<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, 1997
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, no par value Outstanding at June 30, 1997:
1,041,456 common shares
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED June 30, 1997
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:
<TABLE>
<S> <C>
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
</TABLE>
Part II - Other Information
<TABLE>
<S> <C>
Other Information ......................................... 17
Signatures................................................. 18
</TABLE>
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,061,576 $ 6,089,450
Federal funds sold 210,000
------------ ------------
Total cash and cash equivalents 5,061,576 6,299,450
Securities available for sale 48,260,322 48,392,272
Securities held to maturity 2,739,717 2,723,488
Total loans 123,608,619 116,154,788
Allowance for loan losses (985,279) (1,018,608)
------------ ------------
Net loans 122,623,340 115,136,180
Premises and equipment, net 4,015,428 4,159,754
Other real estate 1,135,000 1,150,000
Accrued interest receivable and other assets 3,210,207 3,099,828
------------ ------------
Total assets $187,045,590 $180,960,972
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 13,736,688 $ 14,140,221
Interest-bearing deposits 152,946,866 151,751,741
------------ ------------
Total deposits 166,683,554 165,891,962
Accrued interest payable and other liabilities 836,232 755,765
Short-term borrowings 4,748,000
------------ ------------
Total liabilities 172,267,786 166,647,727
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized
1,041,456 shares issued in 1997; $12.50 par value;
1,000,000 shares authorized; 347,152 shares issued in 1996) 7,815,513 4,339,400
Additional paid-in capital 3,476,113
Retained earnings 7,256,813 6,989,002
Unrealized loss on investment securities available for sale (294,522) (491,270)
------------ ------------
Total shareholders' equity 14,777,804 14,313,245
------------ ------------
Total liabilities and shareholders' equity $187,045,590 $180,960,972
============ ============
</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,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,798,520 $2,451,347 $5,455,006 $4,743,418
Interest on investment securities
Taxable (191,533) 501,579 367,170 1,043,048
Nontaxable 217,395 194,085 422,476 386,087
Other interest income 738,663 7,184 745,355 53,622
---------- ---------- ---------- ----------
Total interest income 3,563,075 3,154,195 6,990,007 6,226,175
INTEREST EXPENSE
Interest on deposits 1,799,789 1,446,942 3,619,292 3,028,905
Other interest expense 41,513 3,524 44,548 3,524
---------- ---------- ---------- ----------
Total interest expense 1,841,302 1,450,466 3,663,840 3,032,429
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,721,773 1,703,729 3,326,167 3,193,746
Provision for loan losses 99,000 30,000 215,000 56,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,622,773 1,673,729 3,111,167 3,137,746
OTHER INCOME
Service charges on deposit
accounts 169,921 158,365 332,416 316,311
Investment security gains/
(losses), net (4,947) 58,660 11,080 64,001
Other income 56,914 25,586 163,433 119,218
---------- ---------- ---------- ----------
Total other income 221,888 242,611 506,929 499,530
OTHER EXPENSE
Salaries and employee benefits 693,858 680,318 1,312,632 1,259,834
Occupancy, furniture and
equipment 141,932 118,379 289,606 238,404
State taxes 69,561 65,104 140,539 127,362
Data processing 143,709 128,766 289,111 262,897
FDIC deposit insurance expense 11,522 17,526 11,522 34,375
Advertising 24,840 56,169 56,864 111,156
Professional fees 66,118 16,811 68,551 37,187
Other expense 290,669 341,609 656,026 643,873
---------- ---------- ---------- ----------
Total other expense 1,442,209 1,424,682 2,824,851 2,715,088
---------- ---------- ---------- ----------
Income before federal income taxes 402,452 491,658 793,245 922,188
Income tax expense 84,176 117,400 160,924 204,315
---------- ---------- ---------- ----------
NET INCOME $ 318,276 $ 374,258 $ 632,321 $ 717,873
========== ========= ========= =========
Earnings per common share $ .31 $ .36 $ .61 $ .69
========== ========= ========= =========
</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,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of period $14,313,245 $14,095,728
Net income 632,321 717,873
Cash dividends declared (364,510) (347,152)
Cash paid in lieu of fractional shares in stock split (26,177)
Change in unrealized loss on investment securities
available for sale 196,748 (903,214)
----------- -----------
Balance at end of period $14,777,804 $13,537,058
=========== ===========
</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,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 734,003 $ 818,151
INVESTING ACTIVITIES
Securities available for sale
Purchases (16,263,377) (7,007,048)
Maturities and repayments 1,276,544 1,681,495
Sales 15,357,232 19,533,714
Net change in loans (7,487,160) (11,581,396)
Disposal of premises and equipment (98,912)
Bank premises and equipment expenditures (30,201) (332,366)
Proceeds from sale of other real estate 93,404
------------ ------------
Net cash used by investing activities (7,146,962) 2,288,891
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 791,592 (7,149,483)
Net change in short-term borrowings 4,748,000 2,690,000
Dividends paid (364,510) (347,152)
Cash paid in lieu of fractional shares (26,177)
------------ ------------
Net cash used by financing activities 5,175,082 (4,832,812)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,237,877) (1,725,770)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,299,450 6,425,650
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,061,573 $ 4,699,880
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 3,628,124 $ 3,082,263
Income taxes 80,000 106,000
</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, 1997, 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, 1996, 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, 1997.
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, 1997 and 1996, which totaled 1,041,456 shares for both periods. In May
1997, the Board of Directors declared a three-for-one stock split, resulting in
the issuance of 694,304 shares. The weighted average number of shares
outstanding have been restated to retroactively reflect this stock split.
NOTE 2 - 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, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 508,106 $ 14,826 $ 493,280
Obligations of federal agencies 7,233,154 130,930 7,102,224
Obligations of state and political
subdivisions 16,883,831 $331,894 25,998 17,189,727
Corporate bonds 502,253 5,704 496,549
Mortgage-backed securities 22,785,622 5,697 360,537 22,430,782
Equity investments 547,760 547,760
----------- -------- -------- -----------
Total securities
available for sale $48,460,726 $337,591 $537,995 $48,260,322
=========== ======== ======== ===========
</TABLE>
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
Obligations of federal agencies $2,739,717 $ 186,173 $ 0 $2,925,890
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 509,206 $ (14,266) $ 494,940
Obligations of federal agencies 8,426,243 $ 1,017 (133,916) 8,293,344
Obligations of state and political
subdivisions 14,559,081 150,034 (80,580) 14,628,535
Corporate bonds 502,500 (2,930) 499,570
Mortgage-backed securities 24,346,113 41,479 (441,969) 23,945,623
Equity investments 530,260 530,260
----------- ---------- --------- -----------
Total securities
available for sale $48,873,403 $192,530 $(673,661) $48,392,272
=========== ======== ========= ===========
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,723,488 $193,902 $ 0 $ 2,917,390
=========== ======== ========= ===========
</TABLE>
Proceeds from sales of debt and mortgage-backed securities during the six
months ended June 30, 1997 and 1996 were $15,357,232 and $19,533,714. Gross
gains of $31,243 and $64,001, and gross losses of $20,163 and $0 were realized
on the sales during the six months ended June 30, 1997 and 1996.
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair values of investments in debt securities
at June 30, 1997, 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>
Amortized Fair
Cost Value
------------ -----------------
<S> <C> <C>
AVAILABLE FOR SALE
Debt securities:
Due in one to five years $ 1,010,359 $ 989,829
Due in five to ten years 9,470,107 9,378,073
Due after ten years 14,646,878 14,913,878
Mortgage-backed securities 22,785,622 22,430,782
------------ ------------
Total debt securities available for sale $ 47,912,966 $ 47,712,562
============ ============
HELD TO MATURITY
Debt securities:
Due in five to ten years $ 2,739,717 $ 2,925,890
============ ============
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
June 30, 1997 December 31, 1996
------------- -----------------
Commercial and other loans $ 55,165,679 $ 51,021,307
Real estate loans 23,584,424 22,979,126
Consumer and credit card 39,287,504 37,344,109
Home equity loans 5,571,012 4,810,246
------------ ------------
Total loans $123,608,619 $116,154,788
============ ============
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank has
retained servicing totaled $21,815,126 and $17,144,184 at June 30, 1997 and
December 31, 1996. Real estate loans originated and held for sale at June 30,
1997 and December 31, 1996 totaled $495,450 and $1,068,000.
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Balance - January 1 $1,018,608 $996,131
Loans charged off (306,768) (156,851)
Recoveries 58,439 67,246
Provision for loan losses 215,000 56,000
---------- --------
Balance - June 30 $ 985,279 $962,526
========== ========
Information regarding impaired loans is as follows:
June 30, December 31,
1997 1996
---------- ------------
Balance of impaired loans $ 249,500 $ 45,391
Less portion for which no allowance for
loan losses is allocated 10,361
---------- --------
Portion of impaired loan balance for which
an allowance for loan losses is allocated $ 249,500 $ 35,030
========== ========
Portion of allowance for loan losses allocated
to the impaired loan balance $ 30,000 $ 35,030
========== ========
Information regarding impaired loans is as follows for the periods ended:
June 30, December 31,
1997 1996
---------- ------------
Average investment in impaired loans $ 183,080 $ 96,475
Interest income recognized on impaired loans
including interest income recognized on cash basis -- --
Interest income recognized on impaired
loans on cash basis -- --
</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, 1997 and December 31, 1996, the contract
amount of these instruments, which primarily includes commitments to extend
credit and standby letters of credit, totaled approximately $8,815,000 and
$13,584,000. 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, 1997, compared to
December 31, 1996, and the consolidated results of operations for the
quarterly and six-month periods ending June 30, 1997 compared to the same
period in 1996. 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 $6,084,618 or 3.4% from December 31, 1996 to
June 30, 1997. The growth in the loan portfolio was the reason for this
increase and is discussed below.
Gross loans increased $7,453,831 or 6.4% during the first six months of 1997.
The most significant increase occurred in the commercial loan portfolio which
increased $4,144,372 or 8.1% during the first six months of 1997. This
reflects management's success during increased competition in the commercial
lending area. Funding for this growth came from the increase in federal funds
purchased. The Bank has previously sold the majority of its fixed rate real
estate loans into the secondary market while retaining servicing rights.
Management has recently begun to retain those loans in an effort to grow the
in-house loan portfolio.
Total deposits increased $791,592 or less than 1.0%, during the first six
months of 1997. The increase in interest-bearing deposits of $1,195,125 for
the period ended June 30, 1997 was offset by a decrease in noninterest-bearing
deposits of $403,533.
The Bank utilized federal funds purchased to supplement the growth in deposits
for funding new loans. The Bank has also been approved for membership into the
Federal Home Loan Bank system to provide an alternative source of funds.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1997 stood at $632,321
compared to $717,873 during the same period in 1996. Second quarter income in
1997 was $318,276 as compared to $374,258 during the same three-month period in
1996. Earnings per share decreased by $0.08 per share for the six-month period
ending June 30, 1997 as compared to the
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
same time period in 1996 and earning per share for the second quarter decreased
from $0.36 to $0.31 compared to the same period in 1996. Discussed below are
the major factors which have influenced these operating results.
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 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 second quarter 1997 stood at $3,563,075 as compared to
$3,154,195 during the same period 1996, an increase of $408,880. During the
same time period, interest expense increased $390,836 from $1,450,466 in 1996
to $1,841,302 in 1997. Interest income and interest expense for the six months
ended June 30, 1997 increased $763,832 or 12.3% and $631,411 or 20.8%,
respectively, over the same period in 1996. The increase in interest income is
the result of the larger investment in higher yielding installment loans. The
increase in interest expense is the result of the shift from
noninterest-bearing to interest-bearing deposits and the increase in federal
funds purchased.
The provision for loan loss increased $69,000 in the second quarter 1997
compared to 1996 and is up $159,000 for the first six months of 1997 compared
to the same period in 1996. This corresponds to the increase in riskier
indirect loans and an increase in net charge-offs. 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 form individual dealers. Management has centralized the underwriting
process for indirect installment loans and does not expect the increased level
of charge-offs experienced to continue. The provision for loan loss for the
remainder of 1997 is expected to be comparable to the first six months.
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST INCOME
Total second quarter noninterest income decreased $20,723 or 8.5% compared to
the same period in 1996. Total other income was up slightly from $499,530 to
$506,929 for the first six months of 1997 as compared to 1996. The larger
fluctuations were the change from a net gain on sale of securities to a net
loss and an offsetting increase in earnings on life insurance investments.
NONINTEREST EXPENSE
Total noninterest expense increased $109,763 or 4.0% for the first six months
of 1997 compared to the same period in 1996. For the second quarter of 1997,
noninterest expense increased modestly compared to the same period in 1996.
The most significant increases occurred in areas of salaries and benefits and
occupancy, furniture and equipment expense. These increases are largely
attributed to the opening of the Bank's second full service office in Marion,
Ohio during the second quarter of 1996.
CAPITAL RESOURCES
Total shareholders' equity increased $464,559 or 3.3% during the first six
months of 1997. Year-to-date net income of $632,321 and an increase in the
fair value of the available-for-sale security portfolio increased equity but
was offset by dividends declared of $364,510. Shareholders' equity to total
assets was 7.9% at June 30, 1997 and 1996.
During the annual meeting in April 1997 the shareholders approved changing the
par value of the Corporation's stock from $12.00 to no par and increasing the
number of shares authorized from 1,000,000 to 4,000,000. In May 1997, the
Board of Directors approved a stock split effected in the form of a dividend in
which two additional shares were issued for each share previously owned.
Shareholders also approved the adoption of an incentive stock option plan for
the benefit of executive officers. Under the plan 50,000 shares were reserved
for granting options. No options have been granted as of June 30, 1997. The
weighted average number of shares outstanding and earning per share have been
restated to retroactively reflect the stock split.
Banking regulations have established minimum capital requirements for banks
and bank holding companies including risk-based capital ratios and leverage
ratios. 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. 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
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 June 30, 1997, the Corporation's leverage
ratio was 7.89% and the risk-based capital ratio was in excess of 11% both of
which exceeded the minimum regulatory requirements.
LIQUIDITY
Liquidity management for the Corporation centers around the assurance that
funds are available to meet the loan and deposit needs of its customers and
the Corporation's other financial commitments.
Cash and cash equivalents at June 30, 1997 stood at $5,061,576. 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, 1997, the ratio of loans
to deposits was 74.2% compared to 70.0% at December 31, 1996. Both ratios are
considered an acceptable level of liquidity by management.
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 1997
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
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 9, 1997, the Annual Meeting of the Shareholders of the
Corporation was held. The following items were submitted to a vote
of security holders and approved by the votes set forth below:
Election of Raymond E. Graves, James A. Deer, Hazel Franks and
Richard Sheaffer to the Board of Directors of the Corporation for
terms expiring in 1999. 224,240 votes for, 621 votes against and 0
votes abstain (J. Deer: 223,598 for and 1,263 against).
Amendment of the Articles of Incorporation to change the par value of
the Corporation's common stock from $12.00 to no par and to change
the number of authorized shares from 1,000,000 to 4,000,000. 184,534
votes for, 30,909 votes against and 9,418 votes abstain.
Adoption of an incentive stock option plan. 156,231 votes for,
52,253 votes against and 16,377 votes abstain.
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
</TABLE>
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)
Philip W. Kinley
Vice President and Chief Financial Officer
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)
/s/ Raymond E. Graves
Date:______________________________ __________________________________________
(Signature)
Raymond E. Graves
President and Chief Executive Officer
/s/ Philip W. Kinley
Date:______________________________ __________________________________________
(Signature)
Philip W. Kinley
Vice President and Chief Financial
Officer
19.
<PAGE> 20
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.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,062
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,260
<INVESTMENTS-CARRYING> 2,740
<INVESTMENTS-MARKET> 2,926
<LOANS> 123,609
<ALLOWANCE> (985)
<TOTAL-ASSETS> 187,046
<DEPOSITS> 166,684
<SHORT-TERM> 4,748
<LIABILITIES-OTHER> 836
<LONG-TERM> 0
<COMMON> 7,816
0
0
<OTHER-SE> 6,962
<TOTAL-LIABILITIES-AND-EQUITY> 187,046
<INTEREST-LOAN> 5,455
<INTEREST-INVEST> 790
<INTEREST-OTHER> 745
<INTEREST-TOTAL> 6,990
<INTEREST-DEPOSIT> 3,619
<INTEREST-EXPENSE> 3,664
<INTEREST-INCOME-NET> 3,326
<LOAN-LOSSES> 215
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 2,825
<INCOME-PRETAX> 793
<INCOME-PRE-EXTRAORDINARY> 793
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 632
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 3.94
<LOANS-NON> 443
<LOANS-PAST> 104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 79
<ALLOWANCE-OPEN> 1,019
<CHARGE-OFFS> 307
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 985
<ALLOWANCE-DOMESTIC> 310
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 675
</TABLE>
