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 September 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 October 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 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,235,788 $ 6,692,802
Securities available for sale, at fair value 33,251,909 38,256,547
Total loans 191,085,391 158,637,114
Allowance for loan losses (1,387,565) (1,182,848)
-----------------------------
Net loans 189,697,826 157,454,266
Premises and equipment, net 5,452,884 3,957,297
Other real estate 806,438 921,500
Accrued interest receivable 1,447,860 1,054,578
Other assets 2,066,986 2,066,742
-----------------------------
Total assets $238,959,691 $210,403,732
=============================
LIABILITIES
Deposits
Noninterest-bearing deposits $ 15,460,446 $ 16,800,775
Interest-bearing deposits 39,218,921 39,985,521
Savings and time deposits 110,017,457 94,178,037
Time deposits $100,000 and greater 42,032,864 22,133,462
Total deposits 206,729,688 173,097,795
Accrued interest payable 484,096 422,085
Borrowed funds 14,802,938 19,220,000
Other liabilities 205,538 616,224
-----------------------------
Total liabilities 222,222,260 193,356,104
SHAREHOLDERS' EQUITY
Common stock (no par value; 4,000,000 shares
authorized; 1,049,999 and 1,048,431 shares
issued in 1999 and 1998 7,981,858 7,963,870
Retained earnings 9,559,445 8,940,775
Unrealized loss on securities available for sale (803,872) 142,983
-----------------------------
Total shareholders' equity 16,737,431 17,047,628
-----------------------------
Total liabilities and shareholders' equity $238,959,691 $210,403,732
=============================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $3,982,025 $3,048,396 $11,213,607 $ 8,514,378
Interest on securities
Taxable 251,669 351,133 851,606 996,952
Nontaxable 172,164 263,695 504,515 687,279
Other interest income 22,887 5,985 44,031 92,355
------------------------------------------------------
Total interest income 4,428,745 3,669,209 12,613,759 10,290,964
Interest expense
Interest on deposits 2,129,324 1,782,070 5,685,582 5,212,917
Other interest expense 176,398 82,407 566,914 91,768
------------------------------------------------------
Total interest expense 2,305,722 1,864,477 6,252,496 5,304,685
------------------------------------------------------
Net interest income 2,123,023 1,804,732 6,362,263 4,986,279
Provision for loan losses 110,000 172,912 382,857 328,012
------------------------------------------------------
Net interest income after
provision for loan losses 2,013,023 1,631,820 5,978,406 4,658,267
------------------------------------------------------
Other income
Service charges on deposit accounts 284,554 200,435 787,848 514,923
Security gains/(losses), net (2,241) 63,718 57,694 84,620
Loan sale gains, net 36,074 93,574 116,552 253,898
Other income 65,144 62,031 270,089 154,629
------------------------------------------------------
Total other income 383,531 419,758 1,232,183 1,008,070
Other expense
Salaries and employee benefits 852,816 718,902 2,575,776 2,106,035
Occupancy, furniture and equipment 181,706 152,930 623,368 447,690
State taxes 71,625 74,041 213,107 215,294
Data processing 125,786 139,598 388,789 414,831
Other operating expense 578,635 508,108 1,694,833 1,255,017
------------------------------------------------------
Total other expense 1,810,568 1,593,579 5,495,873 4,438,867
Income before federal income taxes 585,986 457,999 1,714,716 1,227,370
Income tax expense 170,400 81,230 497,546 219,000
Net income $ 415,586 $ 376,769 $ 1,217,170 $ 1,008,470
======================================================
Basic earnings per common share $ .40 $ .36 $ 1.16 $ .97
======================================================
Diluted earnings per common share $ .39 $ .36 $ 1.13 $ .96
======================================================
</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
September 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $16,575,598 $15,930,088
Comprehensive Income:
Net income 415,586 376,769
Change in net unrealized gain / (loss) on securities
available for sale, net of reclassification
and tax effects (54,253) 831,455
--------------------------
Total comprehensive income 361,333 1,208,224
Stock options exercised -- 43,492
Dividends paid (199,500) --
--------------------------
Balance at end of period $16,737,431 $17,181,804
==========================
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $17,047,628 $15,688,343
Comprehensive Income:
Net income 1,217,170 1,008,470
Change in net unrealized gain/(loss) on securities
available for sale, net of reclassification
and tax effects (946,855) 737,252
--------------------------
Total Comprehensive Income 270,315 1,745,722
Issuance of common stock 17,988 --
Stock Options Exercised -- 134,826
Dividends paid (598,500) (387,087)
--------------------------
Balance at end of period $16,737,431 $17,181,804
==========================
</TABLE>
See notes to the consolidated financial statements.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 724,506 $ 890,498
Investing activities
Securities available for sale
Purchases (9,007,139) (38,795,862)
Maturities and repayments 4,523,738 4,997,681
Sales 8,016,911 25,289,615
Securities held to maturity
Purchases -- (245,078)
Sales -- 916,484
Net change in loans (31,455,699) (11,729,160)
Bank premises and equipment expenditures (1,956,214) (190,173)
Net change in other real estate (37,438) --
----------------------------
Net cash used by investing activities (29,915,841) (19,756,493)
----------------------------
Financing activities
Net change in deposits 33,731,894 7,028,526
Net change in other borrowings (4,417,062) 9,620,000
Dividends paid (598,499) (387,087)
Issuance of common stock 17,988 --
Stock options exercised -- 134,826
----------------------------
Net cash from financing activities 28,734,321 16,396,265
----------------------------
Net change in cash and cash equivalents (457,014) 2,469,730
Cash and cash equivalents at beginning of period 6,692,802 7,111,986
----------------------------
Cash and cash equivalents at end of period $ 6,235,788 $ 4,642,256
============================
Supplemental disclosures
Cash paid during the period for
Interest $ 6,190,485 $ 6,182,284
Income taxes 360,000 400,000
</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 nine months ended September 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 1,049,872 and 1,044,918 weighted average shares outstanding during the
nine months ended September 30, 1999 and 1998 and 1,049,999 and 1,047,110
weighted average shares outstanding during the quarter ended September 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 1,079,794 and 1,052,897 for the nine months ended September
30, 1999 and 1998 and 1,058,338 and 1,058,135 for the quarter ended
September 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 September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 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 $ 1,606,190 $ (92,128) $ 1,514,062
Obligations of state and political
subdivisions 15,691,611 $ 23,913 (709,664) 15,005,861
Corporate bonds 997,329 (44,895) 952,433
Mortgage-backed securities 14,933,128 (395,215) 14,537,913
-------------------------------------------------------
Total Debt Securities 33,228,258 23,913 (1,241,902) 32,010,269
Equity investments 1,241,640 1,241,640
-------------------------------------------------------
Total securities available for sale $34,469,898 $ 23,913 $(1,241,902) $33,251,909
========================================================
<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 and held to maturity at September 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 $ 2,685,272 $ 2,572,870
Due in five to ten years 8,141,092 7,766,423
Due after ten years 7,468,766 7,133,063
Mortgage-backed securities 14,933,128 14,537,913
--------------------------
Total debt securities available for sale $33,228,258 $32,010,269
==========================
</TABLE>
Sales of available for sale securities during the nine months ended
September 30, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Proceeds $8,016,911 $25,289,615
Gross gains 61,894 150,251
Gross losses 4,200 65,631
</TABLE>
Securities with a carrying value of approximately $22,121,926 at September
30, 1999 and $9,731,000 at December 31, 1998 were pledged to secure deposits
and for other purposes.
NOTE 3 - LOANS
Loans at September 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Commercial and other loans $ 81,131,835 $ 79,168,621
Real estate loans 31,499,541 30,739,831
Consumer and credit card 71,494,199 42,012,388
Home equity loans 6,959,816 6,716,274
----------------------------------
Total loans $191,085,391 $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 $63,131,763 and $46,931,540 at September 30,
1999 and December 31, 1998. Real estate loans originated and held for sale
at September 30, 1999 and December 31, 1998 totaled $3,447,144 and
$2,276,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the nine months
ended September 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 (269,189) (414,704)
Recoveries 91,049 44,065
Provision for loan losses 382,857 328,012
------------------------
Balance - September 30 $1,387,565 $1,032,758
========================
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Balance of impaired loans $186,235 $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 $186,235 $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>
September 30, 1999 December31, 1998
<S> <C> <C>
Average investment in impaired loans $381,784 $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 September 30,
1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Fixed rate $ 1,241,000 $ 2,518,000
Variable rate 22,248,000 29,107,000
--------------------------
$23,489,000 $31,625,000
==========================
</TABLE>
At September 30, 1999 and December 31, 1998, reserves of $848,000 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 September 30, 1999, compared to December 31, 1998, and
the consolidated results of operations for the three and nine months ending
September 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.
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, unforeseen business risks
related to Year 2000 computer system issues, government policies and
regulations and rapidly changing technology affecting financial services.
FINANCIAL CONDITION
Total assets increased by $28,555,959 or 13.57% from December 31, 1998 to
September 30, 1999. The increase in the loan portfolio was the primary
reason for this increase and is discussed below.
Gross loans increased $32,448,277 or 20.45% during the first nine months of
1999. Increases occurred in commercial and installment portfolios, which
combined to increase $31,445,025 or 25.9% during the first nine months of
1999. The Bank experienced significant rate competition in the commercial
lending area from larger, megabank institutions. 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, where
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 where Advantage has the first right of financing of all
consumer large ticket items. Large ticket items are considered those items
which have a retail cost exceeding three hundred dollars. The Corporation is
reserving all QFF loans approved at a four- percent reserve for bad debts.
Advantage is currently involved in two periods per year where 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 $33,631,893 or 19.4%, during the first nine months
of 1999. This increase was primarily derived from a $19,899,402 increase in
time deposits of $100,000 and greater. These certificates of deposit were
issued both conventionally to local market deposit customers as well as by
marketing over the Internet. These deposits, with maturities of 9 months of
greater, are used to fund the growth of the Bank's consumer loan portfolio.
Noninterest bearing deposits decreased $1,340,329 for the period ended
September 30, 1999.
The Bank will, from time to time, use advances from Federal Home Loan Bank
to fund loans. This is an additional source of funding. 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 nine-month period ending September 30, 1999 stood at
$1,217,170 compared to $1,008,470 during the same period in 1998. Third
quarter income in 1999 was $415,586 as compared to $376,769 during the same
three-month period in 1998. Diluted earnings per share increased by $.03 and
$.17 per share for the three- and nine- month periods ending September 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. 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.
Interest income for the three and nine months ending September 30, 1999 was
$4,428,745 and $12,613,759 as compared to $3,669,209 and $10,290,964 during
the same periods in 1998, an increase of $759,536 and $2,322,795. During the
nine month time period, interest expense increased $947,811 from $5,304,685
to $6,252,496 in 1999. A factor 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 and a continuing partnership with a Denver
based organization, in which the bank purchases horse trailer loan accounts
on a national and local basis. This relationship has increased interest
income via the increased number of loans that have been approved. This is
considered a niche for the Bank.
The provision for loan loss increased $54,845 for the nine-months ended
September 30, 1999 compared to the same period in 1998. Management has
determined that the loan loss provision is adequate at September 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 September 30, 1999
decreased $36,227 or 8.63% compared to the same period in 1998 and increased
$224,113 or 22.23% for the first nine months of 1999 compared to the same
period in 1998. The larger fluctuations were in the increase in service fees
and overdrafts of $272,925 and other income of $115,460. The other income
increase was primarily due to a $50,143 increase in sales of credit life,
accident and health insurance. In addition, net investor servicing income
related to FASB 122 increased $48,133 or 79.3% for the nine months ended
September 30, 1999 as compared to the same period in 1998.
NONINTEREST EXPENSE
Total noninterest expense increased $1,057,006 or 23.81% for the first nine
months of 1999 compared to the same period in 1998. For the third quarter of
1999, noninterest expense increased $216,989 or 13.62% compared to the same
period in 1998. The most significant increases were $133,914 and $469,741 in
salaries and benefits and $70,527 and $439,816 in other operating expense
for the three and nine months ended September 30, 1999. In 1999, the Bank
has opened a third office in Marion, Ohio, and has renovated the Tiffin
Avenue Office in Findlay, Ohio and the Carey Banking Center in Carey, Ohio.
A second banking center site has been purchased in Findlay, Ohio. Advantage
Finance has also opened their second office in Marion, 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 $310,197 or 1.8% during the first nine
months of 1999. Year-to-date net income of $1,217,170 increased equity,
offset by a $946,855 decrease in the market value of the available for sale
securities portfolio. Shareholders' equity to total assets was 7.00% at
September 30, 1999 compared to 8.1% at December 31, 1998. It is also
noteworthy that the Corporation has determined that 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
dividends in the hands of 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 loan 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 September 30, 1999, the Bank's
leverage ratio was 6.7% and the risk-based capital ratio was 9.3%, both of
which exceeded the minimum regulatory requirements.
The Company's strategic plan calls for a Tier 1 capital leverage ratio of
not less than 7.0%. Also, when this ratio falls below 7.25%, a capital plan
will be developed and presented to the Board of Directors for their
approval. Management is presently developing a capital strategy which will
address both the Tier 1 leverage ratio and the bank's risk based capital
ratios, in an attempt to return the latter above the 10% level by year end
1999 for the purpose of continuing to meet the "well-capitalized" definition
of the Federal Deposit Insurance Corporation.
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 September 30, 1999 and December 31, 1998 stood
at $6,235,788 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 September 30,
1999 and December 31, 1998, the ratio of loans to deposits and borrowed
funds was 86.3% 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 its operations. At this time, however, the
expense that may be incurred by the Corporation in connection with system
failure 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 significantly dependent on one
employer or industry, the Corporation does not expect that 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 2000 issues confronting its customers cannot be
determined.
MANAGEMENT CHANGES
During the month of September 1999, two major changes occurred in the
management of the company.
Raymond E. Graves, who served as the President and Chief Executive Officer
for The Commercial Savings Bank for approximately four years, has taken the
full time position as President and Chief Executive Officer for the
corporation, Commercial Bancshares, Inc. Under his new charge, the President
of The Commercial Savings Bank reports directly to Graves, and Graves is
charged with the supervision of all affiliates, at this time being The
Commercial Savings Bank and Advantage Finance, Inc. Advantage is a
subsidiary of the bank financially but will report managerially as an
affiliate of the holding company. Graves is further charged with exploring
other opportunities that may enhance the shareholder's value and will
concentrate much of his efforts on the value of the stock of the
corporation.
James A. Deer, who served as the Executive Vice President for The Commercial
Savings Bank for six years, and worked for the bank for a total of 15 years,
has moved forward to President and CEO of the bank. He is charged with the
responsibility for the day to day operations of the bank, the holding
company's major affiliate.
Both men have been offered employment contracts for a one year renewal
period of time, which are under advisement. It is believed by the board of
directors that these contracts, in part, prohibit these men, should they
leave the employ of the company, from working in the financial field in any
county of which our company has an office or any contiguous county. It is
believed by the board of directors that these contracts are in the best
interest of the shareholders.
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 September 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)
Exhibit 27, Financial Data Schedule
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 08, 2000 /s/ Raymond E. Graves
-----------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: September 08, 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
