<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:
SEPTEMBER 30, 1996
Commission file number: 0-27894
___________
Commercial Bancshares, Inc.
_____________________________________________
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Ohio 34-1787239
____________________________________________________ _________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
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.
<TABLE>
<S> <C>
Common stock, $12.50 par value Outstanding at October 31, 1996:
347,152 common shares
-------
</TABLE>
Transitional Small Business Disclosure Format:
/ / Yes /x/ No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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 the 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>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,951,949 $ 5,635,650
Federal funds sold 1,535,000 790,000
------------- -------------
Total cash and cash equivalents 6,486,949 6,425,650
Investment securities available for sale, at
fair value (Note 2) 37,877,991 51,609,536
Investment securities held to maturity (Estimated
fair values of $2,856,530 in 1996 and $2,950,050
in 1995) (Note 2) 2,716,208 2,696,515
Total loans (Note 3) 115,903,382 98,512,012
Allowance for loan losses (Note 4) (975,852) (996,131)
------------- -------------
Net loans 114,927,530 97,515,881
Premises and equipment, net 4,185,877 3,895,830
Other real estate 1,160,000 1,180,000
Intangible assets 381,203 415,857
Accrued interest receivable and other assets 3,244,098 2,556,900
------------- -------------
Total assets $ 170,979,856 $ 166,296,169
============= =============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 12,850,153 $ 14,834,310
Interest-bearing deposits 143,415,331 136,787,856
------------- -------------
Total deposits 156,265,484 151,622,166
Accrued interest payable and other liabilities 815,121 578,275
------------- -------------
Total liabilities 157,080,605 152,200,441
------------- -------------
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 6,917,309 7,192,100
Unrealized loss on investment securities available for sale (833,571) (48,598)
------------- -------------
Total shareholders' equity 13,899,251 14,095,728
------------- -------------
Total liabilities and shareholders' equity $ 170,979,856 $ 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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,618,145 $ 2,241,938 $ 7,361,563 $ 6,477,161
Interest dividends on investment
securities
Taxable 402,253 710,045 1,445,301 2,139,702
Nontaxable 184,750 180,739 570,837 491,597
Other interest income 12,341 30,899 65,963 105,050
--------------- -------------- -------------- ---------------
Total interest income 3,217,489 3,163,621 9,443,664 9,213,510
--------------- -------------- -------------- ---------------
INTEREST EXPENSE
Interest on deposits 1,528,950 1,586,654 4,557,855 4,527,214
Other interest expense 28,032 288 31,556 3,336
--------------- -------------- -------------- ---------------
Total interest expense 1,556,982 1,586,942 4,589,411 4,530,550
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 1,660,507 1,576,679 4,854,253 4,682,960
Provision for loan losses (Note 4) 30,000 40,000 86,000 100,000
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,630,507 1,536,679 4,768,253 4,582,960
--------------- -------------- -------------- ---------------
OTHER INCOME
Service charges on
deposit accounts 163,332 175,414 479,643 498,931
Investment security gains/
(losses), net (19,726) 60,947 44,275 99,231
Other income 25,115 25,176 144,333 69,461
--------------- -------------- -------------- ---------------
Total other income 168,721 261,537 668,251 667,623
--------------- -------------- -------------- ---------------
OTHER EXPENSE
Salaries and employee benefits 580,945 523,622 1,840,779 1,655,095
Occupancy, furniture and
equipment 132,510 130,296 370,914 328,857
State taxes 70,941 56,169 198,303 164,074
Data processing 125,699 155,558 388,596 362,184
FDIC deposit insurance expense 162,604 9,375 196,979 172,403
Professional fees 16,145 23,855 53,332 124,732
Other operating expense 394,420 361,920 1,149,449 906,606
--------------- -------------- -------------- ---------------
Total other expense 1,483,264 1,260,795 4,198,352 3,713,951
--------------- -------------- -------------- ---------------
Income before federal income taxes 315,964 537,421 1,238,152 1,536,632
Income tax expense 71,900 124,157 276,215 369,731
--------------- -------------- -------------- ---------------
NET INCOME $ 244,064 $ 413,264 $ 961,937 $ 1,166,901
=============== ============== ============== ===============
Earnings per common share $ 0.70 $ 1.19 $ 2.77 $ 3.36
=============== ============== ============== ===============
</TABLE>
See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 14,095,728 $ 11,512,387
Net income 961,937 1,166,901
Cash dividends declared
($1.00 per common share) (347,152) (278,089)
Cash paid in lieu of fractional shares in stock split (26,289)
Change in unrealized loss on investment
securities available for sale (784,973) 955,534
------------ ------------
Balance at end of period $ 13,899,251 $ 13,356,733
============ ============
</TABLE>
See notes to the consolidated financial statements.
5.
<PAGE> 6
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ (1,897,365) $ 969,026
INVESTING ACTIVITIES
Securities available for sale
Purchases (14,782,205) (26,899,319)
Maturities and repayments 1,903,372 223,576
Sales 25,312,504 25,913,240
Securities held to maturity
Purchases (2,676,461)
Maturities and repayments 2,299,764
Net change in loans (14,323,134) (960,966)
Proceeds from sale of premises and equipment 4,900
Bank premises and equipment expenditures (515,154) (112,261)
Proceeds from sale of foreclosed real estate 93,404
Purchase of life insurance contracts (891,822)
------------ ------------
Net cash used by investing activities (2,311,213) (3,099,349)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 4,643,318 (448,268)
Dividends paid (347,152) (278,089)
Cash paid in lieu of fractional shares (26,289)
------------ ------------
Net cash used by financing activities 4,269,877 (726,357)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 61,299 (2,856,680)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,425,650 9,958,360
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,486,949 $ 7,101,680
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 4,582,367 $ 4,467,269
Income taxes 192,000 325,000
</TABLE>
<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 (the "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 September 30, 1996, and its results of operations and 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 financial statements and related notes that 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 this standard did not materially
affect the allowance for loan losses at January 1, 1995 or for the quarter and
year to date periods ended September 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, home equity and credit loans
less than $200,000 from consideration as impaired.
(Continued)
7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while 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.
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. When management determines that a loss is probable, a full or
partial charge-off is recorded for the amount the book value of the impaired
loan exceeds the present value of the cash flows or the fair value of the
collateral, for collateral dependent loans.
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
September 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.
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 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 $ 509,771 $ (24,191) $ 485,580
Obligations of federal agencies 8,224,301 (328,466) 7,895,835
Obligations of state and
political subdivisions 15,696,392 $ 156,463 (254,744) 15,598,111
Mortgage-backed securities 13,851,082 10,415 (550,516) 13,310,981
Equity investments 587,484 587,484
---------------- -------------- ------------- ----------------
Total securities
available for sale $ 38,869,030 $ 166,878 $ (1,157,917) $ 37,877,991
================ ============== ============= ================
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,716,208 $ 140,322 $ 2,856,530
================ ============== ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
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 $ 2,950,050
================ ============== ==============
</TABLE>
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- INVESTMENT SECURITIES (Continued)
Proceeds from sales of debt securities available for sale during the nine months
ended September 30, 1996 and 1995 were $25,312,504 and $25,913,240,
respectively. Gross gains of $295,724 and $334,261, and gross losses of $339,999
and $235,030 were realized on the sales during the nine months ended September
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.
The amortized cost and estimated fair values of investments in debt securities
at September 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 to five years $ 509,771 $ 485,580
Due in five to ten years 10,757,822 10,435,520
Due after ten years 13,162,871 13,058,426
Mortgage-backed securities 13,851,082 13,310,981
---------------- --------------
Total debt securities available for sale $ 38,281,546 $ 37,290,507
================ ==============
HELD TO MATURITY
Debt securities:
Due in five to ten years $ 2,716,208 $ 2,856,530
================ ==============
</TABLE>
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Commercial and other loans $ 55,722,594 $ 53,708,832
Real estate loans 23,595,743 21,376,721
Consumer and credit card 32,293,578 20,166,587
Home equity loans 4,291,467 3,259,872
---------------- ----------------
Total loans $ 115,903,382 $ 98,512,012
================ ================
</TABLE>
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
September 30, 1996 and December 31,1995 totaled $3,918,500 and $677,000,
respectively.
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the nine months ended
September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance -- January 1 $ 996,131 $ 959,604
Loans charged off (180,086) (139,285)
Recoveries 73,807 123,657
Provision for loan losses 86,000 100,000
-------------- ------------
Balance -- September 30 $ 975,852 $ 1,043,976
============== ============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Balance of impaired loans $ 51,933 $ 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 $ 17,933 $ 124,285
Portion of allowance for loan losses allocated
to the impaired loan balance $ 1,030 $ 9,796
========= ==========
</TABLE>
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Average investment in impaired loans $ 91,580 $ 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>
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 September 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 $14,345,000 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 September 30, 1996, compared to
December 31, 1995, and the consolidated results of operations for the quarterly
and nine-month period ending September 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 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 that would
have such effect if implemented.
FINANCIAL CONDITION
Total assets increased modestly by $4,683,687 or 2.82% from December 31, 1995 to
September 30, 1996. However, individual asset categories changed more
dramatically as discussed below.
Investment securities available for sale declined by $13,731,545 or 26.6% as
management sold securities to fund loan growth during the second and third
quarters of 1996. Securities sold were primarily mortgage-backed obligations and
to a lessor extent obligations of federal agencies. Management does not expect
this trend to continue. Future loan growth is expected to be funded by increases
in core deposits. This will likely require an increase in rates offered on
certain deposit products and may cause a narrowing of the Bank's historical net
interest margin. However, this strategy is expected to result in an increasing
return on equity since the shareholders' equity is leveraged across a larger
asset base.
Gross loans increased $17,391,370 or 17.7% during the first nine months of 1996.
The most significant increases occurred in the installment and credit card
portfolios which combined to increase $12,126,991 or 60.1% during the first nine
months of 1996. This reflects management's continued emphasis on growing the
consumer area due to the increased competition in the commercial lending area.
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
be the Bank and management has established procedures to monitor the ongoing
credit quality of loans purchased form individual dealers. While management
aggressively competes for quality commercial loans, commercial loans only
increased $2,013,762 or 3.8% during the first nine months of 1996. Real estate
loans increased $2,219,022 or 10.4%, including $3,918,500 of loans held for
sale. The Bank sells the majority of its fixed rate real estate loans into the
secondary market while retaining servicing rights.
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
In May 1995, the Financial Accounting Standards Board issued its Statement on
Financial Accounting Standards (FASB) No. 122, "Accounting for Mortgage
Servicing Rights" which requires companies that engage in mortgage banking
activities to recognize, as separate assets, rights to service mortgage loans
for others. This Statement was adopted by the Corporation in 1996 and was
applied prospectively to rights arising from loans sold by the Bank after
adoption of the Statement. The impact of this pronouncement on the Corporation's
financial statements is not material for any period presented.
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The standard
provides that, following a transfer of financial assets, an entity is to
recognize the financial and servicing assets it controls and the liabilities it
has incurred, derecognize financial assets when control has been surrendered and
derecognize liabilities when extinguished. The Statement is effective for
transactions occurring after December 31, 1996. The adoption of this
pronouncement is not expected to have a material impact on the Corporation's
consolidated financial statements.
The increase in accrued interest receivable and other assets of $687,198 during
the first nine 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 increase in the cash surrender
value of these policies is expected to substantially offset the cost of the
supplemental retirement program.
Total deposits increased $4,643,318, or 3.06%, during the first nine months of
1996. The increase in interest-bearing deposits of $6,627,475 for the period
ended September 30, 1996 was offset by a decrease in noninterest bearing
deposits of $1,984,157.
The resulting runoff of interest-bearing time deposits that matured in the
second quarter was greater than anticipated. The Bank implemented various time
deposit specials during the third quarter that led to the net increase in
deposits. Management continues to emphasize marketing and cross selling of
non-interest bearing demand accounts and its lower rate interest-bearing deposit
products. As noted previously, management intends to adopt a strategy of more
aggressively pricing deposits in order to fund loan demand and better leverage
the capital base. The Bank has been approved for membership into the Federal
Home Loan Bank to provide additional, alternative sources of funds should
funding needs arise.
RESULTS OF OPERATIONS
Net income for the nine-month period ending September 30, 1996 stood at $961,937
compared to $1,166,901 during the same period in 1995. Third quarter income in
1996 was $244,064 as compared to $413,264 during the same three-month period in
1995. Earnings per share decreased by $.59 per share for the nine-month period
ending September 30, 1996 and decreased by $.49 per share for the three-month
period ending September 30, 1996 as compared to the same time period in 1995.
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, 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 reduce 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 third quarter 1996 stood at $3,217,489 as compared to
$3,163,621 during the same period 1995, an increase of $53,868. During the same
time period, interest expense decreased $29,960 from $1,586,942 in 1995 to
$1,556,982 in 1996. Interest income and interest expense for the nine months
ended September 30, 1996 increased $230,154 or 2.49% and $58,861 or 1.30%,
respectively, over the same period in 1995. The increase in interest income is
the result of shifting funds from investment securities to higher yielding loans
and receiving FHLB dividends. The decline in interest expense is the result of
the run off of high rate certificates of deposit.
Loan loss provision declined $10,000 in the third quarter 1996 compared to 1995
and is down $14,000 for the first nine months of 1996 compared to the same
period in 1995. Management has determined that loan loss provision is adequate
at September 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 may be increased.
NONINTEREST INCOME
Total third quarter noninterest income of $168,721 represents a decrease of
$92,816 over the same period in 1995. The primary reason for this decrease is
due to investment security losses. Total other income is nearly unchanged for
the first nine months of 1996 as compared to the same period in 1995. The
decrease in service charges on deposit accounts and securities gains was offset
by gains on sales of loans and a gain on sale of other real estate.
NONINTEREST EXPENSE
Total noninterest expense increased $484,401 or 13.04% for the first nine months
of 1996 compared to the same period in 1995. For the third quarter 1996,
noninterest expense increased $222,469 or 17.65% from the same time period last
year. The most significant increases occurred in areas of salaries and benefits,
occupancy, furniture and equipment and other operating expense attributed to the
opening of the Bank's second full service office in Marion, Ohio in the second
quarter of 1996.
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Also, in the third quarter of 1996, the Bank incurred a one-time special
assessment of $154,011 related to deposits insured by the Savings Association
Insurance Fund (SAIF) that were purchased by the Bank in 1992. This one-time
assessment was part of a plan adopted by Congress to recapitalize SAIF. Also, as
a part of this plan, the ongoing insurance premiums for deposits insured by SAIF
are expected to drop to $.065 per $100 from the present $.23, effective January
1, 1997.
CAPITAL RESOURCES
Total shareholders' equity decreased $196,477 or 1.39% during the first three
quarters 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
$961,937 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 8.13% at September 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 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 September 30, 1996, the Bank's leverage
ratio was 8.39% 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 September 30, 1996 stood at $6,486,949 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 September 30, 1996, the ratio of loans to
deposits was 74.17%, considered an acceptable level of liquidity by management.
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 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: There
are no matters required to be reported under this item.
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 Note 1 on page 8,
hereof.)
(b) A Form 8-K was filed on March 31, 1996 to report a 25%
stock split to shareholders on record as of March 15,
1996.
(c) Exhibit No. 27
17.
<PAGE> 18
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)
James A. Deer
Executive Vice President
Date:_____________________________ _______________________________________
(Signature)
Philip W. Kinley
Senior Vice President and Chief Financial
Officer
On behalf of the Registrant and in his
capacity as Vice President and Chief
Financial Officer.
18.
<PAGE> 19
Index to Exhibits
Exhibit 11, Statement re: computation of per share earnings. (Reference is
hereby made to Note 1 on page 8, hereof.)
Exhibit 27
19.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,952
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,535
<TRADING-ASSETS> 0
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<TOTAL-ASSETS> 170,980
<DEPOSITS> 156,265
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<OTHER-SE> 9,560
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<INCOME-PRE-EXTRAORDINARY> 962
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