<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, 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 _____________:
1,041,456 common shares
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED September 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>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS 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 ................................. 14
Part II - Other Information
Other Information ................................................................. 18
Signatures ........................................................................ 19
</TABLE>
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,719,564 $ 6,089,450
Federal funds sold 210,000
------------ ------------
Total cash and cash equivalents 5,719,564 6,299,450
Securities available for sale 40,877,666 48,392,272
Securities held to maturity 2,747,991 2,723,488
Total loans 126,039,454 116,154,788
Allowance for loan losses (1,217,501) (1,018,608)
------------ ------------
Net loans 124,821,953 115,136,180
Premises and equipment, net 3,967,204 4,159,754
Other real estate 1,135,000 1,150,000
Accrued interest receivable and other assets 3,162,221 3,099,828
------------ ------------
Total assets $182,431,599 $180,960,972
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 12,482,552 $ 14,140,221
Interest-bearing deposits 152,922,056 151,751,741
------------ ------------
Total deposits 165,404,608 165,891,962
Accrued interest payable and other liabilities 954,798 755,765
Short-term borrowings 1,084,993
------------ ------------
Total liabilities 167,444,399 166,647,727
------------ ------------
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 7,635,419 6,989,002
Unrealized loss on investment securities available for sale (463,732) (491,270)
------------ ------------
Total shareholders' equity 14,987,200 14,313,245
------------ ------------
Total liabilities and shareholders' equity $182,431,599 $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 Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,866,503 $2,618,145 $ 8,321,509 $7,361,563
Interest on securities
Taxable 542,072 402,253 1,642,695 1,445,301
Nontaxable 174,230 184,750 596,706 570,837
Other interest income 10,380 12,341 22,282 65,963
---------- ---------- ----------- ----------
Total interest income 3,593,185 3,217,489 10,583,192 9,443,664
INTEREST EXPENSE
Interest on deposits 1,798,346 1,528,950 5,417,638 4,557,855
Other interest expense 29,789 28,032 87,170 31,556
---------- ---------- ----------- ----------
Total interest expense 1,828,135 1,556,982 5,504,808 4,589,411
---------- ---------- ----------- ----------
NET INTEREST INCOME 1,765,050 1,660,507 5,078,384 4,854,253
Provision for loan losses 299,000 30,000 514,000 86,000
---------- ---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,466,050 1,630,507 4,564,384 4,768,253
OTHER INCOME
Service charges on deposit
accounts 179,327 163,332 511,743 479,643
Security gains/
(losses), net 64,673 (19,726) 75,753 44,275
Loan sale gains, net 68,591 6,782 121,984 56,246
Other income 54,081 18,333 164,121 88,087
---------- ---------- ----------- ----------
Total other income 366,672 168,721 873,601 668,251
OTHER EXPENSE
Salaries and employee benefits 610,182 580,945 1,922,814 1,840,779
Occupancy, furniture and
equipment 136,492 132,510 426,098 370,914
State taxes 68,937 70,941 209,476 198,303
Data processing 140,972 125,699 430,083 388,596
FDIC deposit insurance expense 8,631 162,604 20,153 196,979
Professional fees 27,817 16,145 96,368 53,332
Other expense 348,986 394,420 1,049,042 1,149,449
---------- ---------- ----------- ----------
Total other expense 1,342,017 1,483,264 4,154,034 4,198,352
---------- ---------- ----------- ----------
Income before federal income taxes 490,705 315,964 1,283,951 1,238,152
Income tax expense 112,100 71,900 273,024 276,215
---------- ---------- ----------- ----------
NET INCOME $ 378,605 $ 244,064 $ 1,010,927 $ 961,937
========== ========== =========== ==========
Earnings per common share $ .36 $ .23 $ .97 $ .92
========== ========== =========== ==========
</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,
-------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of period $14,313,245 $14,095,728
Net income 1,010,927 961,937
Cash dividends declared (364,510) (347,152)
Cash paid in lieu of fractional shares in stock split (26,289)
Change in unrealized loss on securities
available for sale 27,538 (784,973)
----------- -----------
Balance at end of period $14,987,200 $13,899,251
=========== ===========
</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,
-------------
1997 1996
---- ----
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 1,921,491 $ (1,897,365)
INVESTING ACTIVITIES
Securities available for sale
Purchases (23,739,105) (14,782,205)
Maturities and repayments 4,159,046 1,903,372
Sales 27,115,850 25,312,504
Net change in loans (10,199,773) (14,323,134)
Bank premises and equipment expenditures (70,524) (515,154)
Proceeds from sale of other real estate 93,404
------------ ------------
Net cash used by investing activities (2,734,506) (2,311,213)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits (487,354) 4,643,318
Net change in short-term borrowings 1,084,993
Dividends paid (364,510) (347,152)
Cash paid in lieu of fractional shares (26,289)
------------ ------------
Net cash used by financing activities 233,129 4,269,877
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (579,886) 61,299
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,299,450 6,425,650
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,719,564 $ 6,486,949
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 5,387,291 $ 4,582,367
Income taxes 180,000 192,000
</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 September 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 September 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
September 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. 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 these stock splits.
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
September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 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 $ 507,557 $ 9,902 $ 497,655
Obligations of federal agencies 5,233,056 47,099 5,185,957
Obligations of state and political
subdivisions 15,837,384 $133,895 335,085 15,636,194
Corporate bonds 501,975 1,980 499,995
Mortgage-backed securities 18,705,685 11,028 216,308 18,500,405
Equity investments 557,460 557,460
----------- -------- -------- -----------
Total securities
available for sale $41,343,117 $144,923 $610,374 $40,877,666
=========== ======== ======== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
September 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 $2,747,991 $207,029 $ 0 $ 2,955,020
========== ======== ========= ===========
</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>
Proceeds from sales of debt and mortgage-backed securities during the nine
months ended September 30, 1997 and 1996 were $27,115,850 and $25,312,504. Gross
gains of $115,815 and $295,724, and gross losses of $40,062 and $339,999 were
realized on the sales during the nine months ended September 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 September 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 $ 1,009,532 $ 997,650
Due in five to ten years 6,560,704 6,539,111
Due after ten years 14,509,736 14,283,040
Mortgage-backed securities 18,705,685 18,500,405
----------- -----------
Total debt securities available for sale $40,785,657 $40,320,206
=========== ===========
HELD TO MATURITY
Debt securities:
Due in five to ten years $ 2,747,991 $ 2,955,020
=========== ===========
</TABLE>
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Commercial and other loans $ 57,393,126 $ 51,021,307
Real estate loans 25,590,681 22,979,126
Consumer and credit card 37,381,180 37,344,109
Home equity loans 5,674,467 4,810,246
------------ ------------
Total loans $126,039,454 $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 $22,595,919 and $17,144,184 at September 30, 1997 and
December 31, 1996. Real estate loans originated and held for sale at September
30, 1997 and December 31, 1996 totaled $131,595 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 nine months ended
September 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 (391,809) (180,086)
Recoveries 76,702 73,807
Provision for loan losses 514,000 86,000
----------- ---------
Balance - September 30 $ 1,217,501 $ 975,852
=========== =========
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
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
======== =======
</TABLE>
Information regarding impaired loans is as follows for the periods ended:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Average investment in impaired loans $199,685 $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>
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(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 September 30, 1997 and December 31, 1996, the contract
amount of these instruments, which primarily includes commitments to extend
credit and standby letters of credit at variable and fixed interest rates,
totaled approximately $7,407,142 and $13,584,000. 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.
NOTE 6 - STOCK OPTION PLAN
During the annual meeting in April 1997 the shareholders approved the adoption
of an incentive stock option plan for the benefit of executive officers. Options
awarded become first exercisable on the fifth anniversary of the date of grant
or at the discretion of the Compensation Committee. The option period expires 10
years from the date of grant. Under the plan 150,000 shares were reserved for
granting options.
On July 9, 1997, the Board of Directors granted options to purchase 30,000
shares of common stock at an exercise price of $19.33 effective January 1, 1997
to certain officers of the Company. At September 30, 1997, no options were
exercisable. No options were exercised during the three-month and nine-month
periods ended September 30, 1997. In addition, there are 120,000 shares of
authorized but unissued common stock reserved for which no options have been
granted.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must still disclose the pro forma effect on
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12.
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLAN (Continued)
net income and on earnings per share had the accounting method been adopted.
Fair value of a stock option is to be estimated using an option-pricing model
that considers exercise price, expected life of the option, current price of the
stock, expected price volatility, expected dividends on the stock and the
risk-free interest rate. Once estimated, the fair value of an option is not
later changed. The Company elected to disclose the pro forma effect of the fair
value accounting for stock options granted in 1997 and thereafter, and will
include appropriate disclosures in the 1997 annual financial statements.
- --------------------------------------------------------------------------------
13.
<PAGE> 14
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, 1997, compared to
December 31, 1996, and the consolidated results of operations for the quarterly
and nine-month periods ending September 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 $1,470,627 or 0.81% from December 31, 1996 to
September 30, 1997. The growth in the loan portfolio was the reason for this
increase and is discussed below.
Gross loans increased $9,884,666 or 8.51% during the first nine months of 1997.
The most significant increase occurred in the commercial loan portfolio which
increased $6,371,819 or 12.49% during the first nine months of 1997. This
reflects management's success during increased competition in the commercial
lending area. Funding for this growth came from the exchange of securities for
higher yielding loans. Through the second quarter of 1997 the Bank has sold the
majority of its fixed rate real estate loans into the secondary market while
retaining servicing rights. In the third quarter management has begun to retain
those loans in an effort to grow the in-house loan portfolio resulting in an
increase in mortgage loans of $2,611,555 from December 31, 1996 to September 30,
1997 of which $2,006,257 occurred in the third quarter.
Total deposits decreased $487,354 or 0.29%, during the first nine months of
1997. The increase in interest-bearing deposits of $1,170,315 for the period
ended September 30, 1997 was offset by a decrease in noninterest-bearing
deposits of $1,657,669 as those funds moved to higher yielding interest-bearing
deposits and non-deposit products.
The Bank utilized federal funds purchased to offset the decrease in deposits.
The Bank has been approved for membership into the Federal Home Loan Bank to
provide an alternative source of funds.
The Company has submitted an application with the appropriate regulatory
agencies to form a finance company, Advantage Finance, Inc. (Advantage), in
Marion, Ohio. The purpose of Advantage is to provide financing for higher risk
borrowers that do not meet the more
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14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
stringent underwriting criteria of the Bank. Approval has not been received at
of September 30, 1997, but is expected in the fourth quarter.
RESULTS OF OPERATIONS
Net income for the nine-month period ending September 30, 1997 stood at
$1,010,927 compared to $961,937 during the same period in 1996. Third quarter
income in 1997 was $378,605 as compared to $244,064 during the same three-month
period in 1996. Earnings per share increased by $0.05 per share for the
nine-month period ending September 30, 1997 as compared to the same time period
in 1996 and earnings per share increased from $0.23 to $0.36 for the three month
period ended September 30, 1997. 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 third quarter 1997 stood at $3,593,185 as compared to
$3,217,489 during the same period 1996, an increase of $375,696. During the same
time period, interest expense increased $271,153 from $1,556,982 in 1996 to
$1,828,135 in 1997. Interest income and interest expense for the nine months
ended September 30, 1997 increased $1,139,528 or 12.07% and $915,397 or 19.95%,
respectively, over the same period in 1996. The increase in interest income is
the result of the larger investment in higher yielding installment loans during
1996. The increase in interest expense is the result of the shift from
noninterest-bearing to interest-bearing deposits and the higher rate the Bank is
paying due to market conditions.
The provision for loan loss increased $269,000 in the third quarter 1997
compared to 1996 and is up $428,000 for the first nine months of 1997 compared
to the same period in 1996. The large third quarter funding of the allowance for
loan losses corresponds to the increase in riskier indirect and commercial loans
and an increase in net charge-offs of indirect loans. 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
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
standards as loans originated directly by the Bank and management has
established procedures to monitor the ongoing credit quality of loans purchased
from individual dealers. Management has centralized the underwriting process and
reduced the funding 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.
NONINTEREST INCOME
Total third quarter noninterest income increased $216,652 or 128.41% compared to
the same period in 1996. Total other income was up from $668,251 to $873,601 for
the first nine months of 1997 as compared to 1996. The significant causes of the
increase were the gains on sale of securities and loans and an increase in
earnings on life insurance investments.
On September 30, 1997, the Company entered into a definitive agreement with
Liberty Bancshares, Inc. to sell the property, equipment and deposits of the
Kenton branch. The Company anticipates the transaction to close before December
31, 1997. The estimated gain on sale before applicable taxes is $700,000.
NONINTEREST EXPENSE
Total noninterest expense decreased $141,247 or 9.52% for the third quarter of
1997 compared to the same period in 1996. For the first nine months of 1997,
noninterest expense decreased modestly compared to the same period in 1996. The
one-time special assessment of $154,011 in the third quarter of 1996 is the
cause of the decreases in 1997. This assessment related to deposits insured by
the Savings Association Insurance Fund purchased by the Bank in 1992.
CAPITAL RESOURCES
Total shareholders' equity increased $673,955 or 4.71% during the first nine
months of 1997. Year-to-date net income of $1,010,927 increased equity but was
offset by dividends declared of $364,510. Shareholders' equity to total assets
was 8.21% at September 30, 1997 and 7.91% at September 30, 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 marketability of the Company's stock. The weighted average number
of shares outstanding and earning per share have been restated to retroactively
reflect the stock split.
- --------------------------------------------------------------------------------
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 September
30, 1997, the Bank's leverage ratio was 8.17% and the risk-based capital ratio
was in excess of 8.60% 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, 1997 stood at $5,719,564. 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, 1997, the ratio of loans to
deposits was 75.8% compared to 70.0% at December 31, 1996. Both ratios are
considered an acceptable level of liquidity by management.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 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:
The following Exhibits are included in this Form 10-QSB or are
incorporated by reference as noted in the following index:
EXHIBIT INDEX
(a) Exhibit 11, Statement regarding computation of per share
earnings (included in Note 1 to the Consolidated Financial
Statements).
(b) Exhibit No. 27
REPORTS ON FORM 8-K
(a) A Form 8-K was filed on September 22, 1997 to report the
appointment of Deborah J. Grafmiller to the boards of
Commercial Savings Bank and Commercial Bancshares, Inc.
replacing B.E. Beaston who retired effective August 1997.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMERCIAL BANCSHARES, INC.
-------------------------------------
(Registrant)
Date:
---------------------- -------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date:
---------------------- -------------------------------------
(Signature)
Philip W. Kinley
Vice President and Chief Financial
Officer
19.
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
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