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EX-31.1 - COMMERCIAL BANCSHARES INC \OH\ | v193509_ex31-1.htm |
EX-31.2 - COMMERCIAL BANCSHARES INC \OH\ | v193509_ex31-2.htm |
EX-32.1 - COMMERCIAL BANCSHARES INC \OH\ | v193509_ex32-1.htm |
EX-32.2 - COMMERCIAL BANCSHARES INC \OH\ | v193509_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
Quarterly Period ended June 30,
2010. 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
N/A
(Former
Name, Former Address and Former Fiscal Year,
if
Changed Since Last Report)
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 þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one).
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
Reporting Company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
As of
August 12, 2010, the latest practicable date, there were 1,138,497 outstanding
shares of the registrant’s common stock, no par value.
COMMERCIAL
BANCSHARES, INC.
INDEX
Page
|
||
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements (unaudited)
|
|
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
|
13
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
Item
4.
|
Controls
and Procedures
|
23
|
PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
24
|
Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
|
24
|
Item
3.
|
Defaults
Upon Senior Securities
|
24
|
Item
4.
|
Other
Information
|
24
|
Item
5.
|
Exhibits
|
25
|
SIGNATURES
|
26
|
|
EXHIBIT:
|
13a-14(a)
302 Certification
|
|
13a-14(a)
906 Certification
|
|
2.
COMMERCIAL
BANCSHARES, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 4,538 | $ | 4,844 | ||||
Federal
funds sold
|
15,493 | 7,402 | ||||||
Cash
equivalents and federal funds sold
|
20,031 | 12,246 | ||||||
Securities
available for sale
|
37,717 | 36,733 | ||||||
Total
loans
|
222,575 | 228,008 | ||||||
Allowance
for loan losses
|
(2,761 | ) | (2,744 | ) | ||||
Loans,
net
|
219,814 | 225,264 | ||||||
Premises
and equipment, net
|
7,769 | 7,983 | ||||||
Accrued
interest receivable
|
1,134 | 1,147 | ||||||
Other
assets
|
10,244 | 10,907 | ||||||
Total
assets
|
$ | 296,709 | $ | 294,280 | ||||
LIABILITIES
|
||||||||
Deposits
|
||||||||
Noninterest
bearing demand
|
$ | 25,516 | $ | 31,385 | ||||
Interest
bearing demand
|
101,079 | 94,364 | ||||||
Savings
and time deposits
|
101,007 | 101,660 | ||||||
Time
deposits $100,000 and greater
|
43,321 | 37,300 | ||||||
Total
deposits
|
270,923 | 264,709 | ||||||
FHLB
advances
|
— | 5,000 | ||||||
Accrued
interest payable
|
229 | 239 | ||||||
Other
liabilities
|
2,101 | 1,637 | ||||||
Total
liabilities
|
273,253 | 271,585 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Common
stock, no par value: 4,000,000 shares authorized,
|
||||||||
1,181,038
shares issued in 2010 and 2009
|
11,284 | 11,266 | ||||||
Retained
earnings
|
13,128 | 12,278 | ||||||
Unearned
compensation
|
(26 | ) | (26 | ) | ||||
Deferred
compensation plan shares, at cost:
|
||||||||
24,469
shares in 2010, and 22,702 shares in 2009
|
(509 | ) | (494 | ) | ||||
Treasury
stock: 42,541 shares in 2010 and 2009
|
(1,163 | ) | (1,163 | ) | ||||
Accumulated
other comprehensive income
|
742 | 834 | ||||||
Total
shareholders' equity
|
23,456 | 22,695 | ||||||
Total
liabilities and shareholders' equity
|
$ | 296,709 | $ | 294,280 |
See notes
to the consolidated financial statements.
3.
COMMERCIAL
BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest income
|
||||||||||||||||
Interest
and fees on loans
|
$ | 3,579 | $ | 3,425 | $ | 7,151 | $ | 6,799 | ||||||||
Interest
on securities:
|
||||||||||||||||
Taxable
|
160 | 181 | 318 | 380 | ||||||||||||
Nontaxable
|
177 | 189 | 357 | 382 | ||||||||||||
Federal
funds sold
|
11 | 8 | 18 | 14 | ||||||||||||
Total
interest income
|
3,927 | 3,803 | 7,844 | 7,575 | ||||||||||||
Interest
expense
|
||||||||||||||||
Interest
on deposits
|
912 | 1,240 | 1,840 | 2,624 | ||||||||||||
Interest
on borrowings
|
29 | 42 | 71 | 83 | ||||||||||||
Total
interest expense
|
941 | 1,282 | 1,911 | 2,707 | ||||||||||||
Net
interest income
|
2,986 | 2,521 | 5,933 | 4,868 | ||||||||||||
Provision
for loan losses
|
280 | 332 | 525 | 615 | ||||||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses
|
2,706 | 2,189 | 5,408 | 4,253 | ||||||||||||
Noninterest
income
|
||||||||||||||||
Service
fees and overdraft charges
|
434 | 446 | 853 | 861 | ||||||||||||
Gains
(losses): repossessed asset sales, net
|
(56 | ) | (24 | ) | (191 | ) | (22 | ) | ||||||||
Other
income
|
173 | 170 | 317 | 315 | ||||||||||||
Total
noninterest income
|
551 | 592 | 979 | 1,154 | ||||||||||||
Noninterest
expense
|
||||||||||||||||
Salaries
and employee benefits
|
1,296 | 1,276 | 2,596 | 2,549 | ||||||||||||
Premises
and equipment
|
300 | 379 | 642 | 781 | ||||||||||||
OREO
and miscellaneous loan expense
|
136 | 73 | 180 | 99 | ||||||||||||
Professional
fees
|
99 | 135 | 217 | 231 | ||||||||||||
Data
processing
|
62 | 68 | 125 | 131 | ||||||||||||
Software
maintenance
|
78 | 73 | 152 | 143 | ||||||||||||
Advertising
and promotional
|
53 | 63 | 102 | 110 | ||||||||||||
FDIC
deposit insurance
|
140 | 275 | 278 | 370 | ||||||||||||
Franchise
tax
|
71 | 69 | 141 | 138 | ||||||||||||
Other
operating expense
|
294 | 298 | 559 | 586 | ||||||||||||
Total
noninterest expense
|
2,529 | 2,709 | 4,992 | 5,138 | ||||||||||||
Income
before income taxes
|
728 | 72 | 1,395 | 269 | ||||||||||||
Income
tax expense (credit)
|
171 | (57 | ) | 320 | (71 | ) | ||||||||||
Net
income
|
$ | 557 | $ | 129 | $ | 1,075 | $ | 340 | ||||||||
Basic
earnings per common share
|
$ | 0.49 | $ | 0.11 | $ | 0.94 | $ | 0.30 | ||||||||
Diluted
earnings per common share
|
$ | 0.49 | $ | 0.11 | $ | 0.94 | $ | 0.30 |
See notes
to the consolidated financial statements.
4.
COMMERCIAL
BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES
IN
SHAREHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except per
share data)
Three Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Balance
at beginning of period
|
$ | 22,936 | $ | 21,804 | ||||
Comprehensive
income
|
||||||||
Net
income
|
557 | 129 | ||||||
Change
in net unrealized gain (loss) on securities
|
||||||||
available
for sale, net of reclassification and tax effects
|
73 | (92 | ) | |||||
Total
comprehensive income
|
630 | 37 | ||||||
Stock-based
compensation
|
4 | — | ||||||
Dividends
paid ($0.10 and $0.19 per share in 2010 and 2009)
|
(114 | ) | (216 | ) | ||||
Balance
at end of period
|
$ | 23,456 | $ | 21,625 |
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Balance
at beginning of period
|
$ | 22,695 | $ | 21,305 | ||||
Comprehensive
income
|
||||||||
Net
income
|
1,075 | 340 | ||||||
Change
in net unrealized gain (loss) on securities
|
||||||||
available
for sale, net of reclassification and tax effects
|
(92 | ) | 412 | |||||
Total
comprehensive income
|
983 | 752 | ||||||
Stock-based
compensation
|
6 | — | ||||||
Dividends
paid ($0.20 and $0.38 per share in 2010 and 2009)
|
(228 | ) | (432 | ) | ||||
Balance
at end of period
|
$ | 23,456 | $ | 21,625 |
See notes
to the consolidated financial statements.
5.
COMMERCIAL
BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
($ in thousands)
|
||||||||
Cash flows from
operating activities
|
||||||||
Net
income
|
$ | 1,075 | $ | 340 | ||||
Adjustments
|
1,186 | 462 | ||||||
Net
cash from operating activities
|
2,261 | 802 | ||||||
Cash
flows from investing activities
|
||||||||
Purchases
of securities available for sale
|
(4,000 | ) | (4,047 | ) | ||||
Calls,
maturities and repayments on available for sale securities
|
2,772 | 3,664 | ||||||
Net
change in loans
|
5,320 | (9,217 | ) | |||||
Proceeds
from sale of OREO and repossessed assets
|
571 | 559 | ||||||
Additions
to premises and equipment
|
(125 | ) | (580 | ) | ||||
Net
cash from investing activities
|
4,538 | (9,621 | ) | |||||
Cash
flows from financing activities
|
||||||||
Net
change in deposits
|
6,214 | 10,625 | ||||||
Repayments
on other borrowings
|
(5,000 | ) | — | |||||
Cash
dividends paid
|
(228 | ) | (432 | ) | ||||
Net
cash from financing activities
|
986 | 10,193 | ||||||
Net
change in cash, cash equivalents and federal funds sold
|
7,785 | 1,374 | ||||||
Cash,
cash equivalents and federal funds sold at beginning of
period
|
12,246 | 8,934 | ||||||
Cash,
cash equivalents and federal funds sold at end of period
|
$ | 20,031 | $ | 10,308 | ||||
Supplemental
disclosures
|
||||||||
Cash
paid for interest
|
$ | 1,921 | $ | 2,763 | ||||
Cash
paid for income taxes
|
90 | 192 | ||||||
Non-cash
transfer of loans to OREO and repossessed assets
|
255 | 1,565 |
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”). The Bank also owns a 49.9% interest in Beck Title
Agency, Ltd., which is accounted for by using the equity method of accounting.
All significant inter-company balances and transactions have been eliminated in
consolidation.
The
condensed consolidated financial statements have been prepared without
audit. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the Corporation’s
financial position at June 30, 2010, and the results of operations and changes
in cash flows for the periods presented have been made.
In July
2010, FASB issued a statement which expands disclosures about credit quality of
financing receivables and allowance for credit losses. The standard
will require the Corporation to expand disclosures about the credit quality of
its loans and the related reserves against them. The extra
disclosures will include details on past due loans, credit quality indicators
and the modification of loans. The Corporation will adopt the
standard beginning with its December 31, 2010 financial statements.
Certain
information and footnote disclosures typically included in financial statements
prepared in accordance with U.S. generally accepted principles have been
omitted. The Annual Report for the year ended December 31, 2009,
contains consolidated financial statements and related footnote disclosures,
which should be read in conjunction with the accompanying consolidated financial
statements. The results of operations for the period ended June 30,
2010 are not necessarily indicative of the operating results for the full year
or any future interim period.
NOTE
2 – EARNINGS PER SHARE
Weighted
average shares used in determining basic and diluted earnings per share for the
three months ended June 30:
2010
|
2009
|
|||||||
Weighted
average shares outstanding during the period
|
1,138,497 | 1,136,397 | ||||||
Dilutive
effect of exercisable stock options
|
0 | 0 | ||||||
Weighted
average shares considering dilutive effect
|
1,138,497 | 1,136,397 | ||||||
Anti-dilutive
stock options not considered in computing
|
||||||||
diluted
earnings per share
|
20,230 | 6,602 |
Weighted
average shares used in determining basic and diluted earnings per share for the
six months ended June 30:
2010
|
2009
|
|||||||
Weighted
average shares outstanding during the period
|
1,138,497 | 1,136,397 | ||||||
Dilutive
effect of exercisable stock options
|
0 | 0 | ||||||
Weighted
average shares considering dilutive effect
|
1,138,497 | 1,136,397 | ||||||
Anti-dilutive
stock options not considered in computing
|
||||||||
diluted
earnings per share
|
20,230 | 6,602 |
7.
COMMERCIAL
BANCSHARES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – LOANS
Loans (in thousands):
|
June 30, 2010
|
December 31, 2009
|
||||||
Commercial
and agricultural loans
|
$ | 163,242 | $ | 168,611 | ||||
Residential
real estate loans
|
10,382 | 9,296 | ||||||
Construction
loans
|
3,001 | 2,529 | ||||||
Consumer
loans
|
23,552 | 23,721 | ||||||
Home
equity loans
|
21,929 | 22,685 | ||||||
Indirect
finance loans
|
469 | 1,166 | ||||||
Total
loans
|
$ | 222,575 | $ | 228,008 |
Total
loans included loans to farmers for agricultural purposes of approximately
$27,310,000 and $25,602,000 at June 30, 2010 and December 31, 2009,
respectively.
Activity
in the allowance for loan losses (in thousands) for the three
months ended June 30:
2010
|
2009
|
|||||||
Beginning
balance
|
$ | 2,681 | $ | 2,348 | ||||
Provision
for loan loss
|
280 | 332 | ||||||
Loans
charged-off
|
(231 | ) | (304 | ) | ||||
Recoveries
of loans previously charged-off
|
31 | 26 | ||||||
Ending
balance
|
$ | 2,761 | $ | 2,402 |
Activity
in the allowance for loan losses (in thousands) for the six
months ended June 30:
2010
|
2009
|
|||||||
Beginning
balance
|
$ | 2,744 | $ | 2,483 | ||||
Provision
for loan loss
|
525 | 615 | ||||||
Loans
charged-off
|
(553 | ) | (751 | ) | ||||
Recoveries
of loans previously charged-off
|
45 | 55 | ||||||
Ending
balance
|
$ | 2,761 | $ | 2,402 |
Impaired
loans (in
thousands):
June 30, 2010
|
December 31, 2009
|
|||||||
Period-end
loans with no allocated allowance
|
$ | 783 | $ | 943 | ||||
Period-end
loans with allocated allowance
|
747 | 785 | ||||||
Total
|
$ | 1,530 | $ | 1,728 | ||||
Amount
of allowance for loan loss allocated
|
$ | 81 | $ | 88 |
8.
COMMERCIAL
BANCSHARES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Non-performing
loans (in
thousands):
June 30, 2010
|
December 31, 2009
|
|||||||
Loans
past due over 90 days still on accrual
|
$ | 0 | $ | 0 | ||||
Nonaccrual
loans
|
1,671 | 2,641 |
The
impaired and non-performing loans have been considered in management’s
evaluation of the adequacy of the allowance for loan losses.
NOTE
4 – OTHER COMPREHENSIVE INCOME (LOSS)
Other
comprehensive income (loss) for the three months ended June 30:
2010
|
2009
|
|||||||
($ in thousands)
|
||||||||
Unrealized
holding gains (losses) on securities available for sale
|
$ | 110 | $ | (139 | ) | |||
Less:
Reclassification adjustment for losses (gains) recognized in
income
|
— | — | ||||||
Net
unrealized holding gains (losses)
|
110 | (139 | ) | |||||
Tax
effect
|
37 | (47 | ) | |||||
Other
comprehensive income (loss)
|
$ | 73 | $ | (92 | ) |
Other
comprehensive income (loss) for the six months ended June 30:
2010
|
2009
|
|||||||
($ in thousands)
|
||||||||
Unrealized
holding gains (losses) on securities available for sale
|
$ | (139 | ) | $ | 624 | |||
Less:
Reclassification adjustment for losses (gains) recognized in
income
|
— | — | ||||||
Net
unrealized holding gains (losses)
|
(139 | ) | 624 | |||||
Tax
effect
|
(47 | ) | 212 | |||||
Other
comprehensive income (loss)
|
$ | (92 | ) | $ | 412 |
NOTE
5 – FAIR VALUES AND MEASUREMENTS OF FINANCIAL INSTRUMENTS
The
following table presents information about the Corporation’s assets and
liabilities measured at fair value on a recurring basis as of June 30, 2010, and
the valuation techniques used by the Corporation to determine those fair
values.
In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability
to access.
Fair
values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices
for similar assets and liabilities in active markets, and other inputs such as
interest rates and yield curves that are observable at commonly quoted
intervals.
Level 3
inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
9.
COMMERCIAL
BANCSHARES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Corporation’s assessment of the significance of particular inputs
to these fair value measurements requires judgment and considers factors
specific to each asset or liability.
Disclosures
concerning assets and liabilities measured at fair value are as
follows:
Assets
and liabilities, (in
thousands) measured at fair value on a recurring basis for the periods
shown:
Quoted Prices in
|
Significant
|
Significant
|
||||||||||||||
Active Markets
|
Observable
|
Unobservable
|
||||||||||||||
For Identical
|
Inputs
|
Inputs
|
||||||||||||||
Assets (Level 1)
|
(Level 2)
|
(Level 3)
|
Balance
|
|||||||||||||
June
30, 2010
|
||||||||||||||||
Assets: Securities
available for sale
|
$ | — | $ | 37,717 | $ | — | $ | 37,717 | ||||||||
Liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
December
31, 2009
|
||||||||||||||||
Assets: Securities
available for sale
|
$ | — | $ | 36,733 | $ | — | $ | 36,733 | ||||||||
Liabilities
|
$ | — | $ | — | $ | — | $ | — |
Securities
characterized as having Level 2 inputs consist of obligations of U.S. government
and federal agencies, securities from government-sponsored organizations and
obligations of state and political subdivisions.
The
Corporation also has assets that, under certain conditions, are subject to
measurement at fair value on a non-recurring basis. Such assets
consist primarily of impaired loans and other real estate owned. The
Corporation has estimated the fair values of these assets using Level 3 inputs,
specifically, discounted cash flow projections.
Impaired
loans are loans for which, based on current information and events, it is
probable that the creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are
subject to non-recurring fair value adjustments to reflect (1) partial write
downs that are based on the observable market price or current appraised value
of the collateral, or (2) the full charge-off of the loan carrying
value.
Impaired
loans valued using Level 3 inputs totaled $1,449,000 and $1,640,000 at June 30,
2010 and December 31, 2009, respectively. The Corporation estimates
the fair value of the loans based on the present value of expected future cash
flows using management’s best estimate of key assumptions. These
assumptions include future payment ability, timing of payment streams and
estimated realizable values of available collateral (typically based on outside
appraisals).
Other
real estate owned (“OREO”) acquired through or instead of loan foreclosure is
initially recorded at fair value less costs to sell when acquired, establishing
a new cost basis. Management considers third party appraisals as well
as independent fair market value assessments from realtors or persons involved
in selling OREO when determining the fair value of particular
properties. Accordingly, the valuations of OREO and repossessed
assets are subject to significant judgment. If fair value declines
subsequent to foreclosure, a valuation allowance is recorded through
expense. Operating costs incurred after acquisition are
expensed. OREO and other repossessed assets included in other assets
totaled $362,000 and $1,142,000 at June 30, 2010 and December 31, 2009,
respectively.
10.
COMMERCIAL
BANCSHARES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
estimated fair values of financial instruments (in thousands):
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||||
Financial assets
|
||||||||||||||||
Cash
equivalents and federal funds sold
|
$ | 20,031 | $ | 20,031 | $ | 12,246 | $ | 12,246 | ||||||||
Investment
securities available for sale
|
37,717 | 37,717 | 36,733 | 36,733 | ||||||||||||
Loans,
net of allowance for loan losses
|
219,814 | 231,754 | 225,264 | 223,395 | ||||||||||||
Accrued
interest receivable
|
1,134 | 1,134 | 1,147 | 1,147 | ||||||||||||
Financial
liabilities
|
||||||||||||||||
Demand
and savings deposits
|
$ | (142,337 | ) | $ | (142,337 | ) | $ | (140,373 | ) | $ | (140,373 | ) | ||||
Time
deposits
|
(128,586 | ) | (128,125 | ) | (124,336 | ) | (124,390 | ) | ||||||||
FHLB
advances
|
— | — | (5,000 | ) | (5,001 | ) | ||||||||||
Accrued
interest payable
|
(229 | ) | (229 | ) | (239 | ) | (239 | ) |
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate the
value:
|
·
|
Cash equivalents and federal
funds sold – The carrying amount is a reasonable estimate of fair
value.
|
|
·
|
Investment securities –
Fair value is based on quoted market prices in active markets for
identical assets or similar assets in active
markets.
|
|
·
|
Loans – Fair value is
estimated by discounting the future cash flows using the current rate at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining
maturities.
|
|
·
|
Accrued interest receivable
– The fair value approximates the carrying
value.
|
|
·
|
Demand and savings
deposits – Fair value is the amount payable on demand at the
reporting date.
|
|
·
|
Time deposits – Fair
value is estimated using the rates currently offered for deposits of
similar remaining maturities.
|
|
·
|
FHLB advances – Fair
value is estimated by discounting the future cash flows using the current
rate at which similar borrowings with similar remaining maturities could
be made.
|
|
·
|
Accrued interest payable
– The fair value approximates the carrying
value.
|
NOTE
6 – STOCK OPTIONS
The
Corporation has two stock option plans, the 1997 Stock Option Plan and the 2009
Incentive Stock Option Plan. No additional grants may be made under
the 1997 Stock Option Plan. The 2009 Plan, which is shareholder
approved, permits the grant of stock options, restricted stock and certain other
stock-based awards for up to 150,000 shares. At June 30, 2010, a
total of 129,800 shares remained available for issuance. All stock
options have an exercise price that is equal to the closing market value of the
Corporation’s stock on the date the options are granted. The
Corporation measures compensation cost at the grant date based on the fair value
of the award. The fair value of each option award is estimated on the
date of grant using an option valuation model that uses assumptions for the
following: dividend yield, expected volatility, risk-free interest
rate, annual forfeiture rate, expected life of options and weighted average
grant-date fair value.
11.
COMMERCIAL
BANCSHARES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On August
12, 2009, a total of 18,100 stock options with an exercise price of $12.30 were
granted to executive officers and certain key employees. The weighted
average fair value of options granted was $2.08 per share. These
options will vest over three years and have a ten year maximum
term. At June 30, 2010, unrecognized compensation related to stock
options was $27,000. This cost is expected to be recognized as
compensation expense over a remaining period of approximately 2.2
years.
On August
12, 2009, a total of 2,100 restricted stock awards were granted to executive
officers with a grant date fair value of $12.30. Restricted stock
awards are recorded as deferred compensation, a component of shareholders’
equity, at fair value at the date of the grant and amortized to compensation
expense over the vesting period. At June 30, 2010, the unrecognized
compensation cost for restricted awards was $18,000 which will be recognized as
compensation expense over a remaining period of approximately 2.2
years.
12.
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 review presents management’s discussion and analysis of the
consolidated financial condition of Commercial Bancshares, Inc. and its wholly
owned subsidiaries, Commercial Savings Bank and Commercial Financial Insurance
Agency, LTD at June 30, 2010, compared to December 31, 2009, and the
consolidated results of operations for the three and six-month periods ended
June 30, 2010 compared to the same periods in 2009. The purpose of this
discussion is to provide the reader with a more thorough understanding of the
consolidated financial statements and related footnotes.
Despite
the economic environment adversely impacting the banking industry, the
Corporation recorded net income of $1,075,000 or $0.94 basic and diluted
earnings per share for the six-month period ended June 30, 2010, compared with
$340,000 or $0.30 basic and diluted earnings per share for the same period in
2009. Return on average assets and return on average equity was 0.73%
and 9.33%, respectively, in 2010, compared to 0.25% and 3.12% in 2009. The
increase in earnings was primarily due to an improvement in the Corporation’s
net interest margin, due in large part, to lower funding costs as indicated by
an 86 basis point decline in the cost of interest-bearing liabilities from the
second quarter of 2009 and partially offset by a 39 basis point decline in
interest-earning assets.
The
Corporation has not been unaffected by the weakening economic environment as
evidenced by substantial increases in non-performing assets and delinquencies
beginning in the latter half of 2008 and continuing through most of
2009. Profitability was impacted by increased costs as provisions
were made for potential problem credits and charged-off loans, along with
impairment adjustments made on properties held in OREO as well as additional
expense related to the ongoing cost to maintain foreclosed
properties. Conversely, measures were taken to protect profitability
by reducing controllable expenses such as a hiring freeze and setting interest
rate floors on all renewing commercial loans. The Corporation’s
efficiency ratio, on a fully taxable equivalent basis, was 70.44% for the six
months ended June 30, 2010, compared to 82.85% for the same period in
2009.
The
Corporation is designated as a financial holding company by the Federal Reserve
Bank of Cleveland. This status can help the Corporation 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 array 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.
Management
believes there have been no changes with respect to its determinations regarding
the Corporation’s critical accounting policies as disclosed in the Corporation’s
annual report on Form 10-K for the fiscal year ended December 31,
2009.
13.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $2,429,000 or 0.83% to $296,709,000 at June 30, 2010, from
$294,280,000 at December 31, 2009. Interest-earning bank balances,
which include the Bank’s deposits at the Federal Reserve Bank and federal funds
sold, increased $8,091,000, primarily attributable to excess cash generated by a
decrease in net loans of $5,450,000 and an increase in deposit balances of
$6,214,000, partially offset by the repayment of FHLB advances of
$5,000,000.
Securities
available for sale are carried at fair value, with unrealized gains or losses
based on the difference between amortized cost and fair value, reported net of
deferred tax, as accumulated other comprehensive income (loss), a separate
component of shareholders’ equity. Declines in the fair value of
individual available for sale securities below their cost that are
other-than-temporary result in write downs of the individual securities to their
fair value. Securities available for sale, increased $984,000, or
2.68%, to $37,717,000 at June 30, 2010 from $36,733,000 at year-end 2009,
primarily resulting from purchases of U.S. government-sponsored agencies of
$4,000,000 offset with calls, maturities and repayments along with an adjustment
for the decline in market value.
Total
loans receivable, before allowance for loan losses, decreased $5,433,000 or
2.38%, to $222,575,000 at June 30, 2010 from $228,008,000 at December 31,
2009. This decrease was primarily driven by a decline in commercial
loans of $7,077,000 or 4.95%, due to a competitive rate environment and a
continued softening in loan demand brought on by the impact of the recent
recession. The decrease in commercial loans was partially offset with
an increase of $1,708,000 in agricultural loans, an increase of $1,558,000 in
real estate loans and an increase of $636,000 in consumer loans.
The
Corporation’s loan portfolio represents its largest and highest yielding
assets. It also contains the most risk of loss. This risk
is due mainly to changes in borrowers’ primary repayment capacity, general
economic conditions and to collateral values that are subject to change over
time. These risks are managed with specific underwriting guidelines,
loan review procedures, third party reviews and continued personnel
training. Executive management continues to monitor the current
downturn in the real estate market as well as the overall economy and has
implemented the following measures to proactively manage credit risk in the loan
portfolios:
|
1)
|
Reviewed
all underwriting guidelines for various loan portfolios and have
strengthened underwriting guidelines for 1-4 family investment properties
and home equity loans to address identified
risks.
|
|
2)
|
Evaluated
outside loan review parameters, engaging the services of a
well-established firm to continue with such loan review, addressing not
only specific loans but underwriting, analysis, documentation, credit
evaluation and risk identification.
|
|
3)
|
Increased
the frequency of internal reviews of past due and delinquent loans to
assess probable credit risks early in the delinquency process to minimize
losses.
|
|
4)
|
Aggressively
seeking ownership and control, when appropriate, of real estate properties
which would otherwise go through time–consuming and costly foreclosure
proceedings to effectively control the disposition of such
collateral.
|
14.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Although
executive management continues to aggressively engage in other loss mitigation
techniques such as tightening underwriting standards and lowering LTV ratios on
in-house real estate lending, a prolonged economic slowdown would place
significant pressure on consumers and businesses in the Corporation’s local
markets.
The
allowance for loan losses totaled $2,761,000 and $2,744,000 at June 30, 2010 and
December 31, 2009, respectively, reflecting an increase of $17,000 or
0.62%. The ratio of allowance for loan losses to total loans was
1.24% at June 30, 2010 compared to 1.20% at year-end 2009. The
Corporation provided $525,000 to the allowance for loan losses during 2010 to
maintain the balance at an adequate level following net charge-offs of
$508,000.
The
following summarizes the charge-off and recovery activity for the six-month
period ended June 30, 2010 and year-end 2009.
Net Charge-offs
|
||||||||||||||||||||||||
Six Months Ended June 30, 2010
|
as a Percent of
|
|||||||||||||||||||||||
YTD
|
Annualized
|
|||||||||||||||||||||||
Total
|
Average
|
Net
|
||||||||||||||||||||||
(Amounts in thousands)
|
Charge-offs
|
Recoveries
|
Net
|
Charge-offs
|
Loans
|
Charge-offs
|
||||||||||||||||||
Commercial
|
332 | 7 | 325 | 63.90 | % | 0.15 | % | 0.29 | % | |||||||||||||||
Real
estate
|
— | — | — | 0.00 | % | 0.00 | % | 0.00 | % | |||||||||||||||
Consumer
|
105 | 14 | 91 | 17.99 | % | 0.04 | % | 0.08 | % | |||||||||||||||
Indirect
finance
|
37 | 22 | 15 | 2.88 | % | 0.01 | % | 0.02 | % | |||||||||||||||
Home
equity
|
79 | 2 | 77 | 15.23 | % | 0.03 | % | 0.07 | % | |||||||||||||||
Total
|
553 | 45 | 508 | 100.00 | % | 0.23 | % | 0.46 | % |
Net Charge-offs
|
||||||||||||||||||||
Year-End December 31, 2009
|
as a Percent of
|
|||||||||||||||||||
YTD
|
||||||||||||||||||||
Total
|
Average
|
|||||||||||||||||||
(Amounts in thousands)
|
Charge-offs
|
Recoveries
|
Net
|
Charge-offs
|
Loans
|
|||||||||||||||
Commercial
|
579 | 4 | 575 | 47.03 | % | 0.27 | % | |||||||||||||
Real
estate
|
96 | — | 96 | 7.82 | % | 0.05 | % | |||||||||||||
Consumer
|
305 | 34 | 271 | 22.14 | % | 0.13 | % | |||||||||||||
Indirect
finance
|
155 | 54 | 101 | 8.30 | % | 0.05 | % | |||||||||||||
Home
equity
|
180 | — | 180 | 14.71 | % | 0.09 | % | |||||||||||||
Total
|
1,315 | 92 | 1,223 | 100.00 | % | 0.58 | % |
Total
nonaccrual loans were $1,671,000 at June 30, 2010, or 0.75% of total loans,
compared to $2,641,000, or 1.16%, at December 31, 2009. The allowance
for loan losses specifically related to impaired loans at June 30, 2010 and
December 31, 2009 was $81,000 and $88,000, respectively, having principal
balances of $747,000 and $785,000. The gross interest income that
would have been recorded for the six months ended June 30, 2010, had nonaccrual
loans been current totaled $94,000. The Corporation recognizes income on
nonaccrual loans using the cash basis method. Further, interest
income on impaired loans is recognized only after all past due and current
principal payments have been made. For the current year, interest
payments of $17,000 have been recorded on impaired loans.
15.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other
assets totaled $19,147,000 at June 30, 2010, a decrease of $890,000 or 4.44%
from $20,037,000 at year-end 2009. The decrease in other assets is
primarily due to a decrease of $781,000 in OREO and repossessed assets, a
decrease of $214,000 in premises and equipment, offset by an increase of
$140,000 in the cash surrender value of company-owned life
insurance. A total of nine properties have been sold from OREO during
the first six months of 2010. The decrease in premises and equipment
reflects depreciation expense of $326,000 offset with capital purchases of
$112,000.
Interest-bearing
deposit balances increased $12,083,000 or 5.18% to $245,407,000 at June 30, 2010
from $233,324,000 at December 31, 2009, primarily in interest-bearing demand and
money market accounts with increases of $5,416,000 and $1,299,000, respectively,
as well as an increase of $6,021,000 in large certificate of deposit
accounts. Noninterest-bearing accounts decreased $5,869,000 while
FHLB advances decreased $5,000,000 reflecting the payoff of borrowed
funds.
Shareholders’
equity increased $761,000 or 3.35% during the six months ended June 30, 2010,
primarily resulting from earnings of $1,075,000 less dividends paid to
Shareholders of $228,000 and a slight decrease in accumulated other
comprehensive income of $92,000 due to the decline in the market value of
securities available for sale, net of tax. Quarterly cash dividends
of $0.10 per share were paid in each quarter of 2010. The dividend
payout ratio was 21.19% of net income for the six months ended June 30,
2010. The Corporation’s ratio of total shareholders’ equity to total
assets was 7.91% at June 30, 2010 compared to 7.71% at December 31,
2009.
RESULTS
OF OPERATIONS
The
Corporation recorded net income for the second quarter of $557,000 or $0.49
basic and diluted earnings per share compared to net income of $129,000 or $0.11
basic and diluted earnings per share for the second quarter of
2009. Net income for the six months ended June 30, 2010 was
$1,075,000 or $0.94 basic and diluted earnings per share compared to $340,000 or
$0.30 basic and diluted earnings per share for the same period last
year.
Net
interest income for the three and six months ended June 30, 2010 was $2,986,000
and $5,933,000, respectively, an increase of $465,000 or 18.45% and $1,065,000
or 21.88% over the comparable periods a year ago. Net interest income
on a taxable equivalent basis was $3,075,000 and $2,614,000 for the three months
ended June 30, 2010 and 2009, respectively, reflecting an increase in net
interest income of $461,000 or 17.64%. Net interest on a taxable
equivalent basis was $6,112,000 and $5,053,000 for the six months ended June 30,
2010 and 2009, respectively, reflecting an increase in net interest income of
$1,059,000 or 20.96%. The increase in net interest income for both
the three and six-month periods ended June 30, 2010 was largely driven by
increases in average interest-earning assets and average deposits compared to
the same periods a year ago. Furthermore, net interest income for
both the three and six-month periods was positively impacted by an increase in
loans as a percentage of assets and lower rates paid on average
deposits.
Interest
income on a taxable equivalent basis was $4,016,000 during the second quarter of
2010, an increase of $120,000 or 3.08%, compared to $3,896,000 for the second
quarter of 2009. The average tax-equivalent yield earned in the
second quarter of 2010 was 5.80%, a decrease of 41 basis points from 6.21%
earned during the same period in 2009. Average loans, comprising
78.99% and 79.50% of average earning assets in the three months ended June 30,
2010 and 2009, respectively, increased $19,272,000 or 9.63%, while the average
tax-equivalent yield earned decreased 32 basis points. The decline in
interest income on loans was largely due to the downward re-pricing of variable
rate loans. Average federal funds sold, comprising 7.53% and 4.91% of
average earning assets in the second quarter of 2010 and 2009, respectively,
increased $8,553,000, while the average yield earned decreased 5 basis
points.
16.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Yield Analysis
The
following table presents an analysis of average yields earned on interest
earning assets as well as the average rates paid on interest bearing liabilities
on a fully taxable equivalent basis for the three months ended June
30:
Three Months Ended June 30,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
($ in thousands)
|
balance
|
Interest
|
yield/rate
|
balance
|
Interest
|
yield/rate
|
||||||||||||||||||
Federal
funds sold
|
$ | 20,900 | $ | 11 | 0.21 | % | $ | 12,347 | $ | 8 | 0.26 | % | ||||||||||||
Securities
(1)
|
37,453 | 422 | 4.52 | 39,267 | 459 | 4.69 | ||||||||||||||||||
Loans
(2)
|
219,377 | 3,583 | 6.55 | 200,105 | 3,429 | 6.87 | ||||||||||||||||||
Total
interest earning assets
|
277,730 | 4,016 | 5.80 | % | 251,719 | 3,896 | 6.21 | % | ||||||||||||||||
Other
assets
|
24,278 | 22,847 | ||||||||||||||||||||||
Total
assets
|
$ | 302,008 | $ | 274,566 | ||||||||||||||||||||
Interest
bearing deposits
|
$ | 245,743 | 912 | 1.49 | % | $ | 222,195 | 1,240 | 2.24 | % | ||||||||||||||
Borrowed
funds
|
3,462 | 29 | 3.36 | 5,000 | 42 | 3.37 | ||||||||||||||||||
Total
interest bearing liabilities
|
$ | 249,205 | 941 | 1.51 | % | $ | 227,195 | 1,282 | 2.26 | % | ||||||||||||||
Noninterest
bearing demand deposits
|
27,225 | 23,448 | ||||||||||||||||||||||
Other
liabilities
|
2,161 | 1,818 | ||||||||||||||||||||||
Shareholders’
equity
|
23,417 | 22,105 | ||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 302,008 | $ | 274,566 | ||||||||||||||||||||
Net
interest income
|
$ | 3,075 | $ | 2,614 | ||||||||||||||||||||
Interest
rate spread
|
4.29 | % | 3.95 | % | ||||||||||||||||||||
Net
interest margin (3)
|
4.44 | % | 4.16 | % |
(1)
|
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 a 20% disallowance
of interest expense deductibility under TEFRA rules. The amount
of such adjustment was $89,000 and $93,000 for 2010 and 2009,
respectively.
|
(2)
|
Average
balance is net of deferred loan fees of $54,000 and $63,000 for the three
months ended June 30, 2010 and 2009, respectively, as well as $71,000 and
$421,000 of unearned income for the same years. Interest income
includes loan fees of $136,000 and $168,000 and deferred dealer reserve
expense of $48,000 and $54,000 in 2010 and 2009,
respectively.
|
(3)
|
Net
interest income as a percentage of average interest earning
assets.
|
The
average balance of securities available for sale, comprising 13.49% and 15.60%
of average earning assets in the second quarter of 2010 and 2009, respectively,
decreased $1,814,000, while the average tax-equivalent yield earned decreased 17
basis points. The decrease in the average balance and average yield
on available for sale securities was largely due to elevated prepayment speeds
on mortgage-backed securities and the purchase of short-term cushion
bonds.
Interest
income on a taxable equivalent basis for the six months ended June 30, 2010, was
$8,023,000, an increase of $263,000 or 3.39%, compared to $7,760,000 for the
same period in 2009. During this six-month period in 2010, the
average balance of interest-earning assets increased $25,329,000 or 10.23%,
while the average tax-equivalent yield decreased 39 basis points from the
comparable period in 2009.
17.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Yield
Analysis
The
following table presents an analysis of average yields earned on interest
earning assets as well as the average rates paid on interest bearing liabilities
on a fully taxable equivalent basis for the six months ended June
30:
Six Months Ended June 30,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
($ in thousands)
|
balance
|
Interest
|
yield/rate
|
balance
|
Interest
|
yield/rate
|
||||||||||||||||||
Federal
funds sold
|
$ | 17,207 | $ | 18 | 0.21 | % | $ | 11,036 | $ | 14 | 0.26 | % | ||||||||||||
Securities
(1)
|
36,755 | 847 | 4.65 | 38,496 | 940 | 4.92 | ||||||||||||||||||
Loans
(2)
|
218,915 | 7,158 | 6.59 | 198,016 | 6,806 | 6.93 | ||||||||||||||||||
Total
interest earning assets
|
272,877 | 8,023 | 5.93 | % | 247,548 | 7,760 | 6.32 | % | ||||||||||||||||
Other
assets
|
24,684 | 22,873 | ||||||||||||||||||||||
Total
assets
|
$ | 297,561 | $ | 270,421 | ||||||||||||||||||||
Interest
bearing deposits
|
$ | 240,574 | 1,840 | 1.54 | % | $ | 219,258 | 2,624 | 2.41 | % | ||||||||||||||
Borrowed
funds
|
4,227 | 71 | 3.39 | 5,000 | 83 | 3.35 | ||||||||||||||||||
Total
interest bearing liabilities
|
$ | 244,801 | 1,911 | 1.57 | % | $ | 224,258 | 2,707 | 2.43 | % | ||||||||||||||
Noninterest
bearing demand deposits
|
27,446 | 22,371 | ||||||||||||||||||||||
Other
liabilities
|
2,088 | 1,797 | ||||||||||||||||||||||
Shareholders’
equity
|
23,226 | 21,995 | ||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 297,561 | $ | 270,421 | ||||||||||||||||||||
Net
interest income
|
$ | 6,112 | $ | 5,053 | ||||||||||||||||||||
Interest
rate spread
|
4.36 | % | 3.89 | % | ||||||||||||||||||||
Net
interest margin (3)
|
4.52 | % | 4.12 | % |
(1)
|
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 a 20% disallowance
of interest expense deductibility under TEFRA rules. The amount
of such adjustment was $179,000 and $185,000 for 2010 and 2009,
respectively.
|
(2)
|
Average
balance is net of deferred loan fees of $55,000 and $66,000 for the six
months ended June 30, 2010 and 2009, respectively, as well as $97,000 and
$508,000 of unearned income for the same years. Interest income
includes loan fees of $240,000 and $324,000 and deferred dealer reserve
expense of $91,000 and $116,000 in 2010 and 2009,
respectively.
|
(3)
|
Net
interest income as a percentage of average interest earning
assets.
|
Average
loans, comprising 80.22% and 79.99% of average earning assets for the six months
ended June 30, 2010 and 2009, respectively, increased $20,899,000 or 10.55%,
while the average tax-equivalent yield earned decreased 34 basis points,
resulting from the downward re-pricing of variable rate loans and new loans
originated at lower market rates as well as maturities and repayments of loans
with higher rates. Federal funds sold, comprising 6.31% and 4.46% of
average earning assets for the six months ended June 30, 2010 and 2009,
respectively, increased $6,171,000 or 55.92%, while the average yield earned
decreased 5 basis points.
18.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average
securities available for sale, comprising 13.47% and 15.55% of average earning
assets for the six months ending June 30, 2010 and 2009, respectively, decreased
$1,741,000 or 4.52%, while the average tax-equivalent yield earned decreased 27
basis points. The decrease in securities available for sale was due
in part, to the early calls on U.S. government agencies and the elevated
prepayment speeds on mortgage-backed securities.
During
the second quarter of 2010, interest expense of $941,000, decreased $341,000 or
26.60%, compared to $1,282,000 during the same period in 2009. For
the three months ended June 30, 2010, average interest-bearing liabilities
totaled $249,205,000, an increase of $22,010,000 or 9.69% compared to
$227,195,000 for the three months ended June 30, 2009. The average
interest rate paid in the second quarter of 2010 was 1.51%, a decrease of 75
basis points from 2.26% paid during the same period in 2009. Average
interest-bearing demand deposits, comprising 40.69% and 34.62% of
interest-bearing liabilities during the second quarter of 2010 and 2009,
respectively, increased $22,731,000 or 28.90%, while the average rate paid
decreased 44 basis points. Average time deposits, comprising 51.53%
and 56.49% of interest-bearing liabilities during the second quarter of 2010 and
2009, respectively, increased $62,000 or 0.48%, while the average rate paid
decreased 83 basis points.
Interest
expense for the six months ended June 30, 2010 was $1,911,000, a decrease of
$796,000 or 29.41%, compared to $2,707,000 for the six months ended June 30,
2009. Average interest-bearing liabilities of $244,801,000 and
$224,258,000, for the six months ended June 30, 2010 and 2009, respectively,
increased $20,543,000 or 9.16%, while the average rate paid on outstanding
balances decreased 86 basis points. Average interest-bearing demand
deposits, comprising 40.43% and 33.43% of average interest-bearing liabilities
for the six months ended June 30, 2010 and 2009, respectively, increased
$24,005,000 or 32.02%, while the average rate paid decreased 53 basis
points. Average time deposits, comprising 51.52% and 57.72% of
average interest-bearing liabilities for the six months ended June 30, 2010 and
2009, respectively, decreased $3,307,000 or 2.55%, while the average interest
rate paid decreased 94 basis points.
The yield
on earning assets on a taxable equivalent basis for the three and six-month
periods ended June 30, 2010 was 5.80% and 5.93%, respectively, a decrease of 41
and 39 basis points from 6.21% and 6.32% for the same periods in
2009. The rate on interest-bearing liabilities for the three
and six-month periods of 2010 was 1.51% and 1.57%, respectively, a decrease of
75 and 86 basis points from 2.26% and 2.43% for the same periods in
2009. The yield on securities and short-term investments were
negatively impacted by the lower interest rate environment along with prepayment
speeds of mortgage-backed securities purchased at a premium. Loan
yields were negatively impacted by re-pricing of adjustable rate loans as well
as competitive pricing pressures in a low interest rate
environment. The average rate paid on interest-bearing deposit
accounts was positively impacted by the lower interest rate environment as well
as management’s competitive pricing of deposit products to encourage and
strengthen existing and new client relationships. Net interest margin
on a taxable equivalent basis for the three months ended June 30, 2010 was
4.44%, an increase of 28 basis points from 4.16% for the same period last
year. Net interest margin on a taxable equivalent basis for the six
months ended June 30, 2010 was 4.52%, an increase of 40 basis points from 4.12%
for the six months ended June 30, 2009.
Provisions
made to the loan loss reserve for the three and six months ended June 30, 2010
totaled $280,000 and $525,000, respectively, a decrease of $52,000 and $90,000
from $332,000 and $615,000 for the same periods in 2009. Net
charge-offs for the three months ended June 30, 2010 were $200,000, a decrease
of $78,000 or 28.06% from $278,000 for the same period in 2009. Net
charge-offs for the six months ended June 30, 2010 were $508,000, a decrease of
$188,000 or 27.01% from $696,000 for the same period in 2009.
19.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Noninterest
income for the three months ended June 30, 2010, was $551,000, a decrease of
$41,000 or 6.93%, compared to $592,000 for the same period in
2009. Noninterest income for the six months ended June 30, 2010 was
$979,999, a decrease of $175,000 or 15.16%, compared to $1,145,000 for the same
period in 2009. The decrease in noninterest income for both the three
and six-month period is primarily due to net losses on sales of OREO and other
repossessed assets. Total net losses sustained from sales of OREO and
repossessed assets for the three and six-month periods ended June 30, 2010 were
$56,000 and $191,000, respectively, compared to $24,000 and $22,000 for the
comparable periods last year.
Noninterest
expense for the three months ended June 30, 2010 was $2,529,000, a decrease of
$180,000 or 6.64%, compared to $2,709,000 for the same period in
2009. Noninterest expense for the six months ended June 30, 2010 was
$4,992,000, a decrease of $146,000 or 2.84%, compared to $5,138,000 for the same
period last year. The decrease in noninterest expense for both the
three and six-month period is primarily due to a decrease in FDIC insurance
premiums of $135,000 and $92,000 for the three and six-month periods,
respectively. The decline in FDIC insurance premiums relates to the
special assessment imposed on all banks last year. Also significantly
impacting noninterest expense in 2010 is the decline in depreciation expense
associated with premises and equipment for the three and six-month periods of
$79,000 and $139,000, respectively, from the comparable periods in
2009.
The
Corporation recorded income tax expense for the three and six-month period
ending June 30, 2010 of $171,000 and $320,000, respectively, compared to a tax
benefit of $57,000 and $71,000 for the same periods in 2009. The
increase in current income tax expense was primarily driven by an increase in
pre-tax income, offset by earning adjustments pertaining to tax-exempt loans,
investments and company-owned life insurance. The Corporation’s
effective tax rates for the three and six months ended June 30, 2010 were 23.49%
and 22.94%, respectively.
LIQUIDITY
Liquidity
is the ability to satisfy demands for deposit withdrawals, lending commitments
and other corporate needs. The Corporation’s liquidity primarily
represented by cash, cash equivalents and federal funds sold, is a result of its
operating, investing and financing activities, which are summarized in the
Condensed Consolidated Statements of Cash Flows. Primary sources of
funds are deposits, prepayments and maturities of outstanding loans and
securities. While scheduled payments from the amortization of loans
and securities are relatively predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. Funds are primarily used to meet ongoing
commitments, satisfy operational expenses, payout maturing certificates of
deposit and savings withdrawals and fund loan demand with excess funds being
invested in short-term interest-earning assets. Additional funds are
generated through Federal Home Loan Bank advances, overnight borrowings and
other sources.
The
Corporation’s liquidity ratio at June 30, 2010 was 8.86% compared to 5.72% at
year-end 2009. Another measure of liquidity is the relationship of
net loans to deposits and borrowed funds with lower ratios indicating greater
liquidity. The ratio of net loans to deposits and borrowed funds was
81.14% at June 30, 2010 compared to 83.52% at December 31,
2009. Management believes its sources of liquidity are adequate to
meet the needs of the Corporation.
20.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net cash
flows resulted in an increase of $7,785,000 in cash, cash equivalents and
federal funds sold for the six-month period ended June 30, 2010 from $12,246,000
at year-end 2009, primarily due to loan maturities and repayments of $5,320,000,
calls, maturities and repayments on available for sale securities of $2,772,000
along with an increase in deposit balances of $6,213,000, offset by pay downs on
FHLB advances of $5,000,000 and purchases of U.S. government-sponsored agencies
and tax-exempt municipals of $4,000,000. During the same period in
2009, cash, cash equivalents and federal funds sold increased $1,374,000,
primarily due to an increase in deposit balances of $10,625,000 along with
calls, maturities and repayments on available for sale securities of $3,664,000,
offset by loan maturities and repayments of $9,217,000 and purchases of
available for sale securities of $4,047,000.
CAPITAL
RESOURCES
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 8.0%, with half of
the capital composed of core capital. Minimum leverage ratio
requirements range from 3.0% to 5.0% of total assets. Core capital,
or Tier I 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 II 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 II capital can equal up to 100% of an
institution’s Tier I capital with certain limitations in meeting the total
risk-based capital requirements.
The
Bank’s leverage and risk-based capital ratios as of June 30, 2010 were 7.4% and
11.1% respectively, compared to leverage and risk-based capital ratios of 7.5%
and 10.3% at year-end 2009. The Bank exceeded minimum regulatory
requirements to be considered well capitalized for both
periods. Should it become necessary to raise capital to expand the
activities of the Corporation, there are sufficient un-issued shares to effect a
merger, or solicit new investors.
21.
COMMERCIAL
BANCSHARES, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
The
Corporation has certain obligations and commitments to make future payments
under contracts. Total aggregate contractual obligations and
commitments at June 30, 2010:
Contractual
obligations
(Amounts in thousands)
|
Payments Due by Period
|
|||||||||||||||||||
Less Than
|
After
|
|||||||||||||||||||
Total
|
One Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
||||||||||||||||
Time
deposits and certificates of deposit
|
$ | 128,585 | $ | 76,468 | $ | 36,224 | $ | 15,756 | $ | 137 | ||||||||||
Borrowed
funds
|
— | — | — | — | — | |||||||||||||||
Total
|
$ | 128,585 | $ | 76,468 | $ | 36,224 | $ | 15,756 | $ | 137 |
Other
commitments
(Amounts In thousands)
|
Amount of Commitment – Expiration by Period
|
|||||||||||||||||||
Less Than
|
After
|
|||||||||||||||||||
Total
|
One Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
||||||||||||||||
Commitments
to extend commercial credit
|
$ | 12,821 | $ | 8,984 | $ | 828 | $ | 230 | $ | 2,779 | ||||||||||
Commitments
to extend consumer credit
|
11,472 | — | 2,066 | 4,069 | 5,337 | |||||||||||||||
Standby
letters of credit
|
303 | 292 | 11 | — | — | |||||||||||||||
Total
|
$ | 24,596 | $ | 9,276 | $ | 2,905 | $ | 4,299 | $ | 8,116 |
Other
obligations and commitments include the deferred compensation plan, index plan
reserve and split dollar life insurance. The timing of payments for
these plans is unknown. See Note 1 of the 2009 Annual Report for
additional details.
Items
reported under “Contractual Obligations” represent standard bank financing
activity under normal terms and practices. Such funds normally
rollover or are replaced by like items depending on the then-current financing
needs. Items reported 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 comes 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 Corporation is also continually engaged in
the process of approving new loans in a bidding competition with other
banks. Management and Board committees approve the terms of these
potential new loans with conditions and/or counter terms made to the applicant
customers. Customers may accept the 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 approximately $3,253,000 at June
30, 2010, for various possible maturity terms.
22.
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 consist 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
2009. (See Quantitative and Qualitative Disclosures about Market Risk
in the Annual Report to Shareholders for the year ended December 31,
2009.)
Item
4 - Controls and Procedures
Under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the Corporation conducted an
evaluation of its disclosure controls and procedures, pursuant to Securities
Exchange Act of 1934. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Corporation’s disclosure
controls and procedures were effective as of the end of the period covered by
this report.
There was
no change in the Corporation’s internal control over financial reporting that
occurred during the Corporation’s fiscal quarter ended June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, the
Corporation’s internal control over financial reporting.
23.
COMMERCIAL
BANCSHARES, INC.
FORM
10-Q
Quarter
ended June 30, 2010
PART II –
OTHER INFORMATION
Item
1
|
Legal
Proceedings:
|
There are
no matters required to be reported under this item.
Item
1A
|
Risk
Factors:
|
There
have been no material changes from risk factors as previously disclosed in Part
1, Item 1.A. of Commercial Bancshares, Inc.’s 10-K filed on March 29,
2010.
Item
2
|
Unregistered
Sales of Securities and Use of
Proceeds:
|
The
Corporation purchased 2,102 shares totaling $22,335 and delivered 335 shares
totaling $7,141 under the Commercial Savings Bank Deferred Compensation Plan, a
nonqualified deferred compensation plan, to various members of the Board during
the six-month period ended June 30, 2010. Shares are purchased on the
open market and are credited to the respective accounts of the deferred
compensation plan participants. These transactions were not
registered, but were made in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.
The
following table reflects shares repurchased by the Corporation during the
quarter ended June 30, 2010.
Period
|
Total
Number
of Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
Maximum Number
of Shares that May
Yet be Purchased
Under the Plan
or Programs
|
||||||||||||
4/1/10 - 4/30/10
|
-0- | n/a | -0- | 23,548 | ||||||||||||
5/1/10 - 5/31/10
|
-0- | n/a | -0- | 23,548 | ||||||||||||
6/1/10 - 6/30/10
|
-0- | n/a | -0- | 23,548 | ||||||||||||
Total
|
-0- | n/a | -0- | 23,548 |
Item
3
|
Defaults
upon Senior Securities:
|
There are
no matters required to be reported under this item.
Item
4
|
Other
Information:
|
There are
no matters required to be reported under this item.
24.
COMMERCIAL
BANCSHARES, INC.
FORM
10-Q
Quarter
ended June 30, 2010
PART II –
OTHER INFORMATION
Item
5
|
Exhibits:
|
Exhibit
|
||
Number
|
Description of Document
|
|
3.1.a.
|
Amended
Articles of Incorporation of the Corporation (incorporated by reference to
Registrant’s Form 8-K dated April 27, 1995)
|
|
3.1.b.
|
Amendment
to the Corporation’s Amended Articles of Incorporation to increase the
number of shares authorized for the issuance to 4,000,000 common shares,
no par value (incorporated by reference to Appendix I to Registrant’s
Definitive Proxy Statement filed March 13, 1997)
|
|
3.2
|
Code
of Regulations of the Corporation (incorporated by reference to
Registrant’s Form 8-K dated April 27, 1995)
|
|
4
|
Form
of Certificate of Common Shares of the Corporation (incorporated by
reference to Registrant’s Form 8-K dated April 27,
1995)
|
|
11
|
Statement
re computation of per share earnings (reference is hereby made to Note 2
of the Consolidated Financial Statements on page 8
hereof)
|
|
31.1
|
Certification
by CEO Pursuant to Sarbanes Oxley Section 302
|
|
31.2
|
Certification
by CFO Pursuant to Sarbanes Oxley Section 302
|
|
32.1
|
Certification
by CEO Pursuant to Sarbanes Oxley Section 906
|
|
32.2
|
Certification
by CFO Pursuant to Sarbanes Oxley Section
906
|
25.
COMMERCIAL
BANCSHARES, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMMERCIAL BANCSHARES,
INC.
|
|||
(Registrant)
|
|||
Date:
|
August 12, 2010
|
/s/ Robert E. Beach
|
|
(Signature)
|
|||
Robert
E. Beach
|
|||
President
and Chief Executive Officer
|
|||
Date:
|
August 12, 2010
|
/s/ Scott A. Oboy
|
|
(Signature)
|
|||
Scott
A. Oboy
|
|||
Executive
Vice President and Chief Financial
Officer
|
26.