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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Quarterly Period ended MARCH 31, 2003. Commission File Number 000-27894
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COMMERCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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OHIO 34-1787239
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
118 S. SANDUSKY AVENUE, UPPER SANDUSKY, OHIO 43351
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (419) 294-5781
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Shares, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 9, 2003, the last practicable date, there were 1,164,722 outstanding
of the registrant's common shares, no par value.
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......................................... 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 99.1: CEO Certification .................................................................... 18
Exhibit 99.2: CFO Certification ..................................................................... 19
2.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, December 31,
2003 2002
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($ in thousands)
ASSETS
Cash and cash equivalents $ 7,262 $ 7,057
Securities available for sale 45,257 39,668
Total loans 195,796 202,065
Allowance for loan losses (1,958) (2,091)
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Loans, net 193,838 199,974
Premises and equipment, net 6,255 6,167
Accrued interest receivable 1,355 1,197
Other assets 3,074 2,738
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Total assets $ 257,041 $ 256,801
========= =========
LIABILITIES
Deposits
Noninterest-bearing demand $ 20,628 $ 22,453
Interest-bearing demand 63,153 64,678
Savings and time deposits 104,492 102,363
Time deposits $100,000 and greater 34,510 33,314
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Total deposits 222,783 222,808
FHLB advances 11,500 11,500
Federal funds purchased 750 350
Accrued interest payable 355 329
Other liabilities 784 1,036
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Total liabilities 236,172 236,023
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SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares authorized,
1,164,722 and 1,164,233 shares issued in 2003 and 2002 10,686 10,674
Retained earnings 10,371 10,256
Deferred compensation plan shares, at cost,
11,113 shares in 2003 and 2002 (272) (272)
Treasury stock, none in 2003, 529 shares in 2002 -- (12)
Accumulated other comprehensive gain 84 132
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Total shareholders' equity 20,869 20,778
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Total liabilities and shareholders' equity $ 257,041 $ 256,801
========= =========
See notes to the consolidated financial statements.
3.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
March 31,
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2003 2002
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($ in thousands)
INTEREST INCOME
Interest and fees on loans $3,562 $3,776
Interest on securities:
Taxable 159 156
Nontaxable 247 176
Other interest income 4 2
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Total interest income 3,972 4,110
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INTEREST EXPENSE
Interest on deposits 1,314 1,718
Interest on borrowings 131 160
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Total interest expense 1,445 1,878
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NET INTEREST INCOME 2,527 2,232
Provision for loan losses 300 240
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,227 1,992
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NONINTEREST INCOME
Service fees and overdraft charges 471 322
Gains on sale of securities, net 21 14
Gains on sale of loans, net -- 150
Gains on sale of other assets, net -- 27
Other income 120 105
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Total noninterest income 612 618
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NONINTEREST EXPENSE
Salaries and employee benefits 1,179 1,111
Occupancy, furniture and equipment 238 242
State taxes 95 92
Data processing 178 166
FDIC deposit insurance 17 18
Professional fees 79 72
Amortization of intangibles 59 102
Other operating expense 534 506
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Total noninterest expense 2,379 2,309
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Income before income taxes 460 301
Income tax expense 87 48
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Net income $ 373 $ 253
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Basic earnings per common share $ .32 $ .22
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Diluted earnings per common share $ .32 $ .22
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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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Three Months Ended
March 31,
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2003 2002
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($ in thousands)
Balance at beginning of period $ 20,778 $ 19,219
Comprehensive income:
Net income 373 253
Other comprehensive income (loss) (48) (111)
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Total comprehensive income 325 142
Common stock issued, 489 shares for options exercised
in 2003, and 689 shares for deferred compensation plan in 2002 12 16
Treasury stock purchased, 4,190 shares at cost (104) --
Treasury stock reissued for options exercised, 4,719 shares in 2003 79 --
Dividends paid ($.19 per share in 2003 and 2002) (221) (220)
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Balance at end of period $ 20,869 $ 19,157
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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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Three Months Ended
March 31,
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2003 2002
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($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 373 $ 253
Adjustments (38) 2,911
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Net cash from operating activities 335 3,164
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (12,954) (2,696)
Maturities and repayments 1,809 1,130
Sales 5,468 2,532
Net change in loans 5,613 280
Bank premises and equipment expenditures (208) (63)
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Net cash from investing activities (272) 1,183
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CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (25) (3,487)
Net change in FHLB advances and federal funds 400 (2,280)
Treasury stock purchases (105) --
Treasury stock reissued for stock options 116 --
Stock issued for stock options 13 --
Net reduction in retained earnings due to stock options (36) --
Cash dividends paid (221) (220)
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Net cash from financing activities 142 (5,987)
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Net change in cash and cash equivalents 205 (1,640)
Cash and cash equivalents at beginning of period 7,057 7,640
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Cash and cash equivalents at end of period $ 7,262 $ 6,000
======== =======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 1,419 $ 1,916
Cash paid for income taxes 170 10
Non-cash transfer of loans to foreclosed/repossessed assets 279 244
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"), its
wholly-owned subsidiaries, Cash Advantage, Inc. ("Cash Advantage") and The
Commercial Savings Bank (the "Bank") and the Bank's wholly-owned subsidiary
Advantage Finance, Inc. ("Advantage"). The Bank also own a 49% interest in Beck
Title Agency, Ltd. which is accounted for using the equity method of accounting.
All significant inter-company balances and transactions have been eliminated in
consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Corporation at March 31, 2003, 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, 2002 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.
NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted during
2003 they will not have a material impact on the Corporation's financial
condition or results of operations.
7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - EARNINGS PER SHARE
Weighted average shares used in determining basic and diluted earnings per share
are as follows:
2003 2002
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Weighted average shares outstanding 1,163,393 1,155,860
Dilutive effect of exercisable stock options 2,511 4,984
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Weighted average shares considering dilutive effect 1,165,904 1,160,844
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At March 31, 2003 and 2002 there were 34,171 and 73,826 stock options that were
not considered in computing diluted earnings per share because they were
anti-dilutive. The reduction in the number of non-dilutive shares is a direct
result of both an increase in market value, which gave the 1998 plan shares a
minimal value, as well as the exercising of more than 13,400 shares from the
1997 plan.
NOTE 3 - LOANS
Loans were as follows:
March 31, 2003 December 31, 2002
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($ in thousands)
Commercial and other loans $ 114,217 $ 115,813
Real estate loans 16,371 19,321
Construction loans 451 856
Home equity loans 10,235 9,631
Consumer and credit card loans 41,994 45,468
Consumer finance loans 12,528 10,976
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Total loans $ 195,796 $ 202,065
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The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC). At March 31, 2003 and December 31, 2002, loans
sold to FHLMC for which the Bank has retained servicing totaled $77,823,000 and
$87,569,000, and real estate loans originated and held for sale totaled $57,000
and $226,000.
8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - LOANS (CONTINUED)
Activity in the allowance for loan losses for the three months ended March 31
was as follows:
2003 2002
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($ in thousands)
Beginning balance $ 2,091 $ 1,743
Provision for loan losses 300 240
Loans charged off (465) (184)
Recoveries of loans previously charged-off 32 37
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Ending balance $ 1,958 $ 1,836
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Impaired loans were as follows:
March 31, 2003 December 31, 2002
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($ in thousands)
Period-end loans with no allocated allowance $ 674 $ 1,525
Period-end loans with allocated allowance 496 1,827
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Total $ 1,170 $ 3,352
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Amount of allowance allocated $ 123 $ 298
Nonperforming loans were as follows:
March 31, 2003 December 31, 2002
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($ in thousands)
Loans past due over 90 days still on accrual $ 256 $ 46
Nonaccrual loans 1,419 3,865
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. A loan relationship has been resolved since year-end which
contributed $2,240,000 to both the impaired and nonaccrual year-end balances,
and $225,000 of the charge off amounts this year.
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income for the three months ended March 31 was as follows:
2003 2002
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($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ (52) $ (154)
Less: Reclassification adjustment for gains recognized in income (21) (14)
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Net unrealized holding gains (losses) (73) (168)
Tax effect 25 57
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Other comprehensive gain (loss) $ (48) $ (111)
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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 the
Corporation at March 31, 2003, compared to December 31, 2002, and the
consolidated results of operations for the quarterly period ending March 31,
2003 compared to the same period in 2002. 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.
The Corporation is designated 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 increased by $240,000 from $256,801,000 at December 31, 2002 to
$257,041,000 at March 31, 2003, an increase of less than .1%. The primary
reasons for this lack of growth was that total loans declined $6,136,000 due
largely to payoffs of consumer loans, real estate mortgage loans, and the pay
off and partial charge off of the large commercial relationship referred to
previously. The cash proceeds generated by these reductions were reinvested in
securities and other consumer loans.
Total loans decreased $6,269,000 during the first three months of 2003 compared
to $2,300,000 during the same period a year ago. Loan balances are down
$1,596,000 in commercial loans, $3,355,000 in real estate and construction
loans, and $3,473,000 in consumer and credit card loans. Reductions in real
estate and consumer loans are to be expected given management's decision to
reduce the Corporation's activity in those loans. Balances are up $604,000 for
home equity loans, and $1,552,000 for consumer finance loans. While there were
$226,000 of real estate loans awaiting sale at year-end 2002, there are now only
$56,000 held for sale at the end of March, 2003.
10.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The Corporation has become an originator of various types of real estate loans
for Countrywide, Incorporated ("Countrywide") for which it earns commission
fees, rather than originate and sell fixed-rate, long term real estate loans
through the FHLMC. This means that the Corporation will only retain ownership of
the variable-rate real estate loans originated in its home markets. This gives
its customers access to more types of conventional and non-conventional home
financing, without having to maintain a large staff of originators and
processors to handle the activity. It also means that the Corporation is
currently unlikely to grow its remaining portfolio of real estate loans since
most home owners are likely to lock in the current low interest rates available
on fixed terms rather than on adjustable rate terms.
Continuing declines were experienced 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 early 2000, management began
limiting new loan originations from this source, and in 2001 stopped all new
activity. Repayments of loans in this portfolio caused a decline of more than
$3,147,000 during the first three months of 2002, and $2,103,000 during the
first three months of 2003.
Consumer loans generated by the Bank's finance company, Advantage increased
$1,552,000 to $12,528,000 at March 31, 2003 from $10,976,000 at December 31,
2002. These loans are originated through relationships with various vendors
whose customers are predominantly outside the Bank's traditional market area.
Local indirect consumer loans have been transferred to the control of Advantage
to take advantage of an improved accounting and approval system implemented for
that purpose. Customers that qualify for standard Bank rates and terms can still
be funded, and those that don't qualify are still serviced at Advantage's
standard finance company terms. Those loans earn a higher rate of interest than
the Bank's standard portfolio of loans, but carry a higher credit risk as well.
The new system allows the Bank to monitor the bank-qualified loans separate from
the finance-company loans. Management reviews all loans very closely for changes
in payment activity.
Total deposits decreased $25,000 during the first quarter of 2003 compared to a
decrease of $3,487,000 during the same period a year ago. This flat performance
parallels the activity on the asset side of the Corporation as financing needs
due to maturities and rollovers were self-sufficient to meet the lending needs,
and any excess funds have been invested in additional securities.
Interest-bearing and noninterest-bearing demand deposits were down $3,350,000 in
total, but that was made up by an increase in savings and time deposits of
$3,325,000.
Borrowings from the Federal Home Loan Bank ("FHLB") have stayed constant since
year-end, and overnight borrowings were $400,000 higher than at year-end. The
overnight portion of borrowings fluctuates with daily cash-flow needs, and is as
likely to show a positive Federal funds sold balance as a net borrowing
position.
Total shareholders' equity increased $91,000 during the first three months of
2003 compared to a decrease of $62,000 a year ago. Equity increased by first
quarter net income of $373,000. That increase was offset by a decrease of
$48,000 in the fair value of securities available for sale, net of tax, and the
payment of $221,000 in dividends. An additional $13,000 net reduction in equity
was experienced due to the exercise of stock options by certain executive
officers. Shareholders' equity to total assets was 8.12% at March 31, 2003
compared to 8.09% at December 31, 2002.
11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2003 was $373,000 compared to
$253,000 during the same period in 2002. Diluted earnings per share increased to
$.32 for the quarter ended March 31, 2003 from $.22 for the same period in 2002.
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.
Interest income for the first quarter of 2003 was $3,972,000 compared to
$4,110,000 during the same period in 2002, a decrease of $138,000. The decrease
was principally due to interest and fees on loans being $214,000 less in 2003
than in 2002. The level of average loans decreased $1,166,000, to $195,858,000
in 2003 from $197,024,000 in 2002. A generally flat interest rate environment
during 2002 and 2003 has contributed to decreased yields on all financial
instruments. As a net result, the tax-equivalent yield on interest-earning
assets decreased to 6.95% during the first quarter of 2003 from 7.47% during the
same period in 2002.
Interest expense decreased $433,000 to $1,445,000 during the first quarter of
2003 from $1,878,000 during the same period in 2002. The decrease was
principally due to the cost of deposits being $404,000 less in 2003 than in
2002. The average balance of interest-bearing deposits increased by $16,396,000,
to $202,192,000 in the first quarter of 2003 from $185,796,000 in 2002. The Bank
acquired a significant amount of medium-term certificates of deposit immediately
prior to the reduction in the general market interest rates, which began late in
2000 and continued throughout 2001. Those certificates of deposit began to
mature during the first and second quarters of 2002, and have now been renewed
in a much lower rate environment. As a result, the cost of deposits was 2.74% in
2003, compared to 3.75% in 2002. The reduction in deposit rates should continue
through all comparisons to deposits in 2002. The cost of borrowed funds declined
in dollar terms by $29,000 compared to the first quarter of last year, but only
because the average balances of borrowings from the FHLB and other banks were
$5,744,000 lower than last year. The average rate paid for those borrowings was
4.52% in 2003, compared to 3.70% during the first quarter in 2002. The Bank
decreased its use of the FHLB short-term advances as the deposit growth provided
sufficient funds to finance the earning assets. That left the Corporation with
$11,500,000 of long-term fixed-rate borrowings at an average cost of 4.60%.
Those funds cannot be prepaid without incurring a substantial penalty. When
viewed as part of the Corporation's overall funding pool, the funds are simply
part of the funds placed at various times and terms such that the pool costs an
average of 2.74%, 1.01% less than last year for the same period.
12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Three Months Ended March 31,
-------------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
------- -------- ---------- ------- -------- ----------
($ in thousands)
Securities (1) $ 42,647 $ 524 4.98% $ 30,290 $ 412 5.52%
Loans (2) 195,858 3,562 7.38 197,024 3,776 7.77
---------- ------- --------- -------
Total interest-earning assets 238,505 4,086 6.95 227,314 4,188 7.47
Other assets 18,060 15,241
---------- ---------
Total assets $ 256,565 $ 242,555
========== =========
Deposits $ 202,192 1,314 2.64% $ 185,796 1,718 3.75%
Borrowed funds 11,815 131 4.52 17,559 160 3.70
---------- ------- --------- -------
Total interest-bearing liabilities 214,007 1,445 2.74 203,355 1,878 3.75
Noninterest-bearing demand deposits 19,599 18,089
Other liabilities 1,925 1,626
Shareholder's equity 21,034 19,485
---------- ---------
Total liabilities and
shareholders' equity $ 256,565 $ 242,555
========== =========
Net interest income $ 2,641 $ 2,310
======== ========
Interest rate spread 4.21% 3.72%
Net interest margin (3) 4.49% 4.12%
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(1) Securities includes federal funds sold for purposes of this yield table.
Average yields on taxable securities have been computed based on amortized
cost. Income on tax exempt securities has been computed on a fully-taxable
equivalent basis using a 34% tax rate. The amount of such adjustments was
$114,000 and $78,000 for 2003 and 2002.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $156,000 and $187,000 and deferred dealer
reserve expense of $97,000 and $119,000 in 2003 and 2002.
(3) Net interest income as a percentage of average interest-earning assets.
Net interest income before provision for loan losses was $295,000 more in the
first quarter of 2003 than in the same period in 2002. This is an increase of
13.22%, on 4.92% more average total earning assets. The lower yields on earning
assets were more than offset by the lower cost of funds.
13.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The provision for loan losses increased to $300,000 in the first quarter 2003
compared to $240,000 for the same period in 2002. The increased provision for
loan losses is consistent with the loan growth being experienced in the consumer
finance portfolio and the losses incurred by the commercial portfolio. Shrinkage
in the real estate and indirect consumer loan portfolios help make up for some
of the growth, as does the reduction in impaired loans. The higher level of
charge-offs in 2003 was the direct result of the one loan relationship discussed
earlier. As of March 31, 2003, the remaining allowance for loan losses balance
of $1,958,000 represents 1.00% of the current loans outstanding of $195,796,000.
That represents an amount more than double the Bank's historic net charge-off
history. 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 identified losses in the loan portfolio.
Total noninterest income was $6,000 less for the first quarter of 2003 compared
to the same period in 2002 due principally to reduced gains on the sale of loans
and other assets, which amounted to $177,000 in 2002 compared to none in 2003.
This decrease was the result of the decision to become an agent for Countrywide
rather than originate loans for our own portfolio. This decision will bring
permanent reductions in this activity, as well as bring an end to the
recognition of mortgage serving rights value as the Bank does not retain the
servicing of the loans. The reduction of those fees will be offset by the
commissions to be earned from Countrywide, as well as the net reduction in
expense to staff that function. During 2003, service fees and overdraft charges
increased $149,000 to help offset the other reductions, due primarily to the
introduction of the Bank's new overdraft privilege program, which provides its
customers with a facility to have checks honored that would normally be rejected
due to insufficient funds, and thereby avoid return check charges from the
various vendors they presented the checks to in the first place.
Total noninterest expense increased $70,000 to $2,379,000 for the first three
months of 2003 compared to $2,309,000 for the same period in 2002, a 3.1%
increase. The most significant increases were $68,000 in personnel costs,
$12,000 in data processing expenses, $7,000 in professional fees, and $28,000 in
other operating expenses, most notably the cost of running our ATM network, as
the Bank upgraded the entire network with state-of-the-art equipment and
capacity. Reductions in expense were experienced in the amortization of
intangibles, most notably the mortgage servicing rights as the Bank's portfolio
of serviced loans continues to shrink. The remaining balance of $608,000 for
mortgage servicing rights has a limited life expectancy due to the continued
refinancing of old mortgages, which will probably mean the Corporation will
absorb the write-off of the entire remaining amount over the next three or four
years.
14.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 Statement of Cash Flows. Cash and cash
equivalents amounted to $7,262,000 at March 31, 2003 compared to $7,057,000 at
December 31, 2002.
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, 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 March 31, 2003, the Bank's leverage ratio was 7.95% and the risk-based
capital ratio was 11.41%, both of which exceeded the minimum regulatory
requirements to be considered well-capitalized. Likewise, the Corporation's
leverage and risk-based capital ratios, 8.06% and 11.55% at March 31, 2003,
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 2002. (See Quantitative and Qualitative Disclosures
about Market Risk contained in the Annual Report to Shareholders for the year
ended December 31, 2002.)
15.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 2003
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders: There
are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re computation of per share earnings
(reference is hereby made to Note 2 to the Consolidated
Financial Statements on page 7 hereof)
(b) No Report on Form 8-K has been filed during the quarter
ended March 31, 2003
16.
COMMERCIAL BANCSHARES, INC.
SIGNATURES
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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.
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(Registrant)
Date: 05/09/2003 /s/Raymond E. Graves
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(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: 05/09/2003 /s/ John C. Haller
-------------------------------------------- -----------------------------------------------------
(Signature)
John C. Haller
Vice President and Chief Financial Officer