<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
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 (IRS Employer
incorporation or organization) Identification No.)
118 South 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 Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X} No [ ]
As of April 30, 1999, the latest practicable date, 1,049,999 shares of the
issuer's common shares, $.01 par value, were issued and outstanding.
<PAGE> 2
COMMERCIAL BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Balance Sheets.............................................. 3.
Consolidated Statements of Income ....................................... 4.
Condensed Consolidated Statements of Changes in Shareholders' Equity..... 5.
Consolidated Statements of Cash Flows ................................... 6.
Notes to Consolidated Financial Statements .............................. 7.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 13.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 17.
Item 2. Changes in Securities and Use of Proceeds................................ 17.
Item 3. Defaults Upon Senior Securities.......................................... 17.
Item 4. Submission of Matters to a Vote of Security Holders...................... 17.
Item 5. Other Information........................................................ 17.
Item 6. Exhibits and Reports on Form 8-K......................................... 17.
SIGNATURES ............................................................................ 18.
</TABLE>
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2.
<PAGE> 3
<TABLE>
<CAPTION>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Item 1. Financial Statements
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,069,227 $ 6,692,802
Securities available for sale 36,487,428 38,256,547
Total loans 165,783,967 158,637,114
Allowance for loan losses (1,244,686) (1,182,848)
----------------- -----------------
Loans, net 164,539,281 157,454,266
Premises and equipment, net 4,160,939 3,957,927
Other real estate, net 885,000 921,500
Accrued interest receivable 1,160,845 1,054,578
Other assets 2,627,946 2,066,112
----------------- -----------------
Total assets $ 216,930,666 $ 210,403,732
================= =================
LIABILITIES
Deposits
Noninterest-bearing demand $ 15,289,391 $ 16,800,775
Interest-bearing demand 39,225,079 39,985,521
Savings and time deposits 98,645,292 94,178,037
Time deposits $100,000 and greater 27,256,264 22,133,462
----------------- -----------------
Total deposits 180,416,026 173,097,795
Accrued interest payable 445,598 422,085
Borrowed funds 18,070,115 19,220,000
Other liabilities 844,383 616,224
----------------- -----------------
Total liabilities 199,776,122 193,356,104
----------------- -----------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares authorized;
1,049,999 and 1,043,481 and shares issued in 1999 and 1998) 7,981,859 7,963,870
Retained earnings 9,254,832 8,940,775
Unrealized loss on securities available for sale (82,147) 142,983
----------------- -----------------
Total shareholders' equity 17,154,544 17,047,628
----------------- -----------------
Total liabilities and shareholders' equity $ 216,930,666 $ 210,403,732
================= =================
</TABLE>
See notes to the consolidated financial statements.
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3.
<PAGE> 4
<TABLE>
<CAPTION>
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,690,985 $ 2,760,754
Interest on securities
Taxable 287,280 362,870
Nontaxable 165,291 191,126
Other interest income 13,274
-------------- ---------------
Total interest income 4,156,830 3,314,750
-------------- ---------------
INTEREST EXPENSE
Interest on deposits 1,725,305 1,695,336
Interest on other borrowings 172,898 9,361
-------------- ---------------
Total interest expense 1,898,203 1,704,697
NET INTEREST INCOME 2,258,627 1,610,053
Provision for loan losses 151,900 75,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,106,727 1,535,053
-------------- ---------------
OTHER INCOME
Service fees and overdraft charges 235,711 152,778
Security gains, net 30,101 3,733
Loan sale gains, net 29,682 14,093
Other income 147,194 48,998
-------------- ---------------
Total other income 442,688 219,602
-------------- ---------------
OTHER EXPENSE
Salaries and employee benefits 847,785 619,188
Occupancy, furniture and
equipment 195,706 141,129
State taxes 71,890 70,874
Data processing 121,150 140,813
Other operating expense 585,051 346,332
-------------- ---------------
Total other expense 1,821,582 1,318,336
-------------- ---------------
Income before federal income taxes 727,833 436,319
Income tax expense 214,275 86,400
-------------- ---------------
Net income $ 513,558 $ 349,919
============== ===============
Basic earnings per common share $ .49 $ .34
============== ===============
Diluted earnings per common share $ .48 $ .33
============== ===============
</TABLE>
See notes to the consolidated financial statements.
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4.
<PAGE> 5
<TABLE>
<CAPTION>
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 17,047,628 $ 15,688,343
Comprehensive income:
Net income 513,558 349,919
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (225,130) (99,873)
--------------- ----------------
Total comprehensive income 288,428 250,046
Stock options exercised 17,988 39,143
Dividends paid (199,500)
--------------- ----------------
Balance at end of period $ 17,154,544 $ 15,977,532
=============== ================
</TABLE>
See notes to the consolidated financial statements.
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5.
<PAGE> 6
<TABLE>
<CAPTION>
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES $ (1,396,503) $ 2,637,079
INVESTING ACTIVITIES
Securities available for sale
Purchases (4,186,172) (16,336,413)
Maturities and repayments 1,587,431 1,956,905
Sales 4,023,616 9,543,345
Net change in loans (5,384,726) 7,278,229
Bank premises and equipment expenditures (354,057) (14,488)
-------------- ---------------
Net cash used by investing activities (4,313,908) 2,427,578
-------------- ---------------
FINANCING ACTIVITIES
Net change in deposits 7,418,232 (2,217,039)
Net change in other borrowings (1,149,885) (3,030,000)
Stock options exercised 17,989 39,143
Dividends paid (199,500)
-------------- ---------------
Net cash from financing activities 6,086,836 (5,207,896)
-------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 376,425 (143,239)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,692,802 7,111,986
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,069,227 $ 6,968,747
============== ===============
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest $ 1,696,792 $ 1,693,563
Income taxes 65,000 215,000
</TABLE>
See notes to the consolidated financial statements.
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6.
<PAGE> 7
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 March 31, 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. 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. 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 judgment, should be charged off.
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7.
<PAGE> 8
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is considered impaired when management believes full collection of
principal and interest is not probable. Often this is associated with a delay or
shortfall in payments. Smaller-balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one-to-four-family residences and consumer automobile, home equity and credit
card loans with balances less than $200,000. In addition, loans held for sale
are excluded from consideration of impairment.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses incurred are charged to operations as
incurred. Gains and losses on disposition, and changes in the valuation
allowance are reported in net gain or loss on other real estate.
LOAN SERVICING: The Corporation 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. Basic
earnings per share is based on net income divided by 1,049,614 and 1,042,728
weighted average shares outstanding during the periods ended March 31, 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
1,063,994 and 1,051,390 for the quarter ended March 31, 1999 in 1998.
FINANCIAL STATEMENT PRESENTATION: Some items in prior financial statements have
been reclassified to conform with the current presentation.
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8.
<PAGE> 9
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities as of March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Obligations of federal agencies $ 1,607,233 $ 18,392 $ 1,588,841
Obligations of state and political
subdivisions 14,309,287 $ 210,813 59,225 14,460,875
Corporate bonds 1,001,927 0 12,504 989,423
Mortgage-backed securities 18,679,151 459 245,616 18,433,994
--------------- ------------ ------------ ----------------
Total debt securities 35,597,598 211,272 335,737 35,473,133
Equity investments 1,014,295 0 0 1,014,295
--------------- ------------ ------------ ----------------
Total securities $ 36,611,893 $ 211,272 $ 335,737 $ 36,487,428
=============== ============ ============ ================
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 $ 38,039,906 $ 419,058 $ (202,417) $ 38,256,547
=============== ============ ============- ================
</TABLE>
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9.
<PAGE> 10
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and approximate fair values of debt securities available for
sale at March 31, 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 $ 2,384,058 $ 2,375,165
Due in five to ten years 8,144,587 8,159,378
Due after ten years 6,389,802 6,504,596
Mortgage-backed securities 18,679,151 18,433,994
---------------- -----------------
Total debt securities available for sale $ 35,597,598 $ 35,473,133
================ =================
</TABLE>
Sales of available-for-sale securities during the three months ended March 31,
1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $ 4,023,616 $ 9,543,345
Gross gains 31,740 61,351
Gross losses 1,639 57,618
</TABLE>
Securities with a carrying value of approximately $16,382,279 at March 31, 1999
and $9,731,000 at December 31, 1998 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Commercial and other loans $ 76,796,432 $ 79,168,621
Real estate loans 32,804,668 30,739,831
Consumer and credit card 49,466,116 42,012,388
Home equity loans 6,716,751 6,716,274
----------------- -----------------
Total loans $ 165,783,967 $ 158,637,114
================= =================
</TABLE>
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10.
<PAGE> 11
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank has
retained servicing totaled $49,940,124 and $46,931,540 at March 31, 1999 and
December 31, 1998. Real estate loans originated and held for sale at March 31,
1999 and December 31, 1998 totaled $4,128,615 and $2,276,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the three months
ended March 31, 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 (124,766) (160,181)
Recoveries 34,704 20,375
Provision for loan losses 151,900 75,000
-------------- ------------
Balance - March 31 $ 1,244,686 $ 1,010,579
============== ============
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Balance of impaired loans $ 421,851 $ 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 $ 421,851 $ 1,068,036
================= ================
Portion of allowance for loan losses allocated to
the impaired loan balance $ 84,370 $ 213,607
================= ================
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Average investment in impaired loans $ 744,944 $ 1,237,532
Interest income recognized on impaired loans -- --
</TABLE>
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11.
<PAGE> 12
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the normal course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material effect on
financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit and standby letters of credit which involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. Each customer's credit worthiness is evaluated on a case-by-case basis.
The same credit policies are used for commitments and conditional obligations as
are used for loans. The amount of collateral obtained, if deemed necessary upon
extension of credit, is based on management's credit evaluation. Collateral
varies but may include accounts receivable, inventory, property, equipment,
income-producing commercial properties, residential real estate and consumer
assets.
Commitments to extend credit are agreements to lend to a customer as long as no
condition established in the commitment is violated. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being used,
the total commitments do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party.
The following is a summary of commitments to extend credit at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 1,519,189 $ 2,518,000
Variable rate 27,107,614 29,107,000
--------------- ----------------
$ 28,626,803 $ 31,625,000
=============== ================
</TABLE>
At March 31, 1999 and December 31, 1998, reserves of $901,000 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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12.
<PAGE> 13
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
- --------------------------------------------------------------------------------
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 March 31, 1999, compared to
December 31, 1998, and the consolidated results of operations for the quarterly
period ending March 31, 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 $6,526,934 or 3.10% from December 31, 1998 to March
31, 1999. The increase in the loan portfolio was the primary reason for this
increase and is discussed below.
Gross loans increased $7,146,853 or 4.51% during the first three months of 1999.
Increases occurred in real estate and installment portfolios, which combined to
increase $9,518,565 or 13.08% during the first three 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 farm 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 Quality Farm and
Fleet ("QFF") stores whereas Advantage has the first right of financing of all
consumer large ticket items. Large ticket items are considered those items of
which have a retail cost exceeding three hundred dollars. Advantage is reserving
all QFF loans approved at a four- percent reserve for bad debts. AFC is
currently involved in two periods per year whereas 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 $7,318,231, or 4.2%, during the first three months of
1999. Noninterest bearing deposits decreased $1,511,384 for the period ended
March 31, 1999.
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13.
<PAGE> 14
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
- --------------------------------------------------------------------------------
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 three-month period ending March 31, 1999 was $513,558
compared to $349,919 during the same period in 1998. Diluted earnings per share
increased by $.15 per share for the three-month period ending March 31, 1999 as
compared to the same time period 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 changes in the
general market level of interest rates. Management attempts to manage the
repricing of assets and liabilities so as to achieve a stable level of net
interest income and reduce the effect of significant changes in the market level
of interest rates. This is accomplished through the pricing and promotion of
various loan and deposit products as well as the active management of the Bank's
portfolio of investment securities available for sale.
Interest income for the first quarter 1999 was $4,156,830 as compared to
$3,314,750 during the same period 1998, an increase of $842,080. During the same
time period, interest expense increased $193,506 from $1,704,697 in 1998 to
$1,898,203 in 1999. The main reason 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. This relationship has increased interest income via the
increased number of loans which have been approved. This portfolio is
anticipated to continue and enjoy growth, low delinquencies, low charge-offs and
market rates of return. This is considered a niche for the Bank to increase
earnings for the Corporation.
The provision for loan loss increased $76,900 in the first quarter 1999 compared
to 1998. This corresponds to the increase in the loan portfolio. Management has
determined that the loan loss provision is adequate at March 31, 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 which have greater credit risk.
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14.
<PAGE> 15
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Total first quarter noninterest income increased $223,086 or 101.59% compared to
the same period in 1998. The larger fluctuations were in the increase in service
fees and overdrafts of $82,933 and other income of $98,196. The other income
increase was primarily due to gains on the sale of securities of approximately
$26,000 and a $32,000 increase in sales of credit life, accident and health
insurance. For the three months ended March 31, 1998, the Bank lost $72,000 on
repossessions while during the same period in 1999, the Bank lost only $3,000.
NONINTEREST EXPENSE
Total noninterest expense increased $503,246 or 38.17% for the first three
months of 1999 compared to the same period in 1998. The most significant
increases were $228,597 in salaries and benefits and $238,719 in other operating
expense. In 1999, the Bank will open another office in Marion, Ohio, and is
renovating the Tiffin Avenue Office in Findlay, Ohio and the Carey Banking
Center in Carey, Ohio. Due to these changes and expected growth of the
Corporation, management expects noninterest expense to continue to increase.
CAPITAL RESOURCES
Total shareholders' equity increased $106,916 or 0.63% during the first quarter
of 1999. Year-to-date net income of $513,558 increased equity, offset by a
$225,131 decrease in the market value of the available-for-sale security
portfolio. Shareholders' equity to total assets was 7.9% at March 31, 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 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
including risk-based capital ratios and leverage ratios. Risk-based capital
regulations require all banks to have a minimum total risk-based capital ratio
of 8% with half of the capital composed of core capital. Minimum leverage ratio
requirements range from 3% to 5% of total assets. Core capital, or Tier 1
capital, includes common equity, perpetual preferred stock and minority
interests that are held by others in consolidated subsidiaries minus intangible
assets. Supplementary capital, or Tier 2 capital, includes core capital and such
items as mandatory convertible securities, subordinated debt and the allowance
for loans and lease losses, subject to certain limitations. Qualified Tier 2
capital can equal up to 100% of an institution's Tier 1 capital with certain
limitations in meeting the total risk-based capital requirements. At March 31,
1999, the Bank's leverage ratio was 8% and the risk-based capital ratio was in
excess of 11.5%, both of which exceeded the minimum regulatory requirements.
- -------------------------------------------------------------------------------
15.
<PAGE> 16
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
- --------------------------------------------------------------------------------
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 March 31, 1999 and December 31, 1998 stood at
$7,069,227 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 March 31, 1999 and
December 31, 1998, the ratio of loans to deposits and borrowed funds was 83.5%
and 82.5%, considered an acceptable level of liquidity by management.
- -------------------------------------------------------------------------------
16.
<PAGE> 17
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 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 and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders: There
are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re computation of per share
earnings. (Reference is hereby made to Note 1 to the
Consolidated Financial Statements, hereof.)
(b) Exhibit 27, Financial Data Schedules.
(c) Form 8-K was filed on February 9, 1999 disclosing the
change of the charter of Advantage Financial, Inc. to a
wholly owned finance company subsidiary of the Bank and
the approval for a new branch.
- -------------------------------------------------------------------------------
17.
<PAGE> 18
COMMERCIAL BANCSHARES, INC.
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMERCIAL BANCSHARES, INC.
--------------------------------------
(Registrant)
Date: 5/17/99 /s/Raymond E. Graves
------------------------- --------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: 5/17/99 /s/Alicia A. Wagenblast
------------------------- --------------------------------------
(Signature)
Alicia A. Wagenblast
Vice President and Chief Financial
Officer
- --------------------------------------------------------------------------------
18.
<PAGE> 19
COMMERCIAL BANCSHARES, INC.
Index to Exhibits
- --------------------------------------------------------------------------------
Exhibit 11, Statement re: computation of per share earnings. (Reference is
hereby made to Consolidated Statements of Income on page 4, hereof.)
Exhibit 27, Financial Data Schedules
- --------------------------------------------------------------------------------
19.
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,069
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,487
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 165,784
<ALLOWANCE> 1,245
<TOTAL-ASSETS> 216,931
<DEPOSITS> 180,416
<SHORT-TERM> 0
<LIABILITIES-OTHER> 844
<LONG-TERM> 18,070
0
0
<COMMON> 7,982
<OTHER-SE> 9,173
<TOTAL-LIABILITIES-AND-EQUITY> 216,931
<INTEREST-LOAN> 3,691
<INTEREST-INVEST> 453
<INTEREST-OTHER> 13
<INTEREST-TOTAL> 4,157
<INTEREST-DEPOSIT> 1,725
<INTEREST-EXPENSE> 1,898
<INTEREST-INCOME-NET> 2,259
<LOAN-LOSSES> 152
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 1,822
<INCOME-PRETAX> 728
<INCOME-PRE-EXTRAORDINARY> 514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 4.56
<LOANS-NON> 1,126
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,183
<CHARGE-OFFS> 125
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 1,245
<ALLOWANCE-DOMESTIC> 883
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 284
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