<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
JUNE 30, 1996
Commission file number: 0-27894
----------
Commercial Bancshares, Inc.
--------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 34-1787239
- - ----------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
118 S. Sandusky Street, Upper Sandusky, Ohio 43351
--------------------------------------------------
(Address of principal executive offices)
(419) 294-5781
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, $12.50 par value Outstanding at July 31, 1996:
347,152 common shares
-------
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED June 30, 1996
================================================================================
Part I - Financial Information
Interim financial information required by Regulation 228.310-3(b) of Regulation
S-B is included in this Form 10-QSB as referenced below:
ITEM 1 - FINANCIAL STATEMENTS Page
----
Consolidated Balance Sheets ............................................. 3
Consolidated Statements of Income ....................................... 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity ............................................... 5
Condensed Consolidated Statements of Cash Flows ......................... 6
Notes to Consolidated Financial Statements .............................. 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS ........................... 13
Part II - Other Information
Other Information........................................................ 18
Signatures ...............................................................19
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
=============================================================================
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,969,880 $ 5,635,650
Federal funds sold 730,000 790,000
----------------- -----------------
Total cash and cash equivalents 4,699,880 6,425,650
Investment securities available for sale, at fair value (Note 2) 36,047,337 51,609,536
Investment securities held to maturity (Estimated fair
values of $2,856,230 in 1996 and $2,950,050 in 1995) (Note 2) 2,708,530 2,696,515
Total loans (Note 3) 109,771,668 98,512,012
Allowance for loan losses (Note 4) (962,526) (996,131)
----------------- -----------------
Net loans 108,809,142 97,515,881
Premises and equipment, net 4,182,539 3,895,830
Other real estate 1,170,000 1,180,000
Intangible assets 392,774 415,857
Accrued interest receivable and other assets 3,276,249 2,556,900
----------------- -----------------
Total assets $ 161,286,451 $ 166,296,169
================= =================
LIABILITIES
Deposits
Noninterest-bearing deposits $ 12,523,879 $ 14,834,310
Interest-bearing deposits 131,948,804 136,787,856
----------------- -----------------
Total deposits 144,472,683 151,622,166
Accrued interest payable and other liabilities 586,710 578,275
Short-term borrowings 2,690,000
----------------- -----------------
Total liabilities 147,749,393 152,200,441
----------------- -----------------
SHAREHOLDERS' EQUITY
Common stock ($12.50 par value; 1,000,000 shares authorized; 347,152 shares
issued in 1996 and 278,089 shares issued in 1995) 4,339,400 3,476,113
Additional paid-in capital 3,476,113 3,476,113
Retained earnings 6,673,357 7,192,100
Unrealized loss on investment securities available for sale (951,812) (48,598)
----------------- -----------------
Total shareholders' equity 13,537,058 14,095,728
----------------- -----------------
Total liabilities and shareholders' equity $ 161,286,451 $ 166,296,169
================= =================
</TABLE>
===============================================================================
See notes to the consolidated financial statements.
3.
<PAGE> 4
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,451,347 $2,145,254 $4,743,418 $4,235,223
Interest on investment securities
Taxable 501,579 720,408 1,043,048 1,429,657
Nontaxable 194,085 155,036 386,087 310,858
Other interest income 7,184 42,826 53,622 74,151
---------- ---------- ---------- ----------
Total interest income 3,154,195 3,063,524 6,226,175 6,049,889
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,446,942 1,509,619 3,028,905 2,940,559
Other interest expense 3,524 2,920 3,524 3,048
---------- ---------- ---------- ----------
Total interest expense 1,450,466 1,512,539 3,032,429 2,943,607
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,703,729 1,550,985 3,193,746 3,106,282
Provision for loan losses (Note 4) 30,000 20,000 56,000 60,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,673,729 1,530,985 3,137,746 3,046,282
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit
accounts 158,365 168,044 316,311 323,517
Investment security gains/
(losses), net 58,660 78,989 64,001 38,284
Other income 25,586 22,340 119,218 44,285
---------- ---------- ---------- ----------
Total other income 242,611 269,373 499,530 406,086
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 680,318 599,672 1,259,834 1,131,473
Occupancy, furniture and
equipment 118,379 96,722 238,404 198,561
State taxes 65,104 54,171 127,362 107,905
Data processing 128,766 112,057 262,897 206,626
FDIC deposit insurance expense 17,526 81,514 34,375 163,028
Advertising 56,169 21,460 111,156 48,621
Professional fees 16,811 43,907 37,187 100,877
Other expense 341,609 257,068 643,873 496,064
---------- ---------- ---------- ----------
Total other expense 1,424,682 1,266,571 2,715,088 2,453,155
---------- ---------- ---------- ----------
Income before federal income taxes 491,658 533,787 922,188 999,213
Income tax expense 117,400 138,466 204,315 245,574
---------- ---------- ---------- ----------
NET INCOME $ 374,258 $ 395,321 $ 717,873 $ 753,639
========== ========== ========== ==========
Earnings per common share $ 1.08 $ 1.14 $ 2.07 $ 2.17
========== ========== ========== ==========
</TABLE>
================================================================================
See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 14,095,728 $ 11,512,387
Net income 717,873 753,639
Cash dividends declared ($1.00 per common share) (347,152) (278,089)
Cash paid in lieu of fractional shares in stock split (26,177)
Change in unrealized loss on investment securities
available for sale (903,214) 479,306
--------------- ----------------
Balance at end of period $ 13,537,058 $ 12,467,243
=============== ================
</TABLE>
================================================================================
See notes to the consolidated financial statements.
5.
<PAGE> 6
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 818,151 $ 658,441
INVESTING ACTIVITIES
Securities available for sale
Purchases (7,007,048) (20,958,263)
Maturities and repayments 1,681,495 202,462
Sales 19,533,714 17,319,897
Securities held to maturity
Purchases (2,676,461)
Maturities and repayments 1,815,571
Net change in loans (11,581,396) 1,854,970
Proceeds from sale of premises and equipment 650
Disposal of premises and equipment (98,912)
Bank premises and equipment expenditures (332,366) (66,788)
Proceeds from sale of other real estate 93,404
Purchase of life insurance contracts (891,822)
--------------- ----------------
Net cash used by investing activities 2,288,891 (3,399,784)
--------------- ----------------
FINANCING ACTIVITIES
Net change in deposits (7,149,483) (1,700,619)
Net change in short-term borrowings 2,690,000
Dividends paid (347,152) 230,000
Cash paid in lieu of fractional shares (26,177)
--------------- ----------------
Net cash used by financing activities (4,832,812) (1,470,619)
--------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,725,770) (4,211,962)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,425,650 9,958,360
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,699,880 $ 5,746,398
=============== ================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 3,082,263 $ 2,934,585
Income taxes 106,000 160,000
</TABLE>
================================================================================
See notes to the consolidated financial statements.
6.
<PAGE> 7
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Commercial Bancshares, Inc. ("Corporation") and its wholly owned subsidiary, The
Commercial Savings Bank ("Bank"). All material intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Corporation at June 30, 1996, and its results of operations and its cash flows
for the periods presented. The accompanying consolidated financial statements do
not purport to contain all the necessary financial disclosures required by
generally accepted accounting principles that might otherwise be necessary in
the circumstances. The Annual Report for the Bank for the year ended December
31, 1995, contains consolidated financial statements and related notes which
should be read in conjunction with the accompanying consolidated financial
statements.
INDUSTRY SEGMENT INFORMATION: The Corporation is engaged in the business of
banking, which accounts for substantially all of its revenues and assets.
ALLOWANCE FOR LOAN LOSSES: FASB standard No. 114, as amended by standard No.
118, was adopted at January 1, 1995. Under these standards, loans considered to
be impaired, as identified according to internal loan review standards, are
reduced to the present value of expected future cash flows or to the fair value
of collateral by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to require an
increase, such an increase will be reported as a provision for loan losses
charged to expense. The effect of adopting these standards did not materially
affect the allowance for loan losses at January 1, 1995 or for the quarter and
year to date periods ended June 30, 1996.
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the loan contract. Loans which are past due two payments
or less and that management feels are probable of being paid current within 90
days are not considered to be impaired loans. As allowed, management excludes
all consumer installment, residential mortgage and home equity credit loans less
than $200,000 from consideration as impaired.
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while changes in carrying value due to
changes in estimates of future payments and the passage of time are reported as
increases or decreases to the allowance for loan losses.
================================================================================
(Continued)
7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impaired loans are fully or partially charged off when, in management's opinion,
an event or events have occurred which provide reasonable certainty that a loss
is probable.
REAL ESTATE OWNED: Real estate owned, other than that which is used in the
normal course of business, is recorded at the lower of cost or fair value, less
estimated costs to sell. For real estate acquired through foreclosure, any
initial loss is recorded as a charge to the allowance for loan losses prior to
being transferred to real estate owned. Any subsequent reduction in fair value
is recognized in a valuation allowance by charges to income.
INCOME TAXES: The provision for income taxes is based upon the effective
income tax rate expected to be applicable for the entire year.
EARNINGS PER SHARE: Earnings per share was computed by dividing net income by
the weighted average number of shares outstanding for the periods ended June 30,
1996 and 1995, which totaled 347,152 shares for both periods. In March 1996, the
Board of Directors declared a 25% stock split effected in the form of a
dividend, resulting in the issuance of 69,063 shares. The weighted average
number of shares outstanding have been restated to retroactively reflect this
stock dividend.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values
of the investment securities, as presented in the consolidated balance sheet at
June 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 510,291 $ $ (28,506) $ 481,785
Obligations of federal agencies 8,224,828 (422,913) 7,801,915
Obligations of state and political
subdivisions 14,952,823 75,249 (392,627) 14,635,445
Mortgage-backed securities 13,026,639 (392,137) 12,634,502
Equity investments 493,690 493,690
--------------- ------------ ------------ ----------------
Total securities
available for sale $ 37,208,271 $ 75,249 $ (1,236,183) $ 36,047,337
=============== ============ ============ ================
</TABLE>
================================================================================
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,708,530 $ 147,700 $ 0 $ 2,856,230
=============== ============ ============ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 1,006,013 $ (3,793) $ 1,002,220
Obligations of federal agencies 11,649,339 $ 149,827 (78,002) 11,721,164
Obligations of state and political
subdivisions 12,435,388 458,592 (27,738) 12,866,242
Mortgage-backed securities 25,667,515 31,954 (306,999) 25,392,470
Equity investments 627,440 627,440
--------------- ------------ ------------ ----------------
Total securities
available for sale $ 51,385,695 $ 640,373 $ (416,532) $ 51,609,536
=============== ============ ============ ================
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,696,515 $ 253,535 $ 0 $ 2,950,050
=============== ============ ============ ================
</TABLE>
Proceeds from sales of debt and mortgage-backed securities during the six months
ended June 30, 1996 and 1995 were $19,533,714 and $17,319,897, respectively.
Gross gains of $0 and $182,512, and gross losses of $64,000 and $144,228
were realized on the sales during the six months ended June 30, 1996 and 1995,
respectively.
During 1995, two U.S. agency securities classified as held to maturity were sold
within ninety days of their call date. Proceeds of $1,471,070 from these
transactions are reflected as a maturity in the consolidated statement of cash
flows. All other sales were of securities classified as available for sale.
================================================================================
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair values of investments in debt securities
at June 30, 1996, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because certain borrowers may have the
right to call or prepay the debt obligations prior to their contractual
maturities.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
AVAILABLE FOR SALE
Debt securities:
Due in one year or less $ 50,595 $ 50,564
Due in one to five years 1,025,291 1,005,945
Due in five to ten years 11,611,190 11,169,425
Due after ten years 11,000,866 10,693,211
Mortgage-backed securities 13,026,639 12,634,502
---------------- ----------------
Total debt securities available for sale $ 36,714,581 $ 35,553,647
================ ================
HELD TO MATURITY
Debt securities:
Due in five to ten years $ 2,708,530 $ 2,856,230
================ ================
</TABLE>
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Commercial and other loans $ 55,228,942 $ 53,708,832
Real estate loans 24,095,763 21,376,721
Consumer and credit card 26,553,576 20,166,587
Home equity loans 3,893,387 3,259,872
----------------- ----------------
Total loans $ 109,771,668 $ 98,512,012
================= ================
</TABLE>
================================================================================
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3 - LOANS (Continued)
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). Real estate loans originated and held for sale at
June 30, 1996 and December 31, 1995 totaled $561,320 and $677,000, respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance - January 1 $ 996,131 $ 959,604
Loans charged off (156,851) (130,017)
Recoveries 67,246 115,816
Provision for loan losses 56,000 60,000
--------------- ---------------
Balance - June 30 $ 962,526 $ 1,005,403
=============== ===============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Balance of impaired loans $ 58,474 $ 256,563
Less portion for which no allowance for loan losses is
allocated 34,000 132,278
--------------- ---------------
Portion of impaired loan balance for which an allowance
for loan losses is allocated $ 24,474 $ 124,285
=============== ===============
Portion of allowance for loan losses allocated to the
impaired loan balance $ 1,476 $ 9,796
=============== ===============
</TABLE>
Information regarding impaired loans is as follows for the periods ended:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Average investment in impaired loans $ 128,351 $ 276,216
Interest income recognized on impaired loans including interest
income recognized on cash basis 0 2,484
Interest income recognized on impaired loans on cash basis 0 2,484
</TABLE>
================================================================================
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Bank grants residential, consumer, and commercial loans to customers located
primarily in Wyandot, Marion, Hardin and Hancock Counties in Ohio. Most loans
are secured by specific items of collateral including business assets, consumer
assets and residences.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. The
contract amount of these instruments is not included in the consolidated
financial statements. At June 30, 1996 and December 31, 1995, the contract
amount of these instruments, which primarily includes commitments to extend
credit and standby letters of credit, totaled approximately $10,436,000 and
$9,186,000, respectively. Substantially all commitments to extend credit carry
variable interest rates. Since many commitments to make loans expire without
being used, the amount does not represent future cash commitments.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. The Bank
follows the same credit policy to make such commitments as is followed for those
loans recorded in the financial statements. In management's opinion, these
commitments represent normal banking transactions and no material losses are
expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluations of the borrower
and may include real estate and/or business or consumer assets.
================================================================================
12.
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
INTRODUCTION
The following discussion focuses on the consolidated financial condition of
Commercial Bancshares, Inc. (the Corporation) at June 30, 1996, compared to
December 31, 1995, and the consolidated results of operations for the quarterly
and six-month periods ending June 30, 1996 compared to the same periods in 1995.
The purpose of this discussion is to provide the reader with a more thorough
understanding of the consolidated financial statements. This discussion should
be read in conjunction with the interim consolidated financial statements and
related footnotes.
The registrant is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations except as discussed herein. Also, the Registrant
is not aware of any current recommendations by regulatory authorities which
would have such effect if implemented.
FINANCIAL CONDITION
Total assets decreased $5,009,718 or 3.01% from December 31, 1995 to June 30,
1996. Cash and cash equivalents declined $1,725,770 during this period,
including a decrease in federal funds of $60,000 for the six-month period.
Substantially all of the total investment portfolio decrease of $15,550,184
occurred in the "available-for-sale" securities portfolio. The large decrease in
securities occurred as investments were sold to fund loan growth and deposit
outflows during the second quarter of 1996. The Bank classifies debt and
marketable equity securities as held to maturity, available for sale, or
trading. Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities held to maturity
are stated at amortized cost. Securities classified as available for sale are
those that management intends to sell or could be sold for liquidity,
investment management, or similar reasons, even if management does not have a
present intention to sell. Securities available for sale are carried at fair
value with unrealized gains and losses included as a separate component of
shareholders' equity, net of tax.
Gross loans increased $11,259,656 or 11.43% primarily during the second quarter
of 1996. Due to an increase in competition for commercial loans in the Bank's
market area and a reduction in commercial loan interest rates due to this
competition, management has placed an increased emphasis on originating consumer
loans. The loan portfolio reflects management's emphasis on consumer loans as
installment loans have grown over $6 million during the first six months of
1996. The major portion of the installment loan growth represents indirect loans
purchased from auto dealers in the Bank's primary lending area. These loans are
subject to the same credit underwriting standards as loans originated directly
by the Bank and management has established procedures to monitor the ongoing
credit quality of loans purchased from individual dealers.
================================================================================
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
Other real estate of $1,170,000, represents a deed in lieu of foreclosure the
Bank executed during the fourth quarter of 1994. Management is actively
marketing the commercial property for sale. Real estate owned is recorded at the
lower of cost or fair value, less estimated costs to sell.
The increase in accrued interest receivable and other assets of $719,349 during
the first six months of 1996 is due primarily to the purchase of single premium
life insurance contracts for the implementation of a supplemental retirement
program for executive officers. The projected future increase in the cash
surrender value of these policies is expected to substantially offset the
additional cost of the supplemental retirement program.
Total deposits decreased $7,149,483, or 4.72%, during the first half of 1996.
The most significant decline occurred in interest-bearing deposits which fell
$4,839,052 to $131,948,804 at June 30, 1996. This decline is a direct result of
management's effort to control the interest rate spread and to improve earnings
through an increased net interest margin, which is discussed later. Management
has implemented steps to concentrate more on marketing and cross selling into
lower cost forms of deposits such as business demand deposits. In addition, in
order to increase the interest rate spread, management elected not to
aggressively price deposits at the time a pool of high rate certificates of
deposit matured, and allowed these higher rate deposits to run off. The Bank has
applied for membership in the Federal Home Loan Bank to provide additional,
alternative sources of funds should funding needs arise.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1996 stood at $717,873,
compared to $753,639 during the same period in 1995. Second quarter income in
1996 was $374,258 as compared to $395,321 during the same three-month period in
1995. Earnings per share decreased, by $.06 per share, for the second quarter
1996 as compared to 1995 and the six-month period ending June 30, 1996 also
showed a decrease in earnings per share from $2.17 in 1995 to $2.07 in 1996.
Discussed below are the major factors which have influenced these operating
results.
================================================================================
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
NET INTEREST INCOME
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of deposits
and other borrowings obtained to fund them. Net interest income is affected by
the volume and composition of earning assets and interest-bearing liabilities as
well as the level of noninterest-bearing demand deposits and shareholders'
equity. Also impacting net interest income is the susceptibility of
interest-earning assets and interest-bearing liabilities to changes in the
general market level of interest rates. Management attempts to manage the
repricing of assets and liabilities so as to achieve a stable level of net
interest income and soften the effect of significant changes in the market level
of interest rates. This is accomplished through the pricing and promotion of
various loan and deposit products as well as the active management of the Bank's
portfolio of investment securities available for sale.
Interest income for the second quarter 1996 stood at $3,154,195 as compared to
$3,063,524 during the same period in 1995, an increase of $90,671. During the
same period, interest expense decreased $62,073 from $1,512,539 in 1995 to
$1,450,466 in 1996. Interest income and interest expense for the six months
ended June 30, 1996 increased $176,286 or 2.91% and $88,822 or 3.02%,
respectively, over the same period in 1995. The decline in interest expense is
the result of the run off of high rate certificates of deposit as previously
discussed. Should this deposit run off continue, management may respond by
raising interest rates, thus increasing interest expense.
The loan loss provision increased $10,000 in the second quarter 1996 compared to
1995 as a result of loan growth and is down $4,000 for the first six months of
1996 as compared to the same period in 1995. Management has determined that the
loan loss provision is adequate at June 30, 1996 through its analysis of
specific problem loans, historical charge-off experience and local economic
trends. If loan growth continues to exceed expectations, the provisions for loan
losses for the remainder of 1996 may be increased to increase the reserve for
loan loss balance.
NONINTEREST INCOME
Total second quarter noninterest income of $242,611 represents a decrease of
$26,762 from the same period in 1995. This is due to a decrease in service
charges on deposit accounts and security gains. Also, in the second quarter of
1996, gains on sales of loans which are included in other miscellaneous income,
declined in reaction to higher interest rates in the fixed rate loan market.
Total other income is up $93,444 for the first six months of 1996 as compared to
the same period in 1995. This is primarily a result of the gains on the sale of
loans, a gain resulting from the sale of an other real estate owned property and
higher gains from sales of investments.
================================================================================
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
NONINTEREST EXPENSE
Total noninterest expense increased $261,933 or 10.68% for the first six months
of 1996 compared to the same period in 1995. For the second quarter 1996,
noninterest expense increased $158,111 or 12.48% from the same time period in
1995. The most significant increases occurred in the areas of salaries and
benefits, occupancy, furniture and equipment and advertising. These increases
are largely attributed to the opening of the Bank's second full service office
in Marion, Ohio in the second quarter of 1996. In addition, data processing has
continued to increase as management has made the decision to outsource more back
room operations to their data processing center. The increase in data processing
expense represents some one time conversion costs as well as additional ongoing
costs. The move to outsource certain operations is intended to provide future
cost savings in the Bank's personnel costs as well as other operating costs.
A possible future expense item could result from the proposed one-time
assessment of additional FDIC premiums related to the SAIF-insured deposits
purchased by the Bank in 1992. At the time of acquisition, management used the
provisions of the Oakar amendment to avoid additional FDIC insurance charges and
left the deposits in the SAIF fund. A one-time charge of 85 basis points is
currently being proposed for those institutions with SAIF deposits to bolster
the fund. Based on the approximately $29 million of SAIF insured deposits held
by the Bank at June 30, 1996, a one time assessment of 85 basis points would
cause an additional expense of approximately $246,000 if this proposed plan is
adopted. During the first half of 1996, management recognized a reduction of
FDIC premiums of $128,653 as compared to June 30, 1995 due to the virtual
elimination of FDIC premiums for BIF-insured deposits.
CAPITAL RESOURCES
Total shareholders' equity decreased $558,670 or 3.96% during the first half of
1996. The decrease is primarily a result of a decrease in the market value of
the available-for-sale investment portfolio. Year to date net income of $717,873
increased equity but was partially offset by the payment of a cash dividend of
$1.00 per common share in the first half of 1996. Shareholders' equity to total
assets was 8.39% at June 30, 1996 compared to 8.48% at December 31, 1995.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. As of December 31,
1995, 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 ratio requirements range from 3% to 5% of total
assets. Conceptually, risk-based capital requirements assess the risk to its
capital. Core capital, or Tier 1 capital, includes common equity, perpetual
preferred stock and minority interest 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.
================================================================================
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
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 June 30, 1996, the Bank's leverage ratio was 8.74% and the risk-based capital
ratio was in excess of 13%, both of which exceeded the minimum regulatory
requirements.
LIQUIDITY
Liquidity management for the Bank centers around the assurance that funds are
available to meet the loan and deposit needs of its customers and the Bank's
other financial commitments.
Cash and cash equivalents at June 30, 1996 stood at $4,699,880, which includes
deposits in other banks and federal funds sold. Refer to the Statement of Cash
Flows contained within this report.
A standard measure of liquidity is the relationship of loans to deposits. Lower
ratios indicate greater liquidity. At June 30, 1996, the ratio of loans to
deposits was 75.98%, considered an acceptable level of liquidity by management.
================================================================================
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 1996
PART II - OTHER INFORMATION
===============================================================================
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
On April 10, 1996, the Annual Meeting of the Shareholders of the
Corporation was held. The following members of the Board of
Directors of the Corporation were elected by the votes set forth
below for terms expiring in 1999.
Director Votes for Votes against Votes withheld
-------- --------- ------------- --------------
Daniel E. Berg 191,200 430 86,459
Loren H. Dillon 190,895 735 86,459
Mark Dillon 191,200 430 86,459
William T. Gillen 191,128 502 86,459
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re: computation of per share earnings.
(Reference is hereby made to Consolidated Statements of Income
on page 5, hereof.)
(b) A Form 8-K was filed on March 31, 1996 to report a 25% stock
split to shareholders of record as of March 15, 1996.
(c) Exhibit No. 27
================================================================================
18.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
SIGNATURES
================================================================================
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMERCIAL BANCSHARES, INC.
------------------------------------------
(Registrant)
Date:
--------------------------- ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date:
--------------------------- ------------------------------------------
(Signature)
Philip W. Kinley
Vice President and Chief Financial Officer
================================================================================
19.
<PAGE> 20
COMMERCIAL BANCSHARES, INC.
SIGNATURES
================================================================================
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMERCIAL BANCSHARES, INC.
------------------------------------------
(Registrant)
Date: /s/ Raymond E. Graves
--------------------------- ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: /s/ Philip W. Kinley
--------------------------- ------------------------------------------
(Signature)
Philip W. Kinley
Vice President and Chief Financial
Officer
================================================================================
19.
<PAGE> 21
COMMERCIAL BANCSHARES, INC.
Index to Exhibits
================================================================================
Exhibit 11, Statement re: computation of per share earnings. (Reference is
hereby made to Consolidated Statements of Income on page 5, hereof.)
Exhibit No. 27
================================================================================
20.
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,969,880
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 730,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,047,337
<INVESTMENTS-CARRYING> 2,708,530
<INVESTMENTS-MARKET> 2,856,230
<LOANS> 109,771,668
<ALLOWANCE> 962,526
<TOTAL-ASSETS> 161,286,451
<DEPOSITS> 144,472,683
<SHORT-TERM> 2,690,000
<LIABILITIES-OTHER> 586,710
<LONG-TERM> 0
<COMMON> 4,339,400
0
0
<OTHER-SE> 9,197,658
<TOTAL-LIABILITIES-AND-EQUITY> 161,286,451
<INTEREST-LOAN> 4,743,418
<INTEREST-INVEST> 1,429,135
<INTEREST-OTHER> 53,622
<INTEREST-TOTAL> 6,226,175
<INTEREST-DEPOSIT> 3,028,905
<INTEREST-EXPENSE> 3,032,429
<INTEREST-INCOME-NET> 3,193,746
<LOAN-LOSSES> 56,000
<SECURITIES-GAINS> 64,001
<EXPENSE-OTHER> 2,715,088
<INCOME-PRETAX> 922,188
<INCOME-PRE-EXTRAORDINARY> 717,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717,873
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 8.81
<LOANS-NON> 80,000
<LOANS-PAST> 434,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 633,040
<ALLOWANCE-OPEN> 996,131
<CHARGE-OFFS> (156,851)
<RECOVERIES> 67,246
<ALLOWANCE-CLOSE> 962,526
<ALLOWANCE-DOMESTIC> 285,401
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 677,125
</TABLE>
