UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No.1 to 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 June 30, 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 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
-----------------------------------------------------
(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 July 31, 1999, the latest practicable date, 1,049,999 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 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,059,358 $ 6,692,802
Securities available for sale, at fair value 33,951,834 38,256,547
Total loans 182,055,602 158,637,114
Allowance for loan losses (1,311,633) (1,182,848)
----------------------------
Net loans 180,743,969 157,454,266
Premises and equipment, net 4,299,957 3,957,927
Other real estate 823,000 921,500
Accrued interest receivable 1,318,104 1,054,578
Other assets 2,093,088 2,066,112
----------------------------
Total assets $237,289,310 $210,403,732
============================
LIABILITIES
Deposits
Noninterest-bearing deposits $ 14,662,364 $ 16,800,775
Interest-bearing deposits 40,114,125 39,985,521
Savings and time deposits 105,897,394 94,178,037
Time deposits $100,000 and greater 37,269,521 22,133,462
----------------------------
Total deposits 197,943,404 173,097,795
Accrued interest payable and other liabilities 459,936 422,085
Borrowed funds 21,917,974 19,220,000
Other liabilities 392,398 616,224
----------------------------
Total liabilities 220,713,712 193,356,104
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares
authorized; 1,049,999 and 1,046,181 shares
issued in 1999 and 1998 7,981,859 7,963,870
Retained earnings 9,343,357 8,940,775
Unrealized gain/(loss) on securities
available for sale (749,618) 142,983
----------------------------
Total shareholders' equity 16,575,598 17,047,628
----------------------------
Total liabilities and shareholders' equity $237,289,310 $210,403,732
============================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $3,746,252 $2,705,228 $7,231,582 $5,465,982
Interest on securities
Taxable 312,657 330,207 599,937 645,819
Nontaxable 167,060 232,458 332,351 423,584
Other interest income 7,870 39,112 21,145 86,370
----------------------------------------------------
Total interest income 4,233,839 3,307,005 8,185,015 6,621,755
Interest expense
Interest on deposits 1,830,953 1,735,511 3,556,258 3,430,847
Interest on other borrowings 217,618 390,516 9,361
----------------------------------------------------
Total interest expense 2,048,571 1,735,511 3,946,774 3,440,208
Net interest income 2,185,268 1,571,494 4,238,241 3,181,547
Provision for loan losses 120,957 80,100 272,857 155,100
----------------------------------------------------
Net interest income after
provision for loan losses 2,064,311 1,491,394 3,965,384 3,026,447
----------------------------------------------------
Other income
Service fees and overdraft charges 267,583 161,710 503,294 314,488
Security gains, net 29,834 17,169 59,935 20,902
Loan sale gains, net 50,796 146,231 80,478 160,324
Other income 57,751 43,600 204,945 92,598
----------------------------------------------------
Total other income 405,964 368,710 848,652 588,312
----------------------------------------------------
Other expense
Salaries and employee benefits 875,175 767,945 1,722,960 1,387,133
Occupancy, furniture and equipment 245,956 153,631 441,661 294,760
State taxes 69,592 70,379 141,482 141,253
Data processing 141,853 134,419 263,003 275,233
Other operating expense 531,148 400,579 1,116,200 746,909
----------------------------------------------------
Total other expense 1,863,724 1,526,953 3,685,306 2,845,288
----------------------------------------------------
Income before federal income taxes 606,551 333,151 1,128,730 769,471
Income tax expense 182,791 51,370 327,146 137,770
----------------------------------------------------
Net income $ 423,760 $ 281,781 $ 801,584 $ 631,701
====================================================
Basic earnings per common share $ .40 $ .27 $ .76 $ .61
====================================================
Diluted earnings per common share $ .40 $ .27 $ .76 $ .60
====================================================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,018,810 $15,977,532
Comprehensive Income:
Net income 423,760 281,781
Change in net unrealized gain / (loss) on securities
available for sale, net of reclassification
and tax effects (667,472) 5,672
--------------------------
Total comprehensive income (243,712) 287,453
Stock options exercised -- 52,191
Dividends paid (199,500) (387,088)
--------------------------
Balance at end of period $16,575,598 $15,930,088
==========================
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,047,628 $15,688,343
Comprehensive Income:
Net income 801,584 631,701
Change in net unrealized gain / (loss) on securities
available for sale, net of reclassification
and tax effects (892,602) (94,202)
--------------------------
Total comprehensive income (91,018) 543,499
Issuance of common stock 17,988 --
Stock options exercised -- 91,334
Dividends paid (399,000) (387,088)
--------------------------
Balance at end of period $16,575,598 $15,930,088
==========================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 2,560,015 $ 5,702,631
Investing activities
Securities available for sale
Purchases (7,781,481) (27,669,490)
Maturities and repayments 3,412,284 3,764,995
Sales 7,505,976 16,162,424
Purchase of securities held to maturity -- (245,078)
Net change in loans (24,904,647) 4,306,188
Bank premises and equipment expenditures (686,162) (101,234)
----------------------------
Net cash used by investing activities (22,454,030) (3,782,195)
----------------------------
Financing activities
Net change in deposits 24,534,301 (252,987)
Net change in other borrowings 2,697,974 (2,350,000)
Dividends paid (399,000) (387,088)
Issuance of common stock 17,988 --
Stock options exercised -- 91,334
----------------------------
Net cash from financing activities 26,851,263 (2,898,741)
----------------------------
Net change in cash and cash equivalents 7,366,556 (978,305)
Cash and cash equivalents at beginning of period 6,692,802 7,111,986
----------------------------
Cash and cash equivalents at end of period $ 14,059,358 $ 6,133,681
============================
Supplemental disclosures
Cash paid during the period for
Interest $ 3,908,924 $ 3,435,558
Income taxes 360,000 385,000
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reason for Amendment: This amended Form 10-Q reflects an adjustment which,
for the six months ended June 30, 1999, reduces interest and fees on loans
by $206,000, reduces net income by $136,000 and reduces corresponding
diluted earnings per share by $.12 from amounts previously reported. The
adjustment reflects the correction of an error in recording interest on
mortgage loans, which occurred during the Bank's conversion to a new data
processing system in the first quarter of 1999. Management believes this
error was an isolated instance. Revised review procedures are now in place
to detect such items on a more timely basis. The effects of this adjustment
were included in the Company's annual report to shareholders for the year
ended December 31, 1999.
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Commercial Bancshares, Inc. (the
"Corporation") and its wholly owned subsidiary, The Commercial Savings Bank
(the "Bank"). Also included is the Bank's subsidiary Advantage Finance, Inc.
("Advantage"). All material intercompany accounts and transactions have been
eliminated in consolidation.
These interim financial statements are prepared without audit and reflect
all adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present fairly the consolidated financial
position of the Corporation at June 30, 1999, and its results of operations
and its cash flows for the periods presented. The accompanying consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances. The Annual Report for the
Corporation for the year ended December 31, 1998, contains consolidated
financial statements and related notes, which should be read in conjunction
with the accompanying consolidated financial statements.
Industry Segment Information: Commercial Bancshares, Inc. is a bank-holding
corporation whose banking subsidiary, The Commercial Savings Bank, is
engaged in the business of commercial and retail banking, with operations
conducted through its main office and branches located in Upper Sandusky,
Ohio and neighboring communities. Advantage Finance, Inc., a wholly-owned
subsidiary of the Bank, is a consumer finance company operating in Marion,
Ohio. These market areas provide the source of substantially all of the
Corporation's deposit and loan activities, although some indirect loans are
made to borrowers outside the Corporation's immediate market area and some
deposits are obtained from customers outside of the market area.
Substantially all of the Corporation's income is derived from commercial and
retail lending and investments activities.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The collectibility of loans, fair
values of financial instruments and status of contingencies are particularly
subject to change.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgement, should be charged
off.
A loan is considered impaired when management believes full collection of
principal and interest is not probable. Often this is associated with a
delay or shortfall in payments. Smaller-balance homogeneous loans are
evaluated for impairment in total. Such loans include residential first
mortgage loans secured by one-to-four-family residences and consumer
automobile, home equity and credit card loans with balances less than
$200,000. In addition, loans held for sale are excluded from consideration
of impairment.
Other Real Estate: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses incurred are charged to
operations as incurred. Gains and losses on disposition, and changes in the
valuation allowance are reported in net gain or loss on other real estate.
Loan Servicing: The Company has sold various loans to the Federal Home Loan
Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and
losses on loan sales are recorded at the time of the cash sale. Mortgage
servicing rights are determined by allocating total cost of mortgage loans
to mortgage servicing rights and to loans (without mortgage servicing
rights) based on their relative fair values. Mortgage servicing rights
recorded as a separate asset are amortized in proportion to, and over the
period of, estimated net servicing income.
Income Taxes: Income tax expense is the sum of the current-year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences
of temporary differences between the carrying amounts and tax bases of
assets and liabilities computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to
be realized.
Earnings per Share: Basic earnings per share is based on net income divided
by 1,049,808 and 1,043,803 weighted average shares outstanding during the
six months ended June 30, 1999 and 1998 and 1,049,999 and 1,044,867 weighted
average shares outstanding during the quarter ended June 30, 1999 and 1998.
Diluted earnings per share reflect the effect of additional common shares
issuable under stock options using the treasury stock method. The weighted
average number of shares used for determining diluted earnings per share
were 1,058,204 and 1,051,696 for the six months ended June 30, 1999 and 1998
and 1,062,418 and 1,052,809 for the quarter ended June 30, 1999 and 1998.
Financial Statement Presentation: Some items in prior financial statements
have been reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
Securities as of June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale
Obligations of federal agencies $ 1,606,917 $ 76,886 $ 1,530,031
Obligations of state and political
subdivisions 14,485,701 $ 27,783 640,360 13,873,123
Corporate bonds 1,001,118 54,563 946,555
Mortgage-backed securities 16,772,143 391,758 16,380,385
------------------------------------------------------
Total debt securities 33,865,879 27,783 1,163,567 32,730,094
Equity investments 1,221,740 0 0 1,221,740
------------------------------------------------------
Total securities available for sale $35,087,618 $ 27,783 $1,163,567 $33,951,834
======================================================
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale
Obligations of federal agencies $ 2,618,533 $ 10,552 $ 2,629,085
Obligations of state and political
subdivisions 13,163,346 380,141 $ (4,297) 13,539,190
Corporate bonds 1,956,732 3,281 (3,100) 1,956,913
Mortgage-backed securities 19,355,335 25,084 (195,020) 19,185,399
------------------------------------------------------
Total debt securities $37,093,946 $419,058 $ (202,417) $37,310,587
Equity investments 945,960 945,960
------------------------------------------------------
Total securities available for sale $38,039,906 $419,058 $ (202,417) $38,256,547
======================================================
</TABLE>
The amortized cost and approximate fair values of debt securities available
for sale at June 30, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Debt securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Securities available for sale
Due in one to five years $ 2,381,843 $ 2,298,438
Due in five to ten years 7,905,291 7,545,349
Due after ten years 6,805,124 6,504,445
Mortgage-backed securities 18,578,862 18,187,104
--------------------------
Total debt securities available for sale $35,671,121 $34,535,336
==========================
</TABLE>
Sales of available-for-sale securities during the six months ended June 30,
1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $7,505,976 $16,145,255
Gross gains 61,894 104,126
Gross losses 1,959 83,224
</TABLE>
Securities with a carrying value of approximately $17,581,036 at June 30,
1999 and $9,731,000 at December 31, 1998 were pledged to secure deposits and
for other purposes.
NOTE 3 - LOANS
Loans at June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Commercial and other loans $ 80,141,578 $ 79,168,621
Real estate loans 30,828,885 30,739,831
Consumer and credit card 64,226,684 42,012,388
Home equity loans 6,858,455 6,716,274
-------------------------------
Total loans $182,055,602 $158,637,114
===============================
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home
Loan Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank
has retained servicing totaled $58,595,314 and $46,931,540 at June 30, 1999
and December 31, 1998. Real estate loans originated and held for sale at
June 30, 1999 and December 31, 1998 totaled $934,139 and $2,276,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the six months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance - January 1 $1,182,848 $1,075,385
Loans charged off (210,605) (326,446)
Recoveries 66,533 34,495
Provision for loan losses 272,857 155,100
------------------------
Balance - June 31 $1,311,633 $ 938,534
========================
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Balance of impaired loans $37,247 $1,068,036
Less portion for which no allowance
for loan losses is allocated 0 0
----------------------------
Portion of impaired loan balance for which
an allowance for loan losses is allocated $37,247 $1,068,036
============================
Portion of allowance for loan losses
allocated to the impaired loan balance $37,247 $ 213,607
============================
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Average investment in impaired loans $509,046 $1,237,532
Interest income recognized on impaired loans -- --
Interest income recognized on impaired
loans on cash basis -- --
</TABLE>
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial
statements, including claims and legal actions arising in the normal course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet
the financing needs of customers. These financial instruments include
commitments to extend credit and standby letters of credit which involve, to
varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented
by the contractual amount for commitments to extend credit and standby
letters of credit. Each customer's credit worthiness is evaluated on a case-
by-case basis. The same credit policies are used for commitments and
conditional obligations as are used for loans. The amount of collateral
obtained, if deemed necessary, upon extension of credit is based on
management's credit evaluation. Collateral varies but may include accounts
receivable, inventory, property, equipment, income-producing commercial
properties, residential real estate and consumer assets.
Commitments to extend credit are agreements to lend to a customer as long as
no condition established in the commitment is violated. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily
represent future cash requirements. Standby letters of credit are
conditional commitments to guarantee a customer's performance to a third
party.
The following is a summary of commitments to extend credit at June 30, 1999
and December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Fixed rate $ 1,765,446 $ 2,518,000
Variable rate 22,208,935 29,107,000
--------------------------
$23,974,381 $31,625,000
==========================
</TABLE>
At June 30, 1999 and December 31, 1998, reserves of $821,000 and $901,000
were required as deposits with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
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
the Corporation at June 30, 1999, compared to December 31, 1998, and the
consolidated results of operations for the three and six months ending June
30, 1999 compared to the same period in 1998. The purpose of this discussion
is to provide the reader with a more thorough understanding of the
consolidated financial statements and related footnotes.
The 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.
FINANCIAL CONDITION
Total assets increased by $26,885,578 or 12.78% from December 31, 1998 to
June 30, 1999. The increase in the loan portfolio was the primary reason for
this increase and is discussed below.
Gross loans increased $23,419,488 or 14.76% during the first six months of
1999. Increases primarily occurred in the installment portfolios, which
increased $22,303,350 or 52.88% during the first six months of 1999. The
Bank experienced significant rate competition in the commercial lending area
from larger, megabank institutions and strategically decided not to
negatively impact net interest margin by offering comparable rates. The
increase in the installment portfolio was due to growth in the indirect loan
business, specifically financing of horse trailer and consumer lawn and
garden equipment. The Bank has a partnering relationship with a Denver-based
organization, whereas the Bank purchases horse trailer loan accounts on a
national and local basis. Advantage has performed a "partnering" with a
consumer farm company wherein Advantage has the first right of financing of
all consumer large ticket items. Large ticket items are considered those
items that have a retail cost exceeding three hundred dollars. Advantage is
currently involved in two periods per year whereas the customers are offered
six months same as cash. We estimate that over 60% of these loans will go
beyond the six-month period and thereby earn interest retroactive back to
the date of the original contract date. Further all of these accounts are
purchased at a discount of two percent. When Advantage was formed it was
owned by the Corporation and has since been changed to its owner being the
Bank. As the Bank moves forward it has and will purchase all Advantage loans
and will thereby require the Bank to make the appropriate reserves for these
loans. It is anticipated that this loan volume will exceed eight million
dollars annually based on current projections.
Total deposits increased $24,845,609, or 14.35%, during the first six months
of 1999. Deposits grew based upon two important factors, IE: 1. The Bank
offered deposit rates via the INTERNET for certificates of deposits with a
minimum balance of fifty ($50,000.00) thousand dollars or more, and 2. By
use of internal sales, marketing and advertising. Basically the monies
received between the INTERNET and internal was a 50/50 split. Both methods
were employed presenting positive results. Noninterest bearing deposits
decreased $2,138,411 for the period ended June 30, 1999.
The Bank will, from time to time, use advances from Federal Home Loan Bank
to fund loans. This is another source of funds at what may be a lower cost
for the Bank and thereby decrease the Bank's funding cost. These funds can
be employed for a specific time period and thus reduce the Bank's dependency
on consumer and business deposits.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1999 stood at $801,584
compared to $631,701 during the same period in 1998. Second quarter income
in 1999 was $423,760 as compared to $281,781 during the same three-month
period in 1998. Diluted earnings per share increased by $.13 and $.15 per
share for the three- and six- month periods ending June 30, 1999 as compared
to the same periods in 1998. Discussed below are the major factors, which
have influenced these, operating results.
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of
deposits and other borrowings obtained to fund them. Net interest income is
affected by the volume and composition of earning assets and interest-
bearing liabilities as well as the level of noninterest-bearing demand
deposits and shareholders' equity. Also impacting net interest income is the
susceptibility of interest-earning assets and interest-bearing liabilities
to change with the general market level of interest rates. Management
attempts to manage the repricing of assets and liabilities so as to achieve
a stable level of net interest income and reduce the effect of significant
changes in the market level of interest rates. This is accomplished through
the pricing and promotion of various loan and deposit products as well as
the active management of the Bank's portfolio of investment securities
available for sale.
Interest income for the three and six months ending June 30, 1999 was
$4,233,839 and $8,185,015 as compared to $3,307,005 and $6,621,755 during
the same periods in 1998, an increase of $849,825 and $1,563,260. During the
same time period, interest expense increased $506,566 from $3,440,208 in the
first half of 1998 to $3,946,774 in 1999. The primary factor influencing the
growth in interest income is the purchase of loan contracts on the purchases
of horse trailers previously discussed. While the Bank has increased
originations of finance contracts on consumer lawn and garden equipment it
should be noted that most of these contracts are still within their six
month same as cash period and have not as of this date contributed to
earnings. The increase in interest expense is commensurate with the increase
in deposits and other borrowings necessary to fund loan growth.
The provision for loan loss increased $92,798 for the three-months ended
June 30, 1999 compared to the same period in 1998 and has increased $117,757
for the first six months of 1999 compared to the same period in 1998. This
corresponds to the increase in the loan portfolio. Management has determined
that the loan loss provision is adequate at June 30, 1999 through its
analysis of specific problem loans, historical charge-off experience along
with local and national economic trends. However, management 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 June 30, 1999 increased
$37,254 or 9.18% compared to the same period in 1998 and increased $260,340
or 44.25% for the first six months of 1999 compared to the same period in
1998. The larger fluctuations were the increase in service fees and
overdrafts of $188,806 and other income of $112,347. The other income
increase was primarily due to $107,513 increase in sales of credit life,
accident and health insurance.
NONINTEREST EXPENSE
Total noninterest expense increased $840,018 or 29.52% for the first six
months of 1999 compared to the same period in 1998. For the second quarter
of 1999, noninterest expense increased $336,771 or 18.07% compared to the
same period in 1998. The most significant increases were $79,840 and
$335,827 in salaries and benefits (described more fully below) and $184,472
and $369,291 in other operating expense for the three and six months ended
June 30, 1999. In 1999, the Bank will open another office in Marion, Ohio,
has completed the renovation of the Tiffin Avenue Office in Findlay, Ohio
and also completed the remodeling of the Carey Banking Center in Carey,
Ohio. The Bank has also purchased what was the American Electric Power
Company building on Lincoln Avenue, Findlay, Ohio. We fully anticipate that
this building will be used to operate CSB's second full service office in
Findlay, Ohio and will be operational towards the end of the second quarter
of 2000. Due to these changes and expected growth of the Corporation,
management expects noninterest expense to continue to increase.
Salaries and benefits increased due to the following items. The Bank
employed three (3) additional key executive officers to help direct this
Bank into the future. Two hail from one of the major megabanks, one
spearheading lending and the other the banking center network, and the
remaining individual is the Bank's Chief Financial Officer. The other
increases related to this area is the employment of a new banking center
manager for the soon to open additional office on Bellefontaine Avenue
Banking Center, Marion, Ohio, the manager and employees of Advantage Finance
Company, and the normal increases associated with the growth the Bank has
enjoyed over the last twelve months.
CAPITAL RESOURCES
Total shareholders' equity decreased $472,030 or 2.77% during the first six
months of 1999. Year-to-date net income of $801,584 increased equity, offset
by a $892,601 decrease in the market value of the available-for-sale
security portfolio and dividends declared for shareholders of $399,000.
Shareholders' equity to total assets was 7.0% at June 30, 1999 compared to
8.1% at December 31, 1998. It is also note worthy that the Corporation has
determined it is in the best interest of the shareholders to pay the stock
or cash dividend quarterly, rather than the previous method of semi-
annually. This is being done to get the dividend in the hand of the
shareholders more rapidly and to assist in the marketability of the stock.
Banking regulations have established minimum capital requirements for banks
and bank holding companies including risk-based capital ratios and leverage
ratios. Risk-based capital regulations require all banks to have a minimum
total risk-based capital ratio of 8% with half of the capital composed of
core capital. Minimum leverage ratio requirements range from 3% to 5% of
total assets. Core capital, or Tier 1 capital, includes common equity,
perpetual preferred stock and minority interests that are held by others in
consolidated subsidiaries minus intangible assets. Supplementary capital, or
Tier 2 capital, includes core capital and such items as mandatory
convertible securities, subordinated debt and the allowance for loans and
lease losses, subject to certain limitations. Qualified Tier 2 capital can
equal up to 100% of an institution's Tier 1 capital with certain limitations
in meeting the total risk-based capital requirements. At June 30, 1999, the
Bank's leverage ratio (with no material difference between the Bank and
Commercial Bancshares, Inc., the parent company) was 7.2 % and the risk-
based capital ratio was 9.6 %, both of which exceeded the minimum regulatory
requirements.
LIQUIDITY
Liquidity management for the Bank centers on the assurance that funds are
available to meet the loan and deposit needs of its customers and the Bank's
other financial commitments.
Cash and cash equivalents at June 30, 1999 and December 31, 1998 stood at
$14,059,358 and $6,692,802. Refer to the Statement of Cash Flows contained
within this report.
A standard measure of liquidity is the relationship of loans to deposits and
borrowed funds. Lower ratios indicate greater liquidity. At June 30, 1999
and December 31, 1998, the ratio of loans to deposits and borrowed funds was
80.8 % 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 Corporation's operations. At this time,
however, the expense that may be incurred by the Corporation in connection
with system failure related to the Year 2000 issue cannot be determined.
In addition to the possible issues related to its own systems, the
Corporation could incur losses if loan payments are delayed due to Year 2000
problems affecting any of the Corporation's significant borrowers or
impairing the payroll systems of large employers in the Corporation's
primary market area. Because the Corporation's loan portfolio is highly
diversified with regard to individual borrowers and types of businesses and
the Corporation's primary market area is not significant dependent on one
employer or industry, the Corporation does not expect any significant or
prolonged Year 2000 related difficulties will affect net earnings or cash
flow. At this time, the expense that may be incurred by the Corporation in
connection with Year 200 issues confronting its customers cannot be
determined.
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 1998.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended June 30, 1999
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities 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:
The Annual Meeting of Shareholders (the "Meeting") of the
Corporation was held April 14, 1999. There were 524,497 shares of
the 1,049,431 shares currently outstanding, or 50.0% , represented
in person or by proxy at the Meeting. The only matter for voting
was the election of Class II Directors for the Corporation, with a
three year term expiring at the Corporation's 2002 Annual Meeting.
Each of the four nominees, namely Daniel E. Berg,
Loren H. Dillon, Mark Dillon, and William E. Ruse, received at
least 523,003 votes, or 99.7%, of the shares represented at the
Meeting, and were elected as Class II Directors of the
Corporation.
Under the requirements of the Securities Exchange Act of 1934, the
Registrant duly signed the report. A copy of which is on file at
the principal place of business, and is dated May 7, 1999.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits 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 page 8 hereof)
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: September 26, 2000 /s/ Raymond E. Graves
-----------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: September 26, 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 8 hereof)
Exhibit 27 Financial Data Schedule
