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 June 30, 2000
[ ] 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
-----------------------------------------------------
(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, 2000, the latest practicable date, 1,047,610 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 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except share data)
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,615 $ 7,124
Securities available for sale 30,986 32,414
Total loans 203,858 204,773
Allowance for possible loan loss (1,511) (1,499)
----------------------
Loans, net 202,347 203,274
Premises and equipment, net 5,610 5,531
Accrued interest receivable 1,505 1,276
Other assets 2,465 2,333
----------------------
Total assets $249,528 $251,952
======================
LIABILITIES
Deposits
Noninterest-bearing demand $ 16,528 $ 18,203
Interest-bearing demand 41,187 39,576
Savings and time deposits 119,957 115,918
Time deposits $100,000 and greater 32,919 40,659
----------------------
Total deposits 210,591 214,356
FHLB advances 19,500 18,640
Other borrowed funds 527 713
Accrued interest payable 464 514
Other liabilities 715 516
----------------------
Total liabilities 231,797 234,739
----------------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares
authorized, 1,049,999 shares issued in 2000
and 1999 8,056 8,056
Retained earnings 10,905 10,228
Treasury stock, 2,389 shares in 2000 and 1999 (74) (74)
Accumulated other comprehensive income (1,156) (997)
----------------------
Total shareholders' equity 17,731 17,213
----------------------
Total liabilities and shareholders' equity $249,528 $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 Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $4,565 $3,746 $9,033 $7,231
Interest on securities:
Taxable 256 313 520 600
Nontaxable 184 167 363 333
Other interest income 7 8 17 21
--------------------------------------
Total interest income 5,012 4,234 9,933 8,185
--------------------------------------
Interest expense
Interest on deposits 2,321 1,831 4,572 3,556
Interest on borrowings 267 218 491 391
--------------------------------------
Total interest expense 2,588 2,049 5,063 3,947
--------------------------------------
Net interest income 2,424 2,185 4,870 4,238
Provision for loan losses 150 121 249 273
--------------------------------------
Net interest income after
provision for loan losses 2,274 2,064 4,621 3,965
--------------------------------------
Other income
Service fees and overdraft charges 269 268 511 503
Gains on sale of securities, net -- 30 -- 60
Gains on sale of loans, net 28 51 57 81
Other income 90 58 193 205
--------------------------------------
Total other income 387 407 761 849
--------------------------------------
Other expense
Salaries and employee benefits 946 875 1,986 1,723
Occupancy, furniture and equipment 176 246 397 442
State taxes 79 70 155 141
Data processing 137 142 266 263
FDIC deposit insurance 24 8 43 16
Professional fees 49 37 100 71
Other operating expense 506 486 962 1,029
--------------------------------------
Total other expense 1,917 1,864 3,909 3,685
--------------------------------------
Income before federal income taxes 744 607 1,473 1,129
Income tax expense 199 183 397 327
--------------------------------------
Net income $ 545 $ 424 $1,076 $ 802
======================================
Basic earnings per common share $ .52 $ .40 $ 1.03 $ .76
======================================
Diluted earnings per common share $ .52 $ .40 $ 1.03 $ .76
======================================
</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
June 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $17,413 $17,019
Comprehensive income:
Net income 545 424
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
and tax effects (28) (668)
------------------
Total comprehensive income 517 (244)
Dividends declared ($.19 per share in 2000 and 1999) (199) (199)
------------------
Balance at end of period $17,731 $16,576
==================
<CAPTION>
Six Months Ended
June 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $17,213 $17,048
Comprehensive income:
Net income 1,076 802
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
and tax effects (159) (893)
------------------
Total comprehensive income 917 (91)
Stock options exercised -- 18
Dividends declared ($.38 per share in 2000 and 1999) (399) (399)
------------------
Balance at end of period $17,731 $16,576
==================
</TABLE>
See notes to consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands)
Six Months Ended
June 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income $ 1,076 $ 802
Adjustments 644 1,756
------------------
Cash from operating activities $ 1,720 $ 2,558
Investing activities
Securities available for sale
Purchases (333) (7,781)
Maturities and repayments 1,498 3,412
Sales -- 7,506
Net change in loans 411 (24,905)
Bank premises and equipment expenditures (315) (686)
------------------
Cash from investing activities 1,261 (22,454)
------------------
Financing activities
Net change in deposits (3,765) 24,945
Net change in other borrowings 674 2,698
Stock options exercised -- 18
Dividends paid (399) (399)
------------------
Cash from financing activities (3,490) 27,262
------------------
Net change in cash and cash equivalents (509) 7,366
Cash and cash equivalents at beginning of period 7,124 6,693
------------------
Cash and cash equivalents at end of period $ 6,615 $14,059
==================
Supplemental disclosures
Cash paid during the period for:
Interest $ 5,113 $ 3,909
Income taxes 25 360
</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 June 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 1,047,610 and 1,049,999 weighted average shares outstanding during the
quarter ended June 30, 2000 and 1999 and 1,047,610 and 1,049,808 weighted
average shares outstanding during the six months ended June 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 1,048,219 and 1,062,418 for the quarter ended June 30, 2000 and
1999 and 1,048,797 and 1,058,204 for the six months ended June 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.
Industry 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: June 30, 2000 December 31, 1999
------------- -----------------
($ in thousands)
<S> <C> <C>
Commercial and other loans $ 84,660 $ 82,888
Real estate loans 35,154 33,439
Consumer and credit card loans 71,666 75,318
Home equity loans 7,389 7,253
Consumer finance loans 4,989 5,875
---------------------------
Total loans $203,858 $204,773
===========================
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home
Loan Mortgage Corporation (FHLMC). At June 30, 2000 and December 31, 1999,
loans sold to FHLMC for which the Bank has retained servicing totaled $75.7
million and $68.4 million, and real estate loans originated and held for
sale totaled $2.9 million and $2.6 million.
Activity in the allowance for loan loss for the six months ended June 30 was
as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
($ in thousands)
<S> <C> <C>
Beginning balance $1,499 $1,183
Provision for loan loss 249 273
Loans charged off (283) (190)
Recoveries of previous charge-offs 46 46
----------------
Ending balance $1,511 $1,312
================
</TABLE>
<TABLE>
<CAPTION>
Impaired loans were as follows: June 30, 2000 December 31, 1999
------------- -----------------
($ in thousands)
<S> <C> <C>
Period-end loans with no allocated allowance for loan losses $ 277 $ --
Period-end loans with allocated allowance for loan losses 462 186
------------------------
Total loans $ 739 $186
========================
Amount of the allowance for loan losses allocated $ 128 $ 37
Nonperforming loans were as follows:
Loans past due over 90 days still on accrual $ 93 $212
Nonaccrual loans 1,845 530
</TABLE>
Management believes that most nonaccrual loans are adequately collateralized
and that regular payments will resume promptly, and therefore not all of the
nonaccrual loans are considered impaired. 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.
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 June 30, 2000, compared to December 31, 1999,
and the consolidated results of operations for the quarterly and six month
periods ended June 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 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
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 declined by $2.42 million from December 31, 1999 to June 30,
2000. The primary reason for the decrease in total assets was that total
loans declined due to reductions in the Bank's indirect consumer loan
portfolio, as discussed below.
Total loans decreased $915,000 during the first six months of 2000. 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 half of the year have caused a decline
to $47.6 million at June 30, 2000 from $51.8 million at December 31, 1999.
Management has recently renewed this relationship and anticipates $8.0 to
$10.0 million of new loan originations during the remainder of 2000.
Management does not believe this will create any capital deficiency.
Consumer finance loans generated by Advantage decreased to $5.0 million as
of June 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.
An unusually wet spring season was experienced in 2000, which subdued sales
during the first quarter and, as a result, payoffs and regular payments
exceeded new loan originations by $1.6 million through March 31, 2000.
During the second quarter, however, the consumer finance loan portfolio of
Advantage grew by $649,000.
The Bank's traditional, local market area direct loans increased $4.2
million during the six months ended June 30, 2000. Real estate and home
equity loans grew $1.9 million during the first six months of 2000 compared
to growth of $231,000 during the same period a year ago. Consumer and credit
card loans, excluding the indirect business discussed above, increased
$557,000 during the first six months of 2000. Commercial loans rebounded
$2.9 million during the second quarter after experiencing a seasonal decline
of $1.1 million during the first three months of 2000.
Total deposits decreased $3.8 million during the first six months ended June
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
$15.2 million during the first six 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
$7.7 million during the first six months of 2000. Management's focus on a
sales culture throughout its retail banking system continues to garner
positive results. Demand deposits remained stable during the first half of
2000 compared to a decline of $2.2 million during the same period in 1999.
Total borrowed funds amounted to $20.0 million at June 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, such as was
experienced during the first six months of 2000 with the Bank's traditional,
local market area direct loans.
Total shareholders' equity increased $518,000 during the first six months of
2000. Net income of $1.1 million was offset by $399,000 of dividends paid to
shareholders and by a decline of $159,000 in the fair value of securities
available for sale, net of tax. Shareholders' equity to total assets was
7.11% at June 30, 2000 compared to 6.83% at December 31, 1999.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2000 was $1.1 million compared
to $802,000 during the same period in 1999. Net income for the three months
ended June 30, 2000 was $545,000 compared to $424,000 during the same period
in 1999. Diluted earnings per share increased to $ 1.03 for the six months
and $.52 for the quarter ended June 30, 2000 from $.76 and $.40 for the same
periods in 1999. Discussed below are the major factors that have influenced
these operating results.
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of
deposits and borrowings obtained to fund them. The volume and composition of
interest-earning assets and interest-bearing liabilities, as well as the
level of noninterest-bearing demand deposits and shareholders' equity,
affect net interest income. Also impacting net interest income is the
susceptibility of interest-earning assets and interest-bearing liabilities
to changes in the general market level of interest rates. Management
attempts to manage the repricing of assets and liabilities so as to achieve
a stable level of net interest income and reduce the effect of significant
changes in the market level of interest rates. This is accomplished through
the pricing and promotion of various loan and deposit products as well as
the active management of the Bank's portfolio of securities available for
sale and borrowed funds.
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities (1) $ 31,829 $ 542 7.23% $ 36,870 $ 574 6.26%
Loans (2) 202,312 4,565 9.03 174,406 3,746 8.59
------------------- -------------------
Total interest-earning assets 234,141 5,107 8.79 211,276 4,320 8.19
Other assets 13,878 13,205
-------- --------
Total assets $248,019 $224,481
======== ========
Deposits $195,593 2,321 4.75% $170,214 1,831 4.30%
Borrowed funds 16,826 267 6.35 19,473 218 4.48
------------------- -------------------
Total interest-bearing liabilities 212,419 2,588 4.87 189,687 2,049 4.32
Noninterest-bearing demand deposit 16,814 16,325
Other liabilities 1,493 1,297
Shareholders'equity 17,293 17,172
-------- --------
Total liabilities and
shareholders' equity $248,019 $224,481
======== ========
Net interest income $2,519 $2,271
====== ======
Interest rate spread 3.92% 3.87%
Net interest margin (3) 4.34% 4.30%
<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 $95,000 and $86,000 for 2000 and 1999.
<F2> Average balance is net of deferred loan fees and loan discounts.
Interest income includes loan fees of $278,000 and $292,000 and dealer
reserve expense of $169,000 and $115,000 in 2000 and 1999.
<F3> Net interest income as a percentage of average interest-earning
assets.
</FN>
</TABLE>
Interest income for the first six months of 2000 was $9.9 million compared
to $8.2 million during the same period in 1999, an increase of $1.7 million.
Interest income for the second quarter of 2000 was $5.0 million compared to
$4.2 million during the same quarter in 1999, an increase of $778,000. The
increase was principally due to interest and fees on loans being $1.8
million greater for the first six months in 2000 than in 1999. Throughout
1999, and continuing during the first quarter of 2000, the Bank has managed
a shift in the composition of earning assets favoring its commercial and
indirect consumer loan portfolios. The level of average loans increased
$27.9 million, to $202.3 million during the second quarter of 2000 from
$174.4 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 8.79% during the second quarter of 2000 from 8.19% during the
same period in 1999. Despite the increased yield, the average balance of
securities declined $5.1 million, commensurate with the managed shift to
higher-yielding loan assets. As a result, tax equivalent interest income on
securities was $32,000 less in the second quarter of 2000 compared to 1999.
Interest expense increased $1.1 million to $5.1 million during the six
months of 2000 from $3.9 million during the same period in 1999. Interest
expense was $2.6 million during the second quarter of 2000 compared to $2.0
million during the second quarter of 1999. The increase was principally due
to the cost of deposits being $1.0 million greater for the first six months
in 2000 than in 1999. The average balance of deposits increased by $25.4
million, to $195.6 million during the second quarter of 2000 from $170.2
million during the second quarter of 1999 as the Bank actively marketed its
deposit products, particularly its interest-bearing demand and large
certificates of deposit. Accompanying these increases in average balances
was an increased cost of funds because of generally rising interest rates.
The cost of deposits and of borrowed funds rose to 4.75% and 6.35% during
the second quarter in 2000 from 4.30% and 4.48% during the same period in
1999. In addition to the sale of securities to support the growth in loans,
the Bank increased its use of Federal Home Loan Bank advances in 1999. The
average balance of this source of funds was particularly high during the
second quarter of 1999 at $19.5 million, due to the rapid expansion into the
Bank's indirect loan portfolio at the time. By contrast, in 2000, Federal
Home Loan Bank advances have been repaid as deposit growth exceeded loan
growth, averaging $16.8 million during the second quarter. As a result,
interest expense on borrowed funds was $49,000 less in the second quarter of
2000 compared to 1999.
The provision for loan loss decreased to $249,000 for the six months ended
June 30, 2000 compared to $273,000 for the same period in 1999. This is
reflective of both the significant indirect loan growth during the first
half of 1999 and the halting of indirect loan volume during the first half
of 2000. 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 of local and national
economic conditions. Management increased the provision during the second
quarter of 2000 as compared to the first quarter in light of the seasonal
increase in consumer loan financings, which have greater credit risk.
Noninterest income was $87,000 less for the first six months of 2000
compared to the same period in 1999. The decrease was primarily due to gains
on the sale of securities of $60,000 in 1999 not being 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. The Corporation began earning noninterest
income from this source during the second quarter.
Total noninterest expense increased $224,000 to $3.9 million for the first
six months of 2000 compared to $3.7 million for the same period in 1999.
Total noninterest expense was $53,000 more for the second quarter of 2000
compared to the same period in 1999. For the comparable six-month periods,
the most significant increases were $263,000 in salaries and employee
benefits, $29,000 in professional fees, and $27,000 in FDIC deposit
insurance. Other operating expense has been held in check and was $67,000
less in 2000 than in 1999. Since June of 1999, the Bank has opened an office
shared by its finance subsidiary in Marion, Ohio, purchased and began
renovation of a second facility in Findlay, Ohio, and purchased an existing
banking facility in Richwood, Ohio. Staffing for the latter two offices has
already been initiated as they both will begin operations during the third
quarter. Due to these changes and expected growth of the Corporation,
management expects 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 $6.6 million at June 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 June 30, 2000, the Bank's leverage ratio was 7.76% and the risk-based
capital ratio was 10.23%, 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 June 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:
The Annual Meeting of Shareholders (the "Meeting") of the
Corporation was held April 12, 2000. There were 657,573 shares of
the 1,049,999 shares currently outstanding, or 62.6% , represented
in person or by proxy at the Meeting. The only matter for voting
was the election of Class III Directors for the Corporation, with
a three year term expiring at the Corporation's 2003 Annual
Meeting. Each of the four nominees, namely James A. Deer, Hazel D.
Franks, Raymond E. Graves, and Richard A. Sheaffer, received at
least 655,018 votes, or 99.6%, of the shares represented at the
Meeting, and were elected as Class III 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 April 17, 2000.
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 7 hereof)
Exhibit 27, Financial Data Schedule
(b) A Report on Form 8-K was filed April 17, 2000 regarding
Other Events. The report addressed the Corporation's
approval to acquire an ownership interest in Beck Title
Agency, Ltd, for the purpose of preparing title insurance
commitments and issuing title insurance policies under an
agency agreement.
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: August 14, 2000 /s/Raymond E. Graves
----------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: August 14, 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
