UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended September 30, 2000
[X] 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
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COMMERCIAL BANCSHARES, INC.
---------------------------------------------------
(Exact name of registrant 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
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(Address of principal executive offices)
(419) 294-5781
-------------------------------
(Registrant's telephone number)
Check whether the registrant (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 October 31, 2000, the latest practicable date, 1,050,778 shares of the
issuer's common shares, no par value, were issued and outstanding.
COMMERCIAL BANCSHARES, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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 of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except share data)
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,842 $ 7,124
Securities available for sale 32,443 32,414
Total loans 205,626 204,773
Allowance for loan loss (1,587) (1,499)
------------------------
Loans, net 204,039 203,274
Premises and equipment, net 6,090 5,531
Accrued interest receivable 1,650 1,276
Other assets 2,440 2,333
------------------------
Total assets $252,504 $251,952
========================
LIABILITIES
Deposits
Noninterest-bearing demand $ 16,538 $ 18,203
Interest-bearing demand 43,235 39,576
Savings and time deposits 125,064 115,918
Time deposits $100,000 and greater 32,041 40,659
------------------------
Total deposits 216,878 214,356
FHLB advances 16,000 18,640
Other borrowed funds 533 713
Accrued interest payable 565 514
Other liabilities 393 516
------------------------
Total liabilities 234,369 234,739
------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares
authorized, 1,050,778 and 1,049,999 shares
issued in 2000 and 1999 8,076 8,056
Retained earnings 11,007 10,228
Treasury stock, 2,389 shares in 2000 and 1999 (74) (74)
Accumulated other comprehensive income (874) (997)
------------------------
Total shareholders' equity 18,135 17,213
------------------------
Total liabilities and shareholders' equity $252,504 $251,952
========================
</TABLE>
See notes to consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $4,577 $3,982 $13,610 $11,214
Interest on securities:
Taxable 249 252 769 852
Nontaxable 191 172 554 504
Other interest income 18 23 35 44
----------------------------------------
Total interest income 5,035 4,429 14,968 12,614
----------------------------------------
Interest expense
Interest on deposits 2,552 2,129 7,124 5,685
Interest on borrowings 206 177 717 567
----------------------------------------
Total interest expense 2,758 2,306 7,841 6,252
----------------------------------------
Net interest income 2,277 2,123 7,127 6,362
Provision for loan losses 160 110 409 383
----------------------------------------
Net interest income after
provision for loan losses 2,117 2,013 6,718 5,979
----------------------------------------
Other income
Service fees and overdraft charges 279 285 790 788
Gain/(loss) on sale of securities, net -- (2) -- 58
Gain on sale of loans, net 99 36 156 116
Other income 109 65 301 270
----------------------------------------
Total other income 487 384 1,247 1,232
----------------------------------------
Other expense
Salaries and employee benefits 1,084 853 3,070 2,576
Occupancy, furniture and equipment 250 182 647 623
State taxes 80 71 235 213
Data processing 143 126 409 389
FDIC deposit insurance 17 13 59 29
Professional fees 53 27 153 98
Other operating expense 563 539 1,506 1,568
----------------------------------------
Total other expense 2,190 1,811 6,079 5,496
----------------------------------------
Income before federal income taxes 414 586 1,886 1,715
Income tax expense 101 170 498 498
----------------------------------------
Net income $ 313 $ 416 $ 1,388 $ 1,217
========================================
Basic earnings per common share $ .30 $ .40 $ 1.33 $ 1.16
========================================
Diluted earnings per common share $ .30 $ .39 $ 1.32 $ 1.13
========================================
</TABLE>
See notes to consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Three Months Ended
September 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $17,731 $16,576
Comprehensive income:
Net income 313 416
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
and tax effects 281 (55)
------------------
Total comprehensive income 594 361
Issuance of common stock 20 --
Dividends declared ($.20 and $.19 per share in 2000 and 1999) (210) (200)
------------------
Balance at end of period $18,135 $16,737
==================
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $17,213 $17,048
Comprehensive income:
Net income 1,388 1,217
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
and tax effects 123 (947)
------------------
Total comprehensive income 1,511 270
Issuance of common stock 20 18
Dividends declared ($.58 and $.57 per share in 2000 and 1999) (609) (599)
------------------
Balance at end of period $18,135 $16,737
==================
</TABLE>
See notes to consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands)
Nine Months Ended
September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income $ 1,388 $ 1,217
Adjustments 3,113 (492)
-------------------
Cash from operating activities 4,501 725
Investing activities
Securities available for sale
Purchases (2,231) (9,007)
Maturities and repayments 2,355 4,524
Sales -- 8,017
Net change in loans (4,066) (31,456)
Bank premises and equipment expenditures (954) (1,956)
Net change in other real estate -- (38)
-------------------
Cash from investing activities (4,896) (29,916)
-------------------
Financing activities
Net change in deposits 2,522 33,732
Net change in other borrowings (2,820) (4,417)
Issuance of common stock 20 18
Dividends paid (609) (599)
-------------------
Cash from financing activities (887) 28,734
-------------------
Net change in cash and cash equivalents (1,282) (457)
Cash and cash equivalents at beginning of period 7,124 6,693
-------------------
Cash and cash equivalents at end of period $ 5,842 $ 6,236
===================
Supplemental disclosures
Cash paid during the period for:
Interest $ 7,790 $ 6,190
Income taxes 545 360
</TABLE>
See notes to consolidated financial statements.
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 September 30, 2000, and results of operations
and 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, 1999, contains consolidated
financial statements and related notes, which should be read in conjunction
with the accompanying consolidated financial statements.
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.
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. The
provision is based upon the expected effective tax rate for the full year.
Earnings per Share: Basic earnings per share is based on net income divided
by 1,048,008 and 1,049,999 weighted average shares outstanding during the
quarter ended September 30, 2000 and 1999 and 1,047,744 and 1,049,872
weighted average shares outstanding during the nine months ended September
30, 2000 and 1999. 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 1,048,655 and 1,058,338 for the quarter
ended September 30, 2000 and 1999 and 1,048,722 and 1,079,794 for the nine
months ended September 30, 2000 and 1999.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be
recorded by offsetting gains and losses on the hedge and on the hedged item,
even if the fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect but the effect will depend on
derivative holdings when this standard applies.
Financial Statement Presentation: Some items in prior financial statements
have been reclassified to conform with the current presentation.
Business Segments: While the Corporation's chief decision makers monitor the
revenue streams of various products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all
of the Corporation's operations are considered by management to be
aggregated in one reportable segment.
NOTE 2 - LOANS
<TABLE>
<CAPTION>
Loans were as follows: September 30, 2000 December 31, 1999
------------------ -----------------
($ in thousands)
<S> <C> <C>
Commercial and other loans $ 89,809 $ 82,888
Real estate loans 34,633 33,439
Consumer and credit card loans 69,072 75,318
Home equity loans 7,542 7,253
Consumer finance loans 4,570 5,875
------------------------------
Total loans $205,626 $204,773
==============================
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home
Loan Mortgage Corporation (FHLMC). At September 30, 2000 and December 31,
1999, loans sold to FHLMC for which the Bank has retained servicing totaled
$82.0 million and $68.4 million. There were no real estate loans originated
and held for sale at September 30, 2000 and $2.6 million were held for sale
at December 31, 1999.
Activity in the allowance for loan loss for the nine months ended September
30 was as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
($ in thousands)
<S> <C> <C>
Beginning balance $1,499 $1,183
Provision for loan loss 409 383
Loans charged off (411) (269)
Recoveries of previous charge-offs 90 91
----------------
Ending balance $1,587 $1,388
================
</TABLE>
<TABLE>
<CAPTION>
Impaired loans were as follows: September 30, 2000 December 31, 1999
------------------ ----------------
($ in thousands)
<S> <C> <C>
Period-end loans with no allocated allowance for loan losses $ 137 $ --
Period-end loans with allocated allowance for loan losses 299 186
--------------------------
Total loans $ 436 $186
==========================
Amount of the allowance for loan losses allocated $ 162 $ 37
Nonperforming loans were as follows:
Loans past due over 90 days still on accrual $ 97 $212
Nonaccrual loans 1,910 530
</TABLE>
The impaired and nonperforming loans have been considered in management's
evaluation of the adequacy of the allowance for loan loss. Nonperforming
loans includes substantially all impaired loans and smaller balance
homogeneous loans, such as residential mortgage and consumer loans, that are
collectively evaluated for impairment.
The increase in nonperforming loans is largely due to one commercial loan,
with a September 30, 2000 balance of $954,000, to finance numerous rental
properties. The loan was placed on nonaccrual status during the second
quarter of 2000. All subject properties are collateralized by a first
mortgage and were most recently appraised at an aggregate value of $1.4
million. The Bank has received judgement against all borrowers on the note
and has placed the properties in court ordered receivership. Payments are
currently being made through the receivership. The Bank may consider
foreclosure action and recovery against individual borrowers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. at September 30, 2000, compared to December 31,
1999, and the consolidated results of operations for the quarterly and nine
month periods ended September 30, 2000 compared to the same periods in 1999.
The purpose of this discussion is to provide the reader with a more thorough
understanding of the consolidated financial statements and related
footnotes.
The Corporation 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 Corporation 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, government policies and
regulations and rapidly changing technology affecting financial services.
FINANCIAL CONDITION
Total assets increased by $552,000 from December 31, 1999 to September 30,
2000. The increase in total assets was primarily a result of growth in total
loans, which increased $853,000 during the first nine months of 2000.
The Bank's traditional, local market area direct loans increased $6.9
million during the nine months ended September 30, 2000 as management sought
to enhance the risk profile of its loan portfolio by reducing its dependence
on niche market indirect lending. Commercial loans grew by $6.9 million
during the first nine months of 2000 with management's continued emphasis on
core lending growth by meeting the needs of the commercial and agricultural
businesses that operate in the communities we serve. Real estate and home
equity loans grew $1.5 million during the first nine months of 2000 compared
to growth of $1.0 million during the same period a year ago. Consumer and
credit card loans, excluding the indirect business discussed below,
decreased $1.5 million during the first nine months of 2000 in concert with
management's efforts to improve the risk profile of the loan portfolio.
The Bank's largest indirect loan business is based upon a relationship with
a Denver-based organization, where the Bank purchases horse trailer loan
accounts on a national basis. New loan originations from this source were
halted during the first half of 2000 due to the rapid growth in volume
throughout 1999, which placed pressure on the Bank's capital ratios.
Management endeavors to maintain these capital ratios above "well
capitalized" levels as defined by the regulators. Repayments of loans in
this niche portfolio during the first nine months of the year have caused a
decline to $47.1 million at September 30, 2000 from $51.8 million at
December 31, 1999. New loan originations from this source were a modest $1.6
million during the third quarter of 2000.
Consumer finance loans generated by Advantage decreased to $4.6 million as
of September 30, 2000 from $5.9 million at December 31, 1999. These loans
are originated through a relationship with a chain of garden and farm supply
stores and are predominantly to borrowers outside of the Bank's traditional
market area. A majority of the Advantage loans are originated on a six-month
same as cash basis such that if the customers repay the loan within the
first six months, no interest will be collected by Advantage. For the loans
that repay within the first six months, Advantage's income is limited to a
2% discount received upon the initial purchase of these loans. Experience
through the first year and a half of this relationship has shown that
approximately 43% of these loans are repaying within the first six months.
The retail chain that serves as the primary source of indirect loans to
Advantage has undergone a major corporate restructuring during 2000. As a
result, new loan originations through September 30, 2000 totaled $1.3
million less than payoffs and regular payments. Advantage intends to
bolster its current indirect business relationship as well as continue to
pursue indirect consumer finance lending opportunities with other corporate
entities.
Total deposits increased $2.5 million during the first nine months ended
September 30, 2000. Certificates of deposits of $100,000 or more constituted
a large part of the funding for the 1999 indirect loan growth and therefore
grew by $19.9 million during the first nine months of 1999. By contrast, in
2000, management recognized the declining indirect loan portfolio and
reduced the more costly large-balance deposits, particularly public funds
deposits, by $8.6 million during the first nine months of 2000. Management's
focus on a sales culture throughout its retail banking system continues to
garner positive results. Demand deposits increased by $2.0 million during
the first nine months of 2000 compared to a decline of $2.1 million during
the same period in 1999. Core savings and time deposits grew by $9.1 million
through September 30, 2000.
Total borrowed funds amounted to $16.5 million at September 30, 2000
compared to $19.4 million at December 31, 1999. The Bank will, from time to
time, use advances from the Federal Home Loan Bank to fund loan growth,.
Likewise, the Bank will reduce its short-term borrowings from time to time
as funds become available to do so.
Total shareholders' equity increased $922,000 during the first nine months
of 2000. Net income of $1.4 million was offset by $609,000 of dividends paid
to shareholders and bolstered by an increase of $123,000 in the fair value
of securities available for sale, net of tax. The fair value of securities
available for sale, net of tax, increased by $281,000 during the third
quarter of 2000, following two consecutive quarters of decline.
Shareholders' equity to total assets was 7.18% at September 30, 2000
compared to 6.83% at December 31, 1999.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 was $1.4 million
compared to $1.2 million during the same period in 1999. Diluted earnings
per share increased to $1.32 for the nine months ended September 30, 2000
compared to $1.13 for the same period in 1999. Net income for the three
months ended September 30, 2000 was $313,000 compared to $416,000 during the
same period in 1999. Diluted earnings per share was $.30 for the third
quarter in 2000 compared to $.39 for the same period in 1999. The major
factors that have influenced these operating results are discussed on the
following pages.
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
------- -------- ---------- ------- -------- ----------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities (1) $ 33,002 $ 556 6.84% $ 35,150 $ 536 6.14%
Loans (2) 203,378 4,577 9.00 184,188 3,982 8.65
------------------- -------------------
Total interest-earning assets 236,380 5,133 8.70 219,338 4,518 8.25
Other assets 14,073 17,676
-------- --------
Total assets $250,453 $237,014
======== ========
Deposits $199,667 2,552 5.11% $191,336 2,129 4.45%
Borrowed funds 15,599 206 5.28 11,990 177 5.90
------------------- -------------------
Total interest-bearing liabilities 215,266 2,758 5.12 203,326 2,306 4.54
Noninterest-bearing demand deposit 16,422 15,939
Other liabilities 736 774
Shareholders'equity 18,029 16,975
-------- --------
Total liabilities and
shareholders' equity $250,453 $237,014
======== ========
Net interest income $2,375 $2,212
====== ======
Interest rate spread 3.58% 3.71%
Net interest margin (3) 4.03% 4.04%
<FN>
<F1> Securities includes federal funds sold for purposes of this yield
table. Average yields on taxable securities have been computed based
on amortized cost. Income on tax exempt securities as been computed on
a fully-taxable equivalent basis using a 34% tax rate. The amount of
such adjustments was $98,000 and $89,000 for 2000 and 1999.
<F2> Average balance is net of deferred loan fees and loan discounts.
Interest income includes loan fees of $311,000 and $251,000 and dealer
reserve expense of $150,000 and $139,000 in 2000 and 1999.
<F3> Net interest income as a percentage of average interest-earning
assets.
</FN>
</TABLE>
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 borrowings obtained to fund them. The volume and composition of
interest-earning assets and interest-bearing liabilities, as well as the
level of noninterest-bearing demand deposits and shareholders' equity,
affect net interest income. 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 and borrowed funds.
Interest income for the first nine months of 2000 was $15.0 million compared
to $12.6 million during the same period in 1999, an increase of $2.4
million. Interest income for the third quarter of 2000 was $5.0 million
compared to $4.4 million during the same quarter in 1999, an increase of
$606,000. The increase was principally due to interest and fees on loans
being $2.4 million greater in the first nine months and $595,000 greater in
the third quarter of 2000 than for the comparable periods in 1999. The level
of average loans increased $19.2 million, to $203.4 million during the third
quarter of 2000 from $184.2 million during the same period in 1999. In
addition, a generally rising interest rate environment has contributed to
increased yields on both loans and securities. The tax-equivalent yield on
interest-earning assets increased to 8.70% during the third quarter of 2000
from 8.25% during the same period in 1999. Despite the increased yield, the
average balance of securities declined $2.1 million, commensurate with a
managed shift to higher-yielding loan assets. Nevertheless, tax equivalent
interest income on securities was $20,000 more in the third quarter of 2000
compared to 1999.
Interest expense increased $1.5 million to $7.8 million during the nine
months of 2000 from $6.3 million during the same period in 1999. Interest
expense was $2.8 million during the third quarter of 2000 compared to $2.3
million during the third quarter of 1999. The increase was principally due
to the cost of deposits being $1.4 million greater for the first nine months
in 2000 than in 1999. The average balance of deposits increased by $8.3
million, to $199.7 million during the third quarter of 2000 from $191.3
million during the third quarter of 1999. Accompanying the increase in
average balances was an increased cost of funds because of generally rising
interest rates. As a result, the average cost of deposits rose to 5.11%
during the third quarter in 2000 from 4.45% during the same period in 1999.
Borrowings averaged $15.6 million during the third quarter of 2000 and
consist of $11.5 million of fixed rate FHLB advances, $3.6 million of short-
term FHLB borrowings, and $500,000 of debt at the holding company.
While the net interest margin of 4.03% for the quarter ending September 30,
2000 is comparable to the net interest margin of 4.04% in 1999, the trend
has been declining as evidenced by the declining net interest spread.
Management expects the pressure on net interest income to continue for the
next several quarters as deposits continue to reprice at higher rates.
The provision for loan loss increased to $409,000 for the nine months ended
September 30, 2000 compared to $383,000 for the same period in 1999.
Management determines the adequacy of the loan loss provision through its
analysis of specific problem loans and historical charge-off experience in
addition to its evaluation of current local and national economic
conditions. Management increased the provision during the third quarter of
2000 as compared to the first two quarters in light of the portfolio growth
and an increase in loan loss experience related to the Bank's indirect
consumer loan business.
Noninterest income was $15,000 more for the first nine months of 2000 and
$103,000 higher in the third quarter of 2000 compared to the same periods in
1999. Increases in gains on sale of loans and other income between 2000 and
1999 were offset by gains on the sale of securities in 1999, which were not
repeated in 2000. Service fees and overdraft charges increased commensurate
with the nominal growth in total demand deposits. The Corporation acquired a
49.9% interest in a title agency in May of 2000. and began earning
noninterest income from this source during the second quarter.
Total noninterest expense increased $583,000 to $6.1 million for the first
nine months of 2000 compared to $5.5 million for the same period in 1999.
Total noninterest expense was $379,000 more for the third quarter of 2000
compared to the same period in 1999. For the comparable nine-month periods,
the most significant increases were $494,000 in salaries and employee
benefits, $55,000 in professional fees, $30,000 in data processing charges,
and $30,000 in FDIC deposit insurance. Other operating expense has been held
in check and was $62,000 less in 2000 than in 1999.
The increases in personnel and related expenses are largely due to the
Bank's expansion success. Since September of 1999, the Bank has opened an
office shared by its finance subsidiary in Marion, Ohio, and has purchased,
renovated and opened a second facility in Findlay, Ohio, and an existing
banking facility in Richwood, Ohio. Due to these changes and the
expectations of continued growth of the Corporation, management anticipates
noninterest expense to continue to increase.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing
activities, which are summarized in the Statement of Cash Flows. Cash and
cash equivalents amounted to $5.8 million at September 30, 2000 compared to
$7.1 million at December 31, 1999.
Liquidity refers to management's ability to generate sufficient cash to fund
current loan demand, meet deposit withdrawals, pay operating expenses and
meet other financial obligations. The principal sources of funds for the
Bank are deposits, loan repayments and maturities, sales of mortgage loans
in the secondary market, FHLB borrowings, sales of securities, and funds
generated through operations. Management believes that its sources of
liquidity are adequate to meet the needs of the Corporation.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. 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 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, 2000, the Bank's leverage ratio was 7.72% and the risk-
based capital ratio was 10.08%, both of which exceeded the minimum
regulatory requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The only significant market risk to which the Corporation is exposed is
interest rate risk. The business of the Corporation and the composition of
its balance sheet consists of investments in interest-earning assets
(primarily loans and securities), which are funded by interest-bearing
liabilities (deposits and borrowings). These financial instruments have
varying levels of sensitivity to changes in the market rates of interest,
resulting in market risk.
Interest rate risk is managed regularly through the Corporation's
Asset/Liability Management Committee (ALCO). The two primary methods to
monitor and manage interest rate risk are rate-sensitivity gap analysis and
review of the effects of various interest rate-shock scenarios. Based upon
ALCO's review, there has been no significant change in the interest rate
risk of the Corporation since year-end 1999. (See Quantitative and
Qualitative Disclosures about Market Risk contained in the Annual Report to
Shareholders for the year ended December 31, 1999.)
FORM 10-Q
Quarter ended September 30, 2000
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 on page7 hereof)
Exhibit 27, Financial Data Schedule
(b) No Report on Form 8-K has been filed during the quarter
ended September 30, 2000.
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 10, 2000 /s/Raymond E. Graves
-----------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: November 10, 2000 /s/ Patrick S. Smith
-----------------------------------
(Signature)
Patrick S. Smith
Vice President and Chief Financial Officer
COMMERCIAL BANCSHARES, INC.
Index to Exhibits
Exhibit 11 Statement re computation of per share earnings (reference is
hereby made to Note 1 to the Consolidated Financial
Statements on page 7 hereof)
Exhibit 27 Financial Data Schedule
