<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, 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
incorporation or organization) Identification Number)
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, 1998:
1,044,481 common shares
Transitional Small Business Disclosure Format:
/ / Yes /X/ No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED March 31, 1998
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Part I - Financial Information
Interim financial information required by Regulation 228.310-3(b) of Regulation
S-B is included in this Form 10-QSB as referenced below:
ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page
----
Consolidated Balance Sheets .............................................. 3
Consolidated Statements of Income ........................................ 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity ................................................ 5
Condensed Consolidated Statements of Cash Flows .......................... 6
Notes to Consolidated Financial Statements ............................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS ............................ 15
Part II - Other Information
Other Information......................................................... 19
Signatures................................................................ 20
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,178,747 $ 7,111,986
Federal funds sold 790,000
-------------
Total cash and cash equivalents 6,968,747 7,111,986
Securities available for sale, at fair value 40,119,324 35,508,713
Securities held to maturity (Estimated fair values
of $2,986,860 in 1998 and $2,974,830 in 1997) 2,764,808 2,756,218
Total loans 119,681,562 125,959,922
Allowance for loan losses (1,010,579) (1,075,385)
------------- -------------
Net loans 118,670,983 124,884,537
Premises and equipment, net 3,589,671 3,655,643
Other real estate 1,057,500 1,065,000
Accrued interest receivable and other assets 3,132,541 6,384,670
------------- -------------
Total assets $ 176,303,574 $ 181,366,767
============= =============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 12,585,934 $ 14,624,943
Interest-bearing deposits 146,998,189 147,176,219
------------- -------------
Total deposits 159,584,123 161,801,162
Borrowed funds 3,030,000
Accrued interest payable and other liabilities 741,919 847,262
------------- -------------
Total liabilities 160,326,042 165,678,424
------------- -------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized;
1,043,481 and 1,041,456 shares issued in 1998 and 1997) 7,854,656 7,815,513
Additional paid-in capital
Retained earnings 8,448,959 8,099,040
Unrealized loss on securities available for sale (326,083) (226,210)
------------- -------------
Total shareholders' equity 15,977,532 15,688,343
------------- -------------
Total liabilities and shareholders' equity $ 176,303,574 $ 181,366,767
============= =============
</TABLE>
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See notes to the consolidated financial statements.
3.
<PAGE> 4
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
March 31,
---------
1998 1997
---- ----
INTEREST INCOME
Interest and fees on loans $2,760,754 $2,656,486
Interest on securities
Taxable 362,870 558,673
Nontaxable 191,126 205,081
Other interest income 6,692
---------- ----------
Total interest income 3,314,750 3,426,932
---------- ----------
INTEREST EXPENSE
Interest on deposits 1,695,336 1,819,503
Interest on other borrowings 9,361 7,963
---------- ----------
Total interest expense 1,704,697 1,827,466
NET INTEREST INCOME 1,610,053 1,599,466
Provision for loan losses 75,000 116,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,535,053 1,483,466
---------- ----------
OTHER INCOME
Service fees and overdraft charges 152,778 162,495
Security gains, net 3,733 16,027
Loan sale gains, net 14,093 39,341
Other income 48,998 67,179
---------- ----------
Total other income 219,602 285,042
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 619,188 626,809
Occupancy, furniture and
equipment 141,129 156,993
State taxes 70,874 70,978
Data processing 140,813 151,172
Other operating expense 346,332 371,763
---------- ----------
Total other expense 1,318,336 1,377,715
---------- ----------
Income before federal income taxes 436,319 390,793
Income tax expense 86,400 76,748
---------- ----------
Net income $ 349,919 $ 314,045
========== ==========
Basic earnings per common share $ .34 $ .30
========== ==========
Diluted earnings per common share $ .33 $ .30
========== ==========
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See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1998 1997
---- ----
Balance at beginning of period $15,688,343 $14,313,245
Net income 349,919 314,045
Stock options exercised 39,143
Change in unrealized loss on
securities available for sale (99,873) (337,095)
----------- -----------
Balance at end of period $15,977,532 $14,290,195
=========== ===========
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See notes to the consolidated financial statements.
5.
<PAGE> 6
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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Three Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES $ 2,637,079 $ (432,066)
INVESTING ACTIVITIES
Securities available for sale
Purchases (16,336,413) (8,541,176)
Maturities and repayments 1,956,905 442,322
Sales 9,543,345 6,940,968
Net change in loans 7,278,229 (3,221,322)
Bank premises and equipment expenditures (14,488) (23,446)
------------ -----------
Net cash used by investing activities (2,427,578) (4,402,654)
------------ -----------
FINANCING ACTIVITIES
Net change in deposits (2,217,039) 2,536,122
Net change in other borrowings (3,030,000) 1,180,000
Stock options exercised 39,143
------------ -----------
Net cash from financing activities (5,207,896) 3,716,122
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (143,239) (1,118,598)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,111,986 6,299,450
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,968,747 $ 5,180,852
============ ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 1,693,563 $ 1,778,905
Income taxes 215,000 80,000
</TABLE>
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See notes to the consolidated financial statements.
6.
<PAGE> 7
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 March 31, 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 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.
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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 1,042,728 and 1,041,456 weighted average shares
outstanding during the periods ended March 31, 1998 and 1997. Diluted earnings
per share reflects 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 1,051,390 and 1,041,718 for
the quarter ended March 31, 1998 in 1997.
Financial Statement Presentation: Some items in prior financial statements have
been reclassified to conform with the current presentation.
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8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities as of March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 506,404 $ (3,904) $ 502,500
Obligations of federal agencies 2,504,785 (4,275) 2,500,510
Obligations of state and political
subdivisions 17,917,624 $ 103,639 (288,865) 17,732,398
Corporate bonds 509,390 (4,675) 504,715
Mortgage-backed securities 18,313,122 10,750 (99,723) 18,224,149
--------------- ------------ ------------ ----------------
Total debt securities 39,751,325 114,389 (401,442) 39,464,272
Equity investments 655,052 655,052
--------------- ------------ ------------ ----------------
Total securities $ 40,406,377 $ 114,389 $ (401,442) $ 40,119,324
=============== ============ ============ ================
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,764,808 $ 222,052 $ 0 $ 2,986,860
=============== ============ ============ ================
</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
--------------- ------------ ------------ ----------------
Total debt securities 35,045,797 177,132 (291,676) 34,931,253
Equity investments 577,460 577,460
--------------- ------------ ------------ ----------------
Total securities $ 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>
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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 March 31, 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.
Estimated
Amortized Fair
Cost Value
---- -----
SECURITIES AVAILABLE FOR SALE
Due in one to five years $ 506,404 $ 502,500
Due in five to ten years 4,250,373 4,281,044
Due after ten years 16,681,426 16,456,579
Mortgage-backed securities 18,313,122 18,224,149
----------- -----------
Total debt securities available for sale $39,751,325 $39,464,272
=========== ===========
SECURITIES HELD TO MATURITY
Due in five to ten years $ 2,764,808 $ 2,986,860
=========== ===========
Sales of available-for-sale securities during the three months ended March 31,
1998 and 1997 were:
1998 1997
---- ----
Proceeds $9,543,345 $6,940,968
Gross gains 61,351 21,699
Gross losses 57,618 5,672
Securities with a carrying value of approximately $14,013,000 at March 31, 1998
and $15,888,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at March 31, 1998 and December 31, 1997 were as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Commercial and other loans $ 57,256,692 $ 60,677,339
Real estate loans 25,569,990 25,081,877
Consumer and credit card 30,706,519 34,149,658
Home equity loans 6,148,361 6,051,048
------------ ------------
Total loans $119,681,562 $125,959,922
============ ============
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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 $31,413,251 and $23,411,756 at March 31, 1998 and
December 31, 1997. Real estate loans originated and held for sale at March 31,
1998 and December 31, 1997 totaled $1,572,975 and $5,191,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the three months
ended March 31, 1998 and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $ 1,075,385 $ 1,018,608
Loans charged off (160,181) (163,407)
Recoveries 20,375 13,517
Provision for loan losses 75,000 116,000
----------- -----------
Balance - March 31 $ 1,010,579 $ 984,718
=========== ===========
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Balance of impaired loans $1,317,534 $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 $1,317,534 $1,367,977
========== ==========
Portion of allowance for loan losses allocated to
the impaired loan balance $ 263,507 $ 307,323
========== ==========
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Average investment in impaired loans $ 1,361,259 $ 440,744
Interest income recognized on impaired loans -- --
</TABLE>
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11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 March 31, 1998 and
December 31, 1997:
March 31, December 31,
1998 1997
---- ----
Fixed rate $1,370,000 $ 411,000
Variable rate 7,381,000 16,063,000
---------- -----------
$8,751,000 $16,474,000
========== ===========
At March 31, 1998 and December 31, 1997, reserves of $712,000 and $718,000 were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
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12.
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of
Commercial Bancshares, Inc. (the Corporation) at March 31, 1998, compared to
December 31, 1997, and the consolidated results of operations for the quarterly
period ending March 31, 1998 compared to the same period in 1997. 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 decreased by $5,063,193 or 2.8% from December 31, 1997 to March 31,
1998. The decrease in the loan portfolio was the reason for this decrease and is
discussed below.
Gross loans decreased $6,278,360 or 5.0% during the first three months of 1998.
Decreases occurred in the commercial and installment portfolios which combined
to decrease $6,863,786 or 7.2% during the first three months of 1998. The Bank
experienced significant rate competition in the commercial lending area from
larger, megabank institutions and strategically decided not to negatively impact
net interest margin by offering comparable rates. The decrease in the
installment portfolio was due to the continued slowdown in funding the indirect
portfolio. The Bank sells the majority of its fixed rate real estate loans into
the secondary market while retaining servicing rights.
Total deposits decreased $2,217,039, or 1.4%, during the first three months of
1998 which is typical of historical runoff of deposits in the first quarter.
Noninterest bearing deposits decreased $2,039,009 for the period ended March 31,
1998.
The funds from the decrease in the loan portfolio were utilized to payoff
Federal Home Loan Bank advances and federal funds purchases.
RESULTS OF OPERATIONS
Net income for the three-month period ending March 31, 1998 stood at $349,919
compared to $314,045 during the same period in 1997. Diluted earnings per share
increased by $.03 per share for the three-month period ending March 31, 1998 as
compared to the same time period in 1997. 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
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13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 1998 stood at $3,314,750 as compared to
$3,426,932 during the same period 1997, a decrease of $112,182. During the same
time period, interest expense decreased $122,769 from $1,827,466 in 1997 to
$1,704,697 in 1998. The decrease in interest income and expense is the result of
balances of earning assets and interest-bearing liabilities being approximately
$6,100,000 and $5,600,000 lower in 1998 compared to 1997.
The provision for loan loss decreased $41,000 in the first quarter 1998 compared
to 1997. This corresponds to the decrease in the loan portfolio. Management has
determined that loan loss provision is adequate at March 31, 1998 through its
analysis of specific problem loans, historical charge-off experience and local
economic trends.
NONINTEREST INCOME
Total first quarter noninterest income decreased $65,440 or 23.0% compared to
the same period in 1997. The larger fluctuations were the decrease in gains on
sale of loans and securities, the forfeiture of a deposit on Other Real Estate
in 1997 of $15,000 and the decrease in life insurance commissions of $11,383.
NONINTEREST EXPENSE
Total noninterest expense decreased $59,379 or 4.3% for the first three months
of 1998 compared to the same period in 1997. The most significant decreases
occurred in areas of occupancy, furniture and equipment, amortization of
intangibles due to the sale of the Kenton branch in 1997 and data processing.
CAPITAL RESOURCES
Total shareholders' equity increased $289,189 or 1.8% during the first quarter
of 1998. Year-to-date net income of $349,919 and the exercise of stock options
of $39,143 increased equity but was offset by the decrease in the market value
of the available-for-sale investment security
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14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
portfolio which resulted in a decrease to equity of $99,837. Shareholders'
equity to total assets was 9.1% at March 31, 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, 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,
1998, the Bank's leverage ratio was 9.0% and the risk-based capital ratio was in
excess of 13.9% 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, 1998 and December 31, 1997 stood at
$6,968,747 and $7,111,986. Refer to the Statement of Cash Flows contained within
this report.
A standard measure of liquidity is the relationship of loans to deposits and
borrowed funds. Lower ratios indicate greater liquidity. At March 31, 1998 and
December 31, 1997, the ratio of loans to deposits and borrowed funds was 75.0%
and 76.4%, considered an acceptable level of liquidity by management.
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15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended March 31, 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 Note 1 to the
Consolidated Financial Statements, hereof.)
(b) Exhibit 27, Financial Data Schedules.
(c) No reports on Form 8-K were filed during the quarter for
which this report is filed.
- --------------------------------------------------------------------------------
16.
<PAGE> 17
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: May , 1998 /s/ RAYMOND E. GRAVES
--------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: May , 1998 /s/ PHILIP W. KINLEY
--------------------------------------
(Signature)
Philip W. Kinley
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
17.
<PAGE> 18
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 Schedules
- --------------------------------------------------------------------------------
18.
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