<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:
MARCH 31, 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 April 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 March 31, 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>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page
----
<S> <C>
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 .............................................................. 15
Part II - Other Information
Other Information........................................................................................... 19
Signatures ............................................................................................... 20
</TABLE>
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,180,852 $ 6,089,450
Federal funds sold 210,000
------------- -------------
Total cash and cash equivalents 5,180,852 6,299,450
Securities available for sale, at fair value (Note 2) 49,024,499 48,392,272
Securities held to maturity (Estimated fair values
of $2,867,020 in 1997 and $2,917,930 in 1996) (Note 2) 2,731,798 2,723,488
Total loans (Note 3) 120,110,807 116,154,788
Allowance for loan losses (Note 4) (984,718) (1,018,608)
------------- -------------
Net loans 119,126,089 115,136,180
Premises and equipment, net 4,095,795 4,159,754
Other real estate 1,135,000 1,150,000
Accrued interest receivable and other assets 3,452,568 3,099,828
------------- -------------
Total assets $ 184,746,601 $ 180,960,972
============= =============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 12,789,402 $ 14,140,221
Interest-bearing deposits 155,638,682 151,751,741
------------- -------------
Total deposits 168,428,084 165,891,962
Federal funds purchased 1,180,000
Accrued interest payable and other liabilities 848,322 755,765
------------- -------------
Total liabilities 170,456,406 166,647,727
------------- -------------
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 7,303,047 6,989,002
Unrealized loss on securities available for sale (828,365) (491,270)
------------- -------------
Total shareholders' equity 14,290,195 14,313,245
------------- -------------
Total liabilities and shareholders' equity $ 184,746,601 $ 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
March 31,
---------
1997 1996
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans $2,656,486 $2,292,071
Interest on securities
Taxable 558,673 541,469
Nontaxable 205,081 192,002
Other interest income 6,692 46,438
---------- ----------
Total interest income 3,426,932 3,071,980
---------- ----------
INTEREST EXPENSE
Interest on deposits 1,819,503 1,581,963
Interest on other borrowings 3,035
--------- ----------
Total interest expense 1,822,538 1,581,963
NET INTEREST INCOME 1,604,394 1,490,017
Provision for loan losses (Note 4) 116,000 26,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,488,394 1,464,017
---------- ----------
OTHER INCOME
Service fees and overdraft charges 162,495 157,946
Security gains, net 16,027 5,341
Other income 106,519 93,632
---------- ----------
Total other income 285,041 256,919
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 618,774 579,516
Occupancy, furniture and
equipment 147,674 120,025
State taxes 70,978 62,258
Data processing 145,402 134,131
Other operating expense 399,814 394,476
---------- ----------
Total other expense 1,382,642 1,290,406
---------- ----------
Income before federal income taxes 390,793 430,530
Income tax expense 76,748 86,915
---------- ----------
Net income $ 314,045 $ 343,615
========== ==========
Earnings per common share (Note 1) $ .30 $ .33
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of period $ 14,313,245 $ 14,095,728
Net income 314,045 343,615
Cash paid in lieu of fractional shares in stock split (26,177)
Change in unrealized loss on
securities available for sale (337,095) (299,477)
------------ ------------
Balance at end of period $ 14,290,195 $ 14,113,689
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
<PAGE> 6
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES $ (432,066) $ (400,906)
INVESTING ACTIVITIES
Securities available for sale
Purchases (8,541,176) (12,204,445)
Maturities and repayments 442,322 657,381
Sales 6,940,968 13,509,656
Net change in loans (3,221,322) (3,231,320)
Bank premises and equipment expenditures (23,446) (105,671)
Proceeds from sale of other real estate 93,404
------------ ------------
Net cash used by investing activities (4,402,654) (1,280,995)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 2,536,122 (223,763)
Net change in Federal funds purchased 1,180,000
Cash paid in lieu of fractional shares (26,177)
------------ ------------
Net cash from financing activities 3,716,122 (249,940)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,118,598) (1,931,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,299,450 6,425,650
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,180,852 $ 4,493,809
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 1,778,905 $ 1,567,459
Income taxes 80,000
</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 (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 March 31, 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 Corporation 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 a bank-holding Corporation
engaged in the business of commercial and retail banking, with operations
conducted through its main office and branches located in Upper Sandusky, Ohio
and neighboring communities. This market area provides the source of
substantially all of the Corporation's deposit and loan activities. The majority
of the Corporation's income is derived from commercial and retail business
lending activities and investments.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided and future
results could differ. The collectibility of loans, fair values of financial
instruments and status of contingencies are particularly subject to change.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management analyzes commercial loans and other loans with balances greater than
$200,000 on an individual basis and classifies a loan as impaired when an
analysis of the borrower's operating results and financial condition indicates
that underlying cash flows are not adequate to meet its debt service
requirements. Often this is associated with a delay or shortfall in payments of
30 days or more. Smaller-balance homogeneous loans are evaluated for impairment
in total. Such loans include residential first mortgage loans secured by
one-to-four-family residences and consumer automobile, home equity and credit
card loans with balances less than $200,000. In addition, loans held for sale
are excluded from consideration of impairment.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses incurred are charged to operations as
incurred. Gains and losses on disposition, and changes in the valuation
allowance are reported in net gain or loss on other real estate.
LOAN SERVICING: The Company has sold various loans to the Federal Home Loan
Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and
losses on loan sales are recorded at the time of the cash sale. Mortgage
servicing rights are determined by allocating total cost of mortgage loans to
mortgage servicing rights and to loans (without mortgage servicing rights) based
on their relative fair values. Mortgage servicing rights recorded as a separate
asset are amortized in proportion to, and over the period of, estimated net
servicing income.
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
revises accounting treatment for transfers of financial assets, such as loans
and securities, and for distinguishing between sales and secured borrowings.
SFAS No. 125 did not materially impact the Company's financial statements for
the first quarter of 1997.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE: Earnings per share was computed by dividing net income by
the weighted average number of shares outstanding for the periods ended March
31, 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
has been restated to retroactively reflect this stock split.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As the Company has not had significant dilution from stock options, the
new calculation methods will not significantly affect future basic earnings per
share and diluted earnings per share.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities as of March 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 508,676 $ (20,756) $ 487,920
Obligations of federal agencies 7,483,417 (260,119) 7,223,298
Obligations of state and political
subdivisions 16,982,931 $ 44,252 (218,732) 16,808,451
Corporate bonds 502,343 (8,748) 493,595
Mortgage-backed securities 24,026,185 19,742 (564,952) 23,480,975
Equity investments 530,260 530,260
----------- ----------- ----------- -----------
Total securities
available for sale $50,033,812 $ 63,994 $(1,073,307) $49,024,499
=========== =========== =========== ===========
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,731,798 $ 135,222 $ 0 $ 2,867,020
=========== =========== =========== ===========
</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>
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and approximate fair values of debt securities available for
sale and held to maturity at March 31, 1997, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. Debt securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE
Due in one to five years $ 1,011,019 $ 981,515
Due in five to ten years 9,134,676 8,867,383
Due after ten years 15,331,672 15,164,366
Mortgage-backed securities 24,026,185 23,480,975
---------------- -----------------
Total debt securities available for sale $ 49,503,552 $ 48,494,239
================ =================
SECURITIES HELD TO MATURITY
Due in five to ten years $ 2,731,798 $ 2,867,020
================ =================
</TABLE>
Sales of available-for-sale securities during the three months ended March 31,
1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Proceeds $ 6,940,968 $ 13,509,656
Gross gains 21,699 32,755
Gross losses 5,672 27,414
</TABLE>
Securities with a carrying value of approximately $17,403,000 at March 31, 1997
and $11,201,000 at December 31, 1996 were pledged to secure deposits and for
other purposes.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at March 31, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Commercial and other loans $ 51,033,298 $ 51,021,307
Real estate loans 23,307,061 22,979,126
Consumer and credit card 40,417,597 37,344,109
Home equity loans 5,352,851 4,810,246
----------------- -----------------
Total loans $ 120,110,807 $ 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 $19,145,568 and $17,144,184 at March 31, 1997 and
December 31, 1996. Real estate loans originated and held for sale at March 31,
1997 and December 31, 1996 totaled $1,953,000 and $1,068,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the three months
ended March 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance - January 1 $ 1,018,608 $ 996,131
Loans charged off (163,407) (111,834)
Recoveries 13,517 16,117
Provision for loan losses 116,000 26,000
-------------- ------------
Balance - March 31 $ 984,718 $ 926,414
============== ============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Balance of impaired loans $ 254,350 $ 45,391
Less portion for which no allowance for loan
losses is allocated 253,816 10,361
----------------- ----------------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 534 $ 35,030
================= ================
Portion of allowance for loan losses allocated to
the impaired loan balance $ 534 $ 35,030
================= ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
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>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Average investment in impaired loans $ 149,870 $ 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>
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the normal course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material effect on
financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit and standby letters of credit which involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. Each customer's credit worthiness is evaluated on a case-by-case basis.
The same credit policies are used for commitments and conditional obligations as
are used for loans. The amount of collateral obtained, if deemed necessary, upon
extension of credit is based on management's credit evaluation. Collateral
varies but may include accounts receivable, inventory, property, equipment,
income-producing commercial properties, residential real estate and consumer
assets.
Commitments to extend credit are agreements to lend to a customer as long as no
condition established in the commitment is violated. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being used,
the total commitments do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
The following is a summary of commitments to extend credit at March 31, 1997
and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Fixed rate $ 1,426,000 $ 245,000
Variable rate 17,071,000 13,339,000
--------------- ----------------
$ 18,497,000 $ 13,584,000
=============== ================
</TABLE>
At March 31, 1997 and December 31, 1996, reserves of $698,000 and $708,000 were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
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14.
<PAGE> 15
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 March 31, 1997, compared to
December 31, 1996, and the consolidated results of operations for the quarterly
period ending March 31, 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 $3,785,629 or 2.09% from December 31, 1996 to
March 31, 1997. The growth in the loan portfolio was the reason for this
increase and is discussed below.
Gross loans increased $3,956,019 or 3.41% during the first three months of 1997.
The most significant increases occurred in the installment and credit card
portfolios which combined to increase $3,073,488 or 8.23% during the first three
months of 1997. 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
by the Bank and management has established procedures to monitor the ongoing
credit quality of loans purchased form individual dealers. Funding for this
growth came from the increase in deposits and federal funds purchased. The Bank
sells the majority of its fixed rate real estate loans into the secondary market
while retaining servicing rights.
Total deposits increased $2,536,122, or 1.53%, during the first three months of
1997. The increase in interest-bearing deposits of $3,886,941 for the period
ended March 31, 1997 was offset by a decrease in noninterest bearing deposits of
$1,350,819.
The Bank utilized federal funds purchased to supplement the growth in deposits
for funding new loans. The Bank has been approved for membership into the
Federal Home Loan Bank to provide an alternative source of funds.
RESULTS OF OPERATIONS
Net income for the three-month period ending March 31, 1997 stood at $314,045
compared to $343,615 during the same period in 1996. Earnings per share
decreased by $.03 per share for the
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
three-month period ending March 31, 1997 as compared to the same time period in
1996. Discussed below are the major factors which have influenced these
operating results.
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 first quarter 1997 stood at $3,426,932 as compared to
$3,071,980 during the same period 1996, an increase of $354,952. During the same
time period, interest expense increased $240,576 from $1,581,963 in 1996 to
$1,822,539 in 1997. 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 additional growth in time deposits.
The provision for loan loss increased $90,000 in the first quarter 1997 compared
to 1996. This corresponds to the increase in riskier indirect loans discussed
earlier and an increase in net charge-offs. Management has recently centralized
the underwriting process for indirect installment loans and does not expect the
increased level of charge-offs experienced in the first quarter to continue.
Management has determined that loan loss provision is adequate at March 31, 1997
through its analysis of specific problem loans, historical charge-off experience
and local economic trends.
NONINTEREST INCOME
Total first quarter noninterest income did not change significantly compared to
the same period in 1996. The larger fluctuations were the increase in mortgage
servicing income of $30,394 and the offsetting decrease in gain on sale of loans
of $36,725.
NONINTEREST EXPENSE
Total noninterest expense increased $102,236 or 7.92% for the first three months
of 1997 compared to the same period in 1996. The most significant increases
occurred in areas of salaries and benefits, occupancy, furniture and equipment
and other operating expense attributed to writing down other real estate
$15,000.
- --------------------------------------------------------------------------------
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
Total shareholders' equity decreased $23,050 or 0.16% during the first quarter
of 1997. Year-to-date net income of $314,045 increased equity but was offset by
the decrease in the market value of the available-for-sale investment security
portfolio which resulted in a decrease to equity of $337,095. Shareholders'
equity to total assets was 7.74% at March 31, 1997 compared to 7.91% at December
31, 1996.
During the annual meeting in April 1997 the shareholders approved changing the
par value of the Company'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. This was done to
increase the marketablity of the Company's stock. 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 March 31, 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
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 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 March 31,
1997, the Bank's leverage ratio was 7.98% and the risk-based capital ratio was
in excess of 12% 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 March 31, 1997 stood at $5,180,852. Refer to the
Statement of Cash Flows contained within this report.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
A standard measure of liquidity is the relationship of loans to deposits. Lower
ratios indicate greater liquidity. At March 31, 1997, the ratio of loans to
deposits was 71.31%, considered an acceptable level of liquidity by management.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended March 31, 1997
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
Consolidated Statements of Income on page 4,
hereof.)
(b) Exhibit 27, Financial Data Schedule.
(c) No reports on Form 8-K were filed during the
quarter for which this report is filed.
- --------------------------------------------------------------------------------
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:
---------------------- --------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date:
---------------------- --------------------------------------------
(Signature)
Philip W. Kinley
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
20.
<PAGE> 21
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
Senior Vice President and Chief Financial
Officer
- --------------------------------------------------------------------------------
20.
<PAGE> 22
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 4, hereof.)
Exhibit 27, Financial Data Schedule
- --------------------------------------------------------------------------------
21.
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,181
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
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<TOTAL-ASSETS> 184,747
<DEPOSITS> 168,428
<SHORT-TERM> 1,180
<LIABILITIES-OTHER> 848
<LONG-TERM> 0
<COMMON> 7,816
0
0
<OTHER-SE> 6,475
<TOTAL-LIABILITIES-AND-EQUITY> 184,747
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<INTEREST-DEPOSIT> 1,820
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<INTEREST-INCOME-NET> 1,604
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<EXPENSE-OTHER> 1,383
<INCOME-PRETAX> 391
<INCOME-PRE-EXTRAORDINARY> 314
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 314
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 4.04
<LOANS-NON> 275
<LOANS-PAST> 309
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,019
<CHARGE-OFFS> 163
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<ALLOWANCE-CLOSE> 985
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