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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 JUNE 30, 2003. Commission File Number 000-27894
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COMMERCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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 August 12, 2003, the last practicable date, there were 1,164,272
outstanding of the registrant's common shares, no par value.
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.............................. 16
Part II - Other Information
Item 1. Legal Proceedings....................................................................... 17
Item 2. Changes in Securities and Use of Proceeds............................................... 17
Item 3. Defaults Upon Senior Securities......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
Item 5. Other Information....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
SIGNATURES ........................................................................................... 18
EXHIBIT A: CEO 302 Certification ..................................................................... 19
CFO 302 Certification ..................................................................... 20
CEO 906 Certification ..................................................................... 21
CFO 906 Certification ..................................................................... 22
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2.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
2003 2002
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($ in thousands)
ASSETS
Cash and cash equivalents $ 8,078 $ 7,057
Securities available for sale 46,517 39,668
Total loans 204,627 202,065
Allowance for loan losses (1,981) (2,091)
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Loans, net 202,646 199,974
Premises and equipment, net 6,185 6,167
Accrued interest receivable 1,169 1,197
Other assets 2,497 2,738
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Total assets $ 267,092 $ 256,801
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LIABILITIES
Deposits
Noninterest-bearing demand $ 20,318 $ 22,453
Interest-bearing demand 63,896 64,678
Savings and time deposits 107,604 102,363
Time deposits $100,000 and greater 39,946 33,314
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Total deposits 231,764 222,808
FHLB advances 11,500 11,500
Other borrowed funds 100 350
Accrued interest payable 376 329
Other liabilities 1,280 1,036
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Total liabilities 245,020 236,023
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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 10,694 10,674
Retained earnings 10,694 10,256
Deferred compensation plan shares, at cost,
11,443 and 11,113 shares in 2003 and 2002 (280) (272)
Treasury stock, 450 in 2003, 529 shares in 2002 (11) (12)
Accumulated other comprehensive income 975 132
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Total shareholders' equity 22,072 20,778
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Total liabilities and shareholders' equity $ 267,092 $ 256,801
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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,
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2003 2002 2003 2002
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INTEREST INCOME
Interest and fees on loans $ 3,636 $ 3,741 $ 7,198 $ 7,517
Interest on securities:
Taxable 151 179 310 335
Nontaxable 299 172 546 348
Other interest income 4 1 8 3
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Total interest income 4,090 4,093 8,062 8,203
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INTEREST EXPENSE
Interest on deposits 1,274 1,288 2,588 3,006
Interest on borrowings 138 208 270 368
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Total interest expense 1,412 1,496 2,858 3,374
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NET INTEREST INCOME 2,678 2,597 5,204 4,829
Provision for loan losses 325 260 625 500
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,353 2,337 4,579 4,329
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OTHER INCOME
Service fees and overdraft charges 560 371 1,031 693
Gains on sale of securities, net 74 43 96 57
Gains on sale of loans, net 5 205 5 391
Gains on sale of foreclosed assets -- 18 -- 45
Other income 114 81 234 186
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Total other income 753 718 1,366 1,372
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OTHER EXPENSE
Salaries and employee benefits 1,147 1,090 2,326 2,201
Occupancy, furniture and equipment 232 248 468 490
State taxes 89 91 184 183
Data processing 178 164 357 329
FDIC deposit insurance 17 18 34 36
Professional fees 56 86 134 158
Amortization of intangibles 116 107 175 245
Other operating expense 590 569 1,126 1,076
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Total other expense 2,425 2,373 4,804 4,718
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Income before federal income taxes 681 682 1,141 983
Income tax expense 137 179 224 227
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Net income $ 544 $ 503 $ 917 $ 756
=============== ============== ============== ===============
Basic earnings per common share $ .47 $ .44 $ .79 $ .65
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Diluted earnings per common share $ .47 $ .43 $ .79 $ .65
=============== ============== ============== ===============
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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,
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2003 2002
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Balance at beginning of period $ 20,869 $ 19,157
Comprehensive income:
Net income 544 503
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 891 261
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Total comprehensive income 1,435 764
Treasury stock purchase, 450 shares in 2003 (11) --
Dividends paid ($.19 and $.19 per share in 2003 and 2002) (221) (219)
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Balance at end of period $ 22,072 $ 19,702
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Six Months Ended
June 30,
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2003 2002
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Balance at beginning of period $ 20,778 $ 19,219
Comprehensive income:
Net income 917 756
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 843 150
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Total comprehensive income 1,760 906
Common stock issued, 489 shares for options exercised in
2003, and 689 shares for deferred compensation plan in 2002 12 16
Treasury stock purchased, 4,640 shares at cost in 2003 (115) --
Treasury stock reissued for options exercised, 4,719 shares in 2003 79 --
Dividends paid ($.38 and $.38 per share in 2003 and 2002) (442) (439)
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Balance at end of period $ 22,072 $ 19,702
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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,
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2003 2002
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($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 917 $ 756
Adjustments 1,547 (1,892)
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Net cash from operating activities 2,464 (1,136)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (23,800) (9,047)
Maturities and repayments 4,625 1,727
Sales 13,603 9,088
Net change in loans (3,849) 7,364
Proceeds from sale of foreclosed/repossessed assets - 229
Sale of land owned by the Bank - 37
Bank premises and equipment expenditures (263) (101)
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Net cash from investing activities (9,684) 9,297
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CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 8,957 (17,655)
Net change in borrowings from FHLB - 8,250
Net change in federal funds purchased (250) 710
Common shares issued 13 16
Treasury shares purchased (37) -
Cash dividends paid (442) (439)
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Net cash from financing activities 8,241 (9,118)
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Net change in cash and cash equivalents 1,021 (957)
Cash and cash equivalents at beginning of period 7,057 7,640
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Cash and cash equivalents at end of period $ 8,078 $ 6,683
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SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,811 $ 3,557
Cash paid for income taxes 403 219
Non-cash transfer of loans to foreclosed/repossessed assets 330 332
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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 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 owns 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 June 30, 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 will apply for 2003.
The Corporation does not believe this standard will have a material effect on
its financial position or results of operations.
Financial Statement Presentation: Certain items in prior financial statements
have been reclassified to conform with the current presentation of information.
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7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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:
2003 2002
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Weighted average shares outstanding during the period 1,164,041 1,155,873
Dilutive effect of exercisable stock options 2,584 5,029
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Weighted average shares considering dilutive effect 1,166,625 1,160,902
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At June 30, 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:
June 30, 2003 December 31, 2002
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($ in thousands)
Commercial and other loans $ 122,677 $ 115,813
Real estate loans 14,310 19,321
Construction loans 410 856
Home equity loans 12,303 9,631
Consumer and credit card loans 38,854 45,468
Consumer finance loans 16,074 10,976
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Total loans $ 204,628 $ 202,065
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The subsidiary Bank is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC), but has curtailed such activity in favor of
originating new fixed-rate mortgages in conjunction with Countrywide,
Incorporated. Under this arrangement, the Bank no longer owns the originated
loans, but initiates the process through to closing, but final funding comes
directly from Countrywide, for which the Bank earns a fee. At June 30, 2003 and
December 31, 2002, loans sold to FHLMC for which the Bank has retained servicing
totaled $66,104,000 and $87,569,000, and real estate loans originated and held
for sale totaled zero in 2003 and $226,000 at year end 2002.
Activity in the allowance for loan losses for the three months ended June 30 was
as follows:
2003 2002
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($ in thousands)
Beginning balance $ 1,958 $ 1,836
Provision for loan loss 325 260
Loans charged off (340) (277)
Recoveries of loans previously charged-off 38 46
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Ending balance $ 1,981 $ 1,865
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Activity in the allowance for loan losses for the six months ended June 30 was
as follows:
2003 2002
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($ in thousands)
Beginning balance $ 2,091 $ 1,743
Provision for loan loss 625 500
Loans charged off (805) (461)
Recoveries of loans previously charged-off 70 83
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Ending balance $ 1,981 $ 1,865
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8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Impaired loans were as follows:
June 30, 2003 December 31, 2002
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($ in thousands)
Period-end loans with no allocated allowance $ 1,581 $ 2,340
Period-end loans with allocated allowance 443 1,827
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Total $ 2,024 $ 3,865
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Amount of allowance for loan loss allocated $ 122 $ 298
Nonperforming loans were as follows:
June 30, 2003 December 31, 2002
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($ in thousands)
Loans past due over 90 days still on accrual $ 1,132 $ 46
Nonaccrual loans 2,024 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
include 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. Loans past due over 90 days
and still accruing include $848,000 of loans that have matured per original
terms, and are in the process of being rewritten, pending receipt of current
appraisals and financial statements. Management does not consider these loans to
present a loss potential.
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income for the three months ended June 30 was as follows:
2003 2002
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($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 1,425 $ 438
Less: Reclassification adjustment for losses (gains) recognized in income (75) (43)
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Net unrealized holding gains (losses) 1,350 395
Tax effect (459) (134)
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Other comprehensive income $ 891 $ 261
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Other comprehensive income for the six months ended June 30 was as follows:
2002 2002
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($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 1,373 $ 284
Less: Reclassification adjustment for losses (gains) recognized in income (96) (57)
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Net unrealized holding gains (losses) 1,277 227
Tax effect (434) (77)
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Other comprehensive income $ 843 $ 150
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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, 2003, compared to December 31, 2002, and
the consolidated results of operations for the quarterly and year-to-date
periods ending June 30, 2003 compared to the same periods 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 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 increased by $10,291,000 from $256,801,000 at December 31, 2002 to
$267,092,000 at June 30, 2003. The primary reasons for the increase in total
assets were that securities held for sale increased $6,849,000 due to recent
purchases using cash from recent deposit growth, plus an increase in gross loans
of $2,562,000. Commercial loans grew $6,864,000, while pay downs on real estate
loans of $5,011,000, and consumer and credit card loans of $6,614,000 were
partially offset by increases of $5,098,000 in consumer finance loans (through
Advantage), and $2,672,000 in home equity loans. Cash and cash equivalents grew
an additional $1,021,000, primarily deposits with the Bank's lead correspondent
bank.
Total net loans increased $2,672,000 during the first six months of 2003,
coincidentally the same as the growth in home equity loans, compared to a
decline of $4,857,000 during the same period a year ago. While there were
$226,000 of real estate loans held for sale at year-end 2002, there are no
balances held for sale at the end of June 2003. During the second quarter of
2002, the Bank entered into an agreement with Countrywide, Incorporated, a
national mortgage loan origination firm wherein the Bank has become a sales
associate for Countrywide and is paid commissions for real estate loans
originated in the local markets it serves. These loans 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 reduce in relative size to total assets in future
periods.
Declines in the Bank's total consumer loan portfolios have almost been offset by
new originations through Advantage. 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 $4,243,000 during 2003, which was partially offset
by new loans such that the net decline was only $1,516,000 during 2003, compared
to a net decline of $6,125,000 during 2002. Repayments of the Denver-based loans
represented a decrease of $11,260,000 in the first six months of 2002.
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10.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Consumer loans generated by Advantage increased $5,098,000 to $16,074,000 at
June 30, 2003 from $10,976,000 at December 31, 2002. This compares to an
increase of $3,854,000 during the first six months of 2002. 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 $6,864,000 since year-end 2002, as have home equity
loans, which have grown $2,672,000 over the first six months of 2003. It should
be noted that the majority of these loans are tied to the prime rate, which is
now at its historic low point. This continues to put pressure on our net
interest margin.
Total deposits increased $8,956,000 during the first six months of 2003 compared
to a decrease of $17,655,000 during the same period last year. The increases
have occurred mostly in savings and consumer time deposits, which grew
$5,241,000, plus a $6,632,000 increase in time deposits in amounts equal to or
greater than $100,000. The first six months of 2003 saw an $11,873,000 increase
in the two types of accounts after having had a $17,216,000 decrease in such
funds during the first six months of 2002. Last year 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 prior, at rates that were substantially above the then-current market
rates. National rates fell throughout 2001 and 2002, and continued at low levels
throughout the first six months of 2003. The Bank has experienced great pressure
on our net interest margin because of those deposits. All of those deposits have
now been replaced at current market rates with either rollovers, public funds or
brokered deposits. Overall funding rates are now poised to have a favorable
impact on our net interest margin. As an example, the year-to-date average cost
of deposits and borrowed funds is 2.65% in 2003 versus 3.35% in 2002.
Borrowed funds have decreased just $250,000 since year end, with short-term
overnight borrowings at $100,000. Federal Home Loan Bank long-term advances have
held steady at $11,500,000 and federal funds borrowed have decreased by
$250,000, with current overnight rates running less than 1.5%. The FHLB
borrowing is a fixed-rate ten-year convertible issue placed five years ago at
4.60%. There is little likelihood that the issue will be called or converted in
the current market. The Federal Reserve Bank has maintained low discount rates
and federal funds target rates throughout the year.
Total shareholders' equity increased $1,294,000 during the first six months of
2003 compared to an increase of $483,000 a year ago. Net income was $917,000 for
the six months of 2003, with dividends paid of $442,000, compared to earnings of
$756,000 and dividends paid of $439,000 in 2002. Accumulated unrealized earnings
from the fair market value adjustment for securities held for sale added
$843,000 to equity in 2003 versus an addition of $150,000 in 2002. The remaining
activity in the equity accounts resulted in a net reduction in value of $24,000
in 2003 due to treasury stock purchases and issuance of shares to cover stock
options exercised. This compares to a net increase in value of $16,000 during
the same period in 2002 due to the issuance of shares to cover conversion of
directors' fees in the deferred compensation plan. Net income for the six month
period was up primarily due to lower interest expense of $516,000, partially
offset by lower interest income of $141,000 and higher provision for loan losses
of $125,000, and higher operating expense of $86,000. Shareholders' equity to
total assets was 8.26% at June 30, 2003 compared to 8.09% at December 31, 2002,
an increase of 2.1%.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 2003 was $544,000 compared to
$503,000 during the same period in 2002. Earnings for the six-month period
ending June 30, 2003 were $917,000 compared to $756,000 in 2002. Diluted
earnings per share increased to $.47 from $.43 for the quarters ended June 30,
and to $.79 from $.65 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.
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11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Fully-taxable equivalent interest income for the three month period ending June
30, 2003 was $4,228,000 compared to $4,171,000 during the same period in 2002,
an increase of $57,000. This increase was principally due to interest on
securities being $162,000 more in 2003 than in 2002, while interest and fees on
loans declined $105,000. The level of average securities increased $17,357,000,
to $48,746,000 in 2003 from $31,389,000 in 2002, while average loan balances
increased $4,146,000 to $198,275,000 in 2003 from $194,129,000 in 2002. A
generally flat interest rate environment during all of 2002, and a declining
environment throughout all of 2003 has contributed to decreased yields on loans
and securities. The tax-equivalent yield on interest-earning assets decreased to
6.87% during the second quarter of 2003 from 7.42% during the same period in
2002.
Fully-taxable equivalent interest income for the six months of 2003 was
$8,314,000 compared to $8,360,000 during the same period in 2002, a decrease of
$46,000. This decrease was principally due to interest and fees on loans being
$319,000 less in 2003 than in 2002, while interest on securities increased
$273,000. The level of average loans increased $2,403,000, to $197,073,000 in
2003 from $194,670,000 in 2002, and security balances grew $14,871,000 to
$45,714,000 in 2003 from $30,843,000 in 2002. The tax-equivalent yield on
interest-earning assets decreased to 6.91% during the first six months of 2003
from 7.48% during the same period in 2002.
- --------------------------------------------------------------------------------
12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Three Months Ended June 30,
--------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
---------- -------- ---------- ---------- -------- ----------
($ in thousands)
Securities (1) $ 48,746 $ 592 4.87% $ 31,389 $ 430 5.50%
Loans (2) 198,275 3,636 7.36 194,129 3,741 7.73
---------- -------- ---------- --------
Total interest-earning assets 247,021 4,228 6.87 225,518 4,171 7.42
Other assets 17,962 17,219
---------- ----------
Total assets $ 264,983 $ 242,737
========== ==========
Deposits - interest bearing $ 207,322 1,274 2.47% $ 175,777 1,288 2.94%
Borrowed funds 13,251 138 4.19 27,276 208 3.06
----------- -------- ---------- --------
Total interest-bearing deposits
and borrowings $ 220,573 1,412 2.57 $ 203,053 1,496 2.95
Noninterest-bearing demand deposits 19,799 18,647
Other liabilities 2,793 1,411
Shareholder's equity 21,818 19,626
----------- ----------
Total liabilities and
shareholders' equity $ 264,983 $ 242,737
=========== ==========
Net interest income $ 2,816 $ 2,675
======== ========
Interest rate spread 4.30% 4.47%
Net interest margin (3) 4.57% 4.76%
- ----------------
(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 $138,000 and $79,000 for 2003 and
2002.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $176,000 and $175,000 and deferred dealer
reserve expense of $96,000 and $126,000 in 2003 and 2002.
(3) Net interest income as a percentage of average interest-earning assets.
- --------------------------------------------------------------------------------
13.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Six Months Ended June 30,
-------------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
---------- -------- ---------- ------- -------- ----------
($ in thousands)
Securities (1) $ 45,714 $ 1,116 4.92% $ 30,843 $ 843 5.51%
Loans (2) 197,073 7,198 7.37 194,670 7,517 7.79
---------- -------- --------- -------
Total interest-earning assets 242,787 8,314 6.91 225,513 8,360 7.48
Other assets 18,011 17,134
---------- ---------
Total assets $ 260,798 $ 242,647
========== =========
Deposits - interest bearing $ 204,771 2,588 2.55% $ 180,760 3,006 3.35%
Borrowed funds 12,537 270 4.35 22,444 368 3.31
---------- -------- --------- -------
Total interest-bearing deposits
and borrowings $ 217,308 2,858 2.65 $ 203,204 3,374 3.35
Noninterest-bearing demand deposits 19,700 18,369
Other liabilities 2,362 1,518
Shareholder's equity 21,428 19,556
---------- ---------
Total liabilities and
shareholders' equity $ 260,798 $ 242,647
========== =========
Net interest income $ 5,456 $ 4,986
======== =======
Interest rate spread 4.25% 4.13%
Net interest margin (3) 4.53% 4.46%
- ---------------
(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 $252,000 and $157,000 for 2003 and
2002.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $332,000 and $362,000 and deferred dealer
reserve expense of $193,000 and $245,000 in 2003 and 2002.
(3) Net interest income as a percentage of average interest-earning assets.
Interest expense decreased $84,000 to $1,412,000 during the second quarter of
2003 from $1,496,000 during the same period in 2002. The decrease was
principally due to the cost of borrowings being $69,000 less in 2003 than in
2002, with interest on deposits decreasing $14,000. The quarterly average
balance of interest bearing deposits increased by $31,545,000, to $207,322,000
in 2003 from $175,777,000 in 2002. The runoff of high-rate time deposits in 2002
has been replaced with market-rate rollovers, public funds and brokered
deposits. This greatly reduced the Corporation's interest expense such that
equivalent rates for the three month periods on interest-bearing funds declined
to 2.47% from 2.94%. The Bank decreased its use of Federal Home Loan Bank
advances as deposits grew, using $14,025,000 fewer borrowed funds from
year-to-year. However, due to the long-term fixed-rate nature of the core
$11,500,000 of FHLB advances, the average rate on borrowed funds rose to 4.19%
from 3.06% in this same period.
Interest expense decreased $516,000 to $2,858,000 during the six months ended
June 30, 2003 from $3,374,000 during that period in 2002. The decrease was
principally due to the cost of deposits being $418,000 less in 2003 than in
2002. The average rate on deposits was 2.55%, down from 3.35% the year before.
The average balance of interest bearing deposits increased by $24,011,000, to
$204,771,000 in the first six months of 2003 from $180,760,000 in 2002. The cost
of borrowed funds increased to 4.35% during the six months of 2003 from 3.31%
during the same period in 2002, but average balances for borrowed funds declined
$9,907,000 from year-to-year.
The provision for loan losses increased $65,000 to $325,000 for the second
quarter 2003 compared to $260,000 during 2002. The provision was $125,000 higher
for the six months ended June 30, 2003 at $625,000 compared to $500,000 for the
same period in 2002. The higher amounts reflect the higher amount of net
charge-offs in 2003, as well as the higher total loan balances. Net charge-offs
were $71,000 higher during the second quarter in 2003 than in 2002. Net
charge-offs for the six month period was $357,000 higher in 2003 than in 2002.
$225,000 of those charge-offs came from one customer relationship, which had
contributed $2,240,000 to both the non-accrual and non-performing balances at
year end 2002. Non-performing and impaired loan balances reflect the
- --------------------------------------------------------------------------------
14.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
reductions brought about by the resolution of this relationship, which
ultimately led to the $225,000 charge-off. The $1,086,000 increase in loans past
due 90 days and still accruing during 2003 versus year-end 2002 is primarily due
to $848,000 of loans that have matured and are being renewed, but delays in the
receipt of current appraisals and financial statements have prevented the new
notes from being signed.
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 $753,000 for the second quarter of 2003 compared to
$718,000 for the same period in 2002, an increase of $35,000. Items contributing
to the increase included service fees and overdraft charges for $189,000 more,
ATM usage fees at $14,000 more, gains on sales of securities at $31,000 more,
Countrywide commissions at $46,000, and $10,000 more in Beck Title fees. These
increases were partially offset by lower gains on the sale of loans for $200,000
and $18,000 less for gains on the sale of foreclosed assets for the three month
period. The reduction in gains on the sale of loans represents a reduction in
the recognition of non-cash mortgage servicing rights associated with the sold
loans in the amount of $142,000 in addition to the actual cash gains involved in
the sales.
Total noninterest income was $1,366,000 for the six months of 2003 compared to
$1,305,000 in the prior year, an increase of $61,000. Items contributing to the
six month increase include $315,000 more in service fees and overdraft charges,
$19,000 more in ATM charges, $10,000 more in Beck Title fees, and $88,000 in
Countrywide commissions. These increases were partially offset by $386,000 fewer
gains from the sale of loans, $45,000 less in gains from the sale of foreclosed
assets, and $23,000 less in servicing income on real estate loans sold. The
reduction in gains on the sale of loans represents a reduction in the
recognition of non-cash mortgage servicing rights associated with the sold loans
in the amount of $275,000 in addition to the actual cash gains involved in the
sales.
Total noninterest expense increased $52,000 to $2,425,000 in the three months of
the second quarter 2003 compared to $2,373,000 in the same period during 2002.
The largest increase of $57,000 came in salaries and employee benefits, a 5.2%
increase, plus $14,000 more for data processing, $9,000 for amortization of
intangible mortgage servicing rights, and $21,000 for other operating expense
including $11,000 for loan origination expenses, and $5,000 for ATM processing
expenses. These increases were partially offset by lower occupancy costs of
$16,000 and $30,000 for professional services from the Bank's external auditors
and lawyers.
Six month expenses rose $86,000 to $4,804,000 in 2003 compared to $4,718,000
during the same period in 2002. Increases were realized for salaries and
employee benefits of $125,000 (5.7%), $28,000 for data processing, and $50,000
for other operating expenses, including $15,000 for ATM operating expenses and
$59,000 in net losses on overdrafts. These increases were partially offset by
decreases in occupancy expense of $22,000, and $70,000 in lower amortization of
intangible mortgage servicing rights.
The three month before tax income of $681,000 for 2003 is virtually the same as
the $682,000 for 2002. The taxes accrued for 2003 are only $137,000, $42,000
less than the $179,000 in 2002. This reflects the increased amount of income
generated by the portfolio of nontaxable securities and loans in 2003 which
increased $127,000 in 2003.
The six month before tax income of $1,141,000 in 2003 is $158,000 more than the
$983,000 of 2002. Taxes paid on that income is virtually the same at $224,000 in
2003 versus $227,000 in 2002. This also reflects the larger reliance on
nontaxable securities and loans income which grew $198,000.
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 $8,078,000 at June 30, 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, 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.
- --------------------------------------------------------------------------------
15.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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, 2003, the Bank's leverage ratio was 7.96% and the risk-based capital
ratio was 11.05%, both of which exceeded the minimum regulatory requirements to
be considered well-capitalized. Likewise, the Corporation's leverage and
risk-based capital ratios, 8.05% and 11.17% at June 30, 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.)
- --------------------------------------------------------------------------------
16.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended June 30, 2003
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 9, 2003 at the main office of the Commercial Savings
Bank in Upper Sandusky. There were 752,219 shares of the 1,163,175
eligible shares currently outstanding, or 64.7%, represented in person
or by proxy at the Meeting. Items of business transacted at the
meeting included the election of Class III Directors of the Company.
Each of the four nominees, namely Hazel D. Franks, Raymond E. Graves,
Richard A. Sheaffer, and Michael A. Shope, received at least 711,923
votes, or 94.64% of the shares represented at the Meeting, and were
elected as Class III Directors of the Company, with each term expiring
at the Company's 2006 Annual Meeting. Of the votes cast, the
candidates received the following number and percentages of the
752,219 available. Mrs. Franks received 735,584 or 97.8%. Mr. Graves
received 728,082 or 96.8%. Mr. Sheaffer received 736,057 or 97.9%. Mr.
Shope received 711,923 or 94.6%. The remaining eight members of the
Board of Directors not up for election this year are Daniel E. Berg,
Lynn R. Child, Mark Dillon, Edwin G. Emerson, Deborah J. Grafmiller,
Michael A. Mastro, William E. Ruse, and Douglas C. Smith.
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) Report on Form 8-K has been filed during the quarter ended June
30, 2003 on April 9, 2003 regarding results of the election at
the Shareholders' Meeting.
(c) Report on Form 8-K filed on April 9, 2003 included notification
of the change in Registrant's Certifying Accountant from Crowe
Chizek and Company LLC to Plante & Moran, LLP. The change was in
keeping with the provisions of the Sarbanes-Oxley Act, requiring
the separation of external and internal accounting providers,
with Crowe Chizek and Company LLC continuing as provider of
internal accounting services, rather than providing both
services.
- --------------------------------------------------------------------------------
17.
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: 08/12/2003 /s/ Raymond E. Graves
------------------ ------------------------------------------
(Signature)
Raymond E. Graves
President and Chief Executive Officer
Date: 08/12/2003 /s/ John C. Haller
------------------ ------------------------------------------
(Signature)
John C. Haller
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
18.