<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
JUNE 30, 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 July 31, 1998:
1,046,181 common shares
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED June 30, 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:
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 ........................... 13
Part II - Other Information
Other Information........................................................ 16
Signatures............................................................... 17
<PAGE> 3
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,133,681 $ 7,111,986
Securities available for sale, at fair value 42,977,909 35,508,713
Securities held to maturity (Estimated fair values
of $3,230,455 in 1998 and $2,974,830 in 1997) 3,018,450 2,756,218
Total loans 119,873,757 125,959,922
Allowance for loan losses (938,534) (1,075,385)
------------ ------------
Net loans 118,935,223 124,884,537
Premises and equipment, net 3,594,084 3,655,643
Other real estate 1,046,500 1,065,000
Accrued interest receivable and other assets 3,034,802 6,384,670
------------ ------------
Total assets $178,740,649 $181,366,767
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 14,071,007 $ 14,624,943
Interest-bearing deposits 147,477,168 147,176,219
------------ ------------
Total deposits 161,548,175 161,801,162
Borrowed funds 680,000 3,030,000
Accrued interest payable and other liabilities 582,386 847,262
------------ ------------
Total liabilities 162,810,561 165,678,424
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized;
1,046,181 and 1,041,456 shares issued in 1998 and 1997 7,906,847 7,815,513
Additional paid-in capital
Retained earnings 8,343,653 8,099,040
Unrealized loss on securities available for sale (320,412) (226,210)
------------ ------------
Total shareholders' equity 15,930,088 15,688,343
------------ ------------
Total liabilities and shareholders' equity $178,740,649 $181,366,767
============ ============
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</TABLE>
See notes to the consolidated financial statements.
3.
<PAGE> 4
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,705,228 $2,798,520 $5,465,982 $5,455,006
Interest on securities
Taxable 330,207 541,951 645,819 1,100,623
Nontaxable 232,458 217,395 423,584 422,476
Other interest income 39,112 5,210 86,370 11,902
---------- ---------- ---------- ----------
Total interest income 3,307,005 3,563,076 6,621,755 6,990,007
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,735,511 1,799,789 3,430,847 3,619,292
Interest on other borrowings 49,418 9,361 57,381
---------- ---------- ---------- ----------
Total interest expense 1,735,511 1,849,207 3,440,208 3,676,673
NET INTEREST INCOME 1,571,494 1,713,869 3,181,547 3,313,334
Provision for loan losses 80,100 99,000 155,100 215,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,491,394 1,614,869 3,026,447 3,098,334
---------- ---------- ---------- ----------
OTHER INCOME
Service fees and overdraft charges 161,710 169,921 314,488 332,416
Security gains, net 17,169 (4,948) 20,902 11,080
Loan sale gains, net 146,231 14,052 160,324
Other income 43,600 42,861 92,598 163,433
---------- ---------- ---------- ----------
Total other income 368,710 221,886 588,312 506,929
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 767,945 703,342 1,387,133 1,330,151
Occupancy, furniture and
equipment 153,631 152,736 294,760 309,729
State taxes 70,379 69,561 141,253 140,539
Data processing 134,419 152,365 275,233 303,537
Other operating expense 400,579 356,299 746,909 728,062
---------- ---------- ---------- ----------
Total other expense 1,526,953 1,434,303 2,845,288 2,812,018
---------- ---------- ---------- ----------
Income before federal income taxes 333,151 402,452 769,471 793,245
Income tax expense 51,370 84,176 137,770 160,924
---------- ---------- ---------- ----------
Net income $ 281,781 $ 318,276 $ 631,701 $ 632,321
========== ========== ========== ==========
Basic earnings per common share $ .27 $ .31 $ .61 $ .61
========== ========== ========== ==========
Diluted earnings per common share $ .27 $ .31 $ .60 $ .61
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------
1998 1997
---- ----
Net Income 631,701 632,321
Other comprehensive income, net of tax;
Unrealized (loss) gain on securities
available for sale (106,146) 196,748
----------- -----------
Comprehensive income $ 525,555 $ 829,069
=========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------
1998 1997
---- ----
Balance at beginning of period $15,688,343 $14,313,245
Net income 631,701 632,321
Cash dividends declared (387,088) (364,510)
Stock options exercised 91,334
Change in unrealized loss on
securities available for sale (94,202) 196,748
----------- -----------
Balance at end of period $15,930,088 $14,777,804
=========== ===========
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
<PAGE> 6
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,702,631 $ 734,003
INVESTING ACTIVITIES
Securities available for sale
Purchases (27,669,490) (16,263,377)
Maturities and repayments 3,764,995 1,276,544
Sales 16,162,424 15,357,232
Purchase of securities held to maturity (245,078)
Net change in loans 4,306,188 (7,487,160)
Bank premises and equipment expenditures (101,234) (30,201)
------------ ------------
Net cash used by investing activities (3,782,195) (7,146,962)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits (252,987) 791,592
Net change in other borrowings (2,350,000) 4,748,000
Dividends paid (387,088) (364,510)
Stock options exercised 91,334
------------ ------------
Net cash from financing activities (2,898,741) 5,175,082
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (978,305) (1,237,877)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,111,986 6,299,450
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,133,681 $ 5,061,573
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 3,435,558 $ 3,628,124
Income taxes 385,000 80,000
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</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 June 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 1,043,803 and 1,041,456 weighted average shares
outstanding during the six months ended June 30, 1998 and 1997 and 1,044,867 and
1,041,456 weighted average shares outstanding during the quarter ended June 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 1,051,696 and 1,041,970 for the six months ended June 30, 1998 and
1997 and 1,052,809 and 1,042,220 for the quarter ended June 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 June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ 505,805 $ (3,305) $ 502,500
Obligations of federal agencies 1,004,428 (2,499) 1,001,929
Obligations of state and political
subdivisions 20,901,806 $ 96,109 (281,929) 20,715,986
Corporate bonds 509,104 (3,055) 506,049
Mortgage-backed securities 19,621,915 36,486 (117,180) 19,541,221
Equity investments 710,224 710,224
----------- -------- --------- -----------
Total securities
available for sale $43,253,282 $132,595 $(407,968) $42,977,909
=========== ======== ========= ===========
SECURITIES HELD TO MATURITY
Obligations of federal agencies $ 2,773,357 $212,013 $ 2,985,370
Obligations of state and political
subdivisions 245,093 $ (8) 245,085
----------- -------- --------- -----------
Total held to maturity $ 3,018,450 $212,013 $ (8) $ 3,230,455
=========== ======== ========= ===========
</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 June 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 $ 724,689 $ 732,352
Due in five to ten years 3,216,561 3,244,303
Due after ten years 18,979,893 18,749,809
Mortgage-backed securities 19,621,915 19,541,221
----------- -----------
Total debt securities available for sale $42,543,058 $42,267,685
=========== ===========
SECURITIES HELD TO MATURITY
Due in five to ten years $ 2,773,357 $ 2,985,370
Due after ten years 245,093 245,085
----------- -----------
Total debt securities held to maturity $ 3,018,450 $ 3,230,455
=========== ===========
</TABLE>
Sales of available-for-sale securities during the six months ended June 30, 1998
and 1997 were:
1998 1997
---- ----
Proceeds $16,145,255 $15,357,232
Gross gains 104,126 31,243
Gross losses 83,224 20,163
Securities with a carrying value of approximately $14,051,000 at June 30, 1998
and $15,888,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at June 30, 1998 and December 31, 1997 were as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Commercial and other loans $ 59,318,225 $ 60,677,339
Real estate loans 25,945,503 25,081,877
Consumer and credit card 28,246,410 34,149,658
Home equity loans 6,363,619 6,051,048
------------ ------------
Total loans $119,873,757 $125,959,922
============ ============
- --------------------------------------------------------------------------------
(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 $36,314,923 and $23,411,756 at June 30, 1998 and
December 31, 1997. Real estate loans originated and held for sale at June 30,
1998 and December 31, 1997 totaled $3,702,842 and $5,191,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1998 and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $1,075,385 $1,018,608
Loans charged off (326,446) (306,768)
Recoveries 34,495 58,439
Provision for loan losses 155,100 215,000
---------- ----------
Balance - June 31 $ 938,534 $ 985,279
========== ==========
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Balance of impaired loans $1,329,071 $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 $1,329,071 $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>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Average investment in impaired loans $1,350,529 $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 June 30, 1998 and
December 31, 1997.
June 30, December 31,
1998 1997
---- ----
Fixed rate $ 1,486,854 $ 411,000
Variable rate 8,813,835 16,063,000
----------- -----------
$10,300,689 $16,474,000
=========== ===========
At June 30, 1998 and December 31, 1997, reserves of $785,000 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 purpose of this discussion is to focus on information concerning the
consolidated financial condition of Commercial Bancshares, Inc. (the
Corporation) at June 30, 1998, compared to December 31, 1997, and the results of
operations for the three- and six-month periods ended June 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
assumptions 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 decreased by $2,626,118 or 1.4% from December 31, 1997 to June 30,
1998. The primary cause was a decrease in the loan portfolio as discussed below.
Gross loans decreased $6,086,165 or 4.8% during the first six months of 1998.
Decreases occurred in the installment portfolio of $5,903,248 or 17.3% during
the six-months ended June 30, 1998. The decrease in the installment portfolio
was due to the slowdown in funding the indirect auto loan portfolio and payoffs.
The Bank has sold the majority of its fixed rate real estate loans into the
secondary market while retaining servicing rights. Beginning in the third
quarter, the Bank will retain these loans as held-for-sale until market
conditions allow the Bank to sell the loans at a gain or December 31, 1998.
Additionally for the second half of 1998, commercial loan volume will be
increased approximately $11,000,000 by offering a below prime rate of interest
on new loan generation. This commercial product offering will cease on September
31, 1998. Installment loan volume will be increased 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. This immediate increase in loan volume will positively effect the
Bank's net interest margin immediately and will be further discussed in the
Bank's September 30, 1998 10-QSB filing.
Total deposits decreased $252,987 or 0.2% during the first six months of 1998
The funds from the decrease in the loan portfolio were utilized to payoff debt
and purchase municipal securities.
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13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1998 stood at $631,701
compared to $632,321 during the same period in 1997. Second quarter income in
1998 was $281,781 as compared to $318,276 during the same three-month period in
1997. Diluted earnings per share decreased by $0.01 and $0.04 per share for the
six-month and three-month periods ending June 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 second quarter of 1998 stood at $3,307,005 as compared
to $3,563,076 during the same period 1997, a decrease of $256,071. During the
same time period, interest expense decreased $113,696 from $1,849,207 in 1997 to
$1,735,511 in 1998. Interest income and interest expense for the six-months
ended June 30, 1998 decreased $368,252, or 5.3%, and $236,465 or 6.4%
respectively over the same period in 1997. The decrease in interest income and
expense is primarily the result of balances of average earning assets and
interest-bearing liabilities being approximately $5,892,000 and $5,542,000 lower
in 1998 compared to 1997. Management expects improvement of net interest margins
during the 2nd half of 1998 due to the improvement in loan volumes previously
discussed.
The provision for loan loss decreased $18,900 for the three-months ended June
30, 1998 compared to the same period in 1997 and has decreased $59,900 for the
first six months of 1998 compared to the same period in 1997. This corresponds
to the decrease in the loan portfolio. Management has determined that loan loss
provision is adequate at June 30, 1998 through its analysis of specific problem
loans, historical charge-off experience and local economic trends.
NONINTEREST INCOME
Total noninterest income for the three-months ended June 30, 1998 increased
$146,824 or 66.2% compared to the same period in 1997 and increased $81,383 or
16.1% for the first six months of 1998 compared to the same period in 1997. The
increase in noninterest income is related to increases of $132,179 and $160,324
in gains on loans sold for the three- and six-months ended June 30, 1998
compared to the same periods in 1997. Decreases in service fees and overdraft
charges partially offset the increase in noninterest income.
- --------------------------------------------------------------------------------
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Total noninterest expense increased $33,270 or 1.2% for the first six months of
1998 compared to the same period in 1997. For the second quarter of 1998,
noninterest expense increased $92,650 or 6.5% compared to the same period in
1997. The most significant increase occurred in areas of salaries and employee
benefits. A decrease in data processing was offset by an increase in other
operating expenses.
CAPITAL RESOURCES
Total shareholders' equity increased $241,745 or 1.5% during the first six
months of 1998. Year-to-date net income of $631,701 and the exercise of stock
options of $91,334 increased equity. This increase was offset by dividends
declared of $387,088 and the decrease in the market value of the
available-for-sale investment security portfolio resulting in a decrease to
equity of $94,202. Shareholders' equity to total assets was 8.9% at June 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
loans 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 June 30, 1998, the Bank's
leverage ratio was 8.9% and the risk-based capital ratio was more than 14.1%,
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 June 30, 1998 and December 31, 1997 stood at
$6,133,681 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 June 30, 1998 and
December 31, 1997, the ratio of loans to deposits and borrowed funds was 73.9%
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 is working with the
companies that supply or service its computer-operated or -dependent systems to
identify and remedy any year 2000 related problems. As of the date of this Form
10-QSB, the Corporation has not identified any specific expenses that are
reasonably likely to be incurred in connection with this issue and does not
expect to incur significant expense to implement corrective measures. No
assurance can be given, however, that significant expense will not be incurred
in future periods. 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.
During the second quarter, the bank significantly bolstered its management team.
In April, Ron Wilson was hired as Senior Vice President and is in charge of the
Bank's overall loan department and retail activity. Alicia Wagenblast joined the
Bank in May as Vice President and Chief Financial Officer. Susan Brown was hired
in July as Vice President and is responsible for Retail Branch Administration
and establishing a total sales and service culture for the Bank. Mr. Wilson and
Ms. Brown were previously with Bank One Corporation and each bring over 15 years
of banking experience to the Bank's team. Ms. Wagenblast is a Certified Public
Accountant and previously worked for the bank in auditing and operations. These
additions to management are intended to produce a stronger sales culture which
will produce loan and deposit volume increases during the second half of 1998
and well beyond.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 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:
On April 8, 1998, the Annual Meeting of the Shareholders of the
Corporation was held. The following item was submitted to a vote
of security holders and approved by the votes set forth below:
Election of Edwin G. Emerson, Deborah J. Grafmiller, Michael A.
Mastro and Douglas C. Smith to the Board of Directors of the
Corporation for terms expiring in 2002. Each of the nominees
received at least 695,991 votes, or 97.1% of the shares
represented at the Meeting.
Item 5 - Other Information:
Pursuant to Rule 14a-4 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), notice of any shareholder proposals
which are not sought to be included in the Company's proxy
statement, but which are intended to be presented at the
Company's 1999 Annual Meeting of Shareholders (non-Rule 14a-8
proposals), must be submitted in writing to Raymond E. Graves,
President at the Company's principal business offices located at
118 S. Sandusky Avenue, Upper Sandusky, Ohio 43351, by no later
than January 15, 1999. Failure to file a timely notice may permit
the Company's use of its discretionary proxy voting authority
with regard to the proposal.
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) Form 8-K was filed on April 16, 1998 disclosing the
results of the one matter voted upon at the Annual Meeting
of the Shareholders held on April 8, 1998.
- --------------------------------------------------------------------------------
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: /s/ Raymond E. Graves
------------------------ ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: /s/ Alicia A. Wagenblast
------------------------ ------------------------------------------
(Signature)
Alicia A. Wagenblast
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 Schedule
- --------------------------------------------------------------------------------
18.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,134
<INT-BEARING-DEPOSITS> 0
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<LOANS> 118,935
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<TOTAL-ASSETS> 178,741
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<SHORT-TERM> 680
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0
0
<COMMON> 7,907
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<NET-INCOME> 632
<EPS-PRIMARY> .61
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