<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, 1998
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 September 30, 1998:
1,048,431 common shares
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED September30, 1998
- --------------------------------------------------------------------------------
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 ............................ 13
Part II - Other Information
Other Information ........................................................ 17
Signatures ............................................................... 18
</TABLE>
<PAGE> 3
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,642,256 $ 7,111,986
Securities available for sale, at fair value 44,876,169 35,508,713
Securities held to maturity (Estimated fair values 1,999,799
of $3,230,455 in 1998 and $2,974,830 in 1997) 2,756,218
Total loans 141,476,395 125,959,922
Allowance for loan losses (1,032,758) (1,075,385)
------------ ------------
Net loans 140,443,697 124,884,537
Premises and equipment, net 3,599,951 3,655,643
Other real estate 1,021,500 1,065,000
Accrued interest receivable and other assets 2,741,832 6,384,670
------------ ------------
Total assets $199,325,144 $181,366,767
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 14,777,724 $ 14,624,943
Interest-bearing deposits 154,051,964 147,176,219
------------ ------------
Total deposits 168,829,688 161,801,162
Borrowed funds 12,650,000 3,030,000
Accrued interest payable and other liabilities 663,652 847,262
------------ ------------
Total liabilities 182,143,340 165,678,424
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized;
1,048,431 and 1,041,456 shares issued in 1998 and 1997 7,950,339 7,815,513
Additional paid-in capital
Retained earnings 8,720,962 8,099,040
Unrealized gain on securities available for sale 510,503 (226,210)
------------ ------------
Total shareholders' equity 17,181,804 15,688,343
------------ ------------
Total liabilities and shareholders' equity $199,325,144 $181,366,767
============ ============
- -------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
3.
<PAGE> 4
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,048,396 $2,866,503 $ 8,514,378 $ 8,321,509
Interest on securities
Taxable 351,133 542,072 996,952 1,642,695
Nontaxable 263,695 174,230 687,279 596,706
Other interest income 5,985 10,380 92,355 22,282
---------- ---------- ----------- -----------
Total interest income 3,669,209 3,593,185 10,290,964 10,583,192
INTEREST EXPENSE
Interest on deposits 1,782,070 1,798,346 5,212,917 5,417,638
Other interest expense 82,407 29,789 91,768 87,170
---------- ---------- ----------- -----------
Total interest expense 1,864,477 1,828,135 5,304,685 5,504,808
---------- ---------- ----------- -----------
NET INTEREST INCOME 1,804,732 1,765,050 4,986,279 5,078,384
Provision for loan losses 172,912 299,000 328,012 514,000
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,631,820 1,466,050 4,658,267 4,564,384
---------- ---------- ----------- -----------
OTHER INCOME
Service charges on deposit
accounts 200,435 179,327 514,923 511,743
Security gains/
(losses), net 63,718 64,673 84,620 75,753
Loan sale gains, net 93,574 68,591 253,898 121,984
Other income 62,031 54,081 154,629 164,121
---------- ---------- ----------- -----------
Total other income 419,758 366,672 1,008,070 873,601
OTHER EXPENSE
Salaries and employee benefits 718,902 620,363 2,106,035 1,950,514
Occupancy, furniture and
equipment 152,930 148,951 447,690 458,680
State taxes 74,041 68,937 215,294 209,476
Data processing 139,598 149,627 414,831 453,164
FDIC deposit insurance expense 7,859 8,631 21,410 20,153
Professional fees 50,690 19,470 111,172 55,873
Other expense 449,559 326,036 1,122,435 1,006,173
---------- ---------- ----------- -----------
Total other expense 1,593,579 1,342,015 4,438,867 4,154,033
Income before federal income taxes 457,999 490,707 1,227,370 1,283,952
Income tax expense 81,230 112,100 219,000 273,024
NET INCOME $ 376,769 $ 378,607 $ 1,008,470 $ 1,010,928
========== ========== =========== ===========
Basic earnings per common share $ .36 $ .36 $ .97 $ .97
========== ========== =========== ===========
Diluted earnings per common share $ .36 $ .36 $ .96 $ .96
========== ========== =========== ===========
- --------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
4.
<PAGE> 5
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Net income $1,008,470 $ 1,010,927
Other comprehensive income, net of tax;
Unrealized (loss) gain on securities available for sale 510,503 (382,797)
---------- -----------
Comprehensive income $1,518,973 $ 628,130
========== ===========
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $15,688,343 $14,313,245
Net income 1,008,470 1,010,927
Cash dividends declared (387,087) (364,510)
Stock options exercised 134,826
Change in unrealized loss on
securities available for sale 736,713 27,538
----------- -----------
Balance at end of period $17,181,804 $14,987,200
=========== ===========
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
5.
<PAGE> 6
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 890,497 $ 1,921,491
INVESTING ACTIVITIES
Securities available for sale
Purchases (38,795,862) (23,739,105)
Maturities and repayments 4,997,681 4,159,046
Sales 25,289,615 27,115,850
Securities held to maturity
Purchases (245,078)
Sales 916,484
Net change in loans (11,729,160) (10,199,773)
Bank premises and equipment expenditures (190,173) (70,524)
Proceeds from sale of other real estate ------------ ------------
Net cash used by investing activities (19,756,493) (2,734,506)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 7,028,526 (487,354)
Net change in other borrowings 9,620,000 1,084,993
Dividends paid (387,087) (364,510)
Cash paid in lieu of fractional shares 134,826
------------ ------------
Net cash from financing activities 16,396,266 233,129
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,469,730 (579,886)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,111,986 6,299,450
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,642,256 $ 5,719,564
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 6,182,284 $ 5,387,291
Income taxes 400,000 180,000
- -------------------------------------------------------------------------------------
</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. and its wholly owned subsidiaries, the Commercial
Savings Bank (the "Bank") and Advantage Finance, Inc. (together the
"Corporation"). 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, 1998, 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, 1997, 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
commercial and retail banking, with operations conducted through its two
subsidiaries located in Upper Sandusky and Marion, 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 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 judgement, should be charged off.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is considered impaired when management believes full collection of
principal and interest is not probable. Often this is associated with a delay or
shortfall in payments. 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.
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: Basic and diluted earnings per share are computed under a
new accounting standard effective in the quarter ended December 31, 1997. All
prior amounts have been restated to be comparable. Basic earnings per share is
based on net income divided by 1,044,918 and 1,041,456 weighted average shares
outstanding during the nine months ended September 30, 1998 and 1997 and
1,047,110 and 1,041,456 weighted average shares outstanding during the quarter
ended September 30, 1998 and 1997. Diluted earnings per share reflect the effect
of additional common shares issuable under stock options using the treasury
stock method. The weighted average number of shares used for determining diluted
earnings per share were 1,052,897 and 1,042,558 for the nine months ended
September 30, 1998 and 1997 and 1,056,117 and 1,041,456 for the quarter ended
September 30, 1998 and 1997.
Financial Statement Presentation: Some items in prior financial statements have
been reclassified to conform to the current presentation.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities as of September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Obligations of federal agencies $ 5,490,866 $ 167,393 $ (1,138) $ 5,657,121
Obligations of state and political
subdivisions 21,751,255 $ 807,841 22,559,096
Corporate bonds 1,991,777 48,367 (8,344) 2,031,800
Mortgage-backed securities 16,074,099 10,340 (175,083) 15,909,356
Equity investments 718,595 718,595
----------- ---------- --------- -----------
Total securities
available for sale $46,026,592 $1,033,941 $(184,565) $46,875,968
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
December 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 $ 506,963 $ (6,183) $ 500,780
Obligations of federal agencies 4,241,812 $ 7,286 (20,354) 4,228,744
Obligations of state and political
subdivisions 11,013,697 142,579 (85,631) 11,070,645
Corporate bonds 501,766 675 (466) 501,975
Mortgage-backed securities 18,781,559 26,592 (179,042) 18,629,109
Equity investments 577,460 577,460
----------- ----------- --------- -----------
Total securities
available for sale $35,623,257 $ 177,132 $(291,676) $35,508,713
=========== =========== ========= ===========
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,756,218 $ 218,612 $ 0 $ 2,974,830
=========== =========== ========= ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
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 September 30, 1998, 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 $ 2,005,981 $ 2,144,418
Due in five to ten years 6,369,867 6,468,796
Due after ten years 20,858,050 21,634,803
Mortgage-backed securities 16,074,099 15,909,356
----------- -----------
Total debt securities available for sale $45,307,997 $46,157,373
=========== ===========
</TABLE>
Sales of available-for-sale securities during the nine months ended September
30, 1998 and 1997 were:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Proceeds $25,289,615 $27,115,850
Gross gains 150,251 115,815
Gross losses 65,631 40,062
</TABLE>
Securities with a carrying value of approximately $ 13,629,853 at September 30,
1998 and $15,888,000 at December 31, 1997 were pledged to secure deposits and
for other purposes.
NOTE 3 - LOANS
Loans at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Commercial and other loans $ 68,248,871 $ 60,677,339
Real estate loans 31,639,888 25,081,877
Consumer and credit card 34,655,544 34,149,658
Home equity loans 6,867,766 6,051,048
------------ ------------
Total loans $141,412,069 $125,959,922
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank has
retained servicing totaled $36,201,791 and $23,411,756 at September 30, 1998 and
December 31, 1997. Real estate loans originated and held for sale at September
30, 1998 and December 31, 1997 totaled $9,340,720 and $5,191,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the nine months ended
September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - January 1 $1,075,385 $1,018,608
Loans charged off (414,704) (391,809)
Recoveries 52,165 76,702
Provision for loan losses 319,912 514,000
---------- ----------
Balance - September 30 $1,032,758 $1,217,501
========== ==========
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Balance of impaired loans $1,068,036 $1,404,983
Less portion for which no allowance for loan
losses is allocated 0 37,006
---------- ----------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $1,068,036 $1,367,977
========== ==========
Portion of allowance for loan losses allocated to
the impaired loan balance $ 213,607 $ 307,323
========== ==========
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Average investment in impaired loans $1,279,906 $440,744
Interest income recognized on impaired loans -- --
Interest income recognized on impaired
loans on cash basis -- --
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The following is a summary of commitments to extend credit at September 30, 1998
and December 31, 1997.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Fixed rate $ 2,156,308 $ 411,000
Variable rate 11,341,500 16,063,000
----------- -----------
$13,497,808 $16,474,000
=========== ===========
</TABLE>
At September 30, 1998 and December 31, 1997, reserves of $841,000 and $718,000
were required as deposits with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
The purpose of this discussion is to focus on information concerning the
consolidated financial condition of Commercial Bancshares, Inc. (the
Corporation) at September 30, 1998, compared to December 31, 1997, and the
results of operations for the three- and nine-month periods ended September 30,
1998, as compared to the same period in 1997, which is not otherwise apparent
from the financial statements. This discussion should be read in conjunction
with the interim consolidated financial statements and the footnotes thereto
included elsewhere in this Form 10-QSB. Forward-looking statements contained in
this discussion involve risks and uncertainties and are subject to change based
on various important factors. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements, and the purpose of
this paragraph is to secure the use of the safe harbor provisions. While the
Corporation believes that the assumptions underlying the forward-looking
statements contained herein and in other public documents are reasonable, any of
the assumtions could prove to be inaccurate, and accordingly, actual results and
experience could differ materially from the anticipated results or other
experiences expressed by the Corporation in its forward-looking statements
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. In addition, the
Registrant is not aware of any current recommendations by regulatory authorities
that would have such effect if implemented.
FINANCIAL CONDITION
Total assets increased by $17,958,377 or 9.9% from December 31, 1997 to
September 30, 1998. The primary cause was an increase in the loan portfolio as
discussed below.
Gross loans increased $15,559,100 or 12.5% during the first nine months of 1998.
Increases occurred in the installment portfolio of $1,322,604 or 3.3% during the
nine-months ended September 30, 1998. The increase in the installment portfolio
was due to the purchase of the horse trailer portfolio as discussed below. Real
estate loans have increased by $6,558,000 or 25% for the nine months ended
September 30,1998. The Bank will retain these loans as held-for-sale until
market conditions allow the Bank to sell the loans at a gain on or before
December 31, 1998. The Bank has sold the majority of its fixed rate real estate
loans into the secondary market while retaining servicing rights.
Additionally, for the three quarters ended September 30, of 1998, commercial
loan volume has increased by $7,571,532 or 12.5% by offering a below prime rate
of interest on new loan generation. This commercial product offering that ceased
on September 30, 1998. Installment loan volume will continue to increase in the
second half of this year by the Board approved entry into two new indirect loan
product lines - horse trailers and utility cargo trailers. Using Board approved
and verified underwriting guidelines the Bank will purchase indirect installment
loans from a 42 state dealer network that will produce budgeted annualized
volume increases of approximately $12,000,000 in the first full year of
production. Also, during July 1998 the Bank purchased a $6,100,000 portfolio of
horse trailer secured installment loans from Mountain Parks Financial Services,
Inc. of Aurora, Colorado. Total deposits increased $7,028,526 or
- --------------------------------------------------------------------------------
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
4.3% during the first nine months of 1998. The Federal Home Loan Bank has also
been utilized to fund the ever increasing loan demand. At 9/30/98 advances
totaled $12,650,000.
RESULTS OF OPERATIONS
Net income for the nine-month period ending September 30, 1998 stood at
$1,008,470 compared to $1,010,928 during the same period in 1997. Third quarter
income in 1998 was $376,679 as compared to $378,607 during the same three-month
period in 1997. Diluted earnings per share decreased by $.01 per share for the
nine-month and three-month periods ending September 30, 1998. Discussed below
are the major factors that 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 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 securities available for sale.
Interest income for the third quarter of 1998 stood at $3,669,209 as compared to
$3,593,185 during the same period 1997, an increase of $76,024. During the same
time period, interest expense increased $36,342 from $1,828,135 in 1997 to
$1,864,477 in 1998. Interest income and interest expense for the nine-months
ended September 30, 1998 decreased $292,228, or 2.8%, and $200,123 or 3.6%,
respectively, over the same period in 1997. The increase in interest income is a
direct result of the increased loan balances as previously discussed. Interest
expense increased accordingly as the funding needs of the corporation continue
to grow. Management expects improvement of net interest margins during the
fourth quarter of 1998 due to the improvement in loan volumes previously
discussed.
The provision for loan loss decreased $126,088 for the three-months ended
September 30, 1998 compared to the same period in 1997 and has decreased
$185,988 for the first nine months of 1998 compared to the same period in 1997.
Management has determined that loan loss provision is adequate at September 30,
1998, however, efforts will be made in the fourth quarter to bolster the
provision due to the increasing loan portfolio.
NONINTEREST INCOME
Total noninterest income for the three-months ended September 30, 1998 increased
$53,085 or 14.5% compared to the same period in 1997 and increased $134,469 or
15.4% for the first nine months of 1998 compared to the same period in 1997. The
increase in noninterest income is related to increases of $24,983 and $131,914
in gains on loans sold for the three- and nine-months ended September 30, 1998
compared to the same periods in 1997.
- --------------------------------------------------------------------------------
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Total noninterest expense increased $283,834 or 6.9% for the first nine months
of 1998 compared to the same period in 1997. For the third quarter of 1998,
noninterest expense increased $251,564 or 18.8% compared to the same period in
1997. A major portion of the third quarter increase is due to Management's
decision to write down its OREO property. As of this writing a buyer for this
property has been obtained and this transaction should finalize in early 1999.
The agreed upon price for the sale of this property is less that the current
value stated on the books and further write downs will occur through the end of
the year to reach the agreed upon sale price. Further write downs will be
approximately $200,000 over the remainder of the year.
Management and the Board of Directors have committed approximately $500,000 to
upgrade the Corporation's computers and network. This is in conjunction with the
Corporation's conversion of its data processor to Jack Henry & Associates, which
will occur December 18, 1998. This conversion will be discussed further below.
CAPITAL RESOURCES
Total shareholders' equity increased $1,493,462 or 9.5 % during the first nine
months of 1998. Year-to-date net income of $1,008,470 and the exercise of stock
options of $134,826 increased equity. This increase was offset by dividends
declared of $575,805. Shareholders' equity to total assets was 8.6% at September
30, 1998 compared to 8.7% at December 31, 1997.
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 minus intangible assets. Supplementary capital,
or Tier 2 capital, includes core capital and such items as the allowance for
loan 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, 1998, the
Bank's leverage ratio was 8.6% and the risk-based capital ratio was more than
14%, both of which exceeded the minimum regulatory requirements.
LIQUIDITY
Liquidity management for the Bank centers on 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, 1998 and December 31, 1997 stood at
$4,642,256 and $7,111,986. Refer to the Statement of Cash Flows contained within
this report.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
A standard measure of liquidity is the relationship of loans to deposits and
borrowed funds. Lower ratios indicate greater liquidity. At September 30, 1998
and December 31, 1997, the ratio of loans to deposits and borrowed funds was
77.4% and 76.4%, considered an acceptable level of liquidity by management.
GENERAL
As with all financial institutions, the Corporation's operations depend almost
entirely on computer systems. The Corporation is addressing the potential
problems associated with the possibility that the computers that control or
operate the Corporation's operating systems, facilities and infrastructure may
not be programmed to read four-digit date codes and, upon arrival of the year
2000, may recognize the two-digit "00" as the year 1900, causing systems to fail
to function or to generate erroneous data. The Corporation has made the decision
to convert is core data processing system to Jack Henry & Associates as well as
update its computerization, by both purchasing all new, Y2K compliant equipment,
and updating the network of said computers. The costs associated with this
upgrade will be in the area of approximately $500,000. Jack Henry & Associates
has formed an alliance with the Corporation's data processor, SCC Resources,
Inc. which has resulted in this conversion which will be complete by December
18, 1998. By making these moves, the Corporation may confidently announce that
its core data processing system and related computerization is Year 2000
compliant by 1/1/99, one year ahead of schedule The Corporation has established
a dedicated Year 2000 project team responsible for resolving this complex issue
so that our customers will not be adversely affected. Any and all other areas
not specifically related to the core data processing will be monitored by this
team although no other significant expenses outside the upgrade of the core
processing system is anticipated.
- --------------------------------------------------------------------------------
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 1998
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 the Notes to
Consolidated Statements on page 8, 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.
- --------------------------------------------------------------------------------
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: November 16, 1998 /s/ Raymond E. Graves
--------------------- ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: November 16, 1998 /s/ Alicia A. Wagenblast
--------------------- ------------------------------------------
(Signature)
Alicia A. Wagenblast
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
18.
<PAGE> 19
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
- --------------------------------------------------------------------------------
19.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,642,256
<INT-BEARING-DEPOSITS> 154,051,964
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,876,169
<INVESTMENTS-CARRYING> 1,999,799
<INVESTMENTS-MARKET> 3,230,455
<LOANS> 141,476,395
<ALLOWANCE> 1,032,758
<TOTAL-ASSETS> 199,325,144
<DEPOSITS> 168,829,688
<SHORT-TERM> 0
<LIABILITIES-OTHER> 663,652
<LONG-TERM> 12,650,000
0
0
<COMMON> 7,950,339
<OTHER-SE> 8,720,961
<TOTAL-LIABILITIES-AND-EQUITY> 1,718,804
<INTEREST-LOAN> 3,048,396
<INTEREST-INVEST> 614,828
<INTEREST-OTHER> 5,985
<INTEREST-TOTAL> 3,669,209
<INTEREST-DEPOSIT> 1,782,070
<INTEREST-EXPENSE> 1,864,477
<INTEREST-INCOME-NET> 1,804,732
<LOAN-LOSSES> 1,631,820
<SECURITIES-GAINS> 63,718
<EXPENSE-OTHER> 449,559
<INCOME-PRETAX> 457,999
<INCOME-PRE-EXTRAORDINARY> 457,999
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 376,769
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 3.55
<LOANS-NON> 1,068,035
<LOANS-PAST> 80,463
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,075,000
<CHARGE-OFFS> 414,704
<RECOVERIES> 52,165
<ALLOWANCE-CLOSE> 1,032,758
<ALLOWANCE-DOMESTIC> 609,533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 423,225
</TABLE>
