Back to GetFilings.com
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 SEPTEMBER 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 November 10, 2004, the last practicable date, there were 1,178,938
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. Unregistered Sales of Equity 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)
September 30, December 31,
(Amounts in thousands) 2004 2003
------------- -------------
ASSETS
Cash $ 6,251 $ 9,524
Federal funds sold - 1,100
------------- -------------
Cash and cash equivalents 6,251 10,624
Securities available for sale 60,222 48,491
Total loans 210,649 206,274
Allowance for loan losses (2,418) (2,503)
------------- -------------
Loans, net 208,231 203,771
Premises and equipment, net 6,349 6,380
Accrued interest receivable 1,391 1,143
Other assets 2,692 2,431
------------- -------------
Total assets $ 285,136 $ 272,840
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand $ 20,108 $ 26,123
Interest-bearing demand 72,556 68,656
Savings and time deposits 105,115 103,413
Time deposits $100,000 and greater 42,048 40,559
------------- -------------
Total deposits 239,827 238,751
FHLB advances 22,500 11,500
Accrued interest payable 283 415
Other liabilities 600 1,019
------------- -------------
Total liabilities 263,210 251,685
------------- -------------
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 11,052 10,684
Retained earnings 11,000 10,607
Deferred compensation plan shares, at cost,
13,907 and 11,033 shares in 2004 and 2003 (339) (270)
Treasury stock, 1,582 in 2004, 2,770 shares in 2003 (42) (70)
Accumulated other comprehensive income 255 204
------------- -------------
Total shareholders' equity 21,926 21,155
------------- -------------
Total liabilities and shareholders' equity $ 285,136 $ 272,840
============= =============
See notes to the consolidated financial statements.
3.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(Amounts in thousands, except per share data) 2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 3,629 $ 3,655 $ 10,578 $ 10,854
Interest on securities:
Taxable 334 143 865 453
Nontaxable 238 295 730 841
Other interest income 7 3 27 12
---------- ---------- ---------- ----------
Total interest income 4,208 4,096 12,200 12,160
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,151 1,271 3,378 3,860
Interest on borrowings 169 138 437 408
---------- ---------- ---------- ----------
Total interest expense 1,320 1,409 3,815 4,268
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,888 2,687 8,385 7,892
Provision for loan losses 430 465 1,132 1,090
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,458 2,222 7,253 6,802
---------- ---------- ---------- ----------
OTHER INCOME
Service fees and overdraft charges 515 550 1,468 1,581
Gains on sale of securities, net 7 46 33 142
Gains on sale of loans, net -- 3 -- 8
Other income 73 111 232 345
---------- ---------- ---------- ----------
Total other income 595 710 1,733 2,076
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 1,295 1,156 3,697 3,482
Occupancy, furniture and equipment 303 227 852 695
State taxes 109 91 309 276
Data processing 198 177 609 534
FDIC deposit insurance 18 17 51 51
Professional fees 71 50 248 185
Amortization of intangibles 64 82 193 256
Loss on sale of foreclosed assets -- -- 17 --
Other operating expense 555 543 1,709 1,669
---------- ---------- ---------- ----------
Total other expense 2,613 2,343 7,685 7,148
---------- ---------- ---------- ----------
Income before federal income taxes 440 589 1,301 1,730
Income tax expense 73 98 206 322
---------- ---------- ---------- ----------
Net income $ 367 $ 491 $ 1,095 $ 1,408
========== ========== ========== ==========
Basic earnings per common share $ .31 $ .42 $ .93 $ 1.21
========== ========== ========== ==========
Diluted earnings per common share $ .31 $ .42 $ .93 $ 1.21
========== ========== ========== ==========
See notes to the consolidated financial statements.
4.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
September 30,
------------------------
(Amounts in thousands, except per share data) 2004 2003
---------- ----------
Balance at beginning of period $ 20,743 $ 22,072
Comprehensive income:
Net income 367 491
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 1,067 (917)
---------- ----------
Total comprehensive income 1,434 (426)
Treasury stock purchase, 1,002 shares in 2004, 2,320 shares in 2003 (27) (59)
Dividends paid ($.19 and $.19 per share in 2004 and 2003) (224) (221)
---------- ----------
Balance at end of period $ 21,926 $ 21,366
========== ==========
Nine months Ended
September 30,
------------------------
2004 2003
---------- ----------
Balance at beginning of period $ 21,155 $ 20,778
Comprehensive income:
Net income 1,095 1,408
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 51 (74)
---------- ----------
Total comprehensive income 1,146 1,334
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, 3,891 shares in 2004, 6,960 shares in 2003 (104) (174)
Treasury stock reissued for options exercised,
5,079 shares in 2004, 4,719 shares in 2003 89 79
Dividends paid ($.57 and $.57 per share in 2004 and 2003) (671) (663)
---------- ----------
Balance at end of period $ 21,926 $ 21,366
========== ==========
See notes to the consolidated financial statements.
5.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended
September 30,
------------------------
2004 2003
---------- ----------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,095 $ 1,408
Adjustments 632 1,462
---------- ----------
Net cash from operating activities 1,727 2,870
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (20,225) (31,562)
Maturities and repayments 2,934 5,687
Sales 5,525 20,182
Net change in loans (6,044) (4,234)
Proceeds from sale of foreclosed/repossessed assets 458 542
Bank premises and equipment expenditures (424) (508)
---------- ----------
Net cash from investing activities (17,776) (9,893)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,051 8,985
Net change in borrowings from FHLB 11,000 --
Net change in federal funds purchased -- 670
Common shares issued for stock options 269 92
Treasury shares purchased (104) (174)
Treasury shares reissued for stock options 131 --
Cash dividends paid (671) (663)
---------- ----------
Net cash from financing activities 11,676 8,910
---------- ----------
Net change in cash and cash equivalents (4,373) 1,887
Cash and cash equivalents at beginning of period 10,624 7,057
---------- ----------
Cash and cash equivalents at end of period $ 6,251 $ 8,944
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 3,948 $ 4,196
Cash paid for income taxes 515 403
Non-cash transfer of loans to foreclosed/repossessed assets 494 366
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 did not begin operations until
this quarter. Testing and certification of Corporate employees was required
prior to engaging in the insurance and securities market transactions.
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, 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 1,175,782 1,163,959
Dilutive effect of exercisable stock options 2,862 3,021
---------- ----------
Weighted average shares considering dilutive effect 1,178,644 1,166,980
========== ==========
7.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2004 and 2003 there were 13,200 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 all but the 1999 plan
shares a realizable value, as well as the exercising of 15,856 options, and the
forfeiture of another 15,538 options due to the departure of a senior executive.
NOTE 3 - LOANS
Loans were as follows:
September 30, 2004 December 31, 2003
----------------- -----------------
($ in thousands)
Commercial and other loans $ 135,888 $ 129,171
Real estate loans 10,809 12,130
Construction loans 349 193
Home equity loans 17,827 13,445
Consumer and credit card loans 22,979 32,810
Consumer finance loans 22,797 18,525
----------------- -----------------
Total loans $ 210,649 $ 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 September 30, 2004
and December 31, 2003, loans sold to FHLMC for which the Bank has retained
servicing totaled $36,463,000 and $49,878,000 and real estate loans originated
and held for sale totaled zero in 2004 and at year end 2003.
Activity in the allowance for loan losses for the three months ended September
30 was as follows:
2004 2003
------- -------
($ in thousands)
Beginning balance $ 2,439 $ 1,981
Provision for loan loss 430 465
Loans charged off (630) (400)
Recoveries of loans previously charged-off 179 13
------- -------
Ending balance $ 2,418 $ 2,059
======= =======
Activity in the allowance for loan losses for the nine months ended September 30
was as follows:
2004 2003
------- -------
($ in thousands)
Beginning balance $ 2,503 $ 2,091
Provision for loan loss 1,132 1,090
Loans charged off (1,444) (1,205)
Recoveries of loans previously charged-off 227 83
------- -------
Ending balance $ 2,418 $ 2,059
======= =======
8.
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans were as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
($ in thousands)
Period-end loans with no allocated allowance $ 975 $ 2,072
Period-end loans with allocated allowance 773 390
----------- ---------
Total $ 1,748 $ 2,462
=========== =========
Amount of allowance for loan loss allocated $ 71 $ 89
Nonperforming loans were as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
($ in thousands)
Loans past due over 90 days still on accrual $ 92 $ 83
Nonaccrual loans 1,656 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 September 30 was as
follows:
2004 2003
---------- ----------
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 1,622 $ (1,343)
Less: Reclassification adjustment for losses (gains) recognized in income (7) (46)
---------- ----------
Net unrealized holding gains (losses) 1,615 (1,389)
Tax effect 549 (472)
--------- ----------
Other comprehensive income $ 1,066 $ (917)
========= ==========
Other comprehensive income for the nine months ended September 30 was as
follows:
2004 2003
---------- ----------
($ in thousands)
Unrealized holding gains (losses) on securities available for sale $ 110 $ 30
Less: Reclassification adjustment for losses (gains) recognized in income (33) (142)
---------- ----------
Net unrealized holding gains (losses) 77 (112)
Tax effect 26 (38)
--------- ----------
Other comprehensive income $ 51 $ (74)
========= ==========
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 September 30 was as follows:
2004 2003
---------- ----------
Income as reported $ 367 $ 491
Deduct: Stock-based compensation expense
determined under fair value based method 5 11
---------- ----------
Pro forma net income 362 480
Pro forma earnings per share
Basic $ .31 $ .42
Diluted .31 .41
Earnings per share as reported
Basic $ .31 $ .42
Diluted .31 .42
Earnings for the nine months ended September 30 was as follows:
2004 2003
---------- ----------
Income as reported $ 1,095 $ 1,408
Deduct: Stock-based compensation expense
determined under fair value based method 14 32
---------- ----------
Pro forma net income 1,081 1,376
Pro forma earnings per share
Basic $ .93 $ 1.21
Diluted .92 1.18
Earnings per share as reported
Basic $ .93 $ 1.21
Diluted .93 1.21
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 September 30, 2004, compared to December 31,
2003, and the consolidated results of operations for the quarterly and
nine-month periods ending September 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 nine-month 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 $12,296,000 in the nine month period ended September
30, 2004 compared to a $10,155,000 increase the year before from the previous
year end. This represents a 4.51% increase versus 3.95% last year. The Bank has
experienced growth in almost all phases of its operations, with the exception of
Cash and noninterest-bearing demand deposits, which go hand-in-hand as a matched
use
11.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and source of funds. Loans have grown $4,460,000 and Securities have grown by
$11,731,000. This comes despite the fact that previous decisions to stop
purchasing loans through a Denver broker of horse-trailers and to stop
originating and selling long-term fixed rate mortgages meant that balances in
those loans categories have shrunk more than $6,000,000 in horse-trailer loans,
and another $2,000,000 in real estate mortgage footings. The Bank also had a
very short-term, matched-funded loan on the books for $5,000,000 at year end,
which paid off early in the year, reducing current balances since year end a
like amount in both loans and noninterest-bearing demand deposits. Loan growth
works out to nearly $10,000,000 after taking the match-funded loan into account.
ENDING BALANCES AS OF THE DATE SHOWN
-------------------------------------------------------------------------------
(dollars in thousands) 09/30/04 12/31/03 $ CHG % CHG 09/30/03 12/31/02 $ CHG % CHG
--------- --------- ------- -------- -------- -------- ------ ------
Cash & Fed funds 6,251 10,624 (4,373) (41.16) 8,944 7,057 1,887 26.74
Securities AFS 60,222 48,491 11,731 24.19 45,292 39,668 5,624 14.18
Gross loans 210,649 206,274 4,375 2.12 204,668 202,065 2,603 1.29
Allowance for loan losses (2,418) (2,503) 85 (3.40) (2,059) (2,091) 32 (1.53)
--------- --------- ------- -------- -------- -------- ------ ------
Loans, net 208,231 203,771 4,460 2.19 202,609 199,974 2,635 1.32
Premises & Equipment 6,349 6,380 (31) (0.49) 6,306 6,167 139 2.25
Accrued interest receivable 1,391 1,143 248 21.70 1,415 1,197 218 18.21
Other Assets 2,692 2,431 261 10.74 2,390 2,738 (348) (12.71)
--------- --------- ------- -------- -------- -------- ------ ------
Total assets 285,136 272,840 12,296 4.51 266,956 256,801 10,155 3.95
========= ========= ======= ======== ======== ======== ====== ======
Noninterest-bearing demand 20,108 26,123 (6,015) (23.03) 20,125 22,453 (2,328) 10.37)
Interest-bearing demand 72,556 68,656 3,900 5.68 66,244 64,678 1,566 2.42
Savings and time deposits 105,115 103,413 1,702 1.65 105,215 102,363 2,852 2.79
Time deposits of $100k 42,048 40,559 1,489 3.67 40,210 33,314 6,896 20.70
--------- --------- ------- -------- -------- -------- ------ ------
Total deposits 239,827 238,751 1,076 0.45 231,794 222,808 8,986 4.03
FHLB advances 22,500 11,500 11,000 95.65 11,500 11,500 0 0.00
Other borrowed funds 0 0 0 0.00 1,020 350 670 191.43
Accrued interest payable 283 415 (132) (31.81) 400 329 71 21.58
Other liabilities 600 1,019 (419) (41.12) 876 1,036 (160) (15.44)
--------- --------- ------- -------- -------- -------- ------ ------
Total liabilities 263,210 251,685 11,525 4.58 245,590 236,023 9,567 4.05
Shareholders' equity 21,926 21,155 771 3.64 21,366 20,778 588 2.83
--------- --------- ------- -------- -------- -------- ------ ------
Total liabilities & equity 285,136 272,840 12,296 4.51 266,956 256,801 10,155 3.95
========= ========= ======= ======== ======== ======== ====== ======
Loan growth has been hard to come by and competition has been intense, but the
Bank has done well by offering superior service and competitive rates. The Bank
has also been successful in attracting new replacement funds in the public funds
sector, as well as in interest-bearing demand deposits and certificates of
deposits. Deposits have grown $1,076,000 even after accounting for the
$5,000,000 loss of the match-funded loan. Additional funds have been brought in
under agreements with the FHLB, some utilizing two-year funds to buy
similar-term investments in the amount of $5,000,000, as well as another
$6,000,000 in short-term borrowings, taking advantage of the current low
short-term rates. Prior year growth of $10,155,000 was funded by deposit growth
and equity retention, with half of the increase used to buy securities, and the
rest being employed as loans or overnight funds sold.
The reserve for loan losses has decreased $85,000 since year end as net charge
offs have been greater than the provision so far this year. This compares to a
reduction of $32,000 in the reserve during the first nine months last year. With
the provisions made to the reserve and the net charge-offs applied for the last
nine
12.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
months, the reserve stands at 1.15% of gross loans. This compares to a reserve
of just over 1.21% at year end, and a reserve of 1.01% at the end of September,
2003.
The low-rate interest environment has been holding sway in the market for an
unprecedented term, encompassing the entire twenty one month stretch between the
end of 2002 and September 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 now been followed
by two additional increases of .25% each during the third quarter. The increases
will only impact the loans with variable rates tied to prime, and eventually
will work their way into the cost of certificates of deposit and then eventually
into the savings and money market rates. So far, the impact has been minimal as
seen in the yield analysis. The three month and nine month rates on earning
assets plus deposits and borrowed funds are essentially the same for the current
year, as well as for the prior year. The net margin shows minimal increases for
this year versus last year.
Other assets and accrued interest receivable have grown by $509,000 since year
end. Cash balances reflect lower balances for accrued interest payable and the
deployment of excess funds into the securities portfolio. Fixed assets now
reflect a $31,000 reduction in balances due to additional depreciation of fixed
assets, despite having deployed the new ATM network (last year), and various
computer equipment upgrades. Prior year numbers reflected increases in cash of
$1,887,000, and new fixed assets for $139,000, but reductions in net
receivables.
Total shareholders' equity reflects current earnings of $1,095,000 less
dividends of $671,000 during the first nine months of 2004. The change in
unrealized fair market value of securities held for sale increased the equity
value by $51,000. Some executive officers and directors exercised existing stock
options or purchased new shares through their deferred compensation plan. This
resulted in a $401,000 net increase in shareholders' equity. $103,000 was used
to purchase treasury shares in the open market, and $90,000 of that was
redeployed to cover the options purchases. During the same period last year,
equity grew $1,408,000 through earnings, less $663,000 in dividends. The fair
market value changes decrease equity by $74,000 last year. $12,000 was raised in
the prior year through options exercises, with $174,000 spent to buy treasury
shares, $79,000 of which was reissued for exercised options.
Average balance changes of $13,713,000 for the three-month period tend to
reflect the increases over a two year period. Thus, total average asset footings
for the third quarter of 2004 are 5.13% higher than the same quarter in 2003.
The average loan growth during the third 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, and the redeployment of funds into the
securities portfolio. The $4,159,000 increase in loans stands as a tribute to
the efforts of the lending staff. Average balances for the reserve for loan
losses reflect $264,000 more for the three month periods, reflecting the
additions made to the reserve for growth and the new mix of the loan portfolio
during the fourth quarter of 2003.
Average balance changes for the nine-month period reflect the sustained growth
of $12,249,000 for the full period. The growth in public funds and brokered
certificates are reflected in the interest-bearing demand and time accounts of
$100,000 or more. Those increases fuel the need for the securities growth of
more than $7,261,000 and extra cash footings of $2,096,000. The loan growth of
almost $3,300,000 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.
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
---------------------------------------------- ---------------------------------------------
(dollars in thousands) 2004 2003 $ CHG % CHG 2004 2003 $ CHG % CHG
---------- --------- --------- --------- --------- --------- --------- ---------
Cash & Fed funds 8,366 7,999 367 4.59 10,477 8,381 2,096 25.01
Securities AFS 55,620 45,988 9,632 20.94 52,105 44,844 7,261 16.19
Gross loans 209,316 205,157 4,159 2.03 204,859 201,147 3,712 1.85
Allowance for loan losses (2,331) (2,067) (264) 12.77 (2,462) (2,046) (416) 20.33
---------- --------- --------- --------- --------- --------- --------- ---------
Loans, net 206,985 203,090 3,895 1.92 202,397 199,101 3,296 1.66
Premises & Equipment 6,349 6,227 122 1.96 6,333 6,240 93 1.49
Accrued interest receivable 1,319 1,340 (21) (1.57) 1,326 1,345 (19) (1.41)
Other Assets 2,614 2,896 (282) (9.74) 2,681 3,159 (478) (15.13)
---------- --------- --------- --------- --------- --------- --------- ---------
Total assets 281,253 267,540 13,713 5.13 275,319 263,070 12,249 4.66
========== ========= ========= ========= ========= ========= ========= =========
Noninterest-bearing demand 20,208 19,224 984 5.12 21,431 19,539 1,892 9.68
Interest-bearing demand 73,340 66,790 6,550 9.81 72,166 65,288 6,878 10.53
Savings and time deposits 105,202 106,247 (1,045) (0.98) 104,165 105,200 (1,035) (0.98)
Time deposits of $100k 40,833 39,339 1,494 3.80 40,038 36,847 3,191 8.66
---------- --------- --------- --------- --------- --------- --------- ---------
Total deposits 239,583 231,600 7,983 3.45 237,800 226,874 10,926 4.82
FHLB advances 18,663 12,638 6,025 47.67 14,381 12,396 1,985 16.01
Other borrowed funds 171 188 (17) (9.04) 150 238 (88) (36.97)
Accrued interest payable 327 449 (122) (27.17) 353 426 (73) (17.14)
Other liabilities 1,029 1,237 (208) (16.81) 1,150 1,708 (558) (32.67)
---------- --------- --------- --------- --------- --------- --------- ---------
Total liabilities 259,773 246,112 13,661 5.55 253,834 241,642 12,192 5.05
Shareholders' equity 21,480 21,428 52 0.24 21,485 21,428 57 0.27
---------- --------- --------- --------- --------- --------- --------- ---------
Total liabilities & equity 281,253 267,540 13,713 5.13 275,319 263,070 12,249 4.66
========== ========= ========= ========= ========= ========= ========= =========
The sustained low interest rate environment makes income generation hard when
dealing with the limited types of securities in which the Bank is allowed to
invest. 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 September 30, 2004 was $367,000 or
$124,000 less than during the same period in 2003. Earnings per share decreased
to $.31 from $.42 for the quarters ended September 30 in the respective years.
Net income for the nine months ended September 30, 2004 was $1,095,000 or
$313,000 less than during the same period in 2003. Earnings per share decreased
to $.93 from $1.21 for the nine-month periods ended September 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
---------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------- ---------------------------------------
(dollars in thousands) 2004 2003 $ CHG % CHG 2004 2003 $ CHG % CHG
-------- -------- -------- -------- -------- -------- -------- --------
Interest and fees on loans 3,629 3,655 (26) (0.71) 10,578 10,853 (275) (2.53)
Taxable interest on securities 334 143 191 133.57 865 453 412 90.95
Tax-free interest on securities 238 295 (57) (19.32) 730 841 (111) (13.20)
Other interest income 7 3 4 133.33 27 12 15 125.00
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income 4,208 4,096 112 2.73 12,200 12,159 41 0.34
Interest on deposits 1,151 1,271 (120) (9.44) 3,378 3,859 (481) (12.46)
Interest on borrowings 169 138 31 22.46 437 408 29 7.11
-------- -------- -------- -------- -------- -------- -------- --------
Total interest expense 1,320 1,409 (89) (6.32) 3,815 4,267 (452) (10.59)
Net interest income 2,888 2,687 201 7.48 8,385 7,892 493 6.25
Provision for loan losses 430 465 (35) (7.53) 1,132 1,090 42 3.85
-------- -------- -------- -------- -------- -------- -------- --------
Net interest after PLL 2,458 2,222 236 10.62 7,253 6,802 451 6.63
Service and overdraft fees 515 550 (35) (6.36) 1,468 1,581 (113) (7.15)
Gains/(losses) on asset sales 6 49 (43) (87.76) 33 150 (117) (78.00)
Other income 74 111 (37) (33.33) 232 345 (113) (32.75)
-------- -------- -------- -------- -------- -------- -------- --------
Total other income 595 710 (115) (16.20) 1,733 2,076 (343) (16.52)
Salaries and employee benefits 1,295 1,156 139 12.02 3,697 3,482 215 6.17
Occupancy, furniture & equip 303 227 76 33.48 852 695 157 22.59
State taxes 109 91 18 19.78 309 276 33 11.96
Data processing 198 177 21 11.86 609 534 75 14.04
FDIC deposit insurance 18 17 1 5.88 51 51 0 0.00
Professional fees 71 50 21 42.00 248 185 63 34.05
Amortization of intangibles 64 82 (18) (21.95) 193 256 (63) (24.61)
Losses on asset sales 0 0 0 0.00 17 0 17 0.00
Other operating expense 555 543 12 2.21 1,709 1,669 40 2.40
-------- -------- -------- -------- -------- -------- -------- --------
Total other expense 2,613 2,343 270 11.52 7,685 7,148 537 7.51
Income before taxes 440 589 (149) (25.30) 1,301 1,730 (429) (24.80)
Income taxes 73 98 (25) (25.51) 206 322 (116) (36.02)
-------- -------- -------- -------- -------- -------- -------- --------
Net income 367 491 (124) (25.25) 1,095 1,408 (313) (22.23)
======== ======== ======== ======== ======== ======== ======== ========
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
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. 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% and 4.00% for the third quarter as the rate was reduced for
the final time as of June 30, 2003. The first six months of 2004 reflects a
prime rate of 4.00%, and a mixture of 4.25% to 4.75% during the third quarter as
rates were raised on July 2, August 12, and September 23 by .25% respectively.
Rates were lowered in November of 2002 to the 4.25% level, and remained there
until June 30, 2003. Thus, the three-month results reported will reflect lower
equivalent yields on all loans tied to prime rate, and results for the third
quarter will be mixed.
Interest income for the three month period ending September 30, 2004 was
$112,000 more than the prior year's third quarter. On a fully-taxable equivalent
basis, the difference becomes an increase of $87,000 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 6.97% on earning assets this year versus the third quarter
yield of 7.14% last year. To help offset the loss in yield for the quarter, the
Bank's earning assets grew more than $14,100,000 million over the prior year's
second quarter, netting the higher interest income. At the same time, interest
expense shrank $89,000 for the quarter as the cost of funds fell 27 points to
2.21%. Therefore, net interest income rose $201,000 for the comparable period.
Nine month results paralleled the quarterly performance, with interest income
increasing $41,000 or $5,000 less on a taxable equivalent basis, as interest
expense fell even further, decreasing $452,000 for the nine months. This left
net interest margin $493,000 higher for the nine months, or $448,000 higher on a
taxable equivalent basis.
The provision for loan losses was $430,000 for the third quarter of 2004 and
$465,000 for 2003. The provision was $1,132,000 for the nine-month period in
2004 compared to $1,090,000 in 2003. That left the provision $35,000 lower in
the third quarter, and $42,000 higher for the nine-month values in 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 $64,000 higher than last year and
$95,000 higher for the nine 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 $236,000 more for
the third quarter 2004 than in 2003, and $451,000 higher for the nine month
periods ended September 30, 2004. Net interest income after the provision is a
measurement of how well the Bank has weathered changes in the interest rate
environment and variances in the quality of the assets in its portfolios. In
light of the sustained low-rate interest environment and rise in consumer debt
burden, the Bank has held its own in the face of such adversity.
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Three months Ended September 30,
---------------------------------------------------------------------
2004 2003
-------------------------------- --------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
----------- -------- ---------- ---------- -------- ----------
($ in thousands)
Securities (1) $ 57,607 $ 691 4.77% $ 47,387 $ 578 4.84%
Loans (2) 206,984 3,629 6.97 203,090 3,655 7.14
----------- -------- ---------- --------
Total interest-earning assets 264,591 4,320 6.49 250,477 4,233 6.71
Other assets 16,662 17,063
----------- ----------
Total assets $ 281,253 $ 267,540
=========== ==========
Deposits - interest bearing $ 219,375 1,152 2.09% $ 212,376 1,271 2.38%
Borrowed funds 18,834 169 3.57 12,827 138 4.27
----------- -------- ---------- --------
Total interest-bearing deposits $ 238,209 1,321 2.21 $ 225,203 1,409 2.48
and borrowings
Noninterest-bearing demand deposits 20,208 19,224
Other liabilities 1,356 1,685
Shareholder's equity 21,480 21,428
----------- ----------
Total liabilities and
shareholders' equity $ 281,253 $ 267,540
=========== ==========
Net interest income $ 2,999 $ 2,824
======== ========
Interest rate spread 4.29% 4.22%
Net interest margin (3) 4.51% 4.47%
(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 $111,000 and $137,000 for 2004
and 2003.
(2) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $205,000 and $170,000 and deferred dealer
reserve expense of $58,000 and $87,000 in 2004 and 2003.
(3) Net interest income as a percentage of average interest-earning assets.
17.
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Nine months Ended September 30,
---------------------------------------------------------------------
2004 2003
---------------------------------- ---------------------------------
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
----------- -------- ---------- ---------- -------- ----------
($ in thousands)
Securities (1) $ 55,575 $ 1,964 4.72% $ 46,278 $ 1,694 4.89%
Loans (2) 202,397 10,578 6.98 199,101 10,853 7.29
----------- -------- ---------- --------
Total interest-earning assets 257,972 12,542 6.49 245,379 12,547 6.84
Other assets 17,347 17,691
----------- ----------
Total assets $ 275,319 $ 263,070
=========== ==========
Deposits - interest bearing $ 216,369 3,378 2.09% $ 207,335 3,860 2.49%
Borrowed funds 14,532 437 4.02 12,634 408 4.32
----------- -------- ---------- --------
Total interest-bearing deposits $ 230,901 3,815 2.21 $ 219,969 4,268 2.59
and borrowings
Noninterest-bearing demand deposits 21,431 19,539
Other liabilities 1,502 2,134
Shareholder's equity 21,485 21,428
----------- ----------
Total liabilities and
shareholders' equity $ 275,319 $ 263,070
=========== ==========
Net interest income $ 8,727 $ 8,279
======== ========
Interest rate spread 4.29% 4.25%
Net interest margin (3) 4.52% 4.51%
(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 $342,000 and $388,000 for 2004
and 2003.
(5) Average balance is net of deferred loan fees and loan discounts. Interest
income includes loan fees of $537,000 and $502,000 and deferred dealer
reserve expense of $167,000 and $281,000 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 $115,000 for the third quarter of 2004
compared to the same period in 2003, and $343,000 for the full nine 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 $6,000 for the quarter, and $33,000 for
the nine month period compared to $49,000 for the quarter and $150,000 for the
full nine months in 2003. In addition, the Bank experienced a loss on the sale
of a repossessed asset in 2004, which is reflected in the noninterest expense
numbers.
Total noninterest expense increased $270,000 in the three months of the third
quarter 2004 compared to the same period during 2003 and $537,000 for the full
nine month period. Once again, the increases are consistent throughout the full
nine 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 together represent a large amount of additional
expenses. 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 $25,000 for the quarter and $116,000 for the
full nine month period.
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
$124,000 from 2003 and $313,000 for the full nine months. 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 September 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 $ 127,214 $ 68,072 $ 48,059 $ 9,764 $ 1,319
Borrowed funds 21,000 4,500 5,000 11,500 --
----------- --------- --------- --------- ---------
Total $ 148,214 $ 72,572 $ 53,059 $ 21,264 $ 1,319
=========== ========= ========= ========= =========
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 $ 11,054 $ 7,733 $ 2,936 $ 141 $ 244
Commitments to extend consumer credit 13,345 3,328 619 1,346 8,052
Standby letters of credit 2,937 937 -- -- 2,000
----------- --------- --------- --------- ---------
Total $ 27,336 $ 11,998 $ 3,555 $ 1,487 $ 10,296
=========== ========= ========= ========= =========
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 $1,517,000 at September 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 $6,251,000 at September 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 $4,373,000 dollars in
Cash and Cash Equivalents since December 31, 2003. That decrease in cash
occurred as funds were raised and reemployed in earnings assets. Deposits grew
$1,051,000, as all categories increased except noninterest-bearing demand
accounts. Another $660,000 in net payables were paid. Borrowings from the FHLB
were increased by $11,000,000, $6,000,000 in short-term funds to help finance
loan growth and take advantage of low current rates, and another $5,000,000 of
two-year funds to match-fund the purchase of a $5,000,000 addition to the
investment portfolio. A total of $20,225,000 was purchased for the investment
portfolio, including the $5,000,000 piece, the replacement of $2,934,000 of
maturities and repayments, the sale of $5,525,000 of securities in order to
restructure the portfolio to withstand anticipated market value erosion as rates
work their way back up, and additions to help cover pledging requirements for
increases in public fund deposits. Funds amounting to a net of $296,000 were
raised through the exercise of stock options and the purchase/reissue of
Treasury shares. Dividend payments contributed $671,000 to the reduction in cash
balances. Prior year activity for the first nine months saw Cash grow
$1,887,000. Deposits grew $8,985,000, mostly in public funds and brokered
accounts, which in turn required the purchase of more securities to handle the
pledging obligations. $25,869,000 of securities were either sold, matured, or
paid down, leading to replacement purchases of a total of $31,562,000 including
the extra for the public fund pledging. $92,000 was raised from the exercising
of stock options, but net equity raised declined since $174,000 of previously
purchased Treasury shares were issued to cover the purchases. Earnings of
$1,408,000 were partially offset by dividends of $663,000.
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, 2004, the Bank's leverage ratio was 7.73% and the risk-based
capital ratio was 10.82%, both of which exceeded the minimum regulatory
requirements to be considered well-capitalized. The Corporation's leverage and
risk-based capital ratios were 7.85% and 10.98% at September 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 September 30, 2003
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: There are no matters required to be reported
under this item.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds:
The following table reflects shares repurchased by the Corporation
during the third quarter, 2004. These shares were purchased as part of
a program approved by the Corporation's Board of Directors in June,
2002. The Corporation has no publicly announced stock repurchase plans
or programs.
TOTAL AVERAGE MAXIMUM NUMBER OF SHARES
NUMBER OF PRICE TOTAL NUMBER OF SHARES THAT MAY YET BE PURCHASED
SHARES PAID PER PURCHASED AS PART OF UNDER THE PLAN
PERIOD PURCHASED SHARE THE PLAN
September, 2004 1,002 $26.50 11,380 68,358
All shares were purchased in open-market transactions. The plan
provides for a maximum repurchase of 10% of the Corporation's common
stock outstanding as of the date of the plan's approval over a period
of five years. Shares not purchased of each year's 2% allocation are
no longer considered for purchase as each anniversary date is reached.
Item 3 - Defaults upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 11, Statement re computation of per share earnings
(reference is hereby made to Note 2 to the Consolidated
Financial Statements on page 7 hereof)
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: 11/10/2004 /s/ Philip W. Kinley
---------------------------------------
(Signature)
Philip W. Kinley
President and Chief Executive Officer
Date: 11/10/2004 /s/ John C. Haller
---------------------------------------
(Signature)
John C. Haller
Senior Vice President and Chief
Financial Officer
24.