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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Quarterly Period ended SEPTEMBER 30, 2003. Commission File Number
000-27894
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
- ------------------- -----------------------------------------
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 November 10, 2003, the last practicable date, there were 1,161,952
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.................... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 20
Item 2. Changes in Securities and Use of Proceeds..................................... 20
Item 3. Defaults Upon Senior Securities............................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................... 20
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
SIGNATURES .............................................................................. 21
EXHIBIT A: CEO 302 Certification ........................................................ 22
CFO 302 Certification ........................................................ 23
CEO 906 Certification ........................................................ 24
CFO 906 Certification ........................................................ 25
2.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
($ in thousands)
ASSETS
Cash and cash equivalents $ 8,944 $ 7,057
Securities available for sale 45,292 39,668
Total loans 204,668 202,065
Allowance for loan losses (2,059) (2,091)
------------- ------------
Loans, net 202,609 199,974
Premises and equipment, net 6,306 6,167
Accrued interest receivable 1,415 1,197
Other assets 2,390 2,738
------------- ------------
Total assets $ 266,956 $ 256,801
============= ============
LIABILITIES
Deposits
Noninterest-bearing demand $ 20,125 $ 22,453
Interest-bearing demand 66,244 64,678
Savings and time deposits 105,215 102,363
Time deposits $100,000 and greater 40,210 33,314
------------- ------------
Total deposits 231,794 222,808
FHLB advances 11,500 11,500
Other borrowed funds 1,020 350
Accrued interest payable 400 329
Other liabilities 876 1,036
------------- ------------
Total liabilities 245,590 236,023
------------- ------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares authorized,
1,161,952 and 1,164,233 shares issued in 2003 and 2002 10,694 10,674
Retained earnings 10,964 10,256
Deferred compensation plan shares, at cost,
11,443 and 11,113 shares in 2003 and 2002 (280) (272)
Treasury stock, 2,770 in 2003, 529 shares in 2002 (70) (12)
Accumulated other comprehensive income 58 132
------------- ------------
Total shareholders' equity 21,366 20,778
------------- ------------
Total liabilities and shareholders' equity $ 266,956 $ 256,801
============= ============
See notes to the consolidated financial statements.
3.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 3,655 $ 3,823 $ 10,854 $ 11,340
Interest on securities:
Taxable 143 143 453 478
Nontaxable 295 212 841 560
Other interest income 3 7 12 10
-------- -------- -------- --------
Total interest income 4,096 4,185 12,160 12,388
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits 1,271 1,259 3,860 4,265
Interest on borrowings 138 192 408 560
-------- -------- -------- --------
Total interest expense 1,409 1,451 4,268 4,825
-------- -------- -------- --------
NET INTEREST INCOME 2,687 2,734 7,892 7,563
Provision for loan losses 465 405 1,090 905
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,222 2,329 6,802 6,658
-------- -------- -------- --------
OTHER INCOME
Service fees and overdraft charges 550 567 1,581 1,260
Gains on sale of securities, net 46 215 142 272
Gains on sale of loans, net 3 (33) 8 291
Gains on sale of foreclosed assets -- (24) -- 21
Other income 111 123 345 309
-------- -------- -------- --------
Total other income 710 848 2,076 2,153
-------- -------- -------- --------
OTHER EXPENSE
Salaries and employee benefits 1,156 1,147 3,482 3,348
Occupancy, furniture and equipment 227 238 695 728
State taxes 91 88 276 272
Data processing 177 171 534 500
FDIC deposit insurance 17 17 51 53
Professional fees 50 80 185 238
Amortization of intangibles 82 84 256 262
Other operating expense 543 550 1,669 1,626
-------- -------- -------- --------
Total other expense 2,343 2,375 7,148 7,026
-------- -------- -------- --------
Income before federal income taxes 589 802 1,730 1,785
Income tax expense 98 206 322 433
-------- -------- -------- --------
Net income $ 491 $ 596 $ 1,408 $ 1,352
======== ======== ======== ========
Basic earnings per common share $ .42 $ .52 $ 1.21 $ 1.17
======== ======== ======== ========
Diluted earnings per common share $ .42 $ .51 $ 1.21 $ 1.16
======== ======== ======== ========
See notes to the consolidated financial statements.
4.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended
September 30,
-------------------
2003 2002
-------- --------
Balance at beginning of period $ 22,072 $ 19,702
Comprehensive income:
Net income 491 596
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (917) 538
-------- --------
Total comprehensive income (426) 1,134
Shares issued, options exercised 8,250 shares in 2002 -- 145
Treasury stock purchase, 2,320 shares in 2003 (59) --
Dividends paid ($.19 and $.19 per share in 2003 and 2002) (221) (222)
-------- --------
Balance at end of period $ 21,366 $ 20,759
======== ========
Nine Months Ended
September 30,
-------------------
2003 2002
-------- --------
Balance at beginning of period $ 20,778 $ 19,219
Comprehensive income:
Net income 1,408 1,352
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (74) 688
-------- --------
Total comprehensive income 1,334 2,040
Common stock issued, 489 shares for options exercised in
2003, 8,250 for options exercised in 2002, and 689 shares for
deferred compensation plan in 2002 12 161
Treasury stock purchased, 6,960 shares at cost in 2003 (174) --
Treasury stock reissued for options exercised, 4,719 shares in 2003 79 --
Dividends paid ($.57 and $.57 per share in 2003 and 2002) (663) (661)
-------- --------
Balance at end of period $ 21,366 $ 20,759
======== ========
See notes to the consolidated financial statements.
5.
COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2003 2002
---------- ----------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,408 $ 1,352
Adjustments 1,462 (10,982)
---------- ----------
Net cash from operating activities 2,870 (9,630)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (31,562) (24,241)
Maturities and repayments 5,687 2,438
Sales 20,182 16,382
Net change in loans (4,234) 10,260
Proceeds from sale of foreclosed/repossessed assets 542 229
Sale of land owned by the Bank -- 37
Bank premises and equipment expenditures (508) (152)
---------- ----------
Net cash from investing activities (9,893) 4,953
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 8,985 7,665
Net change in borrowings from FHLB -- 1,500
Net change in federal funds purchased 670 (940)
Common shares issued 92 161
Treasury shares purchased (174) --
Cash dividends paid (663) (661)
---------- ----------
Net cash from financing activities 8,910 7,725
---------- ----------
Net change in cash and cash equivalents 1,887 3,048
Cash and cash equivalents at beginning of period 7,057 7,640
---------- ----------
Cash and cash equivalents at end of period $ 8,944 $ 10,688
=========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 4,196 $ 4,974
Cash paid for income taxes 403 400
Non-cash transfer of loans to foreclosed/repossessed assets 366 606
See notes to the consolidated financial statements.
6.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 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 to the current presentation of information.
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
---- ----
Weighted average shares outstanding during the period 1,163,959 1,155,839
Dilutive effect of exercisable stock options 3,021 3,117
--------- ---------
Weighted average shares considering dilutive effect 1,166,980 1,158,956
========= =========
At September 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.
7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
Loans were as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
($ in thousands)
Commercial and other loans $ 125,078 $ 115,813
Real estate loans 12,872 19,321
Construction loans 81 856
Home equity loans 12,719 9,631
Consumer and credit card loans 35,802 45,468
Consumer finance loans 18,116 10,976
---------- -----------
Total loans $ 204,668 $ 202,065
========== ===========
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 September 30, 2003
and December 31, 2002, loans sold to FHLMC for which the Bank has retained
servicing totaled $54,745,000 and $87,569,000, and real estate loans originated
and held for sale totaled zero in 2003 and $226,000 at year end 2002.
Activity in the allowance for loan losses for the three months ended September
30 was as follows:
2003 2002
---- ----
($ in thousands)
Beginning balance $ 1,981 $ 1,865
Provision for loan loss 465 405
Loans charged off (400) (300)
Recoveries of loans previously charged-off 13 34
--------- ---------
Ending balance $ 2,059 $ 2,004
========= =========
Activity in the allowance for loan losses for the nine months ended September 30
was as follows:
2003 2002
---- ----
($ in thousands)
Beginning balance $ 2,091 $ 1,743
Provision for loan loss 1,090 905
Loans charged off (1,205) (761)
Recoveries of loans previously charged-off 83 117
--------- ---------
Ending balance $ 2,059 $ 2,004
========= =========
Impaired loans were as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
($ in thousands)
Period-end loans with no allocated allowance $ 1,924 $ 2,340
Period-end loans with allocated allowance 385 1,827
----------- ---------
Total $ 2,309 $ 3,865
=========== =========
Amount of allowance for loan loss allocated $ 199 $ 298
Nonperforming loans were as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
($ in thousands)
Loans past due over 90 days still on accrual $ 340 $ 46
Nonaccrual loans 2,278 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. All consumer loans included have already been partially charged
down to their estimated collateral recovery value, thereby negating a need for
specific impaired allowances. A loan relationship has been resolved since
year-end which accounted for $2,240,000 of both the impaired and nonaccrual
balances at December 31, 2002, and $225,000 of the charge-off amounts in 2003.
Loans past due over 90 days and still accruing include $76,000 of loans that
have matured per original terms, and are in the process of being rewritten,
pending receipt of current appraisals and financial statements. Management does
not consider these loans to present a loss potential.
8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income for the three months ended September 30 was as
follows:
2003 2002
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ (1,343) $ 1,029
Less: Reclassification adjustment for losses (gains) recognized in income (46) (214)
--------- ---------
Net unrealized holding gains (losses) (1,389) 815
Tax effect (472) 277
--------- ---------
Other comprehensive income $ (917) $ 538
========= =========
Other comprehensive income for the nine months ended September 30 was as
follows:
2003 2002
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 30 $ 1,314
Less: Reclassification adjustment for losses (gains) recognized in income (142) (272)
--------- ---------
Net unrealized holding gains (losses) (112) 1,042
Tax effect (38) 354
--------- ---------
Other comprehensive income $ (74) $ 688
========= =========
9.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 September 30, 2003, compared to December 31,
2002, and the consolidated results of operations for the quarterly and
year-to-date periods ending September 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.
New to this quarter's discussion is the inclusion of three new tables detailing
the dollar and percent changes in ending and average balances for the analysis
of the "Financial Condition" section as well as the quarterly and year-to-date
changes in income and expense items for the "Results of Operations" section. The
tables are provided to allow the reader to reference all changes in balances and
net income in a centralized fashion, and then concentrate on the discussion of
why the values changed rather than get caught up in the details of each dollar
change. The reader should be able to get a clearer picture of the Company's
overall performance when coupled with the existing yield analysis tables.
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 around $10 million in each of the nine month periods
ended September 30, from the previous year ends. This represents an increase of
4% in both years. In light of market conditions wherein inflation has been low,
interest rates have remained flat, and the overnight rates even declined an
additional 25 points during the first quarter of 2003. This sustained low-rate
environment has squeezed the earning power of the Bank, especially given three
significant factors involving specific investments or funding decisions made by
the management staff.
The management team decided two years ago to curtail involvement with a dealer
in horse trailers based in Denver. As that decision has progressed, repayments
on loans in that portfolio have driven the balance down from more than $35
million at year end 2001, to just over $20 million as of September 30, 2003. In
addition, the Bank has become an originator of long-term, fixed-rate real estate
loans for Countrywide, Incorporated. In doing so, the Bank no longer has an
inventory of loans originated and ready to be sold on its books since the new
loans are funded directly by Countrywide. In addition, the partnership with
Countrywide has allowed the Bank to package non-conforming loans, which formerly
were ineligible for sale, for sale or refinancing, thus clearing them from the
Bank's books. It is management's intent that only adjustable rate mortgages be
held in portfolio for investment purposes by the Bank. Total real estate loan
balances have shrunk from more than $42 million at year end 2001, to just under
$13 million as of September 30, 2003.
10.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENDING BALANCES AS OF THE DATE SHOWN
-------------------------------------------------------------------------------------------
09/30/03 12/31/02 $ CHG % CHG 09/30/02 12/31/01 $ CHG % CHG
-------- -------- ------- ------ -------- -------- -------- -------
Cash & Fed funds 8,944 7,057 1,887 26.74 10,688 7,640 3,048 39.90
Securities AFS 45,292 39,668 5,624 14.18 36,171 29,788 6,383 21.43
Gross loans 204,668 202,065 2,603 1.29 200,914 198,937 1,977 0.99
Allowance for loan losses (2,059) (2,091) 32 (1.53) (2,004) (1,743) (261) 14.97
-------- -------- ------- ------ -------- -------- -------- -------
Loans, net 202,609 199,974 2,635 1.32 198,910 197,194 1,716 0.87
Premises & Equipment 6,306 6,167 139 2.25 6,071 6,354 (283) (4.45)
Accrued interest receivable 1,415 1,197 218 18.21 1,271 1,260 11 0.87
Other Assets 2,390 2,738 (348) (12.71) 2,841 3,834 (993) (25.90)
-------- -------- ------- ------ -------- -------- -------- -------
Total assets 266,956 256,801 10,155 3.95 255,952 246,070 9,882 4.02
======== ======== ======= ====== ======== ======== ======== =======
Noninterest-bearing demand 20,125 22,453 (2,328) (10.37) 19,166 19,016 150 0.79
Interest-bearing demand 66,244 64,678 1,566 2.42 63,613 57,417 6,196 10.79
Savings and time deposits 105,215 102,363 2,852 2.79 96,992 110,319 (13,327) (12.08)
Time deposits of $100k 40,210 33,314 6,896 20.70 33,114 18,469 14,645 79.30
-------- -------- ------- ------ -------- -------- -------- -------
Total deposits 231,794 222,808 8,986 4.03 212,885 205,221 7,664 3.73
FHLB advances 11,500 11,500 0 0.00 20,800 19,300 1,500 7.77
Other borrowed funds 1,020 350 670 191.43 0 940 (940) (100.00)
Accrued interest payable 400 329 71 21.58 297 446 (149) (33.41)
Other liabilities 876 1,036 (160) (15.44) 1,211 944 267 28.28
-------- -------- ------- ------ -------- -------- -------- -------
Total liabilities 245,590 236,023 9,567 4.05 235,193 226,851 8,342 3.68
Shareholders' equity 21,366 20,778 588 2.83 20,759 19,219 1,540 8.01
-------- -------- ------- ------ -------- -------- -------- -------
Total liabilities & equity 266,956 256,801 10,155 3.95 255,952 246,070 9,882 4.02
======== ======== ======= ====== ======== ======== ======== =======
11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These two loan portfolio decisions were made in conjunction with a decision to
emphasize loan growth in commercial and agriculture loans at the Bank, as well
as consumer loans originated through Advantage Finance. Thus, loan growth in
those areas has more than offset the combined loss of more than $45 million in
balances in the horse trailer and real estate portfolios, with commercial and
agriculture loans growing by more than $40 million, and the consumer finance
loans growing more than $15 million, such that total gross loans grew by $6.7
million since year end 2001. As the loan portfolios have shifted and grown, the
mix of loans has shifted to slightly riskier collateral positions, and
additional amounts have been added to the reserve for loan losses to cover those
changes. More than $315,000 has been added to the reserve balance to cover the
growth of the portfolio and to move our coverage from 0.88% to 1.00%. In order
to cover the net charge offs and growth over the last year and nine months, the
Bank has expensed $2,245,000 through the provision for loan losses.
The third factor involved in the changing mix of portfolios throughout the Bank
was the pricing of depository products, especially certificates of deposits. A
large block of higher-than-market-rate certificates were placed during the year
2000 for terms ranging from 21 to 28 months. These deposits stayed on the books
throughout 2001 and much of 2002, finally maturing in mid-year last year. The
low-rate environment saw earnings deteriorate as the 7% plus rates of expense
far outpaced the declining prime rate, which even now is 4.00%. Coupled with
$11.5 million of long-term FHLB borrowing at an expense rate of 4.6%, profits
were squeezed until the Bank could rebuild a larger consumer loan base and start
replacing the high-rate deposits as they matured. As the deposits rolled off and
were either renewed at the lower market rates or moved to outside competitors,
the Bank found sufficient replacement funds through both the Public Funds
markets and deposit brokers. The high-rate deposit runoff can be seen in the
decline in savings and time deposits of less than $100,000 from December 31,
2001 to September 30, 2002, when that portfolio shrank by more than $13.3
million.
Those funds were replaced by the larger deposits greater than $100,000, as seen
by the increase over that same period of more than $14.6 million dollars. That
trend continued throughout 2003, with almost another $7 million growth in
balances. During 2003, the regular balances in savings and time deposits have
also grown by another $2.8 million. Part of this excess liquidity has led to the
$15.5 million increase in securities held for sale, partly to have funds used to
guaranty the public fund accounts, as well as shoring up earnings by placing
more funds in the state, county and municipal category to take advantage of more
favorable tax treatment. Some the excess funds were used to pay down the
short-term borrowings from the FHLB, which also had an impact on earnings since
the overnight funds rates were much lower than the long-term certificate rates,
even though those rates were less than half as much as the previous large block
of funds. Thus the Bank's margins were again squeezed, but it was relying less
on borrowings and more on its deposits. The $11.5 million of long-term borrowed
funds from the FHLB cannot be repaid without incurring a prepayment penalty
based on the current rates for the remaining term. As rates have flirted with
higher levels for longer terms in the last month or two, we have come within 50
basis points of the break-even point for that swap. That move would give the
Bank room to negotiate shorter-term borrowings at lower effective rates.
Other assets and cash balances reflect higher balances for accrued interest
receivable and cash on hand. In addition, the Bank has completely replaced it
aged ATM network, upgrading to the latest operating environment and ready for
the latest wave of innovations. In addition, the Bank is also in the process of
upgrading its internal computer network as well, and taking advantage of some
cost-saving changes to have the newest features for less investment at each
computer station. This refurbishment of the Bank's infrastructure is reflected
in the return to higher balances in premises and equipment which had been
reduced by nearly-full depreciation values.
Total shareholders' equity reflects current earnings of $1,408,000, less
dividends of $663,000 during the first nine months of 2003. The change in
unrealized fair market value impacts that balance by $74,000. With the continued
improvement in earnings and favorable market reaction to reported events, the
market value of the Company's shares has made some of the stock options
redeemable. Activity by some executive officers resulted in the conversion of
existing stock options. This resulted in $83,000 worth of realized value lost
for those stock options awarded for prior service. During the same period last
year, equity grew by the $1,352,000 in earnings, less $661,000 in dividends,
plus $161,000 for shares issued for the directors' deferred compensation plan,
plus an increase in unrealized fair market value adjustments of $688,000. The
increases in the equity balances do not follow the 4% value for total assets
because of the activity in the unrealized fair market values and the exercise of
the stock options.
Average balance changes for the three- and nine-month periods do tend to reflect
the total 8% increase over the two year period. As the portfolios have grown and
remixed during the overall period, the allocation of funds to one portfolio or
the other is confirmed by the sustained growth or decline experienced. Thus,
total average asset footings for the third quarter of 2003 are 8.31% higher than
the third quarter of 2002, while the nine-month footings for 2003 are 7.76%
higher than 2002. The average loan growth during the third quarter this year
versus last years helps point out the flat loan environment of 2002, when gross
loans lingered around the $196 million level. The most recent quarter reflects a
much stronger loan demand and production raising the balances
12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by more than $9 million over the same period last year. While the nine-month
average for last year was more or less equal to the third quarter average, the
nine-month average this year is almost $4.8 million higher. Average balances for
the reserve for loan losses reflect $216,000 more for the three month period,
and $214,000 higher during the nine month period when compared to the previous
year, reflecting the additions made to the reserve for growth and the new mix of
the loan portfolio.
The average balance increase of more than $12 million in securities available
for sale equals the increase in public fund placements made on the deposit side,
most of which is carried in the $100,000 deposit account line. The sustained low
interest rate environment makes income generation hard when dealing with the
limited types of securities that are permissible for the Bank to invest in. Most
of the growth has been directed to "tax-free" investments, as alluded to
earlier. Recent state law changes have also made it imperative to concentrate on
in-state issues in order to pledge those securities as collateral for public
funds deposits. While it is possible to have individual out-of-state issues
accepted as collateral, it takes more effort and documentation. However,
Ohio-based securities tend to command a better reputation in the financial
markets, easing the decision to concentrate on in-state issues.
13.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVERAGE DAILY BALANCES FOR THE PERIODS SHOWN
--------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 $ CHG % CHG 2003 2002 $ CHG % CHG
---- ---- ----- ----- ---- ---- ------ ------
Cash & Fed funds 7,999 8,533 (534) (6.26) 8,381 7,399 982 13.27
Securities AFS 45,988 33,552 12,436 37.06 44,844 31,484 13,360 42.43
Gross loans 205,157 196,121 9,036 4.61 201,147 196,367 4,780 2.43
Allowance for loan losses (2,067) (1,851) (216) 11.67 (2,046) (1,832) (214) 11.68
-------- -------- ------- ------- -------- -------- ------- ------
Loans, net 203,090 194,270 8,820 4.54 199,101 194,535 4,566 2.35
Premises & Equipment 6,227 6,107 120 1.96 6,240 6,197 43 0.69
Accrued interest receivable 1,340 1,197 143 11.95 1,345 1,232 113 9.17
Other Assets 2,896 3,355 (459) (13.68) 3,159 3,272 (113) (3.45)
-------- -------- ------- ------- -------- -------- ------- ------
Total assets 267,540 247,014 20,526 8.31 263,070 244,119 18,951 7.76
======== ======== ======= ======= ======== ======== ======= ======
Noninterest-bearing demand 19,224 18,504 720 3.89 19,539 18,415 1,124 6.10
Interest-bearing demand 66,790 59,520 7,270 12.21 65,288 58,471 6,817 11.66
Savings and time deposits 106,247 97,765 8,482 8.68 105,200 103,086 2,114 2.05
Time deposits of $100k 39,339 24,724 14,615 59.11 36,847 19,623 17,224 87.77
-------- -------- ------- ------- -------- -------- ------- ------
Total deposits 231,600 200,513 31,087 15.50 226,874 199,595 27,279 13.67
FHLB advances 12,638 23,020 (10,382) (45.10) 12,396 22,144 (9,748) (44.02)
Other borrowed funds 188 397 (209) (52.64) 238 628 (390) (62.10)
Accrued interest payable 449 374 75 20.05 426 404 22 5.45
Other liabilities 1,237 2,365 (1,128) (47.70) 1,708 1,526 182 11.93
-------- -------- ------- ------- -------- -------- ------- ------
Total liabilities 246,112 226,669 19,443 8.58 241,642 224,297 17,345 7.73
Shareholders' equity 21,428 20,345 1,083 5.32 21,428 19,822 1,606 8.10
-------- -------- ------- ------- -------- -------- ------- ------
Total liabilities & equity 267,540 247,014 20,526 8.31 263,070 244,119 18,951 7.76
======== ======== ======= ======= ======== ======== ======= ======
14.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2003 was nearly $200,000
less than during the same period in 2002, while earnings for the nine-month
period rose slightly compared to 2002. Diluted earnings per share decreased to
$.42 from $.51 for the quarters ended September 30, and increased to $1.21 from
$1.16 for the nine-month periods in the respective years. Discussed below are
the major factors that have influenced these operating results.
The first table details the variance amounts and percentages for the three- and
nine-month periods. The subsequent yield analysis tables detail the combination
of changing portfolio balance mixes and the earning power behind the rates
associated with those balances.
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 three month period ending September 30, 2003 was $89,000
less than the prior year's third quarter. On a fully-taxable equivalent basis,
the difference shrinks to only $50,000 because of the Bank's higher
concentration of tax-free securities. The prime rate has been lowered by 75
points since midway through the fourth quarter of 2002. This is reflected in the
lower interest yield of 6.71% on earning assets this year versus the third
quarter yield of 7.48% last year. To help offset the loss in yield, the Bank's
earning assets grew more than $21 million over the prior year's third quarter,
netting to the $50,000 reduction in interest income. Interest expense shrank
$42,000 for the quarter as the cost of funds fell 32 points to 2.48%, but was
paid out on almost $20 million more in deposits and borrowed funds. Deposit
costs fell 36 points to 2.38%, but average borrowing costs rose 101 points to
4.27% since the core $11.5 million of long-term funds held steady at 4.6%,
although the Bank had almost $11 million less in short-term borrowed funds. The
fully-taxable net interest income for the third quarter was just $8,000 less
than the same quarter last year.
Interest income for the nine months of 2003 was $229,000 less than the
$12,388,000 reported last year. Average yields fell 61 points to 6.84% on more
than $18.5 million additional total earning assets. Prime rate was lowered 50
points in November of 2002 and again by 25 points at the end of June, 2003.
Rates paid on deposits do not normally move quite as fast, but since the Bank
had the large block of high-cost certificates that ran off mainly during the
second quarter last year, the nine-month average cost of funds fell 52 points,
paid on $16 million more deposits. Interest expense fell $558,000 from period to
period, leading to an increase in net interest margin of $329,000. Due to the
increased concentration of tax-free securities, the fully-taxable net interest
margin grew $462,000 from period to period.
The provision for loan losses increased $60,000 for the third quarter 2003
versus 2002. Additions to the provision have been used to cover the growth in
the loan portfolio as well the losses experienced in the portfolio this year
versus last. As shown earlier in Note 3, net charge offs for the quarter were
$121,000 higher than year. Net charge offs were also $478,000 higher for the
nine-month period this year than last. One large loan made up $225,000 of those
losses earlier in the year. The subsequent provisions have been made at a level
to bring the reserve for loan losses back in line with management's anticipated
needs. 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.
15.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS SHOWN
-------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2003 2002 $ CHG % CHG 2003 2002 $ CHG % CHG
---- ---- ----- ----- ---- ---- ----- -----
Interest and fees on loans 3,655 3,822 (167) (4.37) 10,853 11,340 (487) (4.29)
Taxable interest on securities 143 144 (1) (0.69) 453 478 (25) (5.23)
Tax-free interest on securities 295 213 82 38.50 841 560 281 50.18
Other interest income 3 6 (3) (50.00) 12 10 2 20.00
----- ----- ----- ------ ------ ------ ----- ------
Total interest income 4,096 4,185 (89) (2.13) 12,159 12,388 (229) (1.85)
Interest on deposits 1,271 1,259 12 0.95 3,859 4,265 (406) (9.52)
Interest on borrowings 138 192 (54) (28.13) 408 560 (152) (27.14)
----- ----- ----- ------ ------ ------ ----- ------
Total interest expense 1,409 1,451 (42) (2.89) 4,267 4,825 (558) (11.56)
Net interest income 2,687 2,734 (47) (1.72) 7,892 7,563 329 4.35
Provision for loan losses 465 405 60 14.81 1,090 905 185 20.44
----- ----- ----- ------ ------ ------ ----- ------
Net interest after PLL 2,222 2,329 (107) (4.59) 6,802 6,658 144 2.16
Service and overdraft fees 550 567 (17) (3.00) 1,581 1,260 321 25.48
Gains/(losses) on asset sales 49 215 (166) (77.21) 150 708 (558) (78.81)
Other income 111 123 (12) (9.76) 345 309 36 11.65
----- ----- ----- ------ ------ ------ ----- ------
Total other income 710 905 (195) (21.55) 2,076 2,277 (201) (8.83)
Salaries and employee benefits 1,156 1,147 9 0.78 3,482 3,348 134 4.00
Occupancy, furniture & equip 227 238 (11) (4.62) 695 728 (33) (4.53)
State taxes 91 88 3 3.41 276 271 5 1.85
Data processing 177 170 7 4.12 534 500 34 6.80
FDIC deposit insurance 17 17 0 0.00 51 53 (2) (3.77)
Professional fees 50 80 (30) (37.50) 185 238 (53) (22.27)
Amortization of intangibles 82 142 (60) (42.25) 256 386 (130) (33.68)
Other operating expense 543 550 (7) (1.27) 1,669 1,626 43 2.64
----- ----- ----- ------ ------ ------ ----- ------
Total other expense 2,343 2,432 (89) (3.66) 7,148 7,150 (2) (0.03)
Income before taxes 589 802 (213) (26.56) 1,730 1,785 (55) (3.08)
Income taxes 98 206 (108) (52.43) 322 433 (111) (25.64)
----- ----- ----- ------ ------ ------ ----- ------
Net income 491 596 (105) (17.62) 1,408 1,352 56 4.14
===== ===== ===== ====== ====== ====== ===== ======
16.
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 September 30,
-------------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
------- -------- ---------- ------- -------- ----------
($ in thousands)
Securities (1) $ 47,387 $ 578 4.84% $ 35,047 $ 461 5.51%
Loans (2) 203,090 3,655 7.14 194,271 3,822 7.79
---------- -------- -------- --------
Total interest-earning assets 250,477 4,233 6.71 229,318 4,283 7.48
Other assets 17,063 17,696
---------- --------
Total assets $ 267,540 $247,014
========== ========
Deposits - interest bearing $ 212,376 1,271 2.38% $182,008 1,259 2.74%
Borrowed funds 12,827 138 4.27 23,417 192 3.26
---------- -------- -------- --------
Total interest-bearing deposits
and borrowings $ 225,203 1,409 2.48 $205,425 1,451 2.80
Noninterest-bearing demand deposits 19,224 18,504
Other liabilities 1,685 2,740
Shareholder's equity 21,428 20,345
---------- --------
Total liabilities and
shareholders' equity $ 267,540 $247,014
========== ========
Net interest income $ 2,824 $ 2,832
======== ========
Interest rate spread 4.22% 4.68%
Net interest margin (3) 4.47% 4.90%
- -------------------------------
(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 $137,000 and $98,000 for 2003 and
2002.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $170,000 and $166,000 and deferred dealer
reserve expense of $87,000 and $111,000 in 2003 and 2002.
(3) Net interest income as a percentage of average interest-earning assets.
Net interest income after the provision for loan losses was $107,000 less for
the third quarter 2003 than in 2002. On a nine-month basis, the same measurement
was $144,000 more in 2003 than in 2002. Net interest income after the provision
is a measurement of how well the Bank has weathered changes in the interest rate
environment and variances in the quality of the assets in its portfolios. In
light of the sustained low-rate interest environment and rise is consumer debt
burden, the Bank has held its own in the face of such adversity.
Total noninterest income declined $195,000 for the third quarter of 2003
compared to the same period in 2002. Items contributing to the decrease included
service fees and overdraft charges for $30,000, lower cash servicing fees on
sold real estate loans, lower gains from the sale of both loans and securities
for about $175,000 less, and another $15,000 less for the recognition of
non-cash mortgage servicing rights on newly sold real estate loans. Some of
those decreases were made up by higher ATM fees for $9,000, another $7,500 in
Beck Title Agency fees, plus the fact that during last year's third quarter the
Bank experienced a loss on the sale of Other Real Estate Owned (OREO) through
foreclosure on a loan for $23,000. While the latter would normally have been
reported as an expense, gains earlier in the year of 2002 more than offset the
loss, and the net gains on the sale of OREO were reported at $21,000 for the
nine-month period.
17.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Nine Months Ended September 30,
-------------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
------- -------- ---------- ------- -------- ----------
($ in thousands)
Securities (1) $ 46,278 $ 1,694 4.89% $ 32,259 $ 1,304 5.40%
Loans (2) 199,101 10,853 7.29 194,535 11,340 7.79
---------- -------- -------- --------
Total interest-earning assets 245,379 12,547 6.84 226,795 12,643 7.45
Other assets 17,691 17,324
---------- --------
Total assets $ 263,070 $244,119
========== ========
Deposits - interest bearing $ 207,335 3,860 2.49% $181,180 4,265 3.15%
Borrowed funds 12,634 408 4.32 22,772 560 3.31
---------- -------- -------- --------
Total interest-bearing deposits
and borrowings $ 219,969 4,268 2.59 $203,952 4,825 3.16
Noninterest-bearing demand deposits 19,539 18,415
Other liabilities 2,134 1,930
Shareholder's equity 21,428 19,822
---------- --------
Total liabilities and
shareholders' equity $ 263,070 $244,119
========== ========
Net interest income $ 8,279 $ 7,818
======== ========
Interest rate spread 4.25% 4.29%
Net interest margin (3) 4.51% 4.61%
(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 $388,000 and $255,000 for 2003 and
2002.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $502,000 and $528,000 and deferred dealer
reserve expense of $281,000 and $356,000 in 2003 and 2002.
(3) Net interest income as a percentage of average interest-earning assets.
Total noninterest income declined $201,000 for the nine months of 2003 compared
to the prior year. Items contributing to the nine month decrease include $51,000
less cash servicing fees on sold real estate loans, $291,000 less in the
recognition of non-cash mortgage serving rights, $117,000 less gains on the
sales of new real estate loans, and $129,000 less on the sale of securities.
Those reductions were partially offset by $285,000 more in overdraft charges,
$28,000 more in ATM charges, $17,000 more in Beck Title Agency fees, and
$110,000 in Countrywide commissions.
Total noninterest expense decreased $89,000 in the three months of the third
quarter 2003 compared to the same period during 2002. The largest decrease of
$60,000 came in amortization of intangible servicing rights, while an accrual
adjustment led to a reduction in professional fees of $30,000, and there was an
$11,000 reduction in occupancy expenses. These decreases were only partially
offset by increases in personnel expense of $9,000, state taxes at $3,000, and
$7,000 for data processing.
Nine month expenses decreased $2,000 in 2003 compared to the same period in
2002. Decreases were realized on the amortization of mortgage servicing rights
for $130,000, lower professional fees of $53,000, and $33,000 for occupancy and
equipment. These were partially offset by increases of $134,000 for personnel
expenses, $34,000 for higher data processing, and $43,000 in miscellaneous
expenses, mostly losses on overdrafts. The balance left in the capitalized value
of the mortgage servicing rights is less than $420,000. Since the last quarter
of 2001, the Bank has expensed more than $900,000 of the mortgage servicing
rights recognized while the Bank was originating real estate loans for sale. The
remaining balance will likely be completely expensed within the next two years
or less.
The quarterly income before taxes for 2003 was $213,000 less than in 2002, due
to the net of all of the above changes. The nine-month income before taxes for
2003 was just $55,000 less than in 2002. This performance, while still below
managements' goals, shows improvement in the basic earning power of the Bank
since there was a clear decrease in reliance upon asset sales to generate
income, and the Bank has absorbed a large amount of amortization of the non-cash
18.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
mortgage servicing rights as the Bank changes its approach to the very volatile
real estate origination market.
Taxes for the third quarter declined $108,000 as the Bank has repositioned its
portfolio to emphasize more state, county and municipal securities. The same
holds true for the nine month tax expense, which shrank $111,000 compared to
2002.
Change in net income after taxes is the result of netting all the changes in all
of the above categories. For the third quarter, that means income was down
$105,000 from 2002. For the nine-month periods, net income after taxes was
actually up $56,000 compared to last year. In all cases, earnings have been
hampered by higher provisions for loan losses and fewer gains on the sales of
assets. Combined with the continued amortization of mortgage servicing rights, a
non-cash adjusting item, earnings have not yet grown to amounts anticipated
after the repositionings made by management.
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 $8,944,000 at September 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.
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 September 30, 2003, the Bank's leverage ratio was 8.02% and the risk-based
capital ratio was 11.20%, both of which exceeded the minimum regulatory
requirements to be considered well-capitalized. The Corporation's leverage and
risk-based capital ratios, 8.06% and 11.25% at September 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.)
19.
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended September 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:
There are no matters required to be reported under this item.
Item 5 - Other Information:
Ray Graves, President and CEO of Commercial Bancshares, Inc. and of
the Commercial Saving Bank, has been on a leave of absence since
October 9, 2003. Mr. Graves' employment agreement will not be renewed
when it expires on December 31, 2003. This also ends Mr. Graves'
service as Director of Commercial Savings Bank; CEO and Director of
Cash Advantage, Inc. and Advantage Finance, Inc.; and Secretary of
Beck Title Agency, Ltd. - individual entities within the Commercial
Bancshares, Inc. holding company. The terms of his separation are
under negotiation.
Philip W. Kinley has been named Acting President and CEO of
Commercial Bancshares, Inc. and Commercial Savings Bank, and Acting
CEO of Cash Advantage, Inc. and Advantage Finance, Inc. Mr. Kinley,
who has been Senior Executive Vice President of Commercial
Bancshares, Inc. and Commercial Savings Bank for three years, also
served as Acting President and CEO of both organizations for several
months last year in the wake of a heart attack suffered by Mr.
Graves. Mr. Kinley has been with Commercial Bancshares since 1984.
Prior to becoming Senior Executive Vice President, he served for
eight years as Vice President and Chief Operating Officer. The Board
of Directors of Commercial Bancshares, Inc. has appointed a search
committee to locate and recruit a successor to Mr. Graves.
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)
20.
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: 11/10/2003 /s/ Philip W. Kinley
--------------------------------------------
(Signature)
Philip W. Kinley
Acting President and Chief Executive Officer
Date: 11/10/2003 /s/ John C. Haller
--------------------------------------------
(Signature)
John C. Haller
Vice President and Chief Financial Officer
21.