<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:
SEPTEMBER 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 Oct. 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 September 30, 1999
- --------------------------------------------------------------------------------
Part I - Financial Information
Interim financial information required by Rule 10-01 of Regulation S-X 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 .......................... 14
<CAPTION>
Part II - Other Information
<S> <C>
Other Information ...................................................... 19
Signatures ............................................................. 20
</TABLE>
<PAGE> 3
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,235,788 $ 6,692,802
Securities available for sale, at fair value 33,251,909 38,256,547
Total loans 191,085,391 158,637,114
Allowance for loan losses (1,387,565) (1,182,848)
------------ ------------
Net loans 189,697,826 157,454,266
Premises and equipment, net 5,452,884 3,957,297
Other real estate 806,438 921,500
Accrued interest receivable 1,447,860 1,054,578
Other assets 2,066,986 2,066,742
------------ ------------
Total assets $238,959,691 $210,403,732
============ ============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 15,254,792 $ 16,800,775
Interest-bearing deposits 39,218,921 39,985,521
Savings and time deposits 110,017,457 94,178,037
Time deposits $100,000 and greater 42,032,864 22,133,462
------------ ------------
Total deposits 206,524,034 173,097,795
Accrued interest payable 484,096 422,085
Borrowed funds 14,802,938 19,220,000
Other liabilities 275,458 616,224
------------ ------------
Total liabilities 222,086,526 193,356,104
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized;
1,049,999 and 1,048,431 shares issued in 1999 and 1998 7,981,858 7,963,870
Retained earnings 9,695,179 8,940,775
Unrealized loss on securities available for sale (803,872) 142,983
------------ ------------
Total shareholders' equity 16,873,165 17,047,628
------------ ------------
Total liabilities and shareholders' equity $238,959,691 $210,403,732
============ ============
- --------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
3.
<PAGE> 4
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,982,025 $3,048,396 $11,419,261 $8,514,378
Interest on securities
Taxable 251,669 351,133 851,606 996,952
Nontaxable 172,164 263,695 504,515 687,279
Other interest income 22,887 5,985 44,031 92,355
---------- ---------- ----------- ----------
Total interest income 4,428,745 3,669,209 12,819,413 10,290,964
INTEREST EXPENSE
Interest on deposits 2,129,324 1,782,070 5,685,582 5,212,917
Other interest expense 176,398 82,407 566,914 91,768
---------- ---------- ----------- ----------
Total interest expense 2,305,722 1,864,477 6,252,496 5,304,685
---------- ---------- ----------- ----------
NET INTEREST INCOME 2,123,023 1,804,732 6,566,917 4,986,279
Provision for loan losses 110,000 172,912 382,857 328,012
---------- ---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,013,023 1,631,820 6,184,060 4,658,267
---------- ---------- ----------- ----------
OTHER INCOME
Service charges on deposit
accounts 284,554 200,435 787,848 514,923
Security gains/
(losses), net (2,241) 63,718 57,694 84,620
Loan sale gains, net 36,074 93,574 116,552 253,898
Other income 65,144 62,031 270,089 154,629
---------- ---------- ----------- ----------
Total other income 383,531 419,758 1,232,183 1,008,070
OTHER EXPENSE
Salaries and employee benefits 852,816 718,902 2,575,776 2,106,035
Occupancy, furniture and
equipment 181,706 152,930 623,368 447,690
State taxes 71,625 74,041 213,107 215,294
Data processing 125,786 139,598 388,789 414,831
Other operating expense 578,635 508,108 1,694,833 1,255,017
---------- ---------- ----------- ----------
Total other expense 1,810,568 1,593,579 5,495,873 4,438,867
Income before federal income taxes 585,986 457,999 1,920,370 1,227,370
Income tax expense 170,400 81,230 567,466 219,000
NET INCOME $ 415,586 $ 376,769 $ 1,352,904 $1,008,470
========== ========== =========== ==========
Basic earnings per common share $ .40 $ .36 $ 1.29 $ .97
========== ========== =========== ==========
Diluted earnings per common share $ .39 $ .36 $ 1.25 $ .96
========== ========== =========== ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
4.
<PAGE> 5
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,047,628 $15,688,343
Comprehensive Income:
Net income 1,352,904 1,008,470
Change in net unrealized gain/(loss) on securities
Available for sale, net of reclassification and tax effects (946,855) 736,713
-----------------------------
Total Comprehensive Income 406,049 1,745,183
Stock Options Exercised 17,988 134,826
Dividends paid (598,500) (387,087)
Balance at end of period $16,873,165 $17,181,804
=========== ===========
- -------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
5.
<PAGE> 6
<TABLE>
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 930,160 $ 890,498
INVESTING ACTIVITIES
Securities available for sale
Purchases (9,007,139) (38,795,862)
Maturities and repayments 4,523,738 4,997,681
Sales 8,016,911 25,289,615
Securities held to maturity
Purchases (245,078)
Sales 916,484
Net change in loans (31,455,699) (11,729,160)
Bank premises and equipment expenditures (1,956,214) (190,173)
Net change in other real estate (37,438) 0
------------ ------------
Net cash used by investing activities (29,915,841) (19,756,493)
------------ ------------
FINANCING ACTIVITIES
Net change in deposits 33,526,240 7,028,526
Net change in other borrowings (4,417,062) 9,620,000
Dividends paid (598,499) (387,087)
Stock options exercised 17,988 134,826
------------ ------------
Net cash from financing activities 28,528,667 16,396,265
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (457,014) 2,469,730
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,692,802 7,111,986
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,235,788 $ 4,642,256
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 6,190,485 $ 6,182,284
Income taxes 360,000 400,000
- -----------------------------------------------------------------------------------
</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. and its wholly owned
subsidiaries, the Commercial Savings Bank (the "Bank") and Advantage Finance,
Inc. (together the "Corporation"). All material intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Corporation at September 30, 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: 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.
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
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
1,049,872 and 1,044,918 weighted average shares outstanding during the nine
months ended September 30, 1999 and 1998 and 1,049,999 and 1,047,110 weighted
average shares outstanding during the quarter ended September 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
1,079,794 and 1,052,897 for the nine months ended September 30, 1999 and 1998
and 1,058,338 and 1,058,135 for the quarter ended September 30, 1999 and 1998.
Financial Statement Presentation: Some items in prior financial statements have
been reclassified to conform to the current presentation.
- --------------------------------------------------------------------------------
8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities as of September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government obligations $ $ $
Obligations of federal agencies 1,606,190 (92,128) 1,514,062
Obligations of state and political
subdivisions 15,691,611 $23,913 (709,664) 15,005,861
Corporate bonds 997,329 (44,895) 952,433
Mortgage-backed securities 14,933,128 (395,215) 14,537,913
----------- ------- ----------- -----------
Total Debt Securities 33,228,258 23,913 (1,241,902) 32,010,269
Equity investments 1,241,640 1,241,640
----------- ------- ----------- -----------
Total securities
available for sale $34,469,898 $23,913 $(1,241,902) $33,251,909
=========== ======= =========== ===========
<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>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and approximate fair values of debt securities available for
sale and held to maturity at September 30, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE
Due in one to five years $ 2,685,272 $ 2,572,870
Due in five to ten years 8,141,092 7,766,423
Due after ten years 7,468,766 7,133,063
Mortgage-backed securities 14,933,128 14,537,913
----------- -----------
Total debt securities available for sale $33,228,258 $32,010,269
=========== ===========
</TABLE>
Sales of available for sale securities during the nine months ended September
30, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $8,016,911 $25,289,615
Gross gains 61,894 150,251
Gross losses 4,200 65,631
</TABLE>
Securities with a carrying value of approximately $22,121,926 at September 30,
1999 and $9,731,000 at December 31, 1998 were pledged to secure deposits and for
other purposes.
- --------------------------------------------------------------------------------
10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at September 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Commercial and other loans $ 81,131,835 $ 79,168,621
Real estate loans 31,499,541 30,739,831
Consumer and credit card 71,494,199 42,012,388
Home equity loans 6,959,816 6,716,274
------------ ------------
Total loans $191,085,391 $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 $63,131,763 and $46,931,540 at September 30, 1999 and
December 31, 1998. Real estate loans originated and held for sale at September
30, 1999 and December 31, 1998 totaled $3,447,144 and $2,276,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the nine months ended
September 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 (269,189) (414,704)
Recoveries 91,049 44,065
Provision for loan losses 382,857 328,012
---------- ----------
Balance - September 30 $1,387,565 $1,032,758
========== ==========
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Balance of impaired loans $186,235 $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 $186,235 $1,068,036
======== ==========
Portion of allowance for loan losses allocated to
the impaired loan balance $ 37,247 $ 213,607
======== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
1998 September 30, 1999 December 31, 1998
- ---- ------------------ -----------------
<S> <C> <C>
Average investment in impaired loans $381,784 $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.
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.
- --------------------------------------------------------------------------------
12.
(Continued)
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
The following is a summary of commitments to extend credit at September 30, 1999
and December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 1,241,000 $ 2,518,000
Variable rate 22,248,000 29,107,000
----------- -----------
$23,489,000 $31,625,000
=========== ===========
</TABLE>
At September 30, 1999 and December 31, 1998, reserves of $848,000 and $901,000
were required as deposits with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
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13.
<PAGE> 14
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 September 30, 1999, compared to
December 31, 1998, and the consolidated results of operations for the three and
nine months ending September 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.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates", "plans", "expects", "believes" and
similar expressions as they relate to the Corporation or its management are
intended to identify such forward looking statements. The Corporation's actual
results, performance or achievements may materially differ from those expressed
or implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, unforeseen
business risks related to Year 2000 computer system issues, government policies
and regulations and rapidly changing technology affecting financial services.
FINANCIAL CONDITION
Total assets increased by $28,555,959 or 13.57% from December 31, 1998 to
September 30, 1999. The increase in the loan portfolio was the primary reason
for this increase and is discussed below.
Gross loans increased $32,448,277 or 20.45% during the first nine months of
1999. Increases occurred in commercial and installment portfolios, which
combined to increase $31,445,025 or 25.9% during the first nine months of 1999.
The Bank experienced significant rate competition in the commercial lending area
from larger, megabank institutions. The increase in the installment portfolio
was due to growth in the indirect loan business, specifically financing of horse
trailer and consumer farm equipment. The Bank has a partnering relationship with
a Denver-based organization, where the Bank purchases horse trailer loan
accounts on a national and
- --------------------------------------------------------------------------------
14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
local basis. Advantage Finance, Inc. ("Advantage") has performed a "partnering"
with Quality Farm and Fleet ("QFF") stores where 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.
The Corporation is reserving all QFF loans approved at a four- percent reserve
for bad debts. Advantage is currently involved in two periods per year where the
buyers of the consumer goods receive no interest or payments for the first six
months of the contract. We estimate that over 60% of these loans will go beyond
the six-month period. Further all of these accounts are purchased at a discount
of two percent.
Total deposits increased $33,426,239 or 19.31%, during the first nine months of
1999. This increase was primarily derived from a $19,899,402 increase in time
deposits of $100,000 and greater. These certificates of deposit were issued both
conventionally to local market deposit customers as well as by marketing over
the Internet. These deposits, with maturities of 9 months of greater, are used
to fund the growth of the Bank's consumer loan portfolio. Noninterest bearing
deposits decreased $1,545,983 for the period ended September 30, 1999.
The Bank will, from time to time, use advances from Federal Home Loan Bank to
fund loans. This is an additional source of funding. 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 nine-month period ending September 30, 1999 stood at
$1,352,904 compared to $1,008,470 during the same period in 1998. Third quarter
income in 1999 was $415,586 as compared to $376,769 during the same three-month
period in 1998. Diluted earnings per share increased by $.03 and $.29 per share
for the three- and nine- month periods ending September 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. 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 securities available for
sale.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest income for the three and nine months ending September 30, 1999 was
$4,428,745 and $12,819,413 as compared to $3,669,209 and $10,290,964 during the
same periods in 1998, an increase of $759,536 and $2,528,449. During the nine
month time period, interest expense increased $947,811 from $5,304,685 to
$6,252,496 in 1999. A factor for this increase in interest income is the
purchase of a six million-dollar portfolio of horse trailer loans from Mountain
Parks Bank in July 1998 and a continuing partnership with a Denver based
organization, in which the bank purchases horse trailer loan accounts on a
national and local basis. This relationship has increased interest income via
the increased number of loans that have been approved. This is considered a
niche for the Bank.
The provision for loan loss increased $54,845 for the nine-months ended
September 30, 1999 compared to the same period in 1998. Management has
determined that the loan loss provision is adequate at September 30, 1999
through its analysis of specific problem loans, historical charge-off
experience, along with local and national economic trends. However, management
expects to continue to increase the provision due to the expected growth of
indirect loan originations that have greater credit risk.
NONINTEREST INCOME
Total noninterest income for the three-months ended September 30, 1999 decreased
$36,227 or 8.63% compared to the same period in 1998 and increased $224,113 or
22.23% for the first nine months of 1999 compared to the same period in 1998.
The larger fluctuations were in the increase in service fees and overdrafts of
$272,925 and other income of $115,460. The other income increase was primarily
due to a $50,143 increase in sales of credit life, accident and health
insurance. In addition, net investor servicing income related to FASB 122
increased $48,133 or 79.3% for the nine months ended September 30, 1999 as
compared to the same period in 1998.
NONINTEREST EXPENSE
Total noninterest expense increased $1,057,006 or 23.81% for the first nine
months of 1999 compared to the same period in 1998. For the third quarter of
1999, noninterest expense increased $216,989 or 13.62% compared to the same
period in 1998. The most significant increases were $133,914 and $469,741 in
salaries and benefits and $70,527 and $439,816 in other operating expense for
the three and nine months ended September 30, 1999. In 1999, the Bank has opened
a third office in Marion, Ohio, and has renovated the Tiffin Avenue Office in
Findlay, Ohio and the Carey Banking Center in Carey, Ohio. A second banking
center site has been purchased in Findlay, Ohio. Advantage Finance has also
opened their second office in Marion, Ohio. Due to these changes and expected
growth of the Corporation, management expects noninterest expense to continue to
increase.
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
Total shareholders' equity decreased $174,463 or 1.02% during the first nine
months of 1999. Year-to-date net income of $1,352,904 increased equity, offset
by a $946,855 decrease in the market value of the available for sale securities
portfolio. Shareholders' equity to total assets was 7.06% at September 30, 1999
compared to 8.1% at December 31, 1998. It is also noteworthy that the
Corporation has determined that 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 get dividends in the hands of shareholders
more rapidly and to assist in the marketability of the stock.
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 loan and lease losses, subject to certain limitations. Qualified Tier 2
capital can equal up to 100% of an institution's Tier 1 capital with certain
limitations in meeting the total risk-based capital requirements. At September
30, 1999, the Bank's leverage ratio was 7.41% and the risk-based capital ratio
was in excess of 9.95%, both of which exceeded the minimum regulatory
requirements.
The Company's strategic plan calls for a Tier 1 capital leverage ratio of not
less than 7.0%. Also, if this ratio falls to 7.25%, a capital plan will be
developed and presented to the Board of Directors for their approval. In
anticipation of future growth of the Company, management is presently developing
a capital strategy which will address both the Tier 1 leverage ratio and the
bank's risk based capital ratios, in an attempt to keep the latter above the 10%
level at year end 1999 for the purpose of continuing to meet the
"well-capitalized" definition of the Federal Deposit Insurance Corporation.
LIQUIDITY
Liquidity management for the Bank centers on the assurance that funds are
available to meet the loan and deposit needs of its customers and the Bank's
other financial commitments.
Cash and cash equivalents at September 30, 1999 and December 31, 1998 stood at
$6,235,788 and $6,692,802. Refer to the Statement of Cash Flows contained within
this report.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
A standard measure of liquidity is the relationship of loans to deposits and
borrowed funds. Lower ratios indicate greater liquidity. At September 30, 1999
and December 31, 1998, the ratio of loans to deposits and borrowed funds was
86.34% 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
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 its operations. At this time, however, the expense that may be
incurred by the Corporation in connection with system failure 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 significantly dependent on one employer or industry, the
Corporation does not expect that any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow. At this
- --------------------------------------------------------------------------------
18.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
time, the expense that may be incurred by the Corporation in connection with
Year 2000 issues confronting its customers cannot be determined.
MANAGEMENT CHANGES
During the month of September 1999, two major changes occurred in the management
of the company.
Raymond E. Graves, who served as the President and Chief Executive Officer for
The Commercial Savings Bank for approximately four years, has taken the full
time position as President and Chief Executive Officer for the corporation,
Commercial Bancshares, Inc. Under his new charge, the President of The
Commercial Savings Bank reports directly to Graves, and Graves is charged with
the supervision of all affiliates, at this time being The Commercial Savings
Bank and Advantage Finance, Inc. Advantage is a subsidiary of the bank
financially but will report managerially as an affiliate of the holding company.
Graves is further charged with exploring other opportunities that may enhance
the shareholder's value and will concentrate much of his efforts on the value of
the stock of the corporation.
James A. Deer, who served as the Executive Vice President for The Commercial
Savings Bank for six years, and worked for the bank for a total of 15 years, has
moved forward to President and CEO of the bank. He is charged with the
responsibility for the day to day operations of the bank, the holding company's
major affiliate.
Both men have been offered employment contracts for a one year renewal period of
time, which are under advisement. It is believed by the board of directors that
these contracts, in part, prohibit these men, should they leave the employ of
the company, from working in the financial field in any county of which our
company has an office or any contiguous county. It is believed by the board of
directors that these contracts are in the best interest of the shareholders.
19.
<PAGE> 20
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended September 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:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re: computation of per share
earnings. (Reference is hereby made to the Notes to
Consolidated Statements on page 8, hereof.)
(b) Exhibit 27, Financial Data Schedule.
- --------------------------------------------------------------------------------
20.
<PAGE> 21
COMMERCIAL BANCSHARES, INC.
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMERCIAL BANCSHARES, INC.
---------------------------
(Registrant)
Date: November 12, 1999 /s/ Raymond E. Graves
-------------------------- -------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: November 12, 1999 /s/ Alicia A. Wagenblast
-------------------------- ----------------------------------
(Signature)
Alicia A. Wagenblast
Vice President and Chief Financial
Officer
- --------------------------------------------------------------------------------
21.
<PAGE> 22
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
- --------------------------------------------------------------------------------
22.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,235,788
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,251,909
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 191,085,391
<ALLOWANCE> 1,387,565
<TOTAL-ASSETS> 238,959,691
<DEPOSITS> 206,524,034
<SHORT-TERM> 3,302,938
<LIABILITIES-OTHER> 275,458
<LONG-TERM> 11,500,000
0
0
<COMMON> 7,981,858
<OTHER-SE> 8,891,307
<TOTAL-LIABILITIES-AND-EQUITY> 238,959,691
<INTEREST-LOAN> 11,419,261
<INTEREST-INVEST> 1,356,121
<INTEREST-OTHER> 44,031
<INTEREST-TOTAL> 12,819,413
<INTEREST-DEPOSIT> 5,685,582
<INTEREST-EXPENSE> 6,252,496
<INTEREST-INCOME-NET> 6,566,917
<LOAN-LOSSES> 382,857
<SECURITIES-GAINS> 57,694
<EXPENSE-OTHER> 1,694,833
<INCOME-PRETAX> 1,920,370
<INCOME-PRE-EXTRAORDINARY> 1,920,370
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,352,904
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 3.70
<LOANS-NON> 443
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,182,848
<CHARGE-OFFS> 269,189
<RECOVERIES> 91,049
<ALLOWANCE-CLOSE> 1,387,565
<ALLOWANCE-DOMESTIC> 1,152,165
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 235,000
</TABLE>
