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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period ended JUNE 30, 2004. Commission File Number 000-27894
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
- ------------------- -----------------------------------------
none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
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 Securities Exchange Act of 1934). Yes [ ] No [X]
As of August 11, 2004, the last practicable date, there were 1,178,084
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... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 22
Item 4. Controls and Procedures................................................................. 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 23
Item 2. Changes in Securities and Use of Proceeds............................................... 23
Item 3. Defaults Upon Senior Securities......................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders..................................... 23
Item 5. Other Information....................................................................... 23
Item 6. Exhibits and Reports on Form 8-K........................................................ 23
SIGNATURES......................................................................................... 24
EXHIBIT A: CEO 302 Certification................................................................... 25
CFO 302 Certification................................................................... 26
CEO 906 Certification................................................................... 27
CFO 906 Certification................................................................... 28
2.
COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30, December 31,
2004 2003
----------- ----------
ASSETS
Cash $ 7,444 $ 9,524
Federal funds sold 100 1,100
----------- ----------
Cash and cash equivalents 7,544 10,624
Securities available for sale 52,131 48,491
Total loans 207,209 206,274
Allowance for loan losses (2,439) (2,503)
----------- ----------
Loans, net 204,770 203,771
Premises and equipment, net 6,318 6,380
Accrued interest receivable 1,132 1,143
Other assets 3,159 2,431
----------- ----------
Total assets $ 275,054 $ 272,840
=========== ==========
LIABILITIES
Deposits
Noninterest-bearing demand $ 20,801 $ 26,123
Interest-bearing demand 72,505 68,656
Savings and time deposits 104,741 103,413
Time deposits $100,000 and greater 39,238 40,559
----------- ----------
Total deposits 237,285 238,751
FHLB advances 16,000 11,500
Accrued interest payable 253 415
Other liabilities 773 1,019
----------- ----------
Total liabilities 254,311 251,685
----------- ----------
SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares authorized,
1,178,084 and 1,164,722 shares issued in 2004 and 2003 11,074 10,684
Retained earnings 10,821 10,607
Deferred compensation plan shares, at cost,
13,407 and 11,033 shares in 2004 and 2003 (325) (270)
Treasury stock, 580 in 2004, 2,770 shares in 2003 (15) (70)
Accumulated other comprehensive income (812) 204
----------- ----------
Total shareholders' equity 20,743 21,155
----------- ----------
Total liabilities and shareholders' equity $ 275,054 $ 272,840
=========== ==========
See notes to the consolidated financial statements.
3.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- -------------- -------------- ---------------
INTEREST INCOME
Interest and fees on loans $ 3,492 $ 3,636 $ 6,949 $ 7,198
Interest on securities:
Taxable 284 151 531 310
Nontaxable 239 299 492 546
Other interest income 7 4 20 8
--------------- -------------- -------------- ---------------
Total interest income 4,022 4,090 7,992 8,062
--------------- -------------- -------------- ---------------
INTEREST EXPENSE
Interest on deposits 1,104 1,274 2,227 2,588
Interest on borrowings 137 138 268 270
--------------- -------------- -------------- ---------------
Total interest expense 1,241 1,412 2,495 2,858
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 2,781 2,678 5,497 5,204
Provision for loan losses 402 325 702 625
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,379 2,353 4,795 4,579
--------------- -------------- -------------- ---------------
OTHER INCOME
Service fees and overdraft charges 502 560 953 1,031
Gains on sale of securities, net -- 74 27 96
Gains on sale of loans, net -- 5 -- 5
Other income 71 114 158 234
--------------- -------------- -------------- ---------------
Total other income 573 753 1,138 1,366
--------------- -------------- -------------- ---------------
OTHER EXPENSE
Salaries and employee benefits 1,243 1,147 2,402 2,326
Occupancy, furniture and equipment 280 232 550 468
State taxes 102 89 200 184
Data processing 198 178 411 357
FDIC deposit insurance 17 17 34 34
Professional fees 75 56 176 134
Amortization of intangibles 64 116 129 175
Loss on sale of foreclosed assets 17 -- 17 --
Other operating expense 611 590 1,154 1,126
--------------- -------------- -------------- ---------------
Total other expense 2,607 2,425 5,073 4,804
--------------- -------------- -------------- ---------------
Income before federal income taxes 345 681 861 1,141
Income tax expense 40 137 133 224
--------------- -------------- -------------- ---------------
Net income $ 305 $ 544 $ 728 $ 917
=============== ============== ============== ===============
Basic earnings per common share $ .26 $ .47 $ .62 $ .79
=============== ============== ============== ===============
Diluted earnings per common share $ .26 $ .47 $ .62 $ .79
=============== ============== ============== ===============
See notes to the consolidated financial statements.
4.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
June 30,
-----------------------------------
(Amounts in thousands, except per share data) 2004 2003
--------------- ----------------
Balance at beginning of period $ 21,990 $ 20,869
Comprehensive income:
Net income 305 544
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (1,329) 891
--------------- ----------------
Total comprehensive income (1,024) 1,435
Treasury stock purchase, 450 shares in 2003 -- (11)
Dividends paid ($.19 and $.19 per share in 2004 and 2003) (223) (221)
--------------- ----------------
Balance at end of period $ 20,743 $ 22,072
=============== ================
Six months Ended June 30,
-----------------------------------
2004 2003
--------------- ----------------
Balance at beginning of period $ 21,155 $ 20,778
Comprehensive income:
Net income 728 917
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (1,017) 843
--------------- ----------------
Total comprehensive income (289) 1,760
Shares issued, options exercised 10,777 shares in 2004,
489 shares in 2003 250 12
Shares issued for deferred compensation plan, 2,585 shares in 2004 61 --
Treasury stock purchase, 2,889 shares in 2004, 4,190 shares in 2003 (77) (115)
Treasury stock reissued for options exercised,
5,079 shares in 2004, 4,719 shares in 2003 90 79
Dividends paid ($.38 and $.38 per share in 2004 and 2003) (447) (442)
--------------- ----------------
Balance at end of period $ 20,743 $ 22,072
=============== ================
See notes to the consolidated financial statements.
5.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months Ended
June 30,
---------------------------------
2004 2003
-------------- ---------------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 728 $ 917
Adjustments 477 1,547
-------------- ---------------
Net cash from operating activities 1,205 2,464
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (12,777) (23,800)
Maturities and repayments 2,027 4,625
Sales 5,525 13,603
Net change in loans (1,996) (3,849)
Proceeds from sale of foreclosed/repossessed assets 288 --
Bank premises and equipment expenditures (236) (263)
-------------- ---------------
Net cash from investing activities (7,169) (9,684)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (1,493) 8,957
Net change in borrowings from FHLB 4,500 --
Net change in federal funds purchased -- (250)
Common shares issued for stock options 311 13
Treasury shares purchased (77) (37)
Treasury shares reissued for stock options 90 --
Cash dividends paid (447) (442)
-------------- ---------------
Net cash from financing activities 2,884 8,241
-------------- ---------------
Net change in cash and cash equivalents (3,080) 1,021
Cash and cash equivalents at beginning of period 10,624 7,057
-------------- ---------------
Cash and cash equivalents at end of period $ 7,544 $ 8,078
============== ===============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 2,657 $ 2,811
Cash paid for income taxes 295 403
Non-cash transfer of loans to foreclosed/repossessed assets 339 330
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, Commercial Financial and Insurance Agency, LTD
("Commercial Financial") 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. Although formed and filed
for in December of 2003, Commercial Financial has not yet begun operations of
its own.
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, 2004, 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, 2003, 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. 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: Management is not aware
of any new pronouncements scheduled to be implemented in the near future.
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 used in determining basic and diluted earnings per share
are as follows:
2004 2003
--------- ---------
Weighted average shares outstanding during the period 1,174,972 1,164,041
Dilutive effect of exercisable stock options 2,965 2,584
--------- ---------
Weighted average shares considering dilutive effect 1,177,937 1,166,625
========= =========
7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2004 and 2003 there were 13,200 and 34,171 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 all but the 1999 plan
shares a realizable value, as well as the exercising of 15,856 shares, and the
forfeiture of another 15,538 shares due to the departure of a senior executive.
NOTE 3 - LOANS
Loans were as follows:
June 30, 2004 December 31, 2003
------------- -----------------
($ in thousands)
Commercial and other loans $ 131,398 $ 129,171
Real estate loans 10,772 12,130
Construction loans 884 193
Home equity loans 14,205 13,445
Consumer and credit card loans 27,632 32,810
Consumer finance loans 22,318 18,525
----------------- -----------------
Total loans $ 207,209 $ 206,274
================= =================
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, and final funding comes
directly from Countrywide, for which the Bank earns a fee. At June 30, 2004 and
December 31, 2003, loans sold to FHLMC for which the Bank has retained servicing
totaled $39,422,000 and $49,878,000 and real estate loans originated and held
for sale totaled zero in 2004 and at year end 2003.
Activity in the allowance for loan losses for the three months ended June 30 was
as follows:
2004 2003
---- ----
($ in thousands)
Beginning balance $ 2,463 $ 1,958
Provision for loan loss 402 325
Loans charged off (461) (340)
Recoveries of loans previously charged-off 35 38
----------- ---------
Ending balance $ 2,439 $ 1,981
=========== =========
Activity in the allowance for loan losses for the six months ended June 30 was
as follows:
2004 2003
---- ----
($ in thousands)
Beginning balance $ 2,503 $ 2,091
Provision for loan loss 702 625
Loans charged off (814) (805)
Recoveries of loans previously charged-off 48 70
----------- ---------
Ending balance $ 2,439 $ 1,981
=========== =========
8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans were as follows:
June 30, 2004 December 31, 2003
------------- -----------------
($ in thousands)
Period-end loans with no allocated allowance $ 1,534 $ 2,072
Period-end loans with allocated allowance 458 390
----------- ---------
Total $ 1,992 $ 2,462
=========== =========
Amount of allowance for loan loss allocated $ 74 $ 89
Nonperforming loans were as follows:
June 30, 2004 December 31, 2003
------------- -----------------
($ in thousands)
Loans past due over 90 days still on accrual $ 189 $ 83
Nonaccrual loans 1,803 2,377
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.
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income for the three months ended June 30 was as follows:
2004 2003
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ (2,013) $ 1,425
Less: Reclassification adjustment for losses (gains) recognized in income -- (75)
--------- ---------
Net unrealized holding gains (losses) (2,013) 1,350
Tax effect 684 (459)
--------- ---------
Other comprehensive income $ (1,329) $ 891
========= =========
Other comprehensive income for the six months ended June 30 was as follows:
2004 2003
---- ----
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ (1,567) $ 1,373
Less: Reclassification adjustment for losses (gains) recognized in income (27) (96)
--------- ---------
Net unrealized holding gains (losses) (1,540) 1,277
Tax effect 523 (434)
--------- ---------
Other comprehensive income $ (1,017) $ 843
========= =========
9.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK COMPENSATION: Employee compensation expense under stock option
plans is reported using the intrinsic value method. No stock-based compensation
cost is reflected in net income, as all options granted had an exercise plan
equal to or greater than the market price of the underlying common stock at date
of grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation (in thousands
except per share data).
Earnings for the three months ended June 30 was as follows:
2004 2003
---- ----
Income as reported $ 305 $ 544
Deduct: Stock-based compensation expense
determined under fair value based method 4 11
--------- --------
Pro forma net income 301 533
Pro forma earnings per share
Basic $ .26 $ .47
Diluted .26 .46
Earnings per share as reported
Basic $ .26 $ .47
Diluted .26 .47
Earnings for the six months ended June 30 was as follows:
2004 2003
---- ----
Income as reported $ 728 $ 917
Deduct: Stock-based compensation expense
determined under fair value based method 9 22
--------- --------
Pro forma net income 719 895
Pro forma earnings per share
Basic $ .62 $ .79
Diluted .61 .77
Earnings per share as reported
Basic $ .62 $ .79
Diluted .62 .79
10.
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 June 30, 2004, compared to December 31, 2003, and
the consolidated results of operations for the quarterly and six-month periods
ending June 30, 2004 compared to the same periods in 2003. 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.
This quarter's discussion includes three 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 semiannual 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 Corporation'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 $2,214,000 in the six month period ended June 30, 2004
compared to a $10,291,000 increase the year before from the previous year end.
This represents less than a 1% increase versus 4% last year. The Bank
traditionally experiences a reduction in loan balances just after year ends as
companies pay down loans made prior to year end and gear up for new projects,
especially in the
11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
agricultural markets, and then a gradual increase in footings occurs as the year
continues. This year has seen only moderate loan growth of a little less than
$1,000,000 compared to last year's more than $2,500,000. Of course, that growth
comes despite the loss of almost $2,800,000 due to pay-downs on the
horse-trailer portfolio arranged with a broker from Denver during the first six
months of 2004, compared to pay-downs of almost $4,100,000 during that same
period in 2003. The long-term fixed-rate Real Estate portfolio has also declined
$600,000 during 2004, compared to a reduction of almost $4,100,000 during the
same period in 2003. Decisions to leave these areas of lending have hampered the
Bank's attempts to grow its entire portfolio.
(dollars in thousands) ENDING BALANCES AS OF THE DATE SHOWN
--------------------------------------------------------------------------------------------
06/30/04 12/31/03 $ CHG % CHG 06/30/03 12/31/02 $ CHG % CHG
-------- -------- ----- ----- -------- -------- ----- -----
Cash & Fed funds 7,544 10,624 (3,080) (28.99) 8,078 7,057 1,021 14.47
Securities AFS 52,131 48,491 3,640 7.51 46,517 39,668 6,849 17.27
Gross loans 207,209 206,274 935 0.45 204,627 202,065 2,562 1.27
Allowance for loan losses (2,439) (2,503) 64 (2.56) (1,981) (2,091) 110 (5.26)
------- ------- ------ ------ ------- ------- ------ ------
Loans, net 204,770 203,771 999 0.49 202,646 199,974 2,672 1.34
Premises & Equipment 6,318 6,380 (62) (0.97) 6,185 6,167 18 0.29
Accrued interest receivable 1,132 1,143 (11) (0.96) 1,169 1,197 (28) (2.34)
Other Assets 3,159 2,431 728 29.95 2,497 2,738 (241) (8.80)
------- ------- ------ ------ ------- ------- ------ ------
Total assets 275,054 272,840 2,214 0.81 267,092 256,801 10,291 4.01
======= ======= ====== ====== ======= ======= ====== ======
Noninterest-bearing demand 20,801 26,123 (5,322) (20.37) 20,318 22,453 (2,135) (9.51)
Interest-bearing demand 72,505 68,656 3,849 5.61 63,896 64,678 (782) (1.21)
Savings and time deposits 104,741 103,413 1,328 1.28 107,604 102,363 5,241 5.12
Time deposits of $100k 39,238 40,559 (1,321) (3.26) 39,946 33,314 6,632 19.91
------- ------- ------ ------ ------- ------- ------ ------
Total deposits 237,285 238,751 (1,466) (0.61) 231,764 222,808 8,956 4.02
FHLB advances 16,000 11,500 4,500 39.13 11,500 11,500 0 0.00
Other borrowed funds 0 0 0 0.00 100 350 (250) (71.43)
Accrued interest payable 253 415 (162) (39.04) 376 329 47 14.29
Other liabilities 773 1,019 (246) (24.14) 1,280 1,036 244 23.55
------- ------- ------ ------ ------- ------- ------ ------
Total liabilities 254,311 251,685 2,626 1.04 245,020 236,023 8,997 3.81
Shareholders' equity 20,743 21,155 (412) (1.95) 22,072 20,778 1,294 6.23
------- ------- ------ ------ ------- ------- ------ ------
Total liabilities & equity 275,054 272,840 2,214 0.81 267,092 256,801 10,291 4.01
======= ======= ====== ====== ======= ======= ====== ======
Loan growth has been hard to come by, and deposit growth has come from both new
public funds deposits as well as brokered certificates of deposits. The last
year and a half has seen several periods of remixing the deposit portfolio. The
first movement occurred as large numbers of certificates originated with
above-market rates matured and were rolled out of the Bank when we offered only
current market rates rather than the enticement rates. The Bank replaced such
departing funds with a combination of local public fund sources as well as
deposits raised by external brokers at current market rates without premiums.
Public funds footings rose almost $5,600,000 during the first six months of 2003
which led to a need for that much growth in the Securities portfolio to cover
the pledging requirements, with footings rising almost $6,850,000. While public
fund footings originally continued to rise during the first few months of 2004,
additional securities were purchased for both pledging purposes as well as to
have liquid assets earning more than overnight rates. Securities increased
$3,640,000 during the first six months of 2004. Regretfully, as tax revenues
have suffered during the early months of 2004, some of the public funds have
been pulled back and not renewed. They have now decreased by $1,600,000 over the
six
12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
month period. Thus, total assets have grown by just over $1,600,000 despite the
fact that earning assets have grown by more than $4,600,000. Cash balances have
been consumed to pay for the lost deposits, and the net change has been met by
borrowing $4,500,000 in additional overnight FHLB funds.
The reserve for loan losses has decreased $64,000 since year end as net charge
offs have been greater than the provision so far this year. This compares to a
reduction of $110,000 in the reserve during the first six months last year. With
the provisions made to the reserve and the net charge-offs applied for the last
six months, the reserve stands at 1.18% of gross loans. This compares to a
reserve of just over 1.21% at year end, and a reserve of 0.97% at the end of
June, 2003.
The low-rate interest environment has been holding sway in the market for an
unprecedented term, encompassing the entire eighteen month stretch between the
end of 2002 and June 30, 2004. As the second quarter of 2004 came to a close,
the Federal Reserve saw fit to increase rates by just .25%, the first upward
movement in more than two years. That rate increase has had no impact on
performance yet. The mix of deposits has changed again since year end 2003. A
large part of that change, $4,000,000 in noninterest-bearing demand deposits,
were used to pay off a like-amount of cash-collateralized loans that were on the
books as of December 31, 2003. By discounting that transaction, the change in
deposits and borrowings reveal a reliance upon overnight borrowed funds to
off-set the loss in public funds deposits as discussed earlier. With the
uncertainty as to how soon and how high rates will be raised again, it is
incumbent upon management to monitor the funding of its assets to take advantage
of the best possible levels or rates. Deposits have grown by almost $14,500,000
since December 31, 2002.
Other assets and cash balances reflect lower balances for accrued interest
receivable and cash on hand. In addition, the Bank has completely replaced it
aged ATM network last year, 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. Many of these changes have been on the books as
"construction in process" items with amounts "payable to contractors". Most of
those costs have now been put into active status, and the bills for them paid.
Total shareholders' equity reflects current earnings of $728,000 less dividends
of $448,000 during the first six months of 2004. The change in unrealized fair
market value of securities held for sale decreased the equity value by
$1,015,000. Given the improvement in earnings and cash flow, and favorable
market reaction to reported events, the market value of the Company's shares has
made most of the stock options redeemable. Some executive officers exercised
existing stock options. This resulted in a net increase in shareholders' equity
of $250,000. In addition, $60,000 of stock was issued for the directors'
deferred compensation plan. During the same period last year, equity grew by
$917,000 in earnings, less $442,000 in dividends, less $12,000 for shares issued
for exercised options.
Average balance changes for the three-month period tend to reflect the increases
over a two year period. Thus, total average asset footings for the second
quarter of 2004 are 2.14% higher than the same quarter in 2003. The average loan
growth during the second quarter this year versus last year reflects the
sluggish nature of loan originations in light of the runoff of both real estate
and consumer balances. Any increases shown stand as tribute to the efforts of
the lending staff. Average balances for the reserve for loan losses reflect
$470,000 more for the three month period, reflecting the additions made to the
reserve for growth and the new mix of the loan portfolio at the end of 2003.
Average balance changes for the six-month period reflects the sustained growth
of more than $11,500,000 for the full period. The same growth in public funds
and brokered certificates are reflected in the interest-bearing demand and time
accounts of $100,000 or more. Those increases give rise to the securities growth
13.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of more than $6,000,000 and extra cash footings of almost $3,000,000. The loan
growth of almost $3,500,000 is impressive given the runoff of the horse trailer
and real estate loans as discussed earlier. The basic earning power of the Bank
is reflected in these numbers as earning assets continue to grow and deposits
are flowing into the Bank.
AVERAGE DAILY BALANCES FOR THE PERIODS SHOWN
---------------------------------------------------------------------------------------
(dollars in thousands) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------------------- -------------------------------------------
2004 2003 $ CHG % CHG 2004 2003 $ CHG % CHG
---- ---- ----- ----- ---- ---- ----- -----
Cash & Fed funds 10,509 8,469 2,040 24.093 11,544 8,576 2,968 34.61
Securities AFS 51,699 47,312 4,387 9.27 50,328 44,262 6,066 13.70
Gross loans 203,661 200,282 3,379 1.69 202,606 199,109 3,497 1.76
Allowance for loan losses (2,505) (2,008) (497) 24.75 (2,528) (2,036) (492) 24.17
------- ------- ------ ------ ------- ------- ------- ------
Loans, net 201,156 198,274 2,882 1.45 200,078 197,073 3,005 1.52
Premises & Equipment 6,308 6,245 63 1.01 6,325 6,246 79 1.26
Accrued interest receivable 1,368 1,389 (21) (1.51) 1,329 1,348 (19) (1.41)
Other Assets 2,918 3,294 (376) (11.41) 2,876 3,293 (417) (12.66)
------- ------- ------ ------ ------- ------- ------- ------
Total assets 273,958 264,983 8,975 3.39 272,480 260,798 11,682 4.48
======= ======= ====== ====== ======= ======= ======= ======
Noninterest-bearing demand 22,203 19,799 2,404 12.14 22,048 19,700 2,348 11.92
Interest-bearing demand 72,004 65,037 6,967 10.71 71,572 64,524 7,048 10.92
Savings and time deposits 103,951 105,181 (1,230) (1.17) 103,640 104,667 (1,027) (0.98)
Time deposits of $100k 39,988 37,104 2,884 7.77 39,637 35,580 4,057 11.40
------- ------- ------ ------ ------- ------- ------- ------
Total deposits 238,146 227,121 11,025 4.85 236,897 224,471 12,426 5.54
FHLB advances 12,934 13,038 (104) (0.80) 12,217 12,274 (57) (0.46)
Other borrowed funds 281 213 68 31.92 140 263 (123) (46.77)
Accrued interest payable 299 420 (121) (28.81) 366 414 (48) (11.59)
Other liabilities 1,165 2,373 (1,208) (50.91) 1,372 1,948 (576) (29.57)
------- ------- ------ ------ ------- ------- ------- ------
Total liabilities 252,825 243,165 9,660 3.97 250,992 239,370 11,622 4.86
Shareholders' equity 21,133 21,818 (685) (3.14) 21,488 21,428 60 0.28
------- ------- ------ ------ ------- ------- ------- ------
Total liabilities & equity 273,958 264,983 8,975 3.39 272,480 260,798 11,682 4.48
======= ======= ====== ====== ======= ======= ======= ======
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. Much of the growth has been directed to "tax-free" investments.
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.
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 June 30, 2004 was $305,000 or $239,000
less than during the same period in 2003. Earnings per share decreased to $.26
from $.47 for the quarters ended June 30 in the respective years. Net income for
the six months ended June 30, 2004 was $728,000 or $189,000 less than during the
same period in 2003. Earnings per share decreased to $.62 from $.79 for the
six-month periods ended June 30 in the respective years. Discussed below are the
major factors that have influenced these operating results.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS SHOWN
---------------------------------------------------------------------------------------
(dollars in thousands) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------------- ----------------------------------------
2004 2003 $ CHG % CHG 2004 2003 $ CHG % CHG
---- ---- ----- ----- ---- ---- ----- -----
Interest and fees on loans 3,492 3,636 (144) (3.96) 6,949 7,198 (249) (3.46)
Taxable interest on securities 284 151 133 86.84 531 310 221 71.29
Tax-free interest on securities 239 299 (60) (20.07) 492 546 (54) (9.89)
Other interest income 7 4 3 75.00 20 8 12 150.00
----- ----- ---- ------- ----- ----- ---- ------
Total interest income 4,022 4,090 (68) (1.69) 7,992 8,062 (70) (0.87)
Interest on deposits 1,104 1,274 (170) (13.34) 2,227 2,588 (361) (13.95)
Interest on borrowings 137 138 (1) (1.44) 268 270 (2) (0.74)
----- ----- ---- ------- ----- ----- ---- ------
Total interest expense 1,241 1,412 (171) (12.17) 2,495 2,858 (363) (12.70)
Net interest income 2,781 2,678 103 3.85 5,497 5,204 293 5.63
Provision for loan losses 402 325 77 23.69 702 625 77 12.32
----- ----- ---- ------- ----- ----- ---- ------
Net interest after PLL 2,379 2,353 26 1.10 4,795 4,579 216 4.72
Service and overdraft fees 502 560 (58) (10.36) 953 1,032 (79) (7.66)
Gains on loan/security sales -- 79 (79) (100.00) 27 100 (73) (73.00)
Other income 71 114 (43) (37.72) 158 234 (76) (32.48)
----- ----- ---- ------- ----- ----- ---- ------
Total other income 573 753 (180) (23.90) 1,121 1,366 (228) (16.69)
Salaries and employee benefits 1,243 1,147 96 8.37 2,402 2,326 76 3.27
Occupancy, furniture & equip 280 232 48 20.69 550 468 82 17.52
State taxes 102 89 13 14.61 200 184 16 8.70
Data processing 198 178 20 11.24 411 357 54 15.13
FDIC deposit insurance 17 17 0 0.00 34 34 0 0.00
Professional fees 75 56 19 33.93 176 134 42 31.34
Amortization of intangibles 64 116 (52) (44.83) 128 175 (47) (26.86)
Loss on foreclosed asset sales 17 -- 17 -- 17 -- 17 --
Other operating expense 611 590 21 3.56 1,154 1,126 28 2.49
----- ----- ---- ------- ----- ----- ---- ------
Total other expense 2,607 2,425 182 7.51 5,072 4,804 268 5.58
Income before taxes 345 681 (336) (49.34) 861 1,141 (280) (24.54)
Income taxes 40 137 (97) (70.80) 133 224 (91) (40.63)
----- ----- ---- ------- ----- ----- ---- ------
Net income 305 544 (239) (43.93) 728 917 (189) (20.61)
===== ===== ==== ======= ===== ===== ==== ======
15.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The first table details the variance amounts and percentages for the three- and
six-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. Interest income shown on the yield analysis has
been adjusted to show taxable equivalents in order to compare pre-tax earning
power.
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 all of the first six months of 2003 reflects a prime rate
environment of 4.25%, while the entire six months of 2004 reflects a prime rate
of 4.00%. Rates were lowered in November of 2002 to the 4.25% level, and
remained there until June 30, 2003, at which time an additional lowering of 25
points was announced. Rates stayed at that level throughout the remainder of
2003 and all six months of 2004. A rate increase of 25 points has been announced
but is not effective on the Bank's books until July 2, 2004. Thus, both the
three-month and six-month results reported will reflect lower equivalent yields
on all loans tied to prime rate.
Interest income for the three month period ending June 30, 2004 was $68,000 less
than the prior year's second quarter. On a fully-taxable equivalent basis, the
difference becomes a decrease of $94,000 because of the Bank's slightly lower
yield on tax-free securities, as well as a smaller portfolio of tax-free
securities as some were sold off to realize gains last year. The lower prime and
the runoff of higher yielding consumer loans is reflected in the lower interest
yield of 6.98% on earning assets this year versus the first quarter yield of
7.36% last year. To help offset the loss in yield for the quarter, the Bank's
earning assets grew more than $8,910,000 million over the prior year's first
quarter, netting the lower interest income. At the same time, interest expense
shrank $171,000 for the quarter as the cost of funds fell 39 points to 2.18%.
Therefore, net interest income rose $103,000 for the comparable period. Six
month results paralleled the quarterly performance, with interest income
declining $70,000 or $91,000 on a taxable equivalent basis, as interest expense
fell even further, decreasing $363,000 for the six months. This left net
interest margin $293,000 higher for the six months, or $272,000 higher on a
taxable equivalent basis.
The provision for loan losses was the same $300,000 for the first quarters of
both 2004 and 2003, but raised to $402,000 for the second three months of 2004
compared to $325,000 in 2003. That left the provision $77,000 higher in both the
quarterly and year-to-date values for 2004 versus 2003. Additions to the
provision were used to cover the growth in the loan portfolio as well the losses
experienced in the portfolio each year. As shown earlier in Note 3, net charge
offs for the quarter were $124,000 higher than last year but only $31,000 higher
for the six month periods for the two years. 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.
16.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest income after the provision for loan losses was $26,000 more for the
first quarter 2004 than in 2003, and $216,000 higher for the six month periods
ended June 30, 2004. Net interest income after the provision is a measurement of
how well the Bank has weathered changes in the interest rate environment and
variances in the quality of the assets in its portfolios. In light of the
sustained low-rate interest environment and rise in consumer debt burden, the
Bank has held its own in the face of such adversity.
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Three months Ended June 30,
---------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
----------- -------- ---------- ---------- -------- ----------
($ in thousands)
Securities (1) $ 54,775 $ 642 4.71% $ 48,746 $ 592 4.87%
Loans (2) 201,156 3,492 6.98 198,275 3,636 7.36
----------- -------- ---------- --------
Total interest-earning assets 255,931 4,134 6.50 247,021 4,228 6.87
Other assets 18,027 17,962
----------- ----------
Total assets $ 273,958 $ 264,983
=========== ==========
Deposits - interest bearing $ 215,943 1,104 2.06% $ 207,322 1,274 2.47%
Borrowed funds 13,215 137 4.16 13,251 138 4.19
----------- -------- ---------- --------
Total interest-bearing deposits $ 229,158 1,241 2.18 $ 220,573 1,412 2.57
and borrowings
Noninterest-bearing demand deposits 22,203 19,799
Other liabilities 1,464 2,793
Shareholder's equity 21,133 21,818
----------- ----------
Total liabilities and
shareholders' equity $ 273,958 $ 264,983
=========== ==========
Net interest income $ 2,893 $ 2,816
======== ========
Interest rate spread 4.32% 4.30%
Net interest margin (3) 4.55% 4.57%
- -------------------
(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 $112,000 and $138,000 for 2004 and
2003.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $576,000 and $176,000 and deferred dealer
reserve expense of $47,000 and $96,000 in 2004 and 2003.
(3) Net interest income as a percentage of average interest-earning assets.
17.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Six months Ended June 30,
---------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
----------- -------- ---------- ---------- -------- ----------
($ in thousands)
Securities (1) $ 54,548 $ 1,273 4.69% $ 45,714 $ 1,116 4.92%
Loans (2) 200,078 6,950 6.99 197,073 7,198 7.37
----------- -------- ---------- --------
Total interest-earning assets 254,626 8,223 6.49 242,787 8,314 6.91
Other assets 17,854 18,011
----------- ----------
Total assets $ 272,480 $ 260,798
=========== ==========
Deposits - interest bearing $ 214,849 2,227 2.08% $ 204,771 2,588 2.55%
Borrowed funds 12,357 268 4.37 12,537 270 4.35
----------- -------- ---------- --------
Total interest-bearing deposits $ 227,206 2,495 2.21 $ 217,308 2,858 2.65
and borrowings
Noninterest-bearing demand deposits 22,048 19,700
Other liabilities 1,738 2,362
Shareholder's equity 21,488 21,428
----------- ----------
Total liabilities and
shareholders' equity $ 272,480 $ 260,798
=========== ==========
Net interest income $ 5,728 $ 5,456
======== ========
Interest rate spread 4.29% 4.25%
Net interest margin (3) 4.52% 4.53%
- -----------------------
(4) 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 $231,000 and $252,000 for 2004 and
2003.
(5) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $330,000 and $332,000 and deferred dealer
reserve expense of $109,000 and $193,000 in 2004 and 2003.
(6) Net interest income as a percentage of average interest-earning assets.
The basic earning power of the Bank, as evidenced by the net interest margin
after the provision for loan losses continues to perform at a relatively good
pace. Overall earnings performance has been hampered by an inability to generate
consistent non-interest income and control non-interest expenses. Steps have
been taken by management to address specific needs and to set new goals for
improving performance in these areas. Decisions to abandon the specialty loan
niches and to curtail activity in the origination of long-term fixed-rate
mortgages are being re-worked to approach those areas from a different
perspective and improve the fee generation equations that drive them. Plans are
afoot to revamp the mortgage loan origination process, add other financial
partnerships for investments and insurance, and to reenter the
18.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
specialty consumer loan market under more favorable terms. In addition, studies
are under way to gain control of the ever-increasing cost of processing the
Bank's loan and deposit transactions, as well as to streamline the branching
network. None of these will likely result in an immediate change in performance
but taken together should vastly improve the Bank's operating efficiency.
Total noninterest income declined $180,000 for the second quarter of 2004
compared to the same period in 2003, and $228,000 for the full six month period.
Items contributing to the decrease are consistent for both comparative periods
and include reduced fees on overdrawn deposit accounts, lower net fees on
foreign ATM transactions, and lower fees from the origination of mortgage loans
through our Countrywide affiliation. Consumers are paying closer attention to
the fees they incur for overdrawing their accounts as Congress and others look
to regulate or hinder the proliferation of the new "overdraft privilege"
programs. In addition, given the current market tendency for rates to rise
rather than fall, the Bank is not likely to benefit from the sales of assets as
it did in 2003, which netted income of $79,000 for the quarter, and $100,000 for
the six month period in 2003.
Total noninterest expense increased $182,000 in the three months of the second
of quarter 2004 compared to the same period during 2003 and $269,000 for the
full six month period. Once again, the increases are consistent throughout the
full six month comparison as additional personnel expenses reflect the hiring of
a new senior-level operations manager, increased medical plan costs, the
deployment of the new ATM network, the replacement of all the Bank's aged
computer system, higher costs to process the growing number of accounts, higher
costs to run the ATM network, and higher professional fees at the Corporate
level to resolve legal issues involved with the change in senior management.
Taken individually, the increased costs would pose little problem in resolving
our earnings picture but taken as a whole, hitting simultaneously, they
represent a logjam of problems to be overcome. Management is aggressively
attacking each piece of this puzzle and fully expects to have improved earnings
in the near future. Much of these increased costs are non-cash items associated
with the depreciation expense from the new equipment, as well as the continued
amortization of previously-generated mortgage servicing rights as we exit the
fixed-rate, long-term mortgage origination market.
Given the reduction in net earnings, the taxes payable on those earnings are
reflected in the lower values of $97,000 for the quarter and $91,000 for the
full six month period.
Change in net income after taxes is the result of netting all the changes in all
of the above categories. For the second quarter, that means income was down
$239,000 from 2003 but only $189,000 for the full six months. Management
realizes that income should be improved. The management team believes the
appropriate steps have been and are being taken to address the issues discussed
above with an eye on improving the bottom line.
19.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has certain obligations and commitments to make future payments
under contracts. At June 30, 2004, the aggregate contractual obligations and
commitments are:
Contractual obligations
Payments Due by Period
Less Than 1-3 3-5 After
(in thousands) Total One Year Years Years 5 Years
----------- --------- --------- --------- ---------
Time deposits and certificates of deposit $ 123,167 $ 53,952 $ 58,679 $ 9,218 $ 1,318
Borrowed funds 16,000 4,500 -- 11,500 --
----------- --------- --------- --------- ---------
Total $ 139,167 $ 58,452 $ 58,679 $ 20,718 $ 1,318
=========== ========= ========= ========= =========
Other commitments
Amount of Commitment - Expiration by Period
Less Than 1-3 3-5 After
(in thousands) Total One Year Years Years 5 Years
--------- --------- --------- --------- ---------
Commitments to extend commercial credit $ 9,678 $ 8,330 $ 921 $ 141 $ 286
Commitments to extend consumer credit 13,262 3,373 535 1,450 7,904
Standby letters of credit 2,022 22 -- -- 2,000
--------- --------- --------- --------- ---------
Total $ 24,962 $ 11,725 $ 1,456 $ 1,591 $ 10,190
========= ========= ========= ========= =========
Items listed above under "Contractual obligations" represent standard bank
financing activity under normal terms and practices. Such funds normally
roll-over or are replaced by like items depending on then-current financing
needs. Items shown under "Other commitments" also represent standard bank
activity but for extending credit to bank customers. Commercial credits
generally represent lines of credit or approved loans with drawable funds still
available under the contract terms. On an on-going basis, about half of these
amounts are expected to be drawn. Consumer credits generally represent amounts
drawable under revolving home equity lines or credit card programs. Such amounts
are usually deemed less likely to be drawn upon in total as consumers tend not
to draw down all amounts on such lines. Utilization rates tend to be fairly
constant over time. Standby letters of credit represent guarantees to finance
specific projects whose primary source of financing come from other sources. In
the unlikely event of the other source's failure to provide sufficient
financing, the bank would be called upon to fill the need. The bank is also
continually engaged in the process of approving new loans in a bidding
competition with other banks. Terms of possible new loans are approved by
management and Board committees, with caveats and possible counter terms made to
the applicant customers. Those customers may accept those terms, make a counter
proposal, or accept terms from a competitor. These loans are not yet under
contract but offers have been tendered and would be required to be funded if
accepted. Such agreements represent about $4,095,000 at June 30, 2004 for
various possible maturity terms.
20.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities which are
summarized in the Condensed Consolidated Statements of Cash Flows. Cash and cash
equivalents amounted to $7,544,000 at June 30, 2004 compared to $10,624,000 at
December 31, 2003.
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.
Cash flows from daily activity resulted in a decrease of more than $3 million
dollars in Cash and Cash Equivalents since December 31, 2003. That decrease
occurred as deposits shrank $1,500,000, mainly as public fund entities needed to
use their deposits rather than roll them over, and another $1,000,000 in net
payables/receivables were paid. Funds amounting to a net of $323,000 were raised
through the exercise of stock options and the purchase/reissue of Treasury
shares which did not cover the payment of $447,000 in dividends. Coupled with
raising $4,500,000 in short-term borrowings, the net funds were employed to
place nearly $2,000,000 in new loans and more than $3,600,000 in securities.
Prior year activity for the first six months of 2003 saw Cash grow by $1,021,000
as deposits grew by nearly $9,000,000 mainly in public fund and brokered
certificate monies which were used to fund more than $3,800,000 in new loans and
more than $6,800,000 in securities to pledge for the public funds.
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, 2004, the Bank's leverage ratio was 7.72% and the risk-based capital
ratio was 10.97%, both of which exceeded the minimum regulatory requirements to
be considered well-capitalized. The Corporation's leverage and risk-based
capital ratios were 7.89% and 11.19% at June 30, 2004, exceeding
well-capitalized levels.
21.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A 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 2003. (See Quantitative and Qualitative Disclosures
about Market Risk contained in the Annual Report to Shareholders for the year
ended December 31, 2003.)
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Corporation's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934). Based on their evaluation, the Corporation's
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Corporation in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that there were no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect its internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
22.
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 14, 2004 at the main office of the
Commercial Savings Bank in Upper Sandusky. There were 735,400
shares of the 1,175,499 eligible shares currently outstanding, or
62.6%, represented in person or by proxy at the Meeting. Items of
business transacted at the meeting included the election of Class
I Directors of the Company. Each of the four nominees, namely
Edwin G. Emerson, Deborah J. Grafmiller, Michael A. Mastro, and
Douglas C. Smith, received at least 727,531 votes, or 98.9% of
the shares represented at the Meeting, and were elected as Class
I Directors of the Company, with each term expiring at the
Company's 2007 Annual Meeting. Of the votes cast, the candidates
received the following number and percentages of the 735,400
available. Mr. Emerson received 727,531 or 98.9%, Mrs. Grafmiller
received 727,846 or 99.0%, Mr. Mastro received 732,960 or 99.7%,
and Mr. Smith received 732,565 or 99.6%. The remaining eight
members of the Board of Directors not up for election this year
are Daniel E. Berg, John W. Bremyer, Lynn R. Child, Mark Dillon,
Hazel D. Franks, William E. Ruse, Michael A. Shope, and Richard
A. Sheaffer.
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, 2004 on April 14, 2004 regarding results of the
election at the Shareholders' Meeting.
23.
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: 08/11/2004 /s/ Philip W. Kinley
-------------------------------------
(Signature)
Philip W. Kinley
President and Chief Executive Officer
Date: 08/11/2004 /s/ John C. Haller
-------------------------------------
(Signature)
John C. Haller
Senior Vice President and Chief
Financial Officer
24.