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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-27894
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COMMERCIAL BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Ohio 34-1787239
- -------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
118 South Sandusky Street, Upper Sandusky, Ohio 43351
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(Address of principal executive offices)
(419) 294-5781
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(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 July 22, 2002, the latest practicable date, 1,155,983 shares of the
issuer's common shares, no par value, were issued and outstanding.
COMMERCIAL BANCSHARES, INC.
INDEX
Page
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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................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................... 15
Part II - Other Information
Item 1. Legal Proceedings............................................................... 16
Item 2. Changes in Securities and Use of Proceeds....................................... 16
Item 3. Defaults Upon Senior Securities................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................. 16
Item 5. Other Information............................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................................ 16
SIGNATURES ................................................................................... 17
EXHIBIT A: CEO Certification ................................................................. 18
CFO Certification ................................................................. 19
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2.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
2002 2001
--------------- ---------------
($ in thousands)
ASSETS
Cash and due from banks $ 6,683 $ 7,640
Federal funds sold -- --
------------- -------------
Cash and cash equivalents 6,683 7,640
Securities available for sale 28,180 29,788
Total loans 194,202 198,937
Allowance for loan losses (1,865) (1,743)
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Loans, net 192,337 197,194
Premises and equipment, net 6,153 6,354
Accrued interest receivable 1,157 1,260
Other assets 3,150 3,834
------------- -------------
Total assets $ 237,660 $ 246,070
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand $ 17,903 $ 19,016
Interest-bearing demand 58,091 57,417
Savings and time deposits 98,139 110,319
Time deposits $100,000 and greater 13,433 18,469
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Total deposits 187,566 205,221
FHLB advances 27,550 19,300
Other borrowed funds 1,650 940
Accrued interest payable 263 446
Other liabilities 929 944
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Total liabilities 217,958 226,851
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SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares authorized,
1,155,983 and 1,155,294 shares issued in 2002 and 2001 10,510 10,446
Retained earnings 9,495 9,178
Deferred compensation plan shares, at cost,
10,282 and 8,286 shares in 2002 and 2001 (253) (205)
Accumulated other comprehensive income (50) (200)
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Total shareholders' equity 19,702 19,219
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Total liabilities and shareholders' equity $ 237,660 $ 246,070
============= =============
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See notes to the consolidated financial statements.
3.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ------------ -------------
INTEREST INCOME
Interest and fees on loans $ 3,741 $ 4,475 $ 7,517 $ 9,131
Interest on securities:
Taxable 179 255 335 534
Nontaxable 172 184 348 362
Other interest income 1 2 3 7
--------------- -------------- -------------- ---------------
Total interest income 4,093 4,916 8,203 10,034
--------------- -------------- -------------- ---------------
INTEREST EXPENSE
Interest on deposits 1,288 2,421 3,006 4,993
Interest on borrowings 208 255 368 526
--------------- -------------- -------------- ---------------
Total interest expense 1,496 2,676 3,374 5,519
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 2,597 2,240 4,829 4,515
Provision for loan losses 260 350 500 600
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,337 1,890 4,329 3,915
--------------- -------------- -------------- ---------------
OTHER INCOME
Service fees and overdraft charges 371 323 693 604
Gains on sale of securities, net 43 24 57 66
Gains on sale of loans, net 174 75 324 516
Gains/(losses) on sale of foreclosed assets 18 (10) 45 (23)
Other income 81 97 186 189
--------------- -------------- -------------- ---------------
Total other income 687 509 1,305 1,352
--------------- -------------- -------------- ---------------
OTHER EXPENSE
Salaries and employee benefits 1,090 1,052 2,201 2,154
Occupancy, furniture and equipment 248 282 490 572
State taxes 91 85 183 170
Data processing 164 158 329 308
FDIC deposit insurance 18 19 36 42
Professional fees 86 69 158 117
Amortization of intangibles 76 76 178 147
Other operating expense 569 547 1,076 980
--------------- -------------- -------------- ---------------
Total other expense 2,342 2,288 4,651 4,490
--------------- -------------- -------------- ---------------
Income before federal income taxes 682 111 983 777
Income tax expense/(benefit) 179 (18) 227 154
--------------- --------------- -------------- ---------------
Net income $ 503 $ 129 $ 756 $ 623
=============== ============== ============== ===============
Basic earnings per common share $ .44 $ .11 $ .65 $ .54
======== ======== ====== ========
Diluted earnings per common share $ .43 $ .11 $ .65 $ .54
======== ======== ====== ========
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See notes to the consolidated financial statements.
4.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
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(Amounts in thousands, except per share data)
Three Months Ended
June 30,
--------------------------------
2002 2001
------------ ------------
Balance at beginning of period $ 19,157 $ 19,234
Comprehensive income:
Net income 503 129
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 261 (181)
------------- -------------
Total comprehensive income 764 (52)
Dividends paid ($.19 and $.17 per share in 2002 and 2001) (219) (200)
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Balance at end of period $ 19,702 $ 18,982
============= =============
Six Months Ended
June 30,
--------------------------------
2002 2001
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Balance at beginning of period $ 19,219 $ 18,589
Comprehensive income:
Net income 756 623
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 150 169
------------- -------------
Total comprehensive income 906 792
Shares issued 16 --
Dividends paid ($.38 and $.34 per share in 2002 and 2001) (439) (399)
------------- -------------
Balance at end of period $ 19,702 $ 18,982
============= =============
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See notes to the consolidated financial statements.
5.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June 30,
-------------------------------------
2002 2001
-------------- ---------------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 756 $ 623
Adjustments (1,892) 1,561
------------- -------------
Net cash from operating activities (1,136) 2,184
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (9,047) (8,340)
Maturities and repayments 1,727 639
Sales 9,088 7,018
Net change in loans 7,364 7,285
Proceeds from sale of foreclosed/repossessed assets 229 167
Sale of land owned by the Bank 37 --
Bank premises and equipment expenditures (101) (302)
------------- -------------
Net cash from investing activities 9,297 6,467
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CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (17,655) (10,013)
Net change in borrowings from FHLB 8,250 2,000
Net change in federal funds purchased 710 --
Net change in corporate line of credit -- (500)
Common shares issued 16 --
Cash dividends paid (439) (399)
------------- -------------
Net cash from financing activities (9,118) (8,912)
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Net change in cash and cash equivalents (957) (261)
Cash and cash equivalents at beginning of period 7,640 6,592
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Cash and cash equivalents at end of period $ 6,683 $ 6,331
============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 3,557 $ 5,628
Cash paid for income taxes 219 175
Non-cash transfer of loans to foreclosed/repossessed assets 332 220
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See notes to the consolidated financial statements.
6.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Commercial Bancshares, Inc. (the "Corporation") and its
wholly-owned subsidiary, The Commercial Savings Bank (the "Bank"). Also included
is the Bank's wholly-owned 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, 2002, and results of operations and cash flows for the
periods presented. The accompanying consolidated financial statements do not
purport to contain all the necessary financial disclosures required by
accounting principles generally accepted in the United States of America that
might otherwise be necessary in the circumstances. The Annual Report for the
Corporation for the year ended December 31, 2001, contains consolidated
financial statements and related notes, which should be read in conjunction with
the accompanying consolidated financial statements.
USE OF ESTIMATES: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The collectibility of
loans, fair values of financial instruments, and status of contingencies are
particularly subject to change.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred income tax assets and liabilities. The
provision is based upon the expected effective tax rate for the full year.
BUSINESS SEGMENTS: While the Corporation's chief decision-makers monitor the
revenue streams of various products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all of
the Corporation's operations are considered by management to be aggregated in
one reportable segment.
NEW ACCOUNTING PRONOUNCEMENTS: New accounting guidance requires all business
combinations to be recorded using the purchase method of accounting for any
transaction initiated after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the acquired
company must be recorded at fair value at date of acquisition, and the excess of
cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual impairment
testing will be required for goodwill, with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. Adoption of this
standard on January 1, 2002 did not have a material effect on the Corporation's
financial statements.
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Corporation does not believe this standard will have a material
effect on its financial position or results of operations.
Effective January 1, 2002, the Corporation adopted a new standard issued by the
Financial Accounting Standards Board on impairment and disposal of long-lived
assets. The effect of this on the financial position and results of operations
of the Corporation is not expected to be material.
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7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FINANCIAL STATEMENT PRESENTATION: Some items in prior financial statements have
been reclassified to conform to the current presentation.
STOCK DIVIDEND: During December 2001, a 10% stock dividend was distributed to
the then current shareholders. All prior per share amounts have been restated.
NOTE 2 - EARNINGS PER SHARE
Weighted average shares (adjusted for the stock dividend) used in determining
basic and diluted earnings per share are as follows:
2002 2001
---- ----
Weighted average shares outstanding during the period 1,155,873 1,155,295
Dilutive effect of exercisable stock options 5,029 5,030
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Weighted average shares considering dilutive effect 1,160,902 1,160,325
============= =============
At June 30, 2002 and 2001 there were 73,826 and 79,334 stock options that were
not considered in computing diluted earnings per share because they were
anti-dilutive.
NOTE 3 - LOANS
Loans were as follows:
June 30, 2002 December 31, 2001
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($ in thousands)
Commercial and other loans $ 98,846 $ 89,471
Real estate loans 26,918 38,423
Construction loans 558 1,694
Home equity loans 9,156 8,354
Consumer and credit card loans 52,216 58,341
Consumer finance loans 6,508 2,654
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Total loans $ 194,202 $ 198,937
============= =============
The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). At June 30, 2002 and December 31, 2001, loans sold
to FHLMC for which the Bank has retained servicing totaled $106,652,000 and
$95,269,000, and real estate loans originated and held for sale totaled $655,000
and $3,329,000.
Activity in the allowance for loan losses for the three months ended June 30 was
as follows:
2002 2001
---- ----
($ in thousands)
Beginning balance $ 1,836 $ 1,782
Provision for loan loss 260 350
Loans charged off (277) (331)
Recoveries of loans previously charged-off 46 259
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Ending balance $ 1,865 $ 2,060
============= =============
Activity in the allowance for loan losses for the six months ended June 30 was
as follows:
2002 2001
---- ----
($ in thousands)
Beginning balance $ 1,743 $ 2,089
Provision for loan loss 500 600
Loans charged off (461) (920)
Recoveries of loans previously charged-off 83 291
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Ending balance $ 1,865 $ 2,060
============= =============
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8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Impaired loans were as follows:
June 30, 2002 December 31,2001
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($ in thousands)
Period-end loans with no allocated allowance $ 826 $ 665
Period-end loans with allocated allowance 227 337
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Total $ 1,053 $ 1,002
============= =============
Amount of allowance for loan loss allocated $ 148 $ 158
Nonperforming loans were as follows:
June 30, 2002 December 31,2001
------------- ----------------
($ in thousands)
Loans past due over 90 days still on accrual $ 70 $ 977
Nonaccrual loans 959 1,247
The impaired and nonperforming loans have been considered in management's
evaluation of the adequacy of the allowance for loan losses. Nonperforming loans
includes substantially all impaired loans and smaller balance homogenous loans,
such as residential mortgage and consumer loans, that are collectively evaluated
for impairment.
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income for the three months ended June 30 was as follows:
2002 2001
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 438 (250)
Less: Reclassification adjustment for losses (gains) recognized in income (43) (24)
------------- -------------
Net unrealized holding gains (losses) 395 (274)
Tax effect (134) 93
------------- -------------
Other comprehensive income $ 261 $ (181)
============= =============
Other comprehensive income for the six months ended June 30 was as follows:
2002 2001
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 284 $ 322
Less: Reclassification adjustment for losses (gains) recognized in income (57) (66)
------------- -------------
Net unrealized holding gains (losses) 227 256
Tax effect 77 87
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Other comprehensive income $ 150 $ 169
============= =============
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9.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion focuses on the consolidated financial condition of
Commercial Bancshares, Inc. at June 30, 2002, compared to December 31, 2001, and
the consolidated results of operations for the quarterly and year-to-date
periods ending June 30, 2002 compared to the same periods in 2001. The purpose
of this discussion is to provide the reader with a more thorough understanding
of the consolidated financial statements and related footnotes.
The registrant is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations except as discussed herein. Also, the
Corporation is not aware of any current recommendations by regulatory
authorities that would have such effect if implemented.
The Corporation is designated as a financial holding company by the Federal
Reserve Bank of Cleveland. This status enables the Corporation to take advantage
of changes in existing law made by the Financial Modernization Act of 1999. As a
result of being a financial holding company, the Corporation may be able to
engage in an expanded listing of activities determined to be financial in
nature. This will help the Corporation remain competitive in the future with
other financial service providers in the markets in which the Corporation does
business. There are more stringent capital requirements associated with being a
financial holding company. The Corporation intends to maintain its
categorization as a "well capitalized" bank, as defined by regulatory capital
requirements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes" and
similar expressions as they relate to the Corporation or its management are
intended to identify such forward-looking statements. The Corporation's actual
results, performance or achievements may materially differ from those expressed
or implied in the forward-looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, government
policies and regulations, and rapidly changing technology affecting financial
services.
FINANCIAL CONDITION
Total assets declined by $8,410,000 from $246,070,000 at December 31, 2001 to
$237,660,000 at June 30, 2002. The primary reasons for the decrease in total
assets were that total loans declined $4,735,000 due largely to sales of real
estate loans in the secondary market and pay downs on consumer and credit card
loans, partially offset by increases in commercial loans, consumer finance loans
and home equity loans. Partial principal payments and sales of securities led to
an additional decline of $1,608,000, with a reduction of $957,000 in cash and
cash equivalents.
Total loans decreased $4,735,000 during the first six months of 2002 compared to
a decline of $7,505,000 during the same period a year ago. While there were
$3,329,000 of real estate loans held for sale at year-end 2001, there are now
$655,000 held for sale at the end of June 2002. During the second quarter, the
Bank entered into an agreement with Countrywide, Incorporated, a national
mortgage loan origination firm wherein the Bank will become a sales associate
for Countrywide and be paid commissions for real estate loans originated in the
local markets it serves. These loans will belong to Countrywide. The Bank will
continue to issue non-conforming and special real estate loans in order to serve
the needs of the community and generate long-term income to the Corporation, as
well as maintain our association with the FHLMC. However, total real estate
loans will likely reduce in relative size to total assets in future periods.
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10.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Declines continue in the Bank's indirect consumer loan portfolios. The Bank's
largest indirect loan business was based upon a relationship with a Denver-based
organization, where the Bank purchased horse trailer loan accounts on a national
basis. In 2001, management shut off new loan originations from this source.
Repayments of loans in this portfolio caused a decline of $11,260,000 during
2002, and this continues to effect consumer balances that declined a net of
$6,125,000 during the first six months of 2002, compared to a net decline of
$4,137,000 during 2001.
Consumer loans generated by Advantage increased $3,854,000 to $6,508,000 at June
30, 2002 from $2,654,000 at December 31, 2001. These loans are originated
through relationships with various vendors whose customers are predominantly
outside the Bank's traditional market area. These loans earn a higher rate of
interest than the Bank's standard portfolio of loans, but carry a higher credit
risk as well. Management reviews all loans very closely for changes in payment
activity.
Commercial loans have grown $9,375,000 since year-end 2001, as have home equity
loans, which have grown $802,000 over the first six months of 2002. It should be
noted that the majority of these loans are tied to the prime rate, which has now
been at its historic low point for more than a half year. This continues to put
pressure on our net interest margin.
Total deposits decreased $17,655,000 during the first six months of 2002
compared to a decrease of $10,013,000 during the same period last year. The
declines have occurred mostly in savings and consumer time deposits, which
declined $12,180,000, followed by a $5,036,000 decrease in time deposits in
amounts equal to or greater than $100,000. The second quarter saw the final
roll-off of a large amount of time deposits that had been placed on the Bank's
books 21 to 28 months ago at rates that were substantially above the
then-current market rates. National rates fell throughout 2001, and continued at
low levels throughout the first six months of 2002. The Bank has experienced
great pressure on our net interest margin because of those deposits.
Substantially all of those deposits have now either repriced at current market
rates, or left the institution in search of higher rates of return. While the
decreased balances represent about one third of the possible roll-off, the cash
flow out coincided with the declines in our loan portfolio, and management was
able to maintain liquidity and funding by utilizing alternative sources of
funds, primarily borrowings from the FHLB. Overall funding rates are now poised
to have a favorable impact on our net interest margin. As an example, the $88.7
million portfolio of certificates of deposits had an average cost of funds of
5.28% during the month of January, 2002. In June, the portfolio had shrunk to
$72.8 million, but had an average cost of funds for the month of 3.66%. The July
numbers have continued to improve to an average cost of 3.59% on a portfolio of
$75.3 million. Combined with the expanded use of overnight, borrowed funds, the
cost of interest bearing funds has steadily improved as overnight rates have
been relatively constant throughout the entire year at or below a cost of 2%.
Borrowed funds have increased $8,960,000 since year end. Federal Home Loan Bank
short-term advances have grown $8,250,000 and federal funds borrowed have
increased by $710,000, with current overnight rates running less than 2%. The
Federal Reserve Bank has maintained low discount rates and federal funds target
rates.
Total shareholders' equity increased $483,000 during the first six months of
2002 compared to an increase of $393,000 a year ago. Common stock issued, which
includes the shares held in trust for certain directors' deferred compensation
plans of the Corporation, increased $16,000 since December 31, 2001. There were
no shares to be bought in the open market, so the Corporation issued new shares
to cover the Fourth Quarter 2001 amount of the deferred compensation plan. Six
month net income of $756,000 in 2002 was higher due to higher net interest
income and a lower provision for loan losses. The dividend payout was $40,000
higher than the previous six month period last year, reflecting the increased
number of shares issued in December 2001 as a 10% stock dividend, and the
maintenance of the $.19 per share dividend rate. Shareholders' equity to total
assets was 8.29% at June 30, 2002 compared to 7.81% at December 31, 2001, an
increase of 6%.
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11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 2002 was $503,000 compared to
$129,000 during the same period in 2001. Earnings for the six-month period
ending June 30, 2002 were $756,000 compared to $623,000 in 2001. Diluted
earnings per share increased to $.43 from $.11 for the quarters ended June 30,
and to $.65 from $.54 for the six-month periods in the respective years.
Discussed below are the major factors that have influenced these operating
results.
Net interest income, the primary source of earnings, is the amount by which
interest and fees on loans and investments exceed the interest cost of deposits
and borrowings obtained to fund them. The volume and composition of
interest-earning assets and interest-bearing liabilities, as well as the level
of noninterest-bearing demand deposits and shareholders' equity, affect net
interest income. Also impacting net interest income is the susceptibility of
interest-earning assets and interest-bearing liabilities to changes in the
general market level of interest rates. Management attempts to manage the
repricing of assets and liabilities so as to achieve a stable level of net
interest income and reduce the effect of significant changes in the market level
of interest rates. This is accomplished through the pricing and promotion of
various loan and deposit products as well as the active management of the Bank's
portfolio of securities available for sale and borrowed funds.
Fully-taxable equivalent interest income for the three month period ending June
30, 2002 was $4,171,000 compared to $4,978,000 during the same period in 2001, a
decrease of $807,000. This decrease was principally due to interest and fees on
loans being $746,000 less in 2002 than in 2001, while interest on securities
declined $89,000. The level of average loans decreased $12,670,000, to
$194,129,000 in 2002 from $206,799,000 in 2001, while security balances fell
$1,822,000 to $31,389,000 in 2002 from $33,211,000 in 2001. A generally
declining interest rate environment during all of 2001, and a flat environment
throughout all of 2002 has contributed to decreased yields on loans and
securities. The tax-equivalent yield on interest-earning assets decreased to
7.42% during the second quarter of 2002 from 8.65% during the same period in
2001.
Fully-taxable equivalent interest income for the six months of 2002 was
$8,360,000 compared to $10,193,000 during the same period in 2001, a decrease of
$1,833,000. This decrease was principally due to interest and fees on loans
being $1,614,000 less in 2002 than in 2001, while interest on securities
declined $219,000. The level of average loans decreased $13,637,000, to
$194,670,000 in 2002 from $208,307,000 in 2001, while security balances fell
$2,470,000 to $30,843,000 in 2002 from $33,313,000 in 2001. The tax-equivalent
yield on interest-earning assets decreased to 7.48% during the first six months
of 2002 from 8.44% during the same period in 2001.
Interest expense decreased $1,181,000 to $1,496,000 during the second quarter of
2002 from $2,676,000 during the same period in 2001. The decrease was
principally due to the cost of deposits being $1,133,000 less in 2002 than in
2001. The quarterly average balance of interest bearing deposits decreased by
$21,794,000, to $175,777,000 in 2002 from $197,571,000 in 2001. The runoff of
high-rate time deposits has greatly reduced the Corporation's interest expense,
and should be even more favorably impacted now that all of those deposits have
either repriced or left the Bank. Equivalent rates for the coming months should
reflect a much lower average rate. The cost of interest-bearing funds declined
to 2.95% during the second quarter in 2002 from 4.88% during the same period in
2001. The Bank increased its use of Federal Home Loan Bank advances as the
decrease in average earning assets was less than the decrease in average
deposits.
Interest expense decreased $2,145,000 to $3,374,000 during the six months ended
June 30, 2002 from $5,519,000 during that period in 2001. The decrease was
principally due to the cost of deposits being $1,987,000 less in 2002 than in
2001. The average balance of interest bearing deposits decreased by $19,172,000,
to $180,760,000 in the first six months of 2002 from $199,932,000 in 2001. The
cost of borrowed funds declined to 3.35% during the six months of 2002 from
5.02% during the same period in 2001.
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12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Six Months Ended June 30,
-------------------------------------------------------------------
2002 2001
-------------------------------- -------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
------- -------- ---------- ------- -------- ----------
($ in thousands)
Securities (1) $ 30,843 $ 843 5.51% $ 33,313 $ 1,062 6.38%
Loans (2) 194,670 7,517 7.79 208,307 9,131 8.77
---------- ------- --------- --------
Total interest-earning assets 225,513 8,360 7.48 241,620 10,193 8.44
Other assets 17,134 17,065
---------- ---------
Total assets $ 242,647 $ 258,685
========== =========
Deposits - interest bearing $ 180,760 3,006 3.35% $ 199,932 4,993 4.99%
Borrowed funds 22,444 368 3.31 21,580 526 4.87
---------- ------- --------- --------
Total interest-bearing deposits $203,204 3,374 3.35 $221,512 5,519 4.98
and borrowings
Noninterest-bearing demand deposits 18,369 16,459
Other liabilities 1,518 1,558
Shareholder's equity 19,556 19,516
---------- ---------
Total liabilities and
shareholders' equity $ 242,647 $ 258,685
========== =========
Net interest income $ 4,986 $ 4,674
======== ========
Interest rate spread 4.13% 3.46%
Net interest margin (3) 4.46% 3.87%
- --------------------------------------------------------------------------------
(1) Securities include federal funds sold for purposes of this yield table.
Average yields on all securities have been computed based on amortized
cost. Income on tax exempt securities has been computed on a fully-taxable
equivalent basis using a 34% tax rate and the average cost of funds to
support the purchases. The adjustment is $157,000 and $150,000 for 2002 and
2001.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $362,000 and $160,000 and deferred dealer
reserve expense of $245,000 and $313,000 in 2002 and 2001.
(3) Net interest income as a percentage of average interest-earning assets.
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13.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The provision for loan losses decreased $90,000 to $260,000 for the second
quarter 2002 compared to $350,000 during 2001. The provision was $100,000 lower
for the six months ended June 30, 2002 at $500,000 compared to $600,000 for the
same period in 2001. The lower amounts reflect both the lower amount of net
charge-offs in 2002, as well as the lower total loan balances. Net charge-offs
were $251,000 lower in 2002 than in 2001. Non-performing and impaired loan
balances have held steady during the current year with some improvement in the
total balances of loans on nonaccrual, down to $959,000 from $1,247,000 at year
end.
Management determines the adequacy of the allowance for loan losses through its
analysis of specific problem loans and historical charge-off experience in
addition to its evaluation of local and national economic conditions. The Bank
believes that the current allowance balance is sufficient to cover probable
identified losses in the loan portfolio.
Total noninterest income was $687,000 for the second quarter of 2002 compared to
$509,000 for the same period in 2001, an increase of $178,000. Total noninterest
income was $1,305,000 for the six months of 2002 compared to $1,352,000 in the
prior year, a decrease of $47,000. The second quarter increase is due primarily
to $99,000 more in gains from the sale of loans, and a gain of $18,000 from the
sale of foreclosed and repossessed assets, while the 2001 sales resulted in
losses of $10,000. The decrease in six-month income was primarily due to
$192,000 less in gains on the sale of loans, partially offset by higher deposit
service fees and $68,000 more in gains on the sale of foreclosed and repossessed
assets, where the prior year number was a loss of $23,000. As the Bank phases
out loan originations for sale to the FHLMC in favor of the Countrywide program,
gains on the sales of loans should decline. The additional usage of the Bank's
expanded ATM network gave rise to an increase of $38,000 in fee income, which
more than offset the increase in operating expenses for those machines as
detailed below.
Total noninterest expense increased $54,000 to $2,342,000 in the three months of
the second quarter 2002 compared to $2,288,000 in the same period during 2001.
The largest increase came in professional fees for external auditing costs,
which rose $22,000 and consulting fees which were $5,000 higher. Six month
expenses rose $161,000 to $4,651,000 in 2002 compared to $4,490,000 during the
same period in 2001. Data processing expenses for the full six month period rose
$21,000 as the expanded number of branches of the Bank and offices of Advantage
were in operation for the full six months in 2002, external auditing fees rose
$45,000, marketing and advertising expenses rose $49,000, postage rose $11,000,
and the cost of the expanded number of ATMs rose $28,000.
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14.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities, which are
summarized in the Condensed Consolidated Statements of Cash Flows. Cash and cash
equivalents amounted to $6,683,000 at June 30, 2002 compared to $7,640,000 at
December 31, 2001.
Liquidity refers to management's ability to generate sufficient cash to fund
current loan demand, meet deposit withdrawals, pay operating expenses and meet
other financial obligations. The principal sources of funds for the Bank are
deposits, loan repayments and maturities, sale of mortgage loans in the
secondary market, FHLB borrowings, sale of securities, and funds generated
through operations. Management believes that its sources of liquidity are
adequate to meet the needs of the Corporation.
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. Regulations require all
banks to have a minimum total risk-based capital ratio of 8%, with half of the
capital composed of core capital. Minimum leverage ratio requirements range from
3% to 5% of total assets. Core capital, or Tier 1 capital, includes common
equity, perpetual preferred stock and minority interests that are held by others
in consolidated subsidiaries minus intangible assets. Supplementary capital, or
Tier 2 capital, includes core capital and such items as mandatory convertible
securities, subordinated debt and the allowance for loan losses, subject to
certain limitations. Qualified Tier 2 capital can equal up to 100% of an
institution's Tier 1 capital with certain limitations in meeting the total
risk-based capital requirements.
At June 30, 2002, the Bank's leverage ratio was 8.05% and the risk-based capital
ratio was 11.57%, both of which exceeded the minimum regulatory requirements to
be considered well-capitalized. Likewise, the Corporation's leverage and
risk-based capital ratios, 8.08% and 11.61% at June 30, 2002, exceeded
well-capitalized levels.
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 2001. (See Quantitative and Qualitative Disclosures
about Market Risk contained in the Annual Report to Shareholders for the year
ended December 31, 2001.)
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15.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q Quarter ended
June 30, 2002 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 10, 2002 at the main office of the
Commercial Savings Bank in Upper Sandusky. There were 745,442
shares of the 1,147,009 shares currently outstanding, or 65.0%,
represented in person or by proxy at the Meeting. Items of
business transacted at the meeting included the re-election of
Daniel E. Berg, Loren H. Dillon, Mark Dillon, and William E. Ruse
to three-year terms on the Board of Directors, with each term
expiring at the Corporation's 2005 Annual Meeting. Of the votes
cast, the candidates received the following number and
percentages of the 745,442 available. Mr. Berg received 743,460
or 99.7 %. Mr. Loren Dillon received 742,480 or 99.6%. Mr. Mark
Dillon received 741,736 or 99.5%. Mr. Ruse received 743,460 or
99.7%. The remaining eight members of the Board of Directors not
up for election this year are James A. Deer, Edwin G. Emerson,
Hazel Franks, Deborah J. Grafmiller, Raymond E. Graves, Michael
A. Mastro, Richard Sheaffer, and Douglas C. Smith.
Item 5 - Other Information:
The Company entered into a confidential separation agreement (the
"Agreement") with James A. Deer on July 15, 2002. Mr. Deer,
formerly a Director and Executive Officer of the Company,
resigned as Regional President of the Commercial Savings Bank
(the "Bank"), a wholly-owned subsidiary of the Company, in June
2002; and as Director of the Company in July, 2002. The fact of
Mr. Deer's resignation was reported earlier on the Report on Form
8-K filed by the Company on July 12, 2002.
The Agreement provides Mr. Deer with a continuation of salary
payments from the Company at his current base rate of pay for a
period of twenty-four (24) months, and continued participation in
the Company's Executive Indexed Salary Continuation Plan. Mr.
Deer will also be provided with continued participation in the
family group health, disability, and other health and welfare
insurance plans made available to Bank employees. In
consideration of the above, the Agreement contains a
non-competition provision whereby Mr. Deer agrees among other
things that he will not enter the employ of another bank or
similar financial institution within thirty (30) miles of the
Company's corporate office for a period of two years.
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 2 to the Consolidated
Financial Statements on page 7 hereof)
(b) Report on Form 8-K has been filed during the quarter ended
June 30, 2002 on April 10, 2002 regarding results of the
election at the Shareholders' Meeting.
(c) Report on Form 8-K has been filed on July 12, 2002
regarding the resignation of Mr. Deer.
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16.
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/ John C. Haller
-------------------- ----------------------------------------------
(Signature)
John C. Haller
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
17.