISTICAL DISCLOSURES
The following statistical information for 1999, 1998, and 1997, included in the
Annual Report is incorporated herein by reference.
<TABLE>
<CAPTION>
Pages of Annual Report
----------------------
<S> <C>
Distribution of Assets, Liabilities and Shareholders, Equity; 7-9
Interest Rates and Interest Differential
Investment Portfolio 15
Loan Portfolio 11
Summary of Loan Loss Experience 12-14
Deposits 16
Return on Equity and Assets 4
Short-term Borrowings 21 and 32
</TABLE>
ITEM 2 - PROPERTIES
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
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<S> <C>
1. Main Office Two story building built in the early 1900's
118 S. Sandusky Ave. and remodeled in 1991.
Upper Sandusky, Ohio 43351
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2. Carey Office One story building built and opened in 1973.
128 S. Vance Street
Carey, OH 43316
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3. Harpster Office One story building purchased in 1978.
17480 Cherokee Street
Harpster, OH 43323
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4. North Drive-In Office One story drive in office opened in 1981.
400 N. Sandusky Avenue
Upper Sandusky, OH 43351
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5. Marion Barks Road Office One story building purchased, renovated,
170 Barks Road East and opened in 1988.
Marion, OH 43302
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6. Findlay Tiffin Avenue Office One story building purchased from Savings
1600 Tiffin Avenue of America in 1992. The building was
Findlay, OH 45840 renovated in 1999 to add additional offices.
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7. Marion Jamesway Office One story building constructed and opened
279 Jamesway in 1997.
Marion, OH 43302
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</TABLE>
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5.
<PAGE> 6
<TABLE>
<S> <C>
8. Bellefontaine Office One story building purchased, renovated,
1245 Bellefontaine Ave. and opened in 1999.
Marion, OH 43302
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9. Findlay Lincoln Street Office One story building purchased in 1999.
1660 Tiffin Ave. The building is being renovated and is
Findlay, OH 45840 scheduled to open mid-year 2000.
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</TABLE>
The Bank also operates an intermittent office inside the Rotary Towers Nursing
Facility in Marion, Ohio, which was opened in 1991. The Bank's Lincoln Street
building will be used as a banking office and to house the Bank's Real Estate
Mortgage Department.
The Finance Company operates two offices, both of which are leased on a month to
month basis. The addresses of these offices are 117 North Greenwood, Suite 7,
Marion, Ohio and 1239 Bellefontaine Avenue, Marion, Ohio. The Bellefontaine
office is leased from the Bank.
The Bank considers its physical properties to be in good operating condition
(subject to reasonable wear and tear) and suitable for the purposes for which
they are being used. All properties owned by the Bank are free and clear of any
encumbrances and are adequately insured.
ITEM 3 - LEGAL PROCEEDINGS
There is no pending litigation, other than routine litigation incidental to the
business of the Corporation and Bank, of a material nature involving or naming
the Company or Bank as a defendant. Further, there are no material legal
proceedings in which any director, officer, principal shareholder, affiliate of
the Corporation, or security holder owning five percent of the Corporation's
common stock; or any associates of such persons is a party or has a material
interest that is adverse to the Corporation or Bank. None of the routine
litigation in which the Company or Bank is involved is expected to have a
material adverse impact on the financial position or results of operations of
the Corporation or 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 1999.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information set forth under the heading "Shareholder Information" on page 42
of the Annual Report is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information set forth under the heading "Comparative Summary of Selected
Financial Data" on pages 3 and 4 of the Annual Report is incorporated herein by
reference.
ITEM 7 - 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 Operations" on pages 5 through
19, inclusive, of the Annual Report is incorporated herein by reference.
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6.
<PAGE> 7
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the heading "Quantitative and Qualitative
Disclosures about Market Risk" on pages 18 and 19 of the Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained in the consolidated financial statements and related
notes and the report of independent auditors thereon, on pages 20 through 41,
inclusive, of the Annual Report to Shareholders is incorporated herein by
reference.
ITEM 9 - 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.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Corporation
appears on pages 4 through 9 inclusive under the captions "Family
Relationships", "Election of Directors", "Executive Officers" and "Section 16
(a) Beneficial Ownership Reporting Compliance" in the Corporation's Definitive
Proxy Statement dated March 10, 2000 for the Annual Meeting of Shareholders to
be held on April 12, 2000 and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information concerning executive compensation appears on pages 3 and 10 through
16, inclusive, under the captions "Compensation of Directors", "Report of the
Executive Compensation Committee of the Board of Directors on Executive
Compensation", "Compensation Committee Interlocks and Insider Participation in
Compensation Decisions", "Executive Compensation", "Deferred Compensation Plan",
"Executive Incentive Stock Option Plan", "Supplemental Executive Retirement
Plan", and "Performance Graph" in the Corporation's Definitive Proxy Statement
dated March 10, 2000 for the Annual Meeting of Shareholders to be held on April
12, 2000 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is contained on pages 2 and 5 through 7 under the captions "Voting
Securities and Principal Holders Thereof" and "Information Relating to Nominees
and other Directors" in the Corporation's Definitive Proxy Statement dated March
10, 2000 for the Annual Meeting of Shareholders to be held on April 12, 2000 and
is incorporated herein by reference.
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7.
<PAGE> 8
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on page 4 under the caption "Related Transactions" in the
Corporation's Definitive Proxy Statement dated March 10, 2000 for the Annual
Meeting of Shareholders to be held on April 12, 2000 and is incorporated herein
by reference.
ITEM 14 - LIST OF EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description of Document
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<S> <C>
3.1 Amended Articles of Incorporation of the Corporation
(incorporated by reference to Registrant's Form 8-K dated April 27, 1995)
3.2 Code of Regulations of the Corporation
(incorporated by reference to Registrant's Form 8-K dated April 27, 1995)
4 Form of Certificate of Common Shares of the Corporation
(incorporated by reference to Registrant's Form 8-K dated April 27, 1995)
10 Material Contracts
(incorporated by reference to Registrant's Forms S-8 dated August 1, 1997
and March 17, 1999)
13 Annual Report to Shareholders for the Year Ended 1999
21 Subsidiaries of the Registrant
23.1 Consent of Crowe, Chizek and Company, LLP
23.2 Consent of Shumaker, Loop & Kendrick, LLP
(incorporated by reference to Registrant's Forms S-8 dated
August 1, 1997 and March 17, 1999)
27 Financial Data Schedule
</TABLE>
All of such previously filed documents are hereby incorporated by reference
in accordance with Item 601 of Regulation S-K. 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.
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8.
<PAGE> 9
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 29, 2000 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 29, 2000.
<TABLE>
<CAPTION>
Signatures Signatures
---------- ----------
<S> <C>
/s/RAYMOND E. GRAVES /s/EDWIN G. EMERSON
- --------------------------------------- ---------------------------------------
Raymond E. Graves Edwin G. Emerson
President (Principal Executive Officer) Director
and Director
/s/JAMES A. DEER /s/HAZEL FRANKS
- --------------------------------------- ---------------------------------------
James A. Deer Hazel Franks
Secretary, Principal Financial Officer, Principal Director
Accounting Officer and Director
/s/RICHARD SHEAFFER /s/DEBORAH J. GRAFMILLER
- --------------------------------------- ---------------------------------------
Richard Sheaffer Deborah J. Grafmiller
Director, Chairman of the Board Director
/s/DANIEL E. BERG /s/MICHAEL A. MASTRO
- --------------------------------------- ---------------------------------------
Daniel E. Berg Michael A. Mastro
Director Director
/s/LOREN H. DILLON /s/WILLIAM E. RUSE
- --------------------------------------- ---------------------------------------
Loren H. Dillon William E. Ruse
Director Director
/s/MARK DILLON /s/DOUGLAS C. SMITH
- --------------------------------------- ---------------------------------------
Mark Dillon Douglas C. Smith
Director Director
</TABLE>
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9.
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
Reference to Number in
Prior Filing or This
Exhibit Number Form 10-K
Exhibit Number Description of Document Attached Hereto Report
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<S> <C> <C> <C>
3.3 Amended Articles of Incorporation 1 Not Applicable
of the Corporation
3.4 Code of Regulations of 2 Not Applicable
the Corporation
4 Form of Certificate of Common Shares 3 Not Applicable
of the Corporation
10 Material Contracts 4 Not Applicable
13 Annual Report to Shareholders 5 11
for the Year Ended 1999
21 Subsidiaries of the Registrant 6 54
23.1 Consent of Crowe, Chizek and Company LLP 7 55
23.2 Consent of Shumaker, Loop & Kendrick, LLP 8 Not Applicable
27 Financial Data Schedule 9 56
</TABLE>
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(Continued)
10.
<PAGE> 1
EXHIBIT 13
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR END BALANCES 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Total assets $ 251,951,807 $ 210,403,732 $ 181,366,767 $ 180,960,972 $ 166,296,169
Total deposits 214,355,738 173,097,795 161,801,162 165,891,962 151,622,166
Loans, net 203,273,827 157,454,266 124,884,537 115,136,180 97,735,400
Total securities 32,414,530 38,256,547 38,264,931 51,115,760 54,780,151
Total borrowed funds 19,352,977 19,220,000 3,030,000 -- --
Total shareholders'
equity 17,212,316 17,047,628 15,688,343 14,313,245 14,095,728
Book value per
outstanding share 16.43 16.24 15.06 13.74 13.53
Outstanding shares
at year end 1,047,610 1,049,431 1,041,456 1,041,456 1,041,456
RESULTS OF OPERATIONS
Interest income $ 17,877,770 $ 14,026,017 $ 14,021,102 $ 12,831,570 $ 12,466,360
Interest expense 8,692,028 7,237,385 7,323,797 6,335,513 6,118,156
--------------- ---------------- --------------- --------------- ---------------
Net interest income 9,185,742 6,788,632 6,697,305 6,496,057 6,348,204
Provision for
possible loan
losses (494,500) (472,073) (613,000) (205,800) (100,000)
Other income 1,654,722 2,021,605 2,006,696 1,117,620 1,076,972
Salaries and
employee benefits (3,471,143) (2,979,289) (2,600,750) (2,525,990) (2,287,775)
Other expenses (3,967,127) (3,315,757) (3,046,170) (3,129,591) (2,788,217)
--------------- ---------------- --------------- --------------- ---------------
Income before
income taxes 2,907,694 2,043,118 2,444,081 1,752,296 2,249,184
Applicable
income taxes (823,168) (426,210) (605,024) (371,515) (561,695)
--------------- ---------------- --------------- --------------- ---------------
NET INCOME $ 2,084,526 $ 1,616,908 $ 1,839,057 $ 1,380,781 $ 1,687,489
=============== ================ =============== =============== ===============
PER SHARE DATA*
Net income
Basic $ 1.99 $ 1.55 $ 1.77 $ 1.33 $ 1.62
=============== ================ =============== =============== ===============
Diluted $ 1.96 $ 1.53 $ 1.76 $ 1.33 $ 1.62
=============== ================ =============== =============== ===============
Cash dividend paid $ 0.76 $ 0.74 $ 0.70 $ 0.67 $ 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.
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(Continued)
11.
<PAGE> 2
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
FINANCIAL RATIOS 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average
total assets 0.90% 0.86% 1.00% 0.82% 1.05%
Return on average
shareholders' equity 12.18% 9.98% 12.49% 9.83% 13.31%
Average shareholders'
equity to average
total assets 7.43% 8.63% 7.98% 8.35% 7.88%
Dividend payout 38.26% 47.94% 39.64% 50.28% 32.96%
</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
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12.
<PAGE> 3
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 Commercial Bancshares, Inc. (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 $2.1 million in 1999 represents a 29% increase from the net income
of $1.6 million in 1998. Diluted earnings per share increased from $1.53 in 1998
to $1.96 in 1999. Return on average assets was 0.90% in 1999, compared to .86%
in 1998, and return on average shareholders' equity increased to 12.18% in 1999
from 9.98% in 1998. As discussed in greater detail below, these increases
resulted primarily from a $2.4 million increase in net interest income, offset
by an increase in non-interest expense of $1.1 million.
NET INTEREST INCOME
Net interest income, the primary source of earnings for the Corporation, is the
amount by which interest and fees on loans and investments exceed the interest
cost of deposits and other borrowings to fund them. Changes in mix and volume of
earning assets and interest-bearing liabilities and their related yields and
interest rates have a major impact on earnings.
Management attempts to manage the repricing of assets and liabilities to achieve
a stable level of net interest income and minimize the effect of significant
changes in the market level of interest rates. Management is active in pricing
and promotion of loan and deposit products as well as closely monitoring
corporate investment securities classified as available for sale.
Net interest income for 1999 totaled $9.2 million, increasing $2.4 million from
$6.8 million in 1998. Taxable and nontaxable securities income was lower than
the amounts reported in 1998 due to reductions in average balances. The decrease
in securities was used to fund additional loans. This shift in the composition
of earning assets is consistent with management's continuing efforts to increase
its commercial and indirect consumer loan portfolio and to manage the interest
margin by investing funds in higher-yielding assets. The total loan portfolio
increased from $159 million in 1998 to $205 million in 1999, a 29.1% increase.
The average balances increased by 37.3%. These volume increases led to an
increase in interest income on loans of $4.3 million for 1999. This increase was
slightly offset by a reduction in yield, from 8.99% in 1998 to 8.93% in 1999.
The most dramatic increase in the loan portfolio occurred in consumer loans and
consumer finance loans, which nearly doubled to $81.2 million in 1999 from $42.0
million in 1998. The Corporation also recognized more modest increases in loan
volume in commercial and real estate loans of $3.7 million and $2.7 million.
Interest expense increased $1.5 million to $8.7 million in 1999, compared to
$7.2 million in 1998. The overall weighted average cost of funds was unchanged
over the two year period, but average interest-bearing liabilities increased
from $160 million in 1998 to $191 million in 1999, a 19% increase. This balance
increase was responsible for the higher interest expense in 1999. The mix of the
interest-bearing liabilities also changed during 1999. The Corporation made
greater use of borrowings from the Federal Home Loan Bank (FHLB) in 1999 to fund
growth in the loan portfolios. Average advances from the FHLB totaled $16.0
million in 1999, compared to $5.7
- --------------------------------------------------------------------------------
13.
<PAGE> 4
million in 1998. The average rate on these borrowings was 5.05% in 1999 and
4.00% in 1998. The rate paid on these borrowings was an average of 172 basis
points less than time deposits in 1998 and 30 basis points less in 1999.
In 1998, net interest income increased $91,000 to $6.8 million. 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 $18.5 million. 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
$7.9 million 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.
The following tables provide an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities and the change
in net interest income, identifying the portion of the change due to volume
changes versus the portion due to changes in rates.
- --------------------------------------------------------------------------------
14.
<PAGE> 5
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- --------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance (4) Expense Yield Balance (4) Expense Yield Balance (4) Expense Yield
------- ------- ----- ------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 997,726 $ 53,606 5.37% $ 2,231,342 $ 117,104 5.25% $ 1,484,288 $ 77,472 5.22%
Securities
Taxable (1) 20,364,978 1,145,665 5.53 23,921,057 1,337,496 5.53 32,585,903 2,072,713 6.28
Tax exempt (1 and 2) 14,509,766 1,042,317 7.04 17,837,730 1,284,859 7.08 14,890,047 1,142,958 7.68
Loans (3) 179,078,017 15,990,570 8.93 130,470,193 11,723,410 8.99 123,577,448 11,116,565 9.00
------------ ----------- ---- ------------ ----------- ---- ------------ ----------- ----
Total earning assets 214,950,487 18,232,158 8.46% 174,460,322 14,462,869 8.26% 172,537,686 14,409,708 8.33%
------------ ----------- ==== ------------ ----------- ==== ------------ ----------- ====
Other assets 15,521,361 13,235,640 11,970,957
------------ ------------ ------------
Total assets $230,471,848 $187,695,962 $184,508,643
============ ============ ============
Deposits
Interest-bearing
demand deposits $ 36,748,118 1,084,647 2.95% $ 39,985,521 1,100,019 2.75% $ 35,508,530 963,126 2.71%
Savings deposits 19,971,564 450,232 2.25 19,246,791 491,928 2.56 19,900,106 534,422 2.69
Time deposits 118,666,332 6,349,758 5.35 94,662,246 5,418,913 5.72 98,642,740 5,735,511 5.81
Borrowed funds 15,982,521 807,391 5.05 5,668,847 226,525 4.00 1,587,509 90,738 5.72
------------ ----------- ---- ------------ ----------- ---- ------------ ----------- ----
Total interest-
bearing liabilities 191,368,535 8,692,028 4.54% 159,563,405 7,237,385 4.54% 155,638,885 7,323,797 4.71%
------------ ----------- ==== ------------ ----------- ==== ------------ ----------- ====
Noninterest-bearing
demand 20,771,450 11,744,718 13,176,789
Other liabilities 1,218,737 192,985 974,417
Shareholders' equity 17,113,126 16,194,854 14,718,552
------------ ------------ ------------
Total liabilities and
shareholders'
equity $230,471,848 $187,695,962 $184,508,643
============ ============ ============
Net interest income $ 9,540,130 $ 7,225,484 $ 7,085,911
=========== =========== ===========
As a percentage of earning
assets:
Interest income 8.46% 8.26% 8.33%
Interest expense 4.03 4.13 4.23
---- ---- ----
Net interest income 4.43% 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 $354,388, $436,852 and $388,606
for 1999, 1998 and 1997, respectively.
(3) Nonaccrual loans are included in the average balances presented.
(4) Average is a daily average balance.
- --------------------------------------------------------------------------------
15.
<PAGE> 6
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
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 $ (63,498) $ (66,217) $ 2,719 $ 39,632 $ 39,204 $ 428
Investment and mortgage-
backed securities
Taxable (191,831) (196,651) 4,820 (735,217) (505,325) (229,892)
Tax exempt (1) (242,542) (234,328) (8,214) 141,901 215,632 (73,731)
Loans (2) 4,267,160 4,340,831 (73,671) 606,845 619,362 (12,517)
---------- ---------- ----------- ---------- ------------ -----------
Total interest income 3,769,289 3,843,635 (74,346) 53,161 368,873 (315,712)
---------- ---------- ----------- ---------- ------------ -----------
Deposits
Interest-bearing demand deposits (15,372) (92,479) 77,107 136,893 122,988 13,905
Savings deposits (41,696) 17,996 (59,692) (42,494) (17,202) (25,292)
Time deposits 930,845 1,302,794 (371,949) (316,598) (228,855) (87,743)
Borrowed funds 580,866 507,210 73,656 135,787 170,443 (34,656)
---------- ---------- ---------- ---------- ------------ -----------
Total interest expense 1,454,643 1,735,521 (280,878) (86,412) 47,374 (133,786)
---------- ---------- ----------- ---------- ------------ -----------
Net interest income $2,314,646 $2,108,114 $ 206,532 $ 139,573 $ 321,499 $ (181,926)
========== ========== ========== ========== ============ ===========
</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.
- --------------------------------------------------------------------------------
16.
<PAGE> 7
PROVISION FOR POSSIBLE LOAN LOSSES
As the loan portfolio grows, management continues to provide for losses inherent
in the portfolio. The provision for loan losses was $495,000 in 1999, an
increase from $472,000 in 1998, which declined from $613,000 in 1997. The credit
review process includes a number of factors later discussed - see "Allowance for
Loan Losses".
NONINTEREST INCOME
Total non-interest income of $1.7 million was 18.1% lower than 1998. The
Corporation experienced a $188,000 increase in service fees and overdraft
charges during the year resulting from the increase in deposits. These gains
were offset by reductions in the gains realized on securities and loan sales of
$278,000 and $396,000, respectively. The lower gains were mainly the result of
changes in interest rates during 1999. As rates increased, the securities held
by the Corporation experienced a decline in fair value. In addition, the rising
interest rate environment slowed the mortgage loan origination levels seen in
1998, which resulted in lower gains.
In 1998, total non-interest income of $2.0 million was 0.74% higher than in
1997. Non-interest 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 non-interest income was a $185,000 increase in net
gains on sale of securities and an increase of $361,000 in net gains on loan
sales due to increased activity in this area in 1998.
NONINTEREST EXPENSE.
Total non-interest expense increased $1.1 million in 1999, from $6.3 million to
$7.4 million. Customary merit increases of employee salaries, additional
staffing for new locations, increases in occupancy expense - which included
depreciation on a new branch and new computer systems, and losses and expenses
associated with other real estate owned contributed to this increase. Management
anticipates additional increases in noninterest expenses related to additional
branch expansion plans in 2000.
In 1998, total noninterest expense increased $648,126. Increases in employee
salaries, the addition of three executive officers, and increases in
professional fees were partially offset by a reduction in data processing
expense.
INCOME TAXES
Income tax expense of $823,168 in 1999 represents 28.3% of income before taxes
compared to 20.9% in 1998 and 24.8% in 1997. These effective tax rates are 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 declined as a percentage of income before taxes in 1999, which was a
contributing factor to the increase in the effective rate for 1999.
FINANCIAL CONDITION
Total assets were $252 million at December 31, 1999, an increase over 1998 of
19.7%. The major factor in the growth of the Corporation was the increase of $46
million in the loan portfolio, funded by increases in both deposits and
borrowings.
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
- --------------------------------------------------------------------------------
17.
<PAGE> 8
operations. At December 31, 1999, Advantage had loans made to customers of $5.9
million. Substantially all of the Advantage loans are indirect loans to
borrowers outside of the Corporation's traditional market area. These loans are
originated through a relationship with a chain of garden and farm supply stores.
Collateral for these loans typically consists of lawn and garden equipment and
small appliances. A majority of the Advantage loans are originated on a
six-month same as cash basis such that if the customers repay the loan within
the first six months, no interest will be collected by Advantage. For the loans
that repay within the first six months, Advantage's income is limited to a 2%
discount received upon the initial purchase of these loans. The profitability of
Advantage can be significantly impacted by the volume of loans that repay in the
first six months. At year-end, management estimates that approximately 57% of
loans originated under this program are repaying within the first six months.
LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and
other loans $ 82,888,494 $ 79,168,621 $ 60,677,339 $ 51,021,307 $ 53,708,832
Real estate
loans 33,438,899 30,739,831 25,081,877 22,979,126 21,376,721
Consumer and
credit card
loans 75,317,523 42,012,388 34,149,658 37,344,109 20,386,106
Home equity
loans 7,252,796 6,716,274 6,051,048 4,810,246 3,259,872
Consumer finance
loans 5,875,472 -- -- -- --
---------------- --------------- --------------- ---------------- ---------------
Total loans $ 204,773,184 $ 158,637,114 $ 125,959,922 $ 116,154,788 $ 98,731,531
================ =============== =============== ================ ===============
</TABLE>
Consumer and credit card loans increased $33 million or 79.3% from 1998 levels.
The Corporation was active in the indirect loan business, specifically loans for
horse trailers, which accounted for substantially all consumer loan growth in
1999. These indirect loans are originated through a loan broker to whom the
Corporation pays origination fees. Substantially all of these borrowers are
located outside of the Corporation's traditional market area.
Commercial loans were increased 4.7% in 1999 through the efforts of the
Corporation's Business Development Team and strategically lower interest rates.
Management is committed to strengthening business relationships and providing
incentives for loan growth in its local market area.
The significant loan growth that occurred in 1999 was part of management's
strategy to shift funds to higher yielding assets, increase the leverage of the
Corporation's and Bank's capital and improve return to shareholders. While these
goals were achieved, the loan growth in 2000 is expected to decline due to
regulatory capital constraints that impose limits on the level of assets that
can be supported by the current amounts of shareholders' equity. See the
discussion of Capital Resources later in this report.
- --------------------------------------------------------------------------------
18.
<PAGE> 9
The following is a schedule of maturities of commercial loans (in thousands)
based on contract terms as of December 31, 1999.
<TABLE>
<CAPTION>
One Year One Through Over
or less Five Years Five Years
------- ---------- ----------
<S> <C> <C>
$ 10,978 $ 13,312 $ 58,598
</TABLE>
Of the loans included above with maturities exceeding one year, $23.2 million
had fixed rates, while $48.7 had adjustable rates.
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to
cover probable loan losses that are currently anticipated based on past loss
experience, current economic conditions, changes in mix and size of the loan
portfolio, information about specific borrower situations, and other factors and
estimates which are subject to change over time. Management periodically reviews
selected large loans, delinquent and other problem loans, and selected other
loans. Collectibility of these loans is evaluated by considering current
financial position and performance of the borrower, estimated market value of
the collateral, collateral position in relationship to other creditors,
guarantees and other potential sources of repayment. Management forms judgments,
which are subjective, as to the probability of loss and the amount of loss on
these loans as well as other loans taken together.
The allowance for possible loan losses on December 31, 1999 was $1.5 million or
.73% of total loans. This compares to $1.2 million or 0.75% of total loans in
1998. The Corporation's policy is to charge off loans when, in management's
opinion, collection is doubtful. All loans charged off are subject to continuing
review and concerted efforts are made to maximize recovery.
The Corporation provided $495,000 to the allowance for loan losses in 1999 to
maintain the allowance balance at an adequate level following net charge-offs of
$178,000. While loan growth in 1999 was high, the provision for allowance for
loan losses was only slightly higher than 1998 due to management's decreased
activity in the riskier, indirect automobile market and the decline in net
charge offs and nonperforming loans.
While the amount of charge offs and nonperforming loans declined in 1999, there
can be no assurance that these trends will continue. As noted earlier in this
discussion, substantially all of the loan growth experienced in 1999 occurred
with indirect, out-of-area loans. In the banking industry, loans with these
characteristics are often considered to possess a greater risk of loss than
loans originated with customers in the local market area who have other
relationships with the Corporation. Management believes that prudent
underwriting standards have been used in approving these out-of-area loans and
loan repayment history has been good. However, as these loans age, repayment
experience may deteriorate and additional provisions for loan losses may be
required.
- --------------------------------------------------------------------------------
19.
<PAGE> 10
The following schedule presents an analysis (in thousands) of the allowance for
loan losses, average loan data, and related ratios for each of the five years in
the period ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,183 $ 1,075 $ 1,019 $ 996 $ 960
Loans charged off:
Commercial (12) (45) (42) (72) (147)
Real estate -- -- -- -- (1)
Installment (290) (422) (601) (196) (47)
----------- ------------ ------------ ------------ ------------
Total loans charged off (302) (467) (643) (268) (195)
----------- ------------ ------------- ------------ ------------
Recoveries of loans previously
charged off:
Commercial 8 5 30 60 117
Real estate -- -- -- -- --
Installment 116 98 56 25 14
----------- ------------ ------------ ------------ ------------
Total loan recoveries 124 103 86 85 131
----------- ------------ ------------ ------------ ------------
Net loans charged off (178) (364) (557) (183) (64)
Provision charged to operating
expense 494 472 613 206 100
----------- ------------ ------------ ------------ ------------
Balance at end of period $ 1,499 $ 1,183 $ 1,075 $ 1,019 $ 996
=========== ============ =========== =========== ===========
Ratio of net charge-offs to average
loans outstanding for period 0.10% 0.28% 0.45% 0.17% 0.07%
</TABLE>
The following schedule is a breakdown of the allowance for loan losses (in
thousands) allocated by type of loan and related ratios.
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to Category to
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
----------------------- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 207 40.48% $ 509 49.91% $ 530 48.17% $ 424 43.93% $448 54.40%
Real estate 83 19.87 93 23.61 95 24.72 8 23.92 59 20.65
Consumer 1,184 39.65 559 26.48 442 27.11 445 32.15 340 24.95
Unallocated 25 N/A 22 N/A 8 N/A 142 N/A 149 N/A
------ ------ ------ ----- ------ ------ ------ ------ ---- ------
Total $1,499 100.00% $1,183 100.00% $1,075 100.00% $1,019 100.00% $996 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ==== ======
</TABLE>
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 90 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 90
days beyond the due dates. When loans are charged off, any accrued interest
recorded in the current fiscal year is charged against interest income. The
remaining balance is treated as a loan charged-off.
- --------------------------------------------------------------------------------
20.
<PAGE> 11
The Corporation considers loans impaired if full principal and interest payments
are not anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair value
of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans.
Commercial loans and commercial real estate loans that are classified as
substandard or doubtful through the internal loan review process, and loans that
have been placed on nonaccrual status are evaluated for impairment on a
loan-by-loan basis. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans included residential first mortgage loans, home
equity, automobile and credit card loans.
The following schedule summarizes nonperforming and impaired loans (in
thousands) as of December 31.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Impaired loans $ 186 $ 1,068 $ 1,405 $ 45 $ 257
========= ========= ===== == ===
Loans accounted for on a nonaccrual
basis (includes substantially all
impaired loans) $ 530 $ 1,169 $ 1,073 $ 45 $ --
Accruing loans which are contractually
past due 90 days or more as to interest
or principal payments 212 91 289 -- --
Loans that are "troubled debt
restructurings" as defined in
Statement of Financial Accounting
Standard No. 15 (exclusive of loans
listed above) -- -- -- -- --
--------- --------- --------- --------- ---------
Total nonperforming loans $ 742 $ 1,260 $ 1,362 $ 45 $ 0
========= ========= ======== ======== ========
</TABLE>
No interest income was recognized on impaired loans in 1999.
As of December 31, 1999, there are no loans that have not been included above
where known information about possible credit problems of the borrower causes
management to have serious doubts about the ability of the borrower to comply
with present repayment terms.
As of December 31, 1999, there are no other interest- bearing assets that would
be required to be disclosed in the table above, if such assets were loans.
Another factor associated with asset quality is Other Real Estate Owned
("OREO"). OREO represents properties acquired by the Corporation through loan
defaults by customers. 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. During 1999, management disposed of a large commercial property that
had been carried as OREO at year-end 1998. The losses associated with this
property, which were recognized during the year, were approximately $176,000.
There were no properties classified as OREO at year-end 1999.
- --------------------------------------------------------------------------------
21.
<PAGE> 12
SECURITIES
All securities are classified as available for sale and are carried at fair
value. Mortgage-backed securities decreased in 1999 by $5.1 million, corporate
bonds decreased $1.0 million and obligations of federal agencies decreased $1.1
million. These declines were partially offset by an increase in obligations of
state and political subdivisions of $1.1 million. Funds from the decline in
securities were used to make new loans in 1999. As of December 31, 1999, 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 carrying value of securities available for sale as of December 31 are
summarized as follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and U.S. Government
Agency securities $ 1,493,589 $ 2,629,085 $ 4,729,524
Obligations of states and
Political subdivisions 14,683,807 13,539,190 11,070,645
Corporate bonds 935,704 1,956,913 501,975
Mortgage-backed 14,063,670 19,185,399 18,629,109
Equity investments 1,237,760 945,960 577,460
--------------- -------------- --------------
$ 32,414,530 $ 38,256,547 $ 35,508,713
=============== ============== ==============
</TABLE>
The carrying value of securities held to maturity as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Obligations of federal agencies $ -- $ -- $ 2,974,830
================ =============== ===============
</TABLE>
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, 1999:
<TABLE>
<CAPTION>
Maturing
-------------------------------------------------------------------------------------------
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>
Obligations of
federal
agencies $ 1,493,589 6.07%
Obligations of
state and
political
subdivisions $ 244,225 8.70% 1,131,455 7.79 $ 13,308,127 6.97%
Corporate bonds 427,078 5.74 508,626 5.95
Mortgage-
backed
securities 3,032,867 6.25 11,030,803 5.47
-------- ------- ----------- ------- -------------- ------ ------------- ------
Total $ -- --% $ 671,303 6.82% $ 6,166,537 6.46% $ 24,338,930 6.29%
======== ====== =========== ======= ============== ====== ============= ======
</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 been determined on a tax equivalent
basis. Equity securities consisting of Federal Home Loan Bank stock that bears
no stated maturity or yield 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.
- --------------------------------------------------------------------------------
22.
<PAGE> 13
DEPOSITS
Total deposits increased $41.3 million (23.8%) to $214.4 million in 1999. A
notable amount of this increase was in time certificates of deposit of $100,000
or greater resulting from a promotion in the fourth quarter of 1999. Throughout
the year, management has continued its focus on a sales culture and has expanded
its branch system in order to attract additional deposits.
The following is a schedule of maturities of time certificates of deposit (in
thousands) in amounts of more than $100,000 as of December 31, 1999:
<TABLE>
<S> <C>
Three months or less $ 9,222
Over three months through six months 11,415
Over six through twelve months 12,295
Over twelve months 7,727
----------------
Total $ 40,659
================
</TABLE>
The average amount of deposits and average rates paid are summarized as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- --------------------------- ----------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
demand deposits $ 36,748,118 2.95% $ 39,985,521 2.75% $ 35,508,530 2.71%
Savings deposits 19,971,564 2.25 19,246,791 2.56 19,900,106 2.69
Time deposits 118,666,332 5.35 94,662,246 5.72 98,642,740 5.81
Demand deposits
(noninterest-bearing) 20,771,450 11,744,718 13,176,789
--------------- --------------- ----------------
$ 196,157,464 $ 165,639,276 $ 167,228,165
=============== =============== ================
</TABLE>
CAPITAL RESOURCES
Total shareholders' equity at year-end 1999 was $17.2 million, an increase of
$165,000 from total shareholders equity of $17.0 million at year-end 1998. The
Bank's net income contributed to the increase, but was largely offset by the
payment of dividends and the tax-effected decline in fair value of securities
available for sale.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. As of December 31,
1999, 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, 1999, the Bank's total risk-based capital ratio and leverage
ratio were 10.1% and 8.0%, thus exceeding the minimum regulatory requirements.
At December 31, 1998, the ratios were 11.6% and 8.1%. The Corporation has
similar capital requirements on a consolidated basis as described in Note 13 of
the consolidated financial statements.
- --------------------------------------------------------------------------------
23.
<PAGE> 14
At year-end 1999, the Corporation has plans for capital outlays of approximately
$350,000 to fund additional branch expansion. In addition, the Corporation is
negotiating to purchase a property-casualty and life insurance agency business
and partial ownership of a title insurance agency. If these negotiations are
successfully completed, they are not expected to have a material impact on the
Corporation's capital resources.
LIQUIDITY
Liquidity refers to the Corporation's ability to generate sufficient cash to
fund current loan demand, meet deposit withdrawals, pay operating expenses and
meet other obligations. Primary sources of liquidity are cash and cash
equivalents, which totaled $7.1 million at year-end 1999. Net income, securities
available for sale and repayments and maturities of loans serve to increase
liquidity. Other sources of liquidity that could be used to help ensure funds
are available when needed include, but are not limited to, purchase of federal
funds, sale of securities, obtaining advances from the FHLB, adjustments of
interest rates to attract deposits and borrowing at the Federal Reserve discount
window. Management believes that its sources of liquidity are adequate to meet
the needs of the Corporation.
A measure of liquidity is the relationship of loans to deposits and borrowed
funds. Lower ratios indicate greater liquidity. At December 31, 1999 and 1998,
the ratio of loans to deposits and borrowed funds was 87.6% and 82.5%.
Management believes that these ratios represent acceptable levels of liquidity.
See the consolidated statements of cash flows in the accompanying financial
statements for a more detailed presentation of the Corporation's cash flows from
operating, investing and financing activities.
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.
- --------------------------------------------------------------------------------
24.
<PAGE> 15
YEAR 2000
The corporation successfully completed its Year 2000 changeover without any
problems in its core business processes. While management believes it is
unlikely, problems associated with non-compliant third parties could still
occur. Management will continue to monitor all business processes and
relationships during 2000 to ensure that all processes continue proper
functioning.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation disclosed the estimated fair value of its financial instruments
at December 31, 1999 and 1998 in the notes to the consolidated financial
statements. The estimated fair value of financial instruments generally
experienced decreases in 1999 due to an increasing interest rate environment.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only significant market risk to which the Corporation is exposed is interest
rate risk. The business of the Corporation and the composition of its balance
sheet consists of investments in interest-earning assets (primarily loans and
securities), which are funded by interest-bearing liabilities (deposits and
borrowings). These financial instruments have varying levels of sensitivity to
changes in the market rates of interest, resulting in market risk. No financial
instruments are held for trading purposes.
Interest rate risk is managed regularly through the Corporation's
Asset-Liability Management Committee (ALCO). One method used to manage its
interest rate risk is a rate sensitivity gap analysis, which monitors the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. The interest rate sensitivity gap is defined
as the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A "positive gap"
occurs when the amount of interest rate-sensitive assets maturing or repricing
within a given period exceeds the amount of interest-sensitive liabilities
maturing or repricing within the same period. Conversely, a "negative gap"
occurs when the amount of interest rate-sensitive liabilities exceeds the amount
of interest rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income.
Management monitors its gap position with the goal to increase its net interest
income slightly in a rising interest rate environment, in order to maintain
earnings at an acceptable level when additional funding of loan loss reserve may
be necessary. This has historically been accomplished through offering loan
products that are either short-term in nature or which carry variable rates of
interest. Interest rates of the majority of the commercial loan portfolio vary
based on the prime commercial lending rates published by The Wall Street
Journal, while interest rates of the majority of its real estate loan portfolio
vary depending on certain U.S. Treasury rates. Consumer loans have primarily
fixed rates of interest.
The following table provides information about the Corporation's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-average
interest rates by contractual maturities. For core deposits (demand,
interest-bearing checking, savings and money market) that have no contractual
maturity, the table presents principal cash flows and, as applicable, related
weighted-average interest rates based upon the Corporation's historical
experience, management's judgments and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors. Weighted-average variable
rates are based upon rates existing at the reporting date.
- --------------------------------------------------------------------------------
25.
<PAGE> 16
PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
RATE-SENSITIVE ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed interest rate loans $7,178 $7,540 $4,831 $7,303 $10,155 $82,229 $119,236 $118,568
Average interest rate 10.57% 10.15% 10.05% 10.34% 10.32% 9.97% 10.07%
Variable interest rate loans $12,550 $1,178 $1,106 $2,108 $2,861 $65,734 $85,537 $85,192
Average interest rate 10.19% 9.04% 9.38% 8.85% 8.43% 8.83% 9.03%
Fixed interest rate securities - - - $591 $94 $21,961 $22,646 $21,302
Average interest rate - - - 6.89% 7.35% 5.53% 5.57%
Variable interest rate securities - - - - - $10,042 $10,042 $9,875
Average interest rate - - - - - 6.27% 6.27%
RATE SENSITIVE LIABILITIES:
Non interest-bearing checking $6,067 $4,854 $3,640 $3,034 $3,034 $3,640 $24,268 $24,268
Average interest rate - - - - - - -
Interest-bearing deposits $10,587 $10,587 $7,941 $7,941 $5,294 $10,587 $52,937 $52,937
Average interest rate 2.13% 2.13% 2.13% 2.13% 2.13% 2.13% 2.13%
Time deposits $93,179 $32,842 $9,812 $516 $520 $282 $137,151 $137,388
Average interest rate 5.39% 5.48% 5.81% 5.21% 4.86% 3.40% 5.43%
Fixed interest rate borrowings $7,153 - - - - $11,500 $18,653 $17,255
Average interest rate 4.75% - - - - 4.60% 4.66%
Variable interest rate borrowings $500 - - - - - $500 $500
Average interest rate 8.00% - - - - 8.00%
Federal funds purchased $200 - - - - - $200 $200
Average interest rate 5.69% - - - - - 5.69%
</TABLE>
ACCOUNTING STANDARDS
A new standard, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. The new standard
does not allow hedging of a security which is classified as held to maturity.
Upon adoption of the standard, companies are allowed to transfer securities from
held to maturity to available for sale if they wish to be able to hedge the
securities in the future. The standard is effective for fiscal years beginning
after June 15, 2000, with early adoption encouraged for any fiscal quarter, with
no retroactive application. Management does not expect the adoption of this
standard to have a significant impact on its financial statements.
- --------------------------------------------------------------------------------
26.
<PAGE> 17
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, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 21, 2000
- --------------------------------------------------------------------------------
27.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,124,441 $ 6,692,802
Securities available for sale 32,414,530 38,256,547
Total loans 204,773,184 158,637,114
Allowance for possible loan loss (1,499,357) (1,182,848)
----------------- -----------------
Loans - net 203,273,827 157,454,266
Premises and equipment, net 5,531,275 3,957,927
Other real estate, net -- 921,500
Accrued interest receivable 1,276,295 1,054,578
Other assets 2,331,439 2,066,112
----------------- -----------------
Total assets $ 251,951,807 $ 210,403,732
================= =================
LIABILITIES
Deposits
Noninterest-bearing demand $ 24,267,774 $ 16,800,775
Interest-bearing demand 33,510,714 39,985,521
Savings and time deposits 115,917,853 94,178,037
Time deposits $100,000 and greater 40,659,397 22,133,462
----------------- -----------------
Total deposits 214,355,738 173,097,795
Accrued interest payable 514,457 422,085
FHLB advances 18,640,000 18,820,000
Other borrowed funds 712,977 400,000
Other liabilities 516,319 616,224
----------------- -----------------
Total liabilities 234,739,491 193,356,104
----------------- -----------------
SHAREHOLDERS' EQUITY
Common stock, no par value, 4,000,000 shares authorized, 1,049,999
and 1,049,431 issued in 1999 and 1998 8,055,691 7,963,870
Retained earnings 10,227,726 8,940,775
Treasury stock - 2,389 shares (73,832) --
Accumulated other comprehensive income (997,269) 142,983
----------------- -----------------
Total shareholders' equity 17,212,316 17,047,628
----------------- -----------------
Total liabilities and shareholders' equity $ 251,951,807 $ 210,403,732
================= =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
28.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 15,990,570 $ 11,723,410 $ 11,116,565
Securities
Taxable 1,145,665 1,337,496 2,072,713
Tax exempt 687,929 848,007 754,352
Other and dividends 53,606 117,104 77,472
--------------- --------------- ---------------
Total interest income 17,877,770 14,026,017 14,021,102
INTEREST EXPENSE
Deposits 7,884,637 7,010,860 7,233,059
Other borrowings 807,391 226,525 90,738
--------------- --------------- ---------------
Total interest expense 8,692,028 7,237,385 7,323,797
NET INTEREST INCOME 9,185,742 6,788,632 6,697,305
Provision for possible loan loss 494,500 472,073 613,000
--------------- --------------- ---------------
Net interest income after provision for possible
loan loss 8,691,242 6,316,559 6,084,305
--------------- --------------- ---------------
NONINTEREST INCOME
Service fees and overdraft charges 1,045,219 856,789 769,083
Security gains, net 57,694 335,874 151,165
Loan sale gains, net 189,248 585,096 224,225
Gain on branch sale -- -- 656,300
Other income 362,561 243,846 205,923
--------------- --------------- ---------------
Total noninterest income 1,654,722 2,021,605 2,006,696
--------------- --------------- ---------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,471,143 2,979,289 2,600,750
Occupancy, furniture and equipment 835,761 569,017 559,832
State taxes 290,586 289,225 278,123
Data processing 526,420 552,386 603,846
FDIC deposit insurance 46,479 28,989 28,694
Professional fees 142,237 162,419 86,909
Other operating expenses 2,125,644 1,713,721 1,488,766
--------------- --------------- ---------------
Total noninterest expenses 7,438,270 6,295,046 5,646,920
Income before income taxes 2,907,694 2,043,118 2,444,081
Income tax expense 823,168 426,210 605,024
--------------- --------------- ---------------
NET INCOME $ 2,084,526 $ 1,616,908 $ 1,839,057
=============== =============== ===============
Basic earnings per common share $ 1.99 $ 1.55 $ 1.77
=============== =============== ===============
Diluted earnings per common share $ 1.96 $ 1.53 $ 1.76
=============== =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29.
<PAGE> 20
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Paid-in Retained Treasury Comprehensive Shareholders'
Stock Capital Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <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 -- 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 -- 8,940,775 142,983 17,047,628
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE> 21
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Paid-in Retained Treasury Comprehensive Shareholders'
Stock Capital Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income $ 2,084,526 $ 2,084,526
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and
tax effects $(1,140,252) (1,140,252)
-----------
Total comprehensive income 944,274
Cash dividends declared ($.76 per common share) (797,575) (797,575)
Shares acquired for deferred compensation plan
(2,389 shares) $ 73,832 $(73,832) --
Issuance of common stock - 568 shares 17,989 17,989
---------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1999 $8,055,691 $ -- $10,227,726 $(73,832) $ (997,269) $17,212,316
========== ======== =========== ======== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31.
<PAGE> 22
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,084,526 $ 1,616,908 $ 1,839,057
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 581,024 305,563 349,060
Provision for loan loss 494,500 472,073 613,000
Deferred income taxes 352,107 219,015 (22,762)
Gain on sale of securities (57,694) (335,874) (151,165)
Gain on sale of loans (189,248) (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 175,938 143,500 85,000
Stock dividends on FHLB stock (92,251) (33,600) (38,900)
Net amortization on investments 62,266 350,071 142,996
Amortization of intangible assets 182,098 31,031 67,028
Changes in
Loans held for sale (492,226) 3,499,538 (5,888,380)
Interest receivable (221,717) 110,407 180,632
Interest payable 92,372 (18,175) (17,425)
Other assets and liabilities 520,773 3,000,145 (156,439)
-------------- --------------- ----------------
Net cash from operating activities 3,492,468 8,775,506 (3,878,823)
-------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Sales -- 3,000,000 --
Securities available for sale
Purchases (10,742,474) (48,794,196) (31,414,262)
Maturities and repayments 7,018,096 6,516,889 5,947,196
Sales 7,926,411 39,786,890 38,754,663
Net change in loans (45,219,824) (35,956,243) (7,759,099)
Proceeds from sale of premises and equipment -- -- 274,387
Bank premises and equipment expenditures (2,154,372) (607,847) (90,169)
-------------- --------------- ----------------
Net cash from investing activities (43,172,163) (36,054,507) 5,712,716
-------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 41,257,943 11,296,633 5,808,585
Net change in borrowed funds (367,023) 16,190,000 3,030,000
Cash dividends paid (797,575) (775,173) (729,019)
Sale of branch deposits -- -- (9,130,923)
Issuance of common stock 17,989 -- --
Options exercised -- 148,357 --
-------------- --------------- ----------------
Net cash from financing activities 40,111,334 26,859,817 (1,021,357)
-------------- --------------- ----------------
Net change in cash and cash equivalents 431,639 (419,184) 812,536
Cash and cash equivalents at beginning of year 6,692,802 7,111,986 6,299,450
-------------- --------------- ----------------
Cash and cash equivalents at end of year $ 7,124,441 $ 6,692,802 $ 7,111,986
============== =============== ================
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 8,599,656 $ 7,275,410 $ 7,370,171
Cash paid for income taxes 398,500 400,000 445,000
Noncash transfer - other real estate to loans 745,562 -- --
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32.
<PAGE> 23
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 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), its wholly owned
subsidiary, The Commercial Savings Bank (Bank) and the Bank's wholly owned
subsidiary, Advantage Finance, Inc. (Advantage). All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of Operations: 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 in Wyandot, Marion and Hancock counties. 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. The Corporation's primary deposit products
are checking, savings and term certificate accounts, and its primary lending
products are residential mortgage, commercial and installment loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate.
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.
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 1999 and 1998, no securities were classified as
trading.
Interest income includes amortization of purchase premiums and discounts.
Realized gains and losses on sales are determined using the amortized cost of
the specific security sold. Securities are written down to fair value when a
decline in fair value is not temporary.
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.
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE> 24
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income is not reported when full loan repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. Payments
received on such loans are reported as principal reductions until qualifying for
return to accrual status. Accrual is resumed when all contractually due payments
are brought current and future payments are reasonably assured.
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 under the loan terms 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. If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less 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 fair value at acquisition, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.
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.
Servicing Rights: Servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. 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.
Fair value is determined using prices for similar assets with similar
characteristics, when available, or based on discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance.
- --------------------------------------------------------------------------------
(Continued)
34.
<PAGE> 25
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the sum of the current-year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cost flows. If impaired, the assets are recorded at
discounted amounts.
Benefit Plans: Profit-sharing and 401(k) plan expense is the amount contributed,
determined by a formula based on employee deferrals with additional
contributions at the discretion of the Board of Directors.
Deferred compensation plan expense allocates the benefits over years of service.
Shares of the Corporation's common stock that are held in trust for the benefit
of deferred compensation plan participants may be available to the Corporation's
creditors in certain circumstances. Such shares acquired by the trustee are
reported as treasury stock, with a corresponding increase to common stock.
Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense, using an option pricing model to
estimate fair value.
Financial Instruments: Financial instruments include off-balance-sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer-financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
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.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
- --------------------------------------------------------------------------------
(Continued)
35.
<PAGE> 26
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Earnings Per Share: Basic earnings per share is based on net income divided by
1,049,913, 1,045,973 and 1,041,456 weighted average shares outstanding during
the years ended December 31, 1999, 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 1,061,197 in 1999, 1,056,939 in 1998
and 1,043,391 in 1997.
Industry Segments: While the Corporation's chief decision makers monitor the
revenue streams of various products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all of
the Corporation's operations are considered by management to be aggregated in
one reportable segment.
Financial Statement Presentation: Some items in prior financial statements have
been reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
Year-end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999
- ----
<S> <C> <C> <C> <C>
Obligations of federal agencies $ 1,605,588 $ -- $ (111,999) $ 1,493,589
Obligations of state and political
subdivisions 15,658,541 17,296 (992,030) 14,683,807
Corporate bonds 994,977 -- (59,273) 935,704
Mortgage-backed securities 14,428,686 -- (365,016) 14,063,670
--------------- ------------ ------------ ----------------
Total debt securities available
for sale 32,687,792 17,296 (1,528,318) 31,176,770
Equity investments 1,237,760 -- -- 1,237,760
--------------- ------------ ------------ ----------------
Total securities available for
sale $ 33,925,552 $ 17,296 $ (1,528,318) $ 32,414,530
=============== ============ ============ ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36.
<PAGE> 27
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1998
- ----
<S> <C> <C> <C> <C>
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>
Contractual maturities of debt securities at year-end 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due after one year through five years $ 684,490 $ 671,303
Due after five years through ten years 3,345,775 3,133,670
Due after ten years 14,228,841 13,308,127
Mortgage-backed securities 14,428,686 14,063,670
--------------- ----------------
$ 32,687,792 $ 31,176,770
=============== ================
</TABLE>
Sales of available for sale securities were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 7,926,411 $ 39,786,890 $ 38,754,663
Gross gains 61,894 403,741 194,535
Gross losses 4,200 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 in
1998. 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.
At year-end 1999 and 1998, debt securities with a carrying value of $12,331,000
and $9,731,000 were pledged to secure public deposits and other deposits and
liabilities as required or permitted by law.
- --------------------------------------------------------------------------------
(Continued)
37.
<PAGE> 28
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial and other loans $ 82,888,494 $ 79,168,621
Real estate loans 33,438,899 30,739,831
Consumer and credit card loans 75,317,523 42,012,388
Home equity loans 7,252,796 6,716,274
Consumer finance loans 5,875,472 --
---------------- -----------------
Total loans $ 204,773,184 $ 158,637,114
================ =================
</TABLE>
Real estate loans originated and held for sale at year-end 1999 and 1998 totaled
approximately $2,625,000 and $2,276,000.
At December 31, 1999 and 1998, total loans included loans to farmers for
agricultural purposes of approximately $15,061,000 and $14,440,000.
Impaired loans were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Year-end loans with no allocated allowance for loan losses $ -- $ --
Year-end loans with allocated allowance for loan losses 186,235 1,068,036
------------- -------------
Total $ 186,325 $ 1,068,036
============= =============
Amount of the allowance for loan losses allocated $ 37,247 $ 213,607
Average of impaired loans during the year 379,921 1,237,532
No income was recognized on impaired loans in 1999 or 1998.
Nonperforming loans were as follows:
Loans past due over 90 days still on accrual $ 212,000 $ 91,000
Nonaccrual loans 529,756 1,168,537
</TABLE>
Nonperforming loans includes substantially all impaired loans and smaller
balance homogeneous loans, such as residential mortgage and consumer loans, that
are collectively evaluated for impairment.
- --------------------------------------------------------------------------------
(Continued)
38.
<PAGE> 29
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSS
Activity in the allowance for possible loan loss was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 1,182,848 $ 1,075,385 $ 1,018,608
Provision for possible loan loss 494,500 472,073 613,000
Loans charged off (302,321) (467,574) (642,813)
Recoveries of previous charge-offs 124,330 102,964 86,590
-------------- -------------- ------------
Ending balance $ 1,499,357 $ 1,182,848 $ 1,075,385
============== ============== ============
</TABLE>
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
Activity for capitalized mortgage servicing rights was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning of year $ 534,069 $ 193,417
Additions 332,799 438,974
Amortized expense (151,675) (98,322)
-------------- ------------
End of year $ 715,193 $ 534,069
============== ============
</TABLE>
Total loans serviced for others at year-end 1999 and 1998 were $68,373,000 and
$46,932,000.
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 823,897 $ 673,336
Buildings 5,185,725 3,754,064
Furniture and equipment 2,828,502 2,241,675
-------------- --------------
Total 8,838,124 6,669,075
Accumulated depreciation 3,306,849 2,711,148
-------------- --------------
Premises and equipment, net $ 5,531,275 $ 3,957,927
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39.
<PAGE> 30
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
At year-end 1999, scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C>
2000 $ 93,178,738
2001 32,842,226
2002 9,812,115
2003 515,798
2004 519,667
Thereafter 282,368
---------------
$ 137,150,912
</TABLE>
NOTE 8 - FHLB ADVANCES AND OTHER BORROWED FUNDS
FHLB advances consisted of the following at year-end:
<TABLE>
<CAPTION>
Current
Interest
Rate 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal Home Loan Bank (FHLB) variable
rate advances; due February 2000 and
February 1999, respectively 4.75% $ 7,140,000 $ 7,320,000
FHLB fixed rate advance, with monthly
interest payments; due October 2008 4.59 6,500,000 6,500,000
FHLB fixed rate advance, with monthly
interest payments; due October 2008 4.62 5,000,000 5,000,000
-------------- ------------
Total borrowed funds $ 18,640,000 $ 18,820,000
============== ============
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by the Bank
and by the Bank's qualified mortgage loan portfolio.
Other borrowed funds consisted of federal funds purchased of $200,000 and
$400,000 at year-end 1999 and 1998. In addition, at year-end 1999 the
Corporation had $500,000 outstanding on a line of credit and other borrowings of
approximately $13,000.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current provision $ 471,061 $ 207,195 $ 627,786
Deferred provision 352,107 219,015 (22,762)
----------- ------------ ------------
Total income tax expense $ 823,168 $ 426,210 $ 605,024
=========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
40.
<PAGE> 31
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Allowance for loan losses in excess of tax reserve $ 176,984 $ 69,371
Basis reduction of other real estate owned 106,760 48,790
Unrealized loss on investment securities
available for sale 513,745 --
Deferred tax credits and other 10,775 63,281
------------ ------------
Total 808,264 181,442
Items giving rise to deferred tax liabilities
Depreciation (69,990) (91,793)
Mortgage servicing rights (243,166) (181,583)
Deferred loan fees and costs (736,443) (345,258)
FHLB stock dividend (65,076) (38,114)
Unrealized gain on investment securities
available for sale -- (73,657)
Other (10,388) (3,131)
------------ ------------
Total (1,125,063) (733,536)
------------ ------------
Net deferred tax liability $ (316,799) $ (552,094)
============ ============
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rates $ 988,616 $ 694,660 $ 830,988
Increase (decrease) in tax resulting from:
Tax-exempt interest (196,411) (240,746) (214,909)
Other 30,963 (27,704) (11,055)
------------ ------------ ---------------
Total income tax expense $ 823,168 $ 426,210 $ 605,024
============ ============ ===============
</TABLE>
The income tax expense related to investment security gains totaled $19,616,
$114,197 and $51,396 for 1999, 1998, and 1997.
- --------------------------------------------------------------------------------
(Continued)
41.
<PAGE> 32
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 10 - 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.
A summary of the Corporation's stock options activity and related information
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- ------------------------------
Average Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 88,825 $ 26.58 60,000 $ 22.67
Granted 15,655 27.00 36,500 31.50
Forfeited (5,000) 31.50 -- --
Exercised -- -- (7,675) 19.33
----------- -------- ----------- -------
Outstanding - end of year 99,480 $ 26.40 88,825 $ 26.58
=========== ======== =========== =======
Exercisable - end of year 7,325 7,325
=========== ===========
Weighted average fair value
of options granted during
the year $ 7.34 $ 6.45
</TABLE>
Options outstanding at year-end 1999 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- ----------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
--------------- ------ ---- ------ -----
<S> <C> <C> <C> <C>
$ 19 - $ 20 22,325 7.00 years 7,325 $ 19.33
$ 26 - $ 27 45,655 8.69 years -- --
$ 31 - $ 32 31,500 9.00 years -- --
---------- ---- ----------- ----------
Outstanding at year end 99,480 8.41 years 7,325 $ 19.33
========== ==== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
42.
<PAGE> 33
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION PLAN (Continued)
Had compensation expense for stock options been measured using FASB Statement
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income as reported $ 2,084,526 $ 1,616,908 $ 1,839,057
Pro forma net income 1,980,560 1,586,416 1,821,316
Pro forma earnings per share
Basic $ 1.89 $ 1.52 $ 1.75
Diluted 1.87 1.50 1.74
</TABLE>
For purposes of pro forma disclosures, the following weighted average
assumptions were used:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk-free interest rate 6.45% 4.73%
Dividend yield 3.00 3.00
Market price volatility factor 20.86 18.10
Weighted average expected life of options 8 years 8 years
</TABLE>
NOTE 11 - 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 $95,020, $96,124, and 66,646 for the
years-ended December 31, 1999, 1998 and 1997.
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit and standby letters of credit which involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
- --------------------------------------------------------------------------------
(Continued)
43.
<PAGE> 34
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
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 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 815,763 $ 2,517,671
Variable rate 19,875,756 29,107,375
--------------- --------------
$ 20,691,519 $ 31,625,046
=============== ==============
</TABLE>
At year-end 1999 and 1998, reserves of $783,000 and $910,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
NOTE 13 - 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.
- --------------------------------------------------------------------------------
(Continued)
44.
<PAGE> 35
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
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 1999, 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 $ 19,657 9.9% $ 15,871 8.0% $ 19,839 10.0%
Bank $ 19,967 10.1% $ 15,851 8.0% $ 19,814 10.0%
Tier 1 capital (to risk weighted assets)
Corporation $ 18,159 9.2% $ 7,936 4.0% $ 11,903 6.0%
Bank $ 18,468 9.3% $ 7,926 4.0% $ 11,888 6.0%
Tier 1 capital (to average assets)
Corporation $ 18,159 7.9% $ 9,226 4.0% $ 11,533 5.0%
Bank $ 18,468 8.0% $ 9,219 4.0% $ 11,524 5.0%
</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)
45.
<PAGE> 36
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS (Continued)
The Bank was categorized as well capitalized at year-end 1999 and 1998, while
the Corporation was categorized as adequately capitalized at year-end 1999 and
well capitalized at year-end 1998. Management believes that no events have
occurred since the last regulatory determination that would change the capital
category at December 31, 1999.
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 1999, approximately $3,239,000
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.
NOTE 14 - 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 1999 and 1998.
A summary of activity on these borrower relationships with aggregate debt
greater than $60,000 is as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Beginning balance $ 1,362,044
New loans and advances 346,794
Payments (657,122)
Other changes (130,000)
--------------
Ending balance $ 921,716
==============
</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 1999 were not material.
- --------------------------------------------------------------------------------
(Continued)
46.
<PAGE> 37
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year-end fair values of financial instruments were:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and equivalents $ 7,124,441 $ 7,124,000 $ 6,692,802 $ 6,693,000
Securities available
for sale 32,414,530 32,415,000 38,256,547 38,257,000
Loans, net of allowance for
possible loan losses 203,273,827 203,760,000 157,454,266 158,919,000
Accrued interest receivable 1,276,295 1,276,000 1,054,578 1,055,000
Cash surrender value of
life insurance 1,098,229 1,098,000 1,013,696 1,014,000
Mortgage servicing rights 715,193 715,000 534,069 534,000
FINANCIAL LIABILITIES
Demand and savings
deposits (77,204,826) (77,205,000) (76,395,186) (76,395,000)
Time deposits (137,150,912) (137,388,000) (96,702,609) (97,883,000)
Borrowed funds (19,352,977) (17,955,000) (19,220,000) (18,050,000)
Accrued interest payable (514,457) (514,000) (422,085) (422,000)
</TABLE>
The following assumptions were used for purposes of the previous disclosures of
estimated fair value. The carrying amount is considered to estimate fair value
for cash and cash equivalents, for cash surrender value of life insurance, for
mortgage servicing rights, for loans that contractually reprice at intervals of
less than twelve months, for demand and savings deposits, 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,
borrowed funds 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 1999 or 1998, 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, 1999
and 1998 should not necessarily be considered to apply at subsequent dates.
Nonfinancial instruments may have value but are not included in the above
disclosures, such as property and equipment. In addition, nonfinancial
instruments typically not recognized in these financial statements nevertheless
may have value, but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit accounts, the
earnings potential of loan servicing rights, the value of a trained work force,
customer goodwill and similar items.
- --------------------------------------------------------------------------------
(Continued)
47.
<PAGE> 38
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 16 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses
on available-for-sale securities $ (1,669,969) $ 895,258 $ 552,771
Less reclassification adjustments for gains
and losses later recognized in income 57,694 (335,874) (151,165)
------------- ------------- ------------
Net unrealized gains and losses (1,727,663) 559,384 401,606
Tax effect 587,411 (190,191) (136,546)
------------- ------------- ------------
Other comprehensive income $ (1,140,252) $ 369,193 $ 265,060
============= ============= ============
</TABLE>
NOTE 17- PARENT CORPORATION STATEMENTS
The following are condensed financial statements of Commercial Bancshares, Inc.:
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 14,312 $ 46,885
Investment in common stock of subsidiaries 17,595,187 16,888,501
Other assets 104,283 113,708
----------------- -----------------
Total assets $ 17,713,782 $ 17,049,094
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowed funds $ 500,000 $ --
Other liabilities 1,466 1,466
Shareholders' equity 17,212,316 17,047,628
----------------- -----------------
Total liabilities and shareholders' equity $ 17,713,782 $ 17,049,094
================= =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
48.
<PAGE> 39
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17- PARENT CORPORATION STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 798,056 $ 820,173 $ 874,019
Other income 4,283 -- 1,238
----------------- ----------------- -----------------
Total income 802,339 820,173 875,257
EXPENSES
Amortization 13,708 12,348 12,348
Other 50,561 36,245 65,732
----------------- ----------------- -----------------
Total expenses 64,269 48,593 78,080
----------------- ----------------- -----------------
Income before equity in undistributed
earnings of subsidiaries 738,070 771,580 797,177
Equity in undistributed earnings of subsidiaries 1,346,456 845,328 1,041,880
----------------- ----------------- -----------------
NET INCOME $ 2,084,526 $ 1,616,908 $ 1,839,057
================= ================= =================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,084,526 $ 1,616,908 $ 1,839,057
Adjustments to reconcile net income to net cash
from operating activities
Equity in undistributed earnings of
subsidiaries (1,346,456) (845,328) (1,041,880)
Amortization and other 9,033 12,798 12,348
------------ ----------------- -----------------
Net cash from operating activities 747,013 784,378 809,525
------------ ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital infusion to subsidiary (500,000) (45,000) (55,000)
Purchase of certificate of deposit -- (100,000) --
------------ ----------------- -----------------
Net cash from investing activities (500,000) (145,000) (55,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowed funds 500,000 -- --
Issuance of common stock 17,989 -- --
Stock options exercised -- 148,357 --
Cash dividends paid (797,575) (775,173) (729,019)
------------ ----------------- -----------------
Net cash from financing activities (279,586) (626,816) (729,019)
------------ ----------------- -----------------
Net change in cash (32,573) 12,562 25,506
Cash at beginning of period 46,885 34,323 8,817
------------ ----------------- -----------------
CASH AT END OF PERIOD $ 14,312 $ 46,885 $ 34,323
============ ================= =================
</TABLE>
- --------------------------------------------------------------------------------
49.
<PAGE> 40
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 1999 and 1998, 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
1999 Declared Low Bid High Bid Low Ask High Ask
---- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1st Qtr. $ 0.19 $ 30.50 $ 30.50 $ 32.00 $ 32.00
2nd Qtr. 0.19 29.75 30.50 30.00 31.00
3rd Qtr. 0.19 30.00 30.62 30.25 31.50
4th Qtr. 0.19 27.00 30.38 30.00 31.25
</TABLE>
<TABLE>
<CAPTION>
Dividends
1998 Declared Low Bid High Bid Low Ask High Ask
---- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1st Qtr. $ -- $ 25.00 $ 26.00 $ 27.00 $ 28.00
2nd Qtr. 0.37 25.50 28.25 28.00 31.00
3rd Qtr. 0.18 27.75 30.00 29.00 33.00
4th Qtr. 0.19 29.00 31.50 31.00 33.00
</TABLE>
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.
The Corporation has 1,047,610 outstanding shares of common stock held by
approximately 1,563 shareholders as of December 31, 1999. In 1998, the
Corporation paid cash dividends in June, September and December totaling $0.74
per share. In 1999, the Corporation paid cash dividends in March, June,
September and December totaling $0.76 per share.
- --------------------------------------------------------------------------------
50.
<PAGE> 41
BOARD OF DIRECTORS
<TABLE>
<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.
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 President and CEO 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)............................................ President, Advantage Finance, Inc.
Marion, Ohio
William E. Ruse (1)............................................ President of Blanchard Valley
Health Services
Findlay, Ohio
Douglas C. Smith (1) ......................................... Retired 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.
- --------------------------------------------------------------------------------
51.
<PAGE> 42
COMMERCIAL BANCSHARES, INC.
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
James A. Deer, President and Chief Executive Officer
Philip W. Kinley, Vice President/Chief Operations Officer
Bruce J. Beck, Vice-President/Lending
Susan E. Brown, Vice-President/Retail Banking
Steven Huffman, Vice-President/Mortgage Lending
Patrick S. Smith, Vice-President/Chief Financial Officer
ADVANTAGE FINANCE, INC.
EXECUTIVE OFFICERS
Raymond E. Graves, Chief Executive Officer
Tracy L. Morgan, President
Philip W. Kinley, Vice-President
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 shareholders' meeting will be held Wednesday, April 12, 2000 at 4:30
p.m. in the main office of The Commercial Savings Bank, 118 South Sandusky
Avenue, Upper Sandusky, Ohio.
- --------------------------------------------------------------------------------
52.
<PAGE> 43
COMMERCIAL BANCSHARES, INC.
Upper Sandusky, Ohio
ANNUAL REPORT
December 31, 1999
CONTENTS
<TABLE>
<S> <C>
President's Letter........................................................................................ 1
Comparative Summary of Selected Financial Data............................................................ 3
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................... 5
Independent Auditors' Report.............................................................................. 19
Consolidated Financial Statements......................................................................... 20
Notes to Consolidated Financial Statements................................................................ 25
Shareholder Information................................................................................... 42
Board of Directors ...................................................................................... 43
Officers.................................................................................................. 44
</TABLE>
- --------------------------------------------------------------------------------
53.
<PAGE> 1
COMMERCIAL BANCSHARES, INC.
EXHIBIT 21
- ----------
COMMERCIAL BANCSHARES, INC.
---------------------------
<TABLE>
<CAPTION>
State of Percentage of
Subsidiary Incorporation securities owned
---------- ------------- ----------------
<S> <C> <C>
The Commercial Savings Bank Ohio 100% by the Corporation
Advantage Finance, Inc. Ohio 100% by The Commercial
Savings Bank
</TABLE>
The principal office of each of the subsidiaries is located in Upper Sandusky,
Ohio.
- --------------------------------------------------------------------------------
54.
<PAGE> 1
EXHIBIT 23.1
- ------------
CROWE, CHIZEK AND COMPANY, LLP LOGO
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 21, 2000 relating to the consolidated balance sheets of
Commercial Bancshares, Inc. as of December 31, 1999 and 1998, and the related
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1999, 1998 and 1997, which report is included in this Annual Report
on Form 10-K of Commercial Bancshares, Inc. for the year ended December 31,
1999.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
March 28, 2000
- --------------------------------------------------------------------------------
55.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,124
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,415
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 204,773
<ALLOWANCE> 1,499
<TOTAL-ASSETS> 251,952
<DEPOSITS> 214,356
<SHORT-TERM> 713
<LIABILITIES-OTHER> 1,031
<LONG-TERM> 18,640
0
0
<COMMON> 8,056
<OTHER-SE> 9,156
<TOTAL-LIABILITIES-AND-EQUITY> 251,952
<INTEREST-LOAN> 15,991
<INTEREST-INVEST> 1,833
<INTEREST-OTHER> 54
<INTEREST-TOTAL> 17,878
<INTEREST-DEPOSIT> 7,845
<INTEREST-EXPENSE> 8,692
<INTEREST-INCOME-NET> 9,186
<LOAN-LOSSES> 495
<SECURITIES-GAINS> 58
<EXPENSE-OTHER> 2,126
<INCOME-PRETAX> 2,908
<INCOME-PRE-EXTRAORDINARY> 2,908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,085
<EPS-BASIC> 1.99
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 3.92
<LOANS-NON> 530
<LOANS-PAST> 212
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,182
<CHARGE-OFFS> 302
<RECOVERIES> 124
<ALLOWANCE-CLOSE> 1,499
<ALLOWANCE-DOMESTIC> 1,499
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
