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 March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-27894
COMMERCIAL BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Ohio 34-1787239
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
118 South Sandusky Street, Upper Sandusky, Ohio 43351
(Address of principal executive offices)
(419) 294-5781
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 1999, the latest practicable date, 1,049,999 shares of the
issuer's common shares, $.01 par value, were issued and outstanding.
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.
Consolidated Statements of Cash Flows 6.
Notes to Consolidated Financial Statements 7.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17.
Item 2. Changes in Securities and Use of Proceeds 17.
Item 3. Defaults Upon Senior Securities 17.
Item 4. Submission of Matters to a Vote of Security Holders 17.
Item 5. Other Information 17.
Item 6. Exhibits and Reports on Form 8-K 17.
SIGNATURES 18.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Statements
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,069,227 $ 6,692,802
Securities available for sale 36,487,428 38,256,547
Total loans 165,783,967 158,637,114
Allowance for loan losses (1,244,686) (1,182,848)
------------------------------
Loans, net 164,539,281 157,454,266
Premises and equipment, net 4,160,939 3,957,927
Other real estate, net 885,000 921,500
Accrued interest receivable 1,160,845 1,054,578
Other assets 2,627,946 2,066,112
------------------------------
Total assets $216,930,666 $210,403,732
==============================
LIABILITIES
Deposits
Noninterest-bearing demand $ 15,495,045 $ 16,800,775
Interest-bearing demand 39,225,079 39,985,521
Savings and time deposits 98,645,292 94,178,037
Time deposits $100,000 and greater 27,256,264 22,133,462
------------------------------
Total deposits 180,621,680 173,097,795
Accrued interest payable 445,598 422,085
Borrowed funds 18,070,115 19,220,000
Other liabilities 774,463 616,224
------------------------------
Total liabilities 199,911,856 193,356,104
------------------------------
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000
shares authorized; 1,049,999 and
1,043,481 and shares issued in 1999
and 1998) 7,981,859 7,963,870
Retained earnings 9,119,098 8,940,775
Unrealized loss on securities available
for sale (82,147) 142,983
------------------------------
Total shareholders' equity 17,018,810 17,047,628
------------------------------
Total liabilities and shareholders'
equity $216,930,666 $210,403,732
==============================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans $3,485,331 $2,760,754
Interest on securities
Taxable 287,280 362,870
Nontaxable 165,291 191,126
Other interest income 13,274
--------------------------
Total interest income 3,951,176 3,314,750
--------------------------
Interest expense
Interest on deposits 1,725,305 1,695,336
Interest on other borrowings 172,898 9,361
--------------------------
Total interest expense 1,898,203 1,704,697
Net interest income 2,052,973 1,610,053
Provision for loan losses 151,900 75,000
--------------------------
Net interest income after provision for
loan losses 1,901,073 1,535,053
--------------------------
Other income
Service fees and overdraft charges 235,711 152,778
Security gains, net 30,101 3,733
Loan sale gains, net 29,682 14,093
Other income 147,194 48,998
--------------------------
Total other income 442,688 219,602
--------------------------
Other expense
Salaries and employee benefits 847,785 619,188
Occupancy, furniture and equipment 195,706 141,129
State taxes 71,890 70,874
Data processing 121,150 140,813
Other operating expense 585,051 346,332
--------------------------
Total other expense 1,821,582 1,318,336
--------------------------
Income before federal income taxes 522,179 436,319
Income tax expense 144,355 86,400
--------------------------
Net income $ 377,824 $ 349,919
==========================
Basic earnings per common share $ .36 $ .34
==========================
Diluted earnings per common share $ .36 $ .33
==========================
</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
March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,047,628 $15,688,343
Comprehensive income:
Net income 377,824 349,919
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification and tax effects (225,131) (99,873)
----------------------------
Total comprehensive income 152,693 250,046
Stock options exercised 17,989 39,143
Dividends paid (199,500)
----------------------------
Balance at end of period $17,018,810 $15,977,532
============================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash used by operating activities $ (1,502,156) $ 2,637,079
Investing activities
Securities available for sale
Purchases (4,186,172) (16,336,413)
Maturities and repayments 1,587,431 1,956,905
Sales 4,023,616 9,543,345
Net change in loans (5,384,726) 7,278,229
Bank premises and equipment
expenditures (354,057) (14,488)
-------------------------------
Net cash used by investing
activities (4,313,908) 2,427,578
-------------------------------
Financing activities
Net change in deposits 7,523,885 (2,217,039)
Net change in other borrowings (1,149,885) (3,030,000)
Stock options exercised 17,989 39,143
Dividends paid (199,500)
-------------------------------
Net cash from financing activities 6,192,489 (5,207,896)
-------------------------------
Net change in cash and cash equivalents 376,425 (143,239)
Cash and cash equivalents at beginning
of period 6,692,802 7,111,986
-------------------------------
Cash and cash equivalents at end of
period $ 7,069,227 $ 6,968,747
===============================
Supplemental disclosures
Cash paid during the period for
Interest $ 1,696,792 $ 1,693,563
Income taxes 65,000 215,000
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reason for Amendment: This amended Form 10-Q reflects an adjustment which
reduces interest and fees on loans by $206,000, reduces net income by
$136,000 and reduces corresponding earnings per share by $.12 from amounts
previously reported for the quarter ended March 31, 1999. 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 repot 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 March 31, 1999, and its results of
operations and its cash flows for the periods presented. The accompanying
consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances. The
Annual Report for the Corporation for the year ended December 31, 1998,
contains consolidated financial statements and related notes, which should
be read in conjunction with the accompanying consolidated financial
statements.
Industry Segment Information: Commercial Bancshares, Inc. is a bank-
holding corporation whose banking subsidiary, The Commercial Savings Bank,
is engaged in the business of commercial and retail banking, with
operations conducted through its main office and branches located in Upper
Sandusky, Ohio and neighboring communities. Advantage Finance, Inc. is a
consumer finance company operating in Marion, Ohio. These market areas
provide the source of substantially all of the Corporation's deposit and
loan activities, although some indirect loans are made to borrowers outside
the Corporation's immediate market area. Substantially all of the
Corporation's income is derived from commercial and retail lending and
investments activities.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The collectibility
of loans, fair values of financial instruments and status of contingencies
are particularly subject to change.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged
off.
A loan is considered impaired when management believes full collection of
principal and interest is not probable. Often this is associated with a
delay or shortfall in payments. Smaller-balance homogeneous loans are
evaluated for impairment in total. Such loans include residential first
mortgage loans secured by one-to-four-family residences and consumer
automobile, home equity and credit card loans with balances less than
$200,000. In addition, loans held for sale are excluded from consideration
of impairment.
Other Real Estate: Real estate acquired in settlement of loans is
initially reported at estimated fair value at acquisition. After
acquisition, a valuation allowance reduces the reported amount to the lower
of the initial amount or fair value less costs to sell. Expenses incurred
are charged to operations as incurred. Gains and losses on disposition,
and changes in the valuation allowance are reported in net gain or loss on
other real estate.
Loan Servicing: The Corporation has sold various loans to the Federal Home
Loan Mortgage Corporation (FHLMC) while retaining the servicing rights.
Gains and losses on loan sales are recorded at the time of the cash sale.
Mortgage servicing rights are determined by allocating total cost of
mortgage loans to mortgage servicing rights and to loans (without mortgage
servicing rights) based on their relative fair values. Mortgage servicing
rights recorded as a separate asset are amortized in proportion to, and
over the period of, estimated net servicing income.
Income Taxes: Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax
consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, computed using enacted tax rates. A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
Earnings per Share: Basic and diluted earnings per share are computed
under a new accounting standard effective in the quarter ended December 31,
1997. All prior amounts have been restated to be comparable. Basic
earnings per share is based on net income divided by 1,049,614 and
1,042,728 weighted average shares outstanding during the periods
ended March 31, 1999 and 1998. Diluted earnings per share reflect the
effect of additional common shares issuable under stock options using the
treasury stock method. The weighted average number of shares used for
determining diluted earnings per share were 1,063,994 and 1,051,390 for the
quarter ended March 31, 1999 in 1998.
Financial Statement Presentation: Some items in prior financial statements
have been reclassified to conform with the current presentation.
NOTE 2 - SECURITIES
Securities as of March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale
Obligations of federal agencies $ 1,607,233 $ 18,392 $ 1,588,841
Obligations of state and political
subdivisions 14,309,287 $210,813 59,225 14,460,875
Corporate bonds 1,001,927 0 12,504 989,423
Mortgage-backed securities 18,679,151 459 245,616 18,433,994
---------------------------------------------------------
Total debt securities 35,597,598 211,272 335,737 35,473,133
Equity investments 1,014,295 0 0 1,014,295
---------------------------------------------------------
Total securities $36,611,893 $211,272 $ 335,737 $36,487,428
=========================================================
</TABLE>
<TABLE>
<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 $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 March 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Debt securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Securities available for sale
Due in one to five years $ 2,384,058 $ 2,375,165
Due in five to ten years 8,144,587 8,159,378
Due after ten years 6,389,802 6,504,596
Mortgage-backed securities 18,679,151 18,433,994
----------------------------
Total debt securities available
for sale $35,597,598 $35,473,133
============================
</TABLE>
Sales of available-for-sale securities during the three months ended March
31, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $4,023,616 $9,543,345
Gross gains 31,740 61,351
Gross losses 1,639 57,618
</TABLE>
Securities with a carrying value of approximately $16,382,279 at March 31,
1999 and $9,731,000 at December 31, 1998 were pledged to secure deposits
and for other purposes.
NOTE 3 - LOANS
Loans at March 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Commercial and other loans $ 76,796,432 $ 79,168,621
Real estate loans 32,804,668 30,739,831
Consumer and credit card 49,466,116 42,012,388
Home equity loans 6,716,751 6,716,274
------------------------------
Total loans $165,783,967 $158,637,114
==============================
</TABLE>
The subsidiary Bank is an authorized seller/servicer for the Federal Home
Loan Mortgage Corporation (FHLMC). Loans sold to FHLMC for which the Bank
has retained servicing totaled $49,940,124 and $46,931,540 at March 31,
1999 and December 31, 1998. Real estate loans originated and held for sale
at March 31, 1999 and December 31, 1998 totaled $4,128,615 and $2,276,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the three months
ended March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance - January 1 $1,182,848 $1,075,385
Loans charged off (124,766) (160,181)
Recoveries 34,704 20,375
Provision for loan losses 151,900 75,000
--------------------------
Balance - March 31 $1,244,686 $1,010,579
==========================
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Balance of impaired loans $421,851 $1,068,036
Less portion for which no allowance
for loan losses is allocated 0 0
---------------------------
Portion of impaired loan balance for
which an allowance for loan losses
is allocated $421,851 $1,068,036
===========================
Portion of allowance for loan losses
allocated to the impaired loan balance $ 84,370 $ 213,607
===========================
</TABLE>
Information regarding impaired loans is as follows for the period ended:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Average investment in impaired loans $744,944 $1,237,532
Interest income recognized on impaired
loans -- --
</TABLE>
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial
statements, including claims and legal actions arising in the normal course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have
a material effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to
meet the financing needs of customers. These financial instruments include
commitments to extend credit and standby letters of credit which involve,
to varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented
by the contractual amount for commitments to extend credit and standby
letters of credit. Each customer's credit worthiness is evaluated on a
case-by-case basis. The same credit policies are used for commitments and
conditional obligations as are used for loans. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on
management's credit evaluation. Collateral varies but may include accounts
receivable, inventory, property, equipment, income-producing commercial
properties, residential real estate and consumer assets.
Commitments to extend credit are agreements to lend to a customer as long
as no condition established in the commitment is violated. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily
represent future cash requirements. Standby letters of credit are
conditional commitments to guarantee a customer's performance to a third
party.
The following is a summary of commitments to extend credit at March 31,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Fixed rate $ 1,519,189 $ 2,518,000
Variable rate 27,107,614 29,107,000
----------------------------
$28,626,803 $31,625,000
============================
</TABLE>
At March 31, 1999 and December 31, 1998, reserves of $901,000 and $901,000
were required as deposits with the Federal Reserve or as cash on hand.
These reserves do not earn interest.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion focuses on the consolidated financial condition
the Corporation at March 31, 1999, compared to December 31, 1998, and the
consolidated results of operations for the quarterly period ending March
31, 1999 compared to the same period in 1998. The purpose of this
discussion is to provide the reader with a more thorough understanding of
the consolidated financial statements and related footnotes.
The 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 $6,526,934 or 3.10% from December 31, 1998 to
March 31, 1999. The increase in the loan portfolio was the primary reason
for this increase and is discussed below.
Gross loans increased $7,146,853 or 4.51% during the first three months of
1999. Increases occurred in real estate and installment portfolios, which
combined to increase $9,518,565 or 13.08% during the first three months of
1999. The Bank experienced significant rate competition in the commercial
lending area from larger, megabank institutions and strategically decided
not to negatively impact net interest margin by offering comparable rates.
The increase in the installment portfolio was due to growth in the indirect
loan business, specifically financing of horse trailer and consumer farm
equipment. The Bank has a partnering relationship with a Denver-based
organization, whereas the Bank purchases horse trailer loan accounts on a
national and local basis. Advantage has performed a "partnering" with
Quality Farm and Fleet ("QFF") stores whereas Advantage has the first right
of financing of all consumer large ticket items. Large ticket items are
considered those items of which have a retail cost exceeding three hundred
dollars. Advantage is reserving all QFF loans approved at a four- percent
reserve for bad debts. Advantage is currently involved in two periods per
year whereas the buyers of the consumer goods receive no interest or
payments for the first six months of the contract. We estimate that over
60% of these loans will go beyond the six-month period. Further all of
these accounts are purchased at a discount of two percent.
Total deposits increased $7,523,885, or 4.3%, during the first three months
of 1999. Noninterest bearing deposits decreased $1,305,730 for the period
ended March 31, 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
This amended Form 10-Q reflects an adjustment which reduces interest and
fees on loans by $206,000, reduces net income by $136,000 and reduces
corresponding earnings per share by $.12 from amounts previously reported
for the quarter ended March 31, 1999. 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 repot to shareholders for the year ended December 31,
1999.
Net income for the three-month period ending March 31, 1999 was $377,824
compared to $349,919 during the same period in 1998. Diluted earnings per
share increased by $.03 per share for the three-month period ending March
31, 1999 as compared to the same period in 1998. Discussed below are the
major factors, which have influenced these, operating results.
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of
deposits and other borrowings obtained to fund them. Net interest income
is affected by the volume and composition of interest-earning assets and
interest-bearing liabilities as well as the level of noninterest-bearing
demand deposits and shareholders' equity. Also impacting net interest
income is the susceptibility of interest-earning assets and interest-
bearing liabilities to changes in the general market level of interest
rates. Management attempts to manage the repricing of assets and
liabilities to achieve a stable level of net interest income and reduce the
effect of significant changes in the market level of interest rates. This
is accomplished through the pricing and promotion of various loan and
deposit products as well as the active management of the Bank's portfolio
of investment securities available for sale.
Interest income for the first quarter 1999 was $3,951,176 as compared to
$3,314,750 during the same period 1998, an increase of $636,426. During
the same period, interest expense increased $193,506 from $1,704,697 in
1998 to $1,898,203 in 1999. The main reason for this increase in interest
income is the purchase of a six million-dollar portfolio of horse trailer
loans from Mountain Parks Bank in July 1998. This relationship has
increased interest income via the increased number of loans that have been
approved. This portfolio is anticipated to continue and enjoy growth, low
delinquencies, low charge-offs and market rates of return. This is
considered a niche for the Bank to increase earnings for the Corporation.
The provision for loan loss increased $76,900 in the first quarter 1999
compared to 1998. This corresponds to the increase in the loan portfolio.
Management has determined that the loan loss provision is adequate at March
31, 1999 through its analysis of specific problem loans, historical charge-
off experience along with local and national economic trends. However,
management expects to continue to increase the provision due to the
expected growth of indirect loan originations, which have greater credit
risk.
NONINTEREST INCOME
Total first quarter noninterest income increased $223,086 or 101.59%
compared to the same period in 1998. The larger fluctuations were in the
increase in service fees and overdrafts of $82,933 and other income of
$98,196. The other income increase was primarily due to gains on the sale
of securities of approximately $26,000 and a $32,000 increase in sales of
credit life, accident and health insurance. For the three months ended
March 31, 1998, the Bank lost $72,000 on repossessions while during the
same period in 1999, the Bank lost only $3,000.
NONINTEREST EXPENSE
Total noninterest expense increased $503,246 or 38.17% for the first three
months of 1999 compared to the same period in 1998. The most significant
increases were $228,597 in salaries and benefits and $238,719 in other
operating expense. In 1999, the Bank will open another office in Marion,
Ohio, and is renovating the Tiffin Avenue Office in Findlay, Ohio and the
Carey Banking Center in Carey, Ohio. Due to these changes and expected
growth of the Corporation, management expects noninterest expense to
continue to increase.
CAPITAL RESOURCES
Total shareholders' equity decreased $28,818 or 0.63% during the first
quarter of 1999. Year-to-date net income of $377,824 increased equity,
offset by a $225,131 decrease in the market value of the available-for-sale
security portfolio. Shareholders' equity to total assets was 7.8% at March
31, 1999 compared to 8.1% at December 31, 1998. It is also note worthy
that the Corporation has determined it is in the best interest of the
shareholders to pay the stock or cash dividend quarterly, rather than the
previous method of semi-annually. This is being done to get the dividend
in the hand of the shareholders more rapidly and to assist in the
marketability of the stock.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. Risk-based
capital regulations require all banks to have a minimum total risk-based
capital ratio of 8% with half of the capital composed of core capital.
Minimum leverage ratio requirements range from 3% to 5% of total assets.
Core capital, or Tier 1 capital, includes common equity, perpetual
preferred stock and minority interests that are held by others in
consolidated subsidiaries minus intangible assets. Supplementary capital,
or Tier 2 capital, includes core capital and such items as mandatory
convertible securities, subordinated debt and the allowance for loans and
lease losses, subject to certain limitations. Qualified Tier 2 capital can
equal up to 100% of an institution's Tier 1 capital with certain
limitations in meeting the total risk-based capital requirements. At March
31, 1999, the Bank's leverage ratio was 8.0% and the risk-based capital
ratio was in excess of 11.4%, 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 March 31, 1999 and December 31, 1998 stood at
$7,069,227 and $6,692,802. Refer to the Statement of Cash Flows contained
within this report.
A standard measure of liquidity is the relationship of loans to deposits
and borrowed funds. Lower ratios indicate greater liquidity. At March 31,
1999 and December 31, 1998, the ratio of loans to deposits and borrowed
funds was 83.4% and 82.5%, considered an acceptable level of liquidity by
management.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 1999
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re computation of per share earnings
(reference is hereby made to Note 1 to the Consolidated
Financial Statements on page 8 hereof.).
Exhibit 27, Financial Data Schedule.
(b) Form 8-K was filed on February 9, 1999 disclosing the change
of the charter of Advantage to a wholly owned finance
company subsidiary of the Bank and the approval for a new
branch of the Bank.
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: /s/ Raymond E. Graves
------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: /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.
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