<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
JUNE 30, 1999
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, 1999:
1,049,999 common shares
Transitional Small Business Disclosure Format:
[ ] Yes [X] No
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
QUARTER ENDED June 30, 1999
- --------------------------------------------------------------------------------
Part I - Financial Information
Interim financial information required is included in this Form 10-Q 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....................................................... 18
Signatures.............................................................. 19
</TABLE>
<PAGE> 3
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,059,358 $ 6,692,802
Securities available for sale, at fair value 33,951,834 38,256,547
Total loans 182,055,602 158,637,114
Allowance for loan losses (1,311,633) (1,182,848)
------------ ------------
Net loans 180,743,969 157,454,266
Premises and equipment, net 4,299,957 3,957,927
Other real estate 823,000 921,500
Accrued interest receivable 1,318,104 1,054,578
Other assets 2,093,088 2,066,112
------------ ------------
Total assets $237,289,310 $210,403,732
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 14,456,710 $ 16,800,775
Interest-bearing deposits 40,114,125 39,985,521
Savings and time deposits 105,897,394 94,178,037
Time deposits $100,000 and greater 37,269,521 22,133,462
------------ ------------
Total deposits 197,737,750 173,097,795
Accrued interest payable and other liabilities 459,936 422,085
Borrowed funds 21,917,974 19,220,000
Other liabilities 462,318 616,224
------------ ------------
Total liabilities 220,577,978 193,356,104
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares
authorized; 1,049,999 and 1,046,181 shares
issued in 1999 and 1998 7,981,859 7,963,870
Retained earnings 9,479,091 8,940,775
Unrealized gain/(loss) on securities available
for sale (749,618) 142,983
------------ ------------
Total shareholders' equity 16,711,332 17,047,628
------------ ------------
Total liabilities and shareholders' equity $237,289,310 $210,403,732
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
3.
<PAGE> 4
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,746,252 $2,705,228 $7,437,236 $5,465,982
Interest on securities
Taxable 312,657 330,207 599,937 645,819
Nontaxable 167,060 232,458 332,351 423,584
Other interest income 7,870 39,112 21,145 86,370
---------- ---------- ---------- ----------
Total interest income 4,233,839 3,307,005 8,390,669 6,621,755
INTEREST EXPENSE
Interest on deposits 1,830,953 1,735,511 3,556,258 3,430,847
Interest on other borrowings 217,618 390,516 9,361
---------- ---------- ---------- ----------
Total interest expense 2,048,571 1,735,511 3,946,774 3,440,208
NET INTEREST INCOME 2,185,268 1,571,494 4,443,895 3,181,547
Provision for loan losses 120,957 80,100 272,857 155,100
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,064,311 1,491,394 4,171,038 3,026,447
---------- ---------- ---------- ----------
OTHER INCOME
Service fees and overdraft charges 267,583 161,710 503,294 314,488
Security gains, net 29,834 17,169 59,935 20,902
Loan sale gains, net 50,796 146,231 80,478 160,324
Other income 57,751 43,600 204,945 92,598
---------- ---------- ---------- ----------
Total other income 405,964 368,710 848,652 588,312
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 875,175 767,945 1,722,960 1,387,133
Occupancy, furniture and
equipment 245,956 153,631 441,661 294,760
State taxes 69,592 70,379 141,482 141,253
Data processing 141,853 134,419 263,003 275,233
Other operating expense 531,148 400,579 1,116,200 746,909
---------- ---------- ---------- ----------
Total other expense 1,863,724 1,526,953 3,685,306 2,845,288
---------- ---------- ---------- ----------
Income before federal income taxes 606,551 333,151 1,334,384 769,471
Income tax expense 182,791 51,370 397,066 137,770
---------- ---------- ---------- ----------
Net income $ 423,760 $ 281,781 $ 937,318 $ 631,701
========== ========== ========== ==========
Basic earnings per common share $ .40 $ .27 $ .89 $ .61
========== ========== ========== ==========
Diluted earnings per common share $ .40 $ .27 $ .88 $ .60
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
4.
<PAGE> 5
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,047,628 $15,688,343
Comprehensive Income:
Net income 937,318 631,701
Change in net unrealized gain / (loss) on securities
Available for sale, net of reclassification and tax effects (892,602) (94,202)
----------- -----------
Total comprehensive income 44,716 543,499
Stock options exercised 17,988 91,334
Dividends paid (399,000) (387,088)
----------- -----------
Balance at end of period $16,711,332 $15,930,088
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to the consolidated financial statements.
5.
<PAGE> 6
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,763,669 $ 5,702,631
INVESTING ACTIVITIES
Securities available for sale
Purchases (7,781,481) (27,669,490)
Maturities and repayments 3,412,284 3,764,995
Sales 7,505,976 16,162,424
Purchase of securities held to maturity 0 (245,078)
Net change in loans (24,904,647) 4,306,188
Bank premises and equipment expenditures (686,162) (101,234)
------------ ------------
Net cash used by investing activities (22,454,030) (3,782,195)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 24,739,955 (252,987)
Net change in other borrowings 2,697,974 (2,350,000)
Dividends paid (399,000) (387,088)
Stock options exercised 17,988 91,334
------------ ------------
Net cash from financing activities 27,056,917 (2,898,741)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,366,556 (978,305)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,692,802 7,111,986
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,059,358 $ 6,133,681
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 3,908,924 $ 3,435,558
Income taxes 360,000 385,000
</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
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Commercial Bancshares, Inc. (the "Corporation") and its
wholly owned subsidiary, The Commercial Savings Bank (the "Bank"). Also included
is the Bank's subsidiary Advantage Finance, Inc. ("Advantage"). 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, 1999, 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, 1998, contains consolidated financial statements and related notes,
which should be read in conjunction with the accompanying consolidated financial
statements.
Industry Segment Information: Commercial Bancshares, Inc. is a bank-holding
corporation whose banking subsidiary, The Commercial Savings Bank, is engaged in
the business of commercial and retail banking, with operations conducted through
its main office and branches located in Upper Sandusky, Ohio and neighboring
communities. Advantage Finance, Inc., a wholly-owned subsidiary of the Bank, is
a consumer finance company operating in Marion, Ohio. These market areas provide
the source of substantially all of the Corporation's deposit and loan
activities, although some indirect loans are made to borrowers outside the
Corporation's immediate market area and some deposits are obtained from
customers outside of the market area. Substantially all of the Corporation's
income is derived from commercial and retail lending and investments activities.
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 earnings per share is based on net income divided by
1,049,808 and 1,043,803 weighted average shares outstanding during the six
months ended June 30, 1999 and 1998 and 1,049,999 and 1,044,867 weighted average
shares outstanding during the quarter ended June 30, 1999 and 1998. 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 1,058,204 and
1,051,696 for the six months ended June 30, 1999 and 1998 and 1,062,418 and
1,052,809 for the quarter ended June 30, 1999 and 1998.
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, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Obligations of federal agencies $ 1,606,917 $ 76,886 $ 1,530,031
Obligations of state and political
subdivisions 14,485,701 $27,783 640,360 13,873,123
Corporate bonds 1,001,118 54,563 946,555
Mortgage-backed securities 16,772,143 391,758 16,380,385
----------- ------- ---------- -----------
Total debt securities 33,865,879 27,783 1,163,567 32,730,094
Equity investments 1,221,740 0 0 1,221,740
----------- ------- ---------- -----------
Total securities
available for sale $35,087,618 $27,783 $1,163,567 $33,951,834
=========== ======= ========== ===========
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Obligations of federal agencies 2,618,533 $ 10,552 $ 2,629,085
Obligations of state and political
subdivisions 13,163,346 380,141 $ (4,297) 13,539,190
Corporate bonds 1,956,732 3,281 (3,100) 1,956,913
Mortgage-backed securities 19,355,335 25,084 (195,020) 19,185,399
----------- -------- --------- -----------
Total debt securities $37,093,946 $419,058 $(202,417) $37,310,587
Equity investments 945,960 945,960
----------- -------- --------- -----------
Total securities
available for sale $38,039,906 $419,058 $(202,417) $38,256,547
=========== ======== ========= ===========
</TABLE>
The amortized cost and approximate fair values of debt securities available for
sale at June 30, 1999, 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.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE
Due in one to five years $ 2,381,843 $ 2,298,438
Due in five to ten years 7,905,291 7,545,349
Due after ten years 6,805,124 6,504,445
Mortgage-backed securities 18,578,862 18,187,104
----------- -----------
Total debt securities available for sale $35,671,121 $34,535,336
=========== ===========
</TABLE>
Sales of available-for-sale securities during the six months ended June 30, 1999
and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $ 7,505,976 $16,145,255
Gross gains 61,894 104,126
Gross losses 1,959 83,224
</TABLE>
Securities with a carrying value of approximately $17,581,036 at June 30, 1999
and $9,731,000 at December 31, 1998 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Commercial and other loans $ 80,141,578 $ 79,168,621
Real estate loans 30,828,885 30,739,831
Consumer and credit card 64,226,684 42,012,388
Home equity loans 6,858,455 6,716,274
------------ ------------
Total loans $182,055,602 $158,637,114
============ ============
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank has
retained servicing totaled $58,595,314 and $46,931,540 at June 30, 1999 and
December 31, 1998. Real estate loans originated and held for sale at June 30,
1999 and December 31, 1998 totaled $934,139 and $2,276,000.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance - January 1 $1,182,848 $1,075,385
Loans charged off (210,605) (326,446)
Recoveries 66,533 34,495
Provision for loan losses 272,857 155,100
---------- ----------
Balance - June 31 $1,311,633 $ 938,534
========== =========
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Balance of impaired loans $37,247 $1,068,036
Less portion for which no allowance for loan
losses is allocated 0 0
------- ----------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $37,247 $1,068,036
======= ==========
Portion of allowance for loan losses allocated to
the impaired loan balance $37,247 $ 213,607
======= ==========
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Average investment in impaired loans $509,046 $1,237,532
Interest income recognized on impaired loans -- --
Interest income recognized on impaired
loans on cash basis -- --
</TABLE>
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the normal course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material effect on
financial condition or results of operations.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
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, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 1,765,446 $ 2,518,000
Variable rate 22,208,935 29,107,000
----------- -----------
$23,974,381 $31,625,000
=========== ===========
</TABLE>
At June 30, 1999 and December 31, 1998, reserves of $821,000 and $901,000 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
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of
Commercial Bancshares, Inc. (the Corporation) at June 30, 1999, compared to
December 31, 1998, and the consolidated results of operations for the three and
six months ending June 30, 1999 compared to the same period in 1998. The purpose
of this discussion is to provide the reader with a more thorough understanding
of the consolidated financial statements and related footnotes.
The registrant is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations except as discussed herein. Also, the Registrant
is not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
FINANCIAL CONDITION
Total assets increased by $26,885,578 or 12.78% from December 31, 1998 to June
30, 1999. The increase in the loan portfolio was the primary reason for this
increase and is discussed below.
Gross loans increased $23,419,488 or 14.76% during the first six months of 1999.
Increases primarily occurred in the installment portfolios, which increased
$22,303,350 or 52.88% during the first six months of 1999. 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 increase in the installment
portfolio was due to growth in the indirect loan business, specifically
financing of horse trailer and consumer lawn and garden equipment. The Bank has
a partnering relationship with a Denver-based organization, whereas the Bank
purchases horse trailer loan accounts on a national and local basis. Advantage
Finance, Inc. ("Advantage") has performed a "partnering" with a consumer farm
company whereas Advantage has the first right of financing of all consumer large
ticket items. Large ticket items are considered those items which have a retail
cost exceeding three hundred dollars. Advantage is currently involved in two
periods per year whereas the customers are offered six months same as cash. We
estimate that over 60% of these loans will go beyond the six-month period and
thereby earn interest retroactive back to the date of the original contract
date. Further all of these accounts are purchased at a discount of two percent.
When Advantage Finance Company was formed it was owned by the holding company,
Commercial Bancshares, Inc., and has since been changed to its owner being The
Commercial Savings Bank. As the Bank moves forward it has and will purchase all
Advantage Finance Company loans and will thereby require the Bank to make the
appropriate reserves for these loans. It is anticipated that this loan volume
will exceed eight million dollars annually based on current projections.
Total deposits increased $24,639,955, or 14.23%, during the first six months of
1999. Deposits grew based upon two important factors, IE: 1. The Bank offered
deposit rates via the INTERNET for certificates of deposits with a minimum
balance of fifty ($50,000.00) thousand dollars or more, and 2.
- --------------------------------------------------------------------------------
13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
By use of internal sales, marketing and advertising. Basically the monies
received between the INTERNET and internal was a 50/50 split. Both methods were
employed presenting positive results. Noninterest bearing deposits decreased
$2,344,065 for the period ended June 30, 1999.
The Bank will, from time to time, use advances from Federal Home Loan Bank to
fund loans. This is another source of funds at what may be a lower cost for the
Bank and thereby decrease the Bank's funding cost. These funds can be employed
for a specific time period and thus reduce the Bank's dependency on consumer and
business deposits.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1999 stood at $937,318
compared to $631,701 during the same period in 1998. Second quarter income in
1999 was $423,760 as compared to $281,781 during the same three-month period in
1998. Diluted earnings per share increased by $.21 and $.28 per share for the
three- and six- month periods ending June 30, 1999 as compared to the same
periods in 1998. Discussed below are the major factors, which have influenced
these, operating results.
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of deposits
and other borrowings obtained to fund them. Net interest income is affected by
the volume and composition of earning assets and interest-bearing liabilities as
well as the level of noninterest-bearing demand deposits and shareholders'
equity. Also impacting net interest income is the susceptibility of
interest-earning assets and interest-bearing liabilities to change with 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 three and six months ending June 30, 1999 was $4,233,839
and $8,390,669 as compared to $3,307,005 and $6,621,755 during the same periods
in 1998, an increase of $849,825 and $1,768,914. During the same time period,
interest expense increased $506,566 from $3,440,208 in the first half of 1998 to
$3,946,774 in 1999. The primary factor influenciency the growth in interest
income is the purchase of loan contracts on the purchases of horse trailers
previously discussed. While the Bank has increased originations of finance
contracts on consumer lawn and garden equipment it should be noted that most of
these contracts are still within their six month same as cash period and have
not as of this date contributed to earnings. The increase in interest expense is
commensurate with the increase in deposits and other borrowings necessary to
fund loan growth.
The provision for loan loss increased $92,798 for the three-months ended June
30, 1999 compared to the same period in 1998 and has increased $117,757 for the
first six months of 1999 compared to the same period in 1998. This corresponds
to the increase in the loan portfolio. Management has determined that the loan
loss provision is adequate at June 30, 1999 through its analysis of specific
problem loans, historical charge-off experience along with local and national
economic trends. However, management
- --------------------------------------------------------------------------------
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
expects to continue to increase the provision due to the expected growth of
indirect loan originations which have greater credit risk.
NONINTEREST INCOME
Total noninterest income for the three-months ended June 30, 1999 increased
$37,254 or 9.18% compared to the same period in 1998 and increased $260,340 or
44.25% for the first six months of 1999 compared to the same period in 1998. The
larger fluctuations were the increase in service fees and overdrafts of $188,806
and other income of $112,347. The other income increase was primarily due to
$107,513 increase in sales of credit life, accident and health insurance.
NONINTEREST EXPENSE
Total noninterest expense increased $840,018 or 29.52% for the first six months
of 1999 compared to the same period in 1998. For the second quarter of 1999,
noninterest expense increased $336,771 or 18.07% compared to the same period in
1998. The most significant increases were $79,840 and $335,827 in salaries and
benefits (described more fully below) and $184,472 and $369,291 in other
operating expense for the three and six months ended June 30, 1999. In 1999, the
Bank will open another office in Marion, Ohio, has completed the renovation of
the Tiffin Avenue Office in Findlay, Ohio and also completed the remodeling of
the Carey Banking Center in Carey, Ohio. The Bank has also purchased what was
the American Electric Power Company building on Lincoln Avenue, Findlay, Ohio.
We fully anticipate that this building will be used to operate CSB's second full
service office in Findlay, Ohio and will be operational towards the end of the
second quarter of 2000. Due to these changes and expected growth of the
Corporation, management expects noninterest expense to continue to increase.
Salaries and benefits increased due to the following items. The Bank employed
three (3) additional key executive officers to help direct this Bank into the
future. Two hail from one of the major megabanks, one spearheading lending and
the other the banking center network, and the remaining individual is the Bank's
Chief Financial Officer. The other increases related to this area is the
employment of a new banking center manager for the soon to open additional
office on Bellefontaine Avenue Banking Center, Marion, Ohio, the manager and
employees of Advantage Finance Company, and the normal increases associated with
the growth the Bank has enjoyed over the last twelve months.
CAPITAL RESOURCES
Total shareholders' equity decreased $336,294 or 1.97% during the first six
months of 1999. Year-to-date net income of $937,318 increased equity, offset by
a $892,601 decrease in the market value of the available-for-sale security
portfolio and dividends declared for shareholders of $399,000. Shareholders'
equity to total assets was 7.04% at June 30, 1999 compared to 8.1% at December
31, 1998. It is also note worthy that the Corporation has determined it is in
the best interest of the shareholders to pay the stock or cash dividend
quarterly, rather than the previous method of semi-annually. This is being done
to
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
get the dividend in the hand of the shareholders more rapidly and to assist in
the marketability of the stock.
Banking regulations have established minimum capital requirements for banks and
bank holding companies 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 June 30, 1999, the Bank's leverage ratio
(with no material difference between the Bank and Commercial Bancshares, Inc.,
the parent company) was 7.6 % and the risk-based capital ratio was in excess of
10.5 %, 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, 1999 and December 31, 1998 stood at
$14,059,358 and $6,692,802. 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, 1999 and
December 31, 1998, the ratio of loans to deposits and borrowed funds was 80 %
and 82.5%, considered an acceptable level of liquidity by management.
YEAR 2000
The Corporation uses a third-party data processing center, which also provides
data processing services to other financial institutions. The Corporation's
lending and deposit activities are almost entirely dependent on computer systems
which process and record transactions, although the Corporation can effectively
operate with manual systems for brief periods when its electronic systems
malfunction or cannot be accessed. In addition to its basic operating
activities, the Corporation's facilities and infrastructure, such as security
systems and communications equipment, are dependent, to varying degrees, on
computer systems.
The Corporation is aware of the potential Year 2000 related problems that may
affect the computers that control or operate the Corporation's operating
systems, facilities and infrastructure. In 1997, the Corporation began a process
of identifying any Year 2000 related problems that may be experienced by its
computer-operated or computer-dependent systems. Each application has been
identified as "Mission Critical" or "Nonmission Critical". The Corporation has
contacted the companies that supply or service the Corporation's
computer-operated or computer-dependent systems to obtain confirmation that each
- --------------------------------------------------------------------------------
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
that is material to the operations of the Corporation is either currently Year
2000 compliant or is expected to be Year 2000 compliant. With respect to systems
that cannot presently be confirmed as Year 2000 compliant, the Corporation will
continue to work with the appropriate supplier or servicer to ensure all such
systems will be rendered compliant in a timely manner, with minimal expense to
the Corporation or disruption of the Corporation's operations. All of the
identified computer systems affected by the Year 2000 issue are currently in the
renovation or implementation phase of the process of becoming Year 2000
compliant. As a contingency plan, however, the Corporation has determined that
if the Corporation's systems fail the Corporation would implement manual systems
until such systems could be re-established. The Corporation does not anticipate
that such short-term manual systems would have a material adverse affect on the
Corporation's operations. At this time, however, the expense that may be
incurred by the Corporation in connection with system failure related to the
Year 2000 issue cannot be determined.
In addition to the possible issues related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significant dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow. At this time, the expense
that may be incurred by the Corporation in connection with Year 200 issues
confronting its customers cannot be determined.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended June 30, 1999
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:
The Annual Meeting of Shareholders (the "Meeting") of Commercial
Bancshares, Inc. (the "Company") was held April 14, 1999 at 4:30 p.m.
at the principal business offices of the Company located at 118 S.
Sandusky Avenue, Upper Sandusky, Ohio 43351. There were 524,497 shares
of the 1,049,431 shares currently outstanding, or 50.0%, represented
in person or by proxy at the Meeting. The only matter for voting was
the election of Class II Directors for the Company, with a three year
term expiring at the Company's 2002 Annual Meeting. Each of the four
nominees, namely Daniel E. Berg, Loren H. Dillon, Mark Dillon, and
William E. Ruse received at least 523,003 votes, or 99.7% of the
shares represented at the Meeting, and were elected as Class II
Directors of the Company.
Under the requirements of the Securities Exchange Act of 1934 the
Registrant duly signed the report. A copy of which is on file at the
principal place of business, and is dated May 7, 1999.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits:
(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.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
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: 8/13/99 /s/ Raymond E. Graves
---------------------- ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: 8/13/99 /s/ Alicia A. Wagenblast
---------------------- ------------------------------------------
(Signature)
Alicia A. Wagenblast
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
19.
<PAGE> 20
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
- --------------------------------------------------------------------------------
20.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,739,358
<INT-BEARING-DEPOSITS> 14,456,710
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 182,055,602
<ALLOWANCE> 1,311,633
<TOTAL-ASSETS> 237,289,310
<DEPOSITS> 197,737,750
<SHORT-TERM> 10,417,974
<LIABILITIES-OTHER> 462,318
<LONG-TERM> 11,500,000
0
0
<COMMON> 7,981,859
<OTHER-SE> 8,729,475
<TOTAL-LIABILITIES-AND-EQUITY> 16,711,332
<INTEREST-LOAN> 7,437,236
<INTEREST-INVEST> 16,400
<INTEREST-OTHER> 4,745
<INTEREST-TOTAL> 8,390,669
<INTEREST-DEPOSIT> 3,556,258
<INTEREST-EXPENSE> 3,946,774
<INTEREST-INCOME-NET> 4,443,895
<LOAN-LOSSES> 272,857
<SECURITIES-GAINS> 59,935
<EXPENSE-OTHER> 3,685,306
<INCOME-PRETAX> 1,334,384
<INCOME-PRE-EXTRAORDINARY> 1,334,384
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 937,318
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 4.14
<LOANS-NON> 424,231
<LOANS-PAST> 40,634
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,182,848
<CHARGE-OFFS> 210,605
<RECOVERIES> 66,533
<ALLOWANCE-CLOSE> 1,311,633
<ALLOWANCE-DOMESTIC> 1,105,313
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 206,320
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