<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1994
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-20232
-------
COMMERCIAL BANCSHARES, INCORPORATED
-----------------------------------
(Exact name of small business issuer as specified in its charter)
West Virginia 55-0622108
------------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) identification No.)
415 Market Street, Parkersburg, WV 26101
-----------------------------------------
(Address of principal executive offices)
304-424-0300
------------
(Issuer's telephone number)
Check whether the issue (1) has 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at June 30, 1994
----- ----------------------------
Common Stock $5.00 par value 758,506
<PAGE>
COMMERCIAL BANCSHARES, INCORPORATED
("Commercial")
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page No.
<S> <C>
Condensed Consolidated Balance Sheet as of June 30,
1994 and December 31, 1993............................ 3
Condensed Consolidated Statement of Income for
Six Months ended June 30, 1994 and 1993............... 4
Condensed Statement of Changes in Stockholders
Equity for Six months ended June 30, 1994............. 5
Consolidated Statement of Cash Flows for the Six
Months ended June 30, 1994 and 1993................... 6
Notes to Condensed Consolidated Financial Statements... 7-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11-12
Part II Other Information.............................. 13-14
Signatures............................................. 14
</TABLE>
-2-
<PAGE>
PART I FINANCIAL INFORMATION
COMMERCIAL BANCSHARES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, Dec. 31,
1994 1993
---- ----
(unaudited) *
<S> <C> <C>
Cash and Due from Banks............................................. $ 10,528 $ 10,172
Interest-Bearing Deposits in Banks.................................. 239 99
Federal Funds Sold.................................................. 8,375 7,924
Investment Securities............................................... 51,605 56,269
(Market Value: $51,827 and $57,274)
Loans - net of unearned discount.................................... 191,379 174,476
LESS: Reserve for Losses........................................... (2,481) (2,388)
Premises and Equipment.............................................. 5,580 5,658
Notes Receivable.................................................... 255 255
Accrued Interest Receivable......................................... 1,707 1,659
Foreclosed Properties - Net......................................... 1,616 1,253
Other Assets........................................................ 3,469 2,840
--------------------
TOTAL ASSETS...................................................... $272,272 $258,217
--------------------
<CAPTION>
LIABILITIES AND CAPITAL
Deposits:
Demand - Non-Interest Bearing..................................... $ 34,447 $ 32,819
Demand - Interest Bearing......................................... 42,970 47,550
Savings........................................................... 55,006 52,618
Time Deposits..................................................... 110,146 101,095
--------------------
TOTAL DEPOSITS...................................................... $242,569 $234,082
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase............................... 5,300 0
ESOP Borrowings..................................................... 0 424
Accrued Interest Payable............................................ 547 550
Other Liabilities................................................... 1,739 1,877
--------------------
TOTAL LIABILITIES................................................... $250,155 $236,933
--------------------
Shareholders' Equity:
Preferred Stock (Stated Value: $100)
Outstanding: 27,165 and 27,165 shares.......................... $ 2,716 $ 2,716
Common Stock (Par Value $5.00)
Outstanding: 758,506 shares and 758,506 shares................. 3,792 3,792
Additional Paid In Capital........................................ 5,683 5,683
Undivided Profits................................................. 10,711 9,864
Net Unrealized Gain (Loss) on Available-for-Sale Securities....... (438)
Less: Employee Stock Ownership Plan
Shares Purchased with Debt.................................... 0 (424)
Treasury Stock, at cost........................................ (347) (347)
--------------------
TOTAL SHAREHOLDERS' EQUITY........................................ $ 22,117 $ 21,284
--------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $272,272 $258,217
--------------------
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statement.
-3-
<PAGE>
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands of dollars except for per share data)
Six Months Ended Three Months Ended
June 30 June 30
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans............... $7,851 $7,610 $4,121 $3,789
Interest on Investment Securities
Taxable Investments................... 1,137 1,002 580 460
Non-taxable Investments............... 249 337 122 183
Interest on Federal Funds Sold........... 97 249 58 143
Interest on Notes Receivable............. 0 6 1 3
Interest on Time Deposits with
Other Banks............................ 4 2 3 1
----------------------------------
TOTAL INTEREST INCOME.................... $9,338 $9,206 4,885 $4,579
----------------------------------
INTEREST EXPENSE
Interest on Deposits..................... $3,316 $3,625 $1,670 $1,810
Interest on Federal Funds Purchased and
Securities Sold Under Agreement to
Repurchase............................ 26 35 24 30
Interest on Notes Payable................ 0 0 0 0
----------------------------------
TOTAL INTEREST EXPENSE................... $3,342 $3,660 $1,694 $1,840
----------------------------------
NET INTEREST INCOME...................... $5,996 $5,546 $3,191 $2,739
Provision for Loan Losses.................. 126 208 59 44
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES................ $5,870 $5,338 $3,132 $2,695
OTHER INCOME
Trust Department Income.................. 247 271 128 154
Service Charges and Fees................. 437 349 253 179
Security Gains........................... 0 15 0 0
Other Income............................. 298 353 160 133
----------------------------------
Total Other Income.................... 982 988 541 466
OTHER EXPENSES
Employee Compensations & Benefits........ $2,490 $2,029 $1,145 $ 925
Occupancy Expense
(Net of Rental Income)................ 265 262 121 109
Furniture and Equipment.................. 353 355 177 186
Other Operating Expenses................. 1,486 1,317 816 690
----------------------------------
Total Other Expenses.................. 4,594 3,963 2,258 1,910
INCOME BEFORE APPLICABLE
INCOME TAXES........................ $2,258 $2,362 $1,415 $1,251
Applicable Income Taxes.................... 904 826 531 425
----------------------------------
NET INCOME............................... $1,354 $1,536 $ 883 $ 826
----------------------------------
NET INCOME AVAILABLE FOR
COMMON STOCKHOLDERS........................ $1,218 $1,400 $ 815 $ 758
EARNINGS PER SHARE DATA:
Primary.................................. $ 1.64 $ 1.89 $ 1.10 $ 1.02
Fully Diluted............................ 1.44 1.63 .94 .88
Cash Dividends Declared.................. .50 .46 .25 .23
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
for the six months ended June 30, 1994
(unaudited)
<TABLE>
<CAPTION>
(in thousands
of dollars)
<S> <C>
Convertible Preferred stock (43,328 Shares authorized):
Cumulative Preferred $100 Series:
Balance at Beginning of Year............................................ $ 2,716
-------
Balance at End of Period - 27,165 shares outstanding June 30, 1994...... $ 2,716
-------
Common Stock ($5.00 Par Value; 2,000,000 Shares authorized)
Balance at beginning of year.............................................. $ 3,792
-------
Balance at end of period - 758,506 Shared Issued
and Outstanding at June 30, 1994........................................ $ 3,792
-------
Additional Paid In Capital
Balance at Beginning of Year.............................................. $ 5,683
-------
Balance at End of Period.................................................. $ 5,683
-------
Undivided Profits
Balance at Beginning of Year.............................................. $ 9,864
Net Income................................................................ 1,354
Cash Dividend Declared on Preferred Stock................................. 137
Cash Dividend Declared on Common Stock.................................... 370
-------
Balance at End of Period.................................................. $10,711
-------
Less: Net Unrealized Gain (Loss) on Available-for-Sale Securities
Balance at Beginning of Year.............................................. $ 0
Change, net of applicable deferred income taxes........................... ( 438)
-------
Balance at End of Period.................................................. $( 438)
-------
Less: Employee Stock Ownership Plan Shares Collateralizing Debt, at Cost
Balance at Beginning of Year.............................................. $ 424
Principal Reduction of ESOP Obligation.................................... ( 424)
-------
Balance at End of Period.................................................. $ 0
-------
Less: Treasury Stock, at Cost
Balance at Beginning of Year.............................................. $( 347)
-------
Balance at End of Period (17,643 Shares).................................. $( 347)
-------
Total Shareholders' Equity................................................ $22,117
-------
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands of dollars)
Six Months Ended
June 30
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................... $ 1,354 $ 1,536
Adjustments to Reconcile Net Income to Net
Cash from Operating Activities:
Depreciation.................................................... 328 329
Deferred Employee Benefits...................................... 424 16
Provision for Loan Loss......................................... 126 208
Investment Amortization - Net................................... 284 33
Other - Net..................................................... ( 6) ( 6)
Realized Investment Securities (Gains) Losses................... ( 15)
Income Tax Benefit.............................................. ( 16) ( 34)
Provision for Deferred Taxes.................................... 5 80
(Increase) Decrease:
Accrued Interest Receivable................................... ( 48) ( 60)
Other Assets.................................................. ( 636) ( 481)
Increase (Decrease):
Accrued Interest Payable...................................... ( 4) ( 42)
Other Liabilities............................................. ( 123) ( 532)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... $ 1,688 $ 1,032
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal Funds Sold...................... $( 827) $( 3,493)
Proceeds from Maturities of Securities Reported at Amortized Cost.. 7,443 14,114
Purchases of Securities Reported at Amortized Cost................. ( 3,797) (23,385)
Net (Loans Originated) Principal Collected......................... (17,153) 5,093
Capital Expenditures............................................... ( 250) ( 343)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES............................. $(14,584) ( 8,014)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Total Deposits.......................... $ 8,495 $ 3,662
Net Increase (Decrease) in Federal Funds Purchased................. 5,696 1,950
Principal Payments on ESOP Borrowing............................... (424) (16)
Proceeds from Issuance of ESOP Debt................................ 94
Principal Payments on Capital Lease................................ (9) (14)
Dividends Paid..................................................... (506) (476)
-------- --------
FINANCING ACTIVITIES............................................... $ 13,252 $ 5,200
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................................... $ 356 $( 1,595)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 10,172 10,499
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 10,528 $ 8,904
-------- --------
</TABLE>
During the first six months of 1994 and 1993, the Corporation paid $3,342,000
and $3,660,000, respectively, in interest on deposits and other borrowings and
$745,000 and $1,227,000, respectively, for income taxes.
Disclosure of Accounting Policy:
For purposes of the statement of cash flows, Commercial has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and Due
from Banks."
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
COMMERCIAL BANCSHARES, INC. AND SUBSIDIARIES
("Commercial")
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1994,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1994. For further information, refer to the consolidated
financial statements and footnotes thereto included in Commercial's' annual
report on Form 10-KSB for the year ended December 31, 1993.
NOTE 2: INVESTMENT SECURITIES
The book value and approximate market value of investment securities as of
June 30, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
--------------------------------------------
June 30, 1994
--------------------------------------------
(Thousands of Dollars)
Gross Gross Aggregate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury and Government Agency
Securities:
Mortgage Backed Securities $ 4,248 $ 4 $172 $ 4,080
Collateralized Mortgage
Obligations 2,104 6 30 2,080
Other Treasury and Agency
Securities 33,353 108 651 32,810
Obligations of States and their
Subdivisions 0 0
Corporate Debt Securities 333 333
Equity Securities - FHLB Stock 542 542
--------------------------------------------
TOTAL $40,580 $ 118 $853 $39,845
============================================
Held to Maturity
U.S. Treasury and Government Agency
Securities:
Mortgage Backed Securities $ 19 $ 19
Collateralized Mortgage
Obligations 0 0
Other Treasury and Agency
Securities 783 12 771
Obligations of States and their
Subdivisions 10,449 279 63 10,665
Corporate Debt Securities 509 21 530
--------------------------------------------
TOTAL $11,760 $ 300 $ 75 $11,985
============================================
<CAPTION>
--------------------------------------------
June 30, 1993
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government Agency
Securities $37,828 $ 718 $ 21 $38,525
Obligations of States and their
Subdivisions 8,821 422 9,243
Other Investments 1,432 50 1,482
--------------------------------------------
TOTAL $48,081 $1,190 $ 21 $49,250
============================================
</TABLE>
-7-
<PAGE>
NOTE 3: LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
June 30
------------------
1994 1993
(thousands of dollars)
<S> <C> <C>
Real Estate Loans....................... $ 65,980 $ 59,376
Installment Loans....................... 36,505 33,562
Credit Card Loans....................... 2,963 2,750
Commercial Loans........................ 85,933 75,327
------------------
$191,381 $171,015
------------------
Unearned Income......................... 2 7
------------------
TOTAL LOANS............................. $191,379 $171,008
------------------
</TABLE>
Changes in the allowance for loan losses were as follows for the six months
ended June 30, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
(thousands of dollars)
<S> <C> <C>
Balance, Beginning of Year.............. $ 2,388 $ 2,282
Provision Charged to Operation.......... 126 209
Loans Charged Off....................... (63) (59)
Recoveries.............................. 30 125
------------------
Balance, End of Period.................. $ 2,481 $ 2,557
------------------
</TABLE>
NOTE 4: DEPOSITS
Time deposits in denominations of $100,000 or more at June 30, 1994 and
1993 were $10,447,000 and $8,239,000 respectively.
NOTE 5: FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS
Federal funds purchased and securities sold under repurchase agreements
generally represent overnight borrowing transactions.
The details of these classifications for the dates indicated are as
follows:
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
6-30-94 12-31-93
-------- ---------
<S> <C> <C>
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS
Balance at End of Period............................................................. $ 5,300 $ 0
Average during Period................................................................ 2,953 780
Maximum Month-end Balance............................................................ 5,300 1,500
Average Rate during Period........................................................... 3.91% 3.05%
Rate at the end of Period............................................................ 5.00% N/A
Long-term debt, as presented on the balance sheet is as follows:
LONG-TERM BORROWINGS
During 1992, the ESOP Trust obtained a revolving conversion note for the
principal amount of one million dollars to finance the acquisition of Commercial
common stock, pledging those shares as collateral. The revolving conversion
note was a conversion line-of-credit up to $1,000,000, available on a revolving
basis until May 31, 1993. The amount of the credit outstanding on May 31, 1993,
converted to a term loan. Interest on the unpaid principal balance of the loan
was payable at the end of each calendar quarter since September 30, 1992. The
principal balance of the term loan was payable at the end of each calendar
quarter commencing June 30, 1993, in 28 equal quarterly installments. Interest
was at a rate of the lender's prime plus 1/2%, fluctuating accordingly. The
interest rate as of December 31, 1993, was 6.50%. The
ESOP paid off the loan in its entirety in March, 1994...........................................$ 0 $ 424
--------------------
</TABLE>
-8-
<PAGE>
NOTE 6: INCOME TAX EXPENSE
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Six Months ended
June 30
1994 1993
----- ----
Current: (In thousands of dollars)
<S> <C> <C>
State............................. $ 117 $ 114
Federal........................... 779 672
Deferred Income Taxes............. 8 ( 44)
--------------------
TOTAL PROVISION FOR INCOME TAXES.. $ 904 $ 826
--------------------
</TABLE>
NOTE 7: CONVERTIBLE PREFERRED STOCK
In conjunction with the acquisition of Jackson County Bank, Ravenswood,
West Virginia, Commercial issued 28,717 shares of Convertible Preferred Stock to
former owners of Jackson County Bank Common Stock. The Convertible Preferred
has a stated value of $100 per share and pays cumulative dividends of $10.00 per
share per year, paid quarterly. Shares of Convertible Preferred are convertible
by the holders into 7.332 shares of Commercial Common Stock at any time.
Convertible Preferred may be redeemed during 1994 at $105 per share, and after
January 1, 1995, at $100 per share. Holders of Convertible Preferred voted as a
class on the election of two members of Commercial's Board of Directors as long
as more than 13,673 shares of Convertible Preferred remain outstanding.
Thereafter one member of the Board will be elected by holders of Convertible
Preferred as long as any shares remain outstanding. To date, 1,599 shares of
Convertible Preferred stock have been converted to Commercial Common Stock. No
shares have been redeemed.
NOTE 8: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
COMMERCIAL BANCSHARES, INCORPORATED (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---- ----
ASSETS (In Thousands of Dollars)
<S> <C> <C>
Cash and Due from Banks (All from subsidiaries)....................... $ 173 $ 215
Accounts Receivable (All from subsidiaries)........................... 184 91
Notes Receivable...................................................... 255 255
Investment in Subsidiaries (Equity Basis)............................. 21,086 20,888
Premises and Equipment - Net.......................................... 412 478
Other Assets.......................................................... 270 287
----------------------
TOTAL ASSETS.......................................................... $22,380 $22,214
----------------------
LIABILITIES
ESOP Borrowings....................................................... $ 0 $ 424
Other Liabilities..................................................... 263 506
----------------------
TOTAL LIABILITIES..................................................... $ 263 $ 930
----------------------
STOCKHOLDERS EQUITY
Preferred Stock (Stated Value $100.00)
Outstanding: 27,165 shares and 27,165 Shares at June 30,
1994 and December 31, 1993, respectively............................ $ 2,716 $ 2,716
Common Stock (Par Value $5.00, Authorized:
1,000,000 Shares. Outstanding : 758,506 Shares and 758,506 Shares
at June 30, 1994 and December 31,1993, respectively)................ 3,792 3,792
Surplus............................................................... 5,683 5,683
Undivided Profits..................................................... 10,711 9,863
Unrealized Gain (Loss) on Securities Available for Sale, Net.......... ( 438)
LESS:
Employee Stock Ownership Plan Shares Collateralizing Debt........... 0 ( 424)
Treasury Stock...................................................... ( 347) ( 347)
----------------------
TOTAL STOCKHOLDERS EQUITY............................................. $22,117 $21,284
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY............................. $22,380 $22,214
----------------------
</TABLE>
-9-
<PAGE>
COMMERCIAL BANCSHARES, INCORPORATED (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1994
(In thousands)
<TABLE>
<CAPTION>
REVENUE
<S> <C>
Dividend from Subsidiary Banks.................... $ 935
Fees from Subsidiaries............................ 474
------
TOTAL REVENUE....................................... $1,409
------
EXPENSES
Employee Compensation and Benefits................ $ 396
Occupancy and Furniture Expense................... 145
Other Expenses.................................... $ 166
------
TOTAL EXPENSES...................................... $ 707
------
Income before Tax Benefit and Equity in
Undistributed Net Income of Subsidiaries.......... $ 702
Income Tax Benefit.................................. ( 16)
------
Income before Equity in Undistributed
Net Income of Subsidiaries........................ $ 718
Equity in Undistributed Net Income of Subsidiaries.. 636
------
NET INCOME.......................................... $1,354
------
</TABLE>
COMMERCIAL BANCSHARES, INCORPORATED (PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1994
(In Thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net Income........................................... $1,354
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation and Amortization................... 81
Net Amortization of Purchase Accounting Adjustments 2
Undistributed Net(Income) Loss on Subsidiaries.. ( 636)
Deferred Employee Benefits...................... 424
Increase(Decrease) Accounts Receivable.......... ( 93)
Accrued Interest Receivable..................... 2
Other Assets.................................... 13
Other Liabilities............................... ( 228)
Income Tax Benefit.............................. $( 16)
------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ $ 903
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................... $( 14)
------
NET CASH USED BY INVESTING ACTIVITIES................ $( 14)
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on ESOP and long-term debts..... $( 424)
Dividends paid..................................... ( 507)
------
NET CASH USED BY FINANCING ACTIVITIES................ $( 931)
------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ $( 42)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 215
------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 173
------
</TABLE>
During the first six months of 1994, Commercial paid $556,000 in income taxes.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SOURCES AND USES OF FUNDS
During the first six months of 1994, Commercial's' largest source of funds,
its deposits, grew $8.5 million or 3.63% from December 31, 1993, to $242.6
million. The largest increase was in time deposits, which were up 8.9% ($9.0
million). Non interest-bearing demand and savings deposits also experienced
increases. Non interest-bearing deposits were up $1.6 million (5.0%) and
savings were up $2.4 million (4.5%). However, interest-bearing demand deposits
decreased $4.6 million or 9.6%. The predominant interest for consumers during
the first half of 1994 was in time certificates of deposit of short term.
Customers appeared to move to time deposits to increase their return as yields
began to edge upward.
Commercial's' position in the Federal funds market was somewhat higher than at
year end. Net sales of funds were $8.4 million at June 30, 1994, compared to
$7.9 million at year end. Federal funds purchased increased from $0 to $5.3
million. Commercial's banks regularly undertake borrowings to accommodate
smaller correspondent banks and in such cases those funds are ordinarily
invested in federal funds sold. Additionally, during the first half of 1994 the
increase in loans exceeded the growth in deposits and borrowings were used as an
inexpensive source of short-term funds. Federal funds sold represent temporary
liquid investments that may be used to meet loan or deposit demands, as well as
funds that are awaiting investment in longer term investments.
The long term debt of the ESOP was eliminated, as the $424,000 balance was
paid off by the ESOP during the first quarter.
Cash and due from banks increased by $356,000 or 3.5% from December 31, 1993,
to June 30, 1994. Changes in this category are not unusual, as the balance
fluctuates with inflows and outflows of deposits.
Commercial's' largest use of funds, lending, increased by $16.9 million
(9.7%) during the first half of the year. Consumer and commercial loans both
experienced increases while credit cards and real estate loans showed slight
decreases.
The securities portfolio decreased. It was down $4.6 million or 8.3%. The
investment in securities is expected to continue to decline during the year, as
it is expected the proceeds of maturing securities will be reinvested in loans
whenever possible.
EARNINGS--SIX MONTHS
Consolidated net income for the first half of 1994 was 11.85% less than the
first half of 1993 ($1,354,000 in 1994, $1,536,000 in 1993). Fully diluted
earnings per common share were $1.44 compared to $1.63 for 1993.
Total interest income increased 1.43% or $132,000 from $9,206,000 in 1993 to
$9,338,000 in 1994. Total interest expense decreased 8.69% or $318 thousand
from the 1993 level. This resulted in an increase of 8.11% or $450 thousand in
net interest income.
The provision for loan losses was 39.42% less in 1994 than it was in the first
half of 1993. The 1994 provision was $126 thousand compared to net loan losses
of $33 thousand. In 1993, the first half provision was $209 thousand and there
were net recoveries of $66,000. At June 30, 1994, the reserve for possible loan
losses of $2,481,000 was equal to 1.29% of net loans outstanding. This compares
with $2,388,000 or 1.37% of net loans outstanding at December 31, 1993.
Non interest income decreased 0.61% from the first half of 1993 to the first
half of 1994. Trust department fees were down by 8.86%. Service charges and
fees grew 25.21%. However, Other income declined $55,000 or 15.58% from 1993 to
1994. In 1993, the gains on loans sold was $76,000 higher than 1994. The loan
fee reduction was the result of a decrease in the number and volume of loans
being offered for sale.
None of Commercial's' subsidiary banks sold securities during the first half
of either 1993 or 1994. However, in 1993, there were securities gains arising
from a security being called at a premium. Therefore, there was a $15,000
decrease in gains on securities from 1993 to 1994.
Non-interest expense increased 15.92%, or $631,000 from 1993 to 1994. The
major cause of the increase is attributed to employee compensation and benefits,
which grew $461,000 or 22.72%. In 1993, an unusually large proportion of the
employee expense was delayed until the fourth quarter because of late
implementation of a new incentive bonus program. For 1994, Commercial and its
banks have been accruing the 1994 expense since the beginning of the year. This
has caused a substantial increase in employee expense compared to 1993.
However, it is expected that the total employee expense for the year will be
approximately 10% more than the 1993 expense.
Occupancy expense was up $3,000 compared to the same period in 1993.
Furniture and equipment was down $2,000. Together, these fixed assets expenses
increased $1,000, from a combined total of $617,000 in 1993 to $618,000 in 1994.
Other operating expense increased $169,000 (12.83%) from the first half of
1993. Most items that are included in the category were not significantly
different from the prior year. Marketing expense did increase $32,000 or
51.61% Also FDIC Insurance increased due to the increase in deposits.
Net income before taxes was down $104,000 (4.40%) for the 1993 period, but the
provision for Federal and state income taxes increased $78,000 or 9.44%. The
deferred tax calculation on the reserve for loan losses, in compliance with FAS
109, caused an increase in the effective tax rate for the period.
EARNINGS--THREE MONTHS
Consolidated net income for the second quarter of 1994 was 6.90% more than the
second quarter of 1993. ($883,000 in 1994 and $826,000 in 1993). Fully
diluted earnings per share were $0.94 compared to $0.88 for the 1993 quarter.
Total interest income increased 6.68% to $4,885,000 from $4,579,000 in 1993.
Total interest expense decreased 7.93% to $1,694,000 from $1,840,000 in 1993.
As a result, net interest income increased $452,000 or 16.50% from the second
quarter of 1993.
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<PAGE>
The provision for loan losses was 34.09% higher during the second quarter of
1994 than it was during the second quarter of 1993. The 1994 provision was
$59,000 compared to net losses of $33,000. The 1993 second quarter provision
was $44,000 compared to net recoveries of $51,000.
Non interest income increased 16.09% from 1994 to 1993. Trust department
income experienced a decrease of $26,000 (16.88%) from the second quarter 1993
to 1994. Services charges and fees were up $74,000 or 41.34% from the second
quarter of 1993, and other income increased $27,000 or 20.30%.
Non-interest expense was up 18.22% ($348,000) from the second quarter of 1993.
Employee compensation and benefits increased by 23.78%, or $220,000. Occupancy
expense increased $12,000 (11.01%) while furniture and equipment decreased
$9,000 (4.84%). All other operating expenses increased $126,000 (18.26%)
Net income before taxes was up 13.11% and the provision for Federal and state
income taxes increased $106,000 (24.94%) from 1993.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The principal amount of nonaccrual loans was $716,000 at June 30, 1994, a
decrease of $251,000 (25.96%) from December 31, 1993. Loans past due 90 days or
more and still accruing totaled $414,000 June 30, 1994, up $305,000 from year
end totals. Restructured loans totaled $1,382,000 at the end of the second
quarter of 1994.
LIQUIDITY
BancShares primary source of liquidity has been the attraction and retention
of retail deposit accounts. The total deposit growth over the six month period
was 3.63%, or an increase of $8,487,000. Time deposits, a prime component of
core deposit relationships, grew $9.0 million, an 8.95% increase. Deposits
promise to continue to be a good source of funds. Also available to Commercial
are short-term market-rate liabilities, including Federal funds purchased and
securities sold under agreements to repurchase. These instruments are currently
used to accommodate customers and on a limited basis to provide a short-term
source of funds. Commercial's' largest subsidiary is a member of the Federal
Home Loan Bank of Pittsburgh, which makes available to its members a number of
credit products, any or all of which could be used to meet liquidity needs.
Additionally, Commercial is aware of brokers who could, in a short period of
time, provide large amounts of certificates of deposit at market rates. None of
Commercial's' banks currently use or intend to use brokered funds, but the
source exists should liquidity needs require its use. Commercial's' banks also
have extensions of credit that are guaranteed by various U.S. government
agencies and are, therefore, salable.
Although liabilities provide its primary sources of liquidity, Commercial also
maintains an adequate level of cash and near-cash items on hand to meet day-to-
day operating needs. Additionally, Commercial owns marketable securities and
short-term investments that can be converted to cash in a very short time.
Maturing within one year is 20.4% of the total securities portfolio.
CAPITAL
During the first six months of 1994, Commercial increased it stockholders'
equity by $833,000 (3.91%), bringing the balance at June 30, 1994, to $22.1
million or, 8.12% of total assets. The increase was from internal capital
growth.
In January 1989, banking industry regulators officially released risk-
adjusted capital guidelines for banks and bank holding companies. The
guidelines established final requirements that must be achieved by year-end
1992. As of June 30, 1994, Commercial's' Tier 1 ratio of 11.56% and combined
Tier 1 and Tier 2 ratio of 12.81% exceed the requirements. Additionally,
Commercial's' ratios of primary capital to total assets of 7.87% and total
capital to total assets of 8.73% exceed the final requirements which became
effective at year-end 1992 for those relationships.
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<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The company is a defendant in certain legal actions arising from normal
business activities. The ultimate liability, if any, resulting from them will
not materially affect the company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
A. The annual meeting of shareholders was held on May 11, 1994.
(1) Each of the persons named in the proxy statement as a nominee for director
was elected.
(2) The following are the voting results on each of the matters which were
submitted to the shareholders:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Election of Directors
- ---------------------
Common shares present and voting:...........601,380
<CAPTION>
Broker
Name For Withheld Abstain Non-Votes
---- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
Robert W. Burk, Jr. 553,093 39,321
Frank L. Christy 555,333 37,481
A. V. Criss, III 982,449 2,753
Carl E. Dollman 554,933 37,881
James A. Meagle, Jr. 573,801 36,642
William E. Mildren, Sr. 555,513 37,481
William E. Mildren, Jr. 555,153 37,661
Jack F. Poe 555,533 37,481
Robert E. Richardson 555,333 37,481
Susan S. Ross 556,941 37,347
Thomas N. Webster 555,533 37,481
Morris B. Wilkins 551,837 40,577
Preferred shares present and voting:.........21,841
Bruce Bingham 21,191 751
W. S. Ritchie, Jr. 22,491 101
Appointment of Harman, Thompson,
-------------------------------- Broker
Mallory & Ice, A.C. as independent For Against Abstain Non-Votes
---------------------------------- ------- -------- ------- ---------
accountant for 1994 598,709 2,066
-------------------
</TABLE>
The text of the matters referred to under Item 4. A. is set forth in the proxy
statement dated April 1, 1994, filed with the Securities and Exchange Commission
on March 29, 1994, and is incorporated herein by reference.
B. A special meeting of shareholders was held on June 22, 1994.
(1) A plan to merge Commercial BancShares, Incorporated, and Hometown,
Bancshares, Inc., pursuant to the terms of the Agreement and Plan of Merger
between Commercial and Hometown dated as of September 30, 1993, was adopted
and approved.
(2) The following are the voting results on the proposal to merge Hometown
with and into Commercial:
<TABLE>
<S> <C> <C> <C>
Proposal to adopt and approve a
- --------------------------------
plan to merge with Hometown For Against Abstain
- --------------------------- --- ------- -------
Bancshares, Inc. 464,076.1464 36,873.6458 248.4186
- ----------------
</TABLE>
The text of the matter referred to under Item 4.B. is set forth in the
Prospectus/Joint Proxy Statement filed with the Securities and Exchange
Commission April 7, 1994, in Registration Statement No. 33-53017, and is
incorporated herein by reference.
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<PAGE>
Item 5. Other Information
Acquisition of Assets
- ---------------------
By press release dated August 1, 1994, Commercial announced that it had, as
of that date, consummated the merger of Commercial with Hometown Bancshares,
Inc. ("Hometown"), approved by its shareholders on June 22, 1994, and fully
described in Form S-4 Registration Statement No. 33-53017, effective May 10,
1994. The holders of Hometown common stock received 1.512 shares of Commercial
common stock in exchange for each share of Hometown common stock. The exchange
ratio was reached through negotiations between Commercial and Hometown and
various factors were considered. Under the terms of the agreement, Hometown
merged with and into Commercial, and Hometown ceased to exist. The subsidiaries
acquired from Hometown will continue to operate as separate subsidiaries of
Commercial for the foreseeable future.
Financial Statements of Business Acquired
- -----------------------------------------
The financial statements of Hometown Bancshares, Inc., as of December 31,
1993, and December 31, 1992, are included in the Form S-4 Registration Statement
No. 33-53017, effective May 10, 1994, and are incorporated herein by reference.
The June 30, 1994, financial statements are not yet available, and it is
therefore impracticable to file them. The June 30, 1994, financial statements
will be filed not later than September 15, 1994.
Item 6. Exhibits and Reports on Form 8-K
Commercial did not file any reports on Form 8-K during the three months
ended June 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL BANCSHARES, INC.
(Registrant)
Date: August 12, 1994 /s/ William E. Mildren, Jr.
---------------- ---------------------------------------
William E. Mildren, Jr.
Chairman, President and
Chief Executive Officer
Date: August 12, 1994 /s/ Larry G. Johnson
--------------- ---------------------------------------
Larry G. Johnson
Secretary-Treasurer
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