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EX-32.2 - COMMERCIAL BANCSHARES INC \OH\ | v228947_ex32-2.htm |
EX-31.1 - COMMERCIAL BANCSHARES INC \OH\ | v228947_ex31-1.htm |
EX-31.2 - COMMERCIAL BANCSHARES INC \OH\ | v228947_ex31-2.htm |
EX-32.1 - COMMERCIAL BANCSHARES INC \OH\ | v228947_ex32-1.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, 2011. Commission File Number 000-27894
COMMERCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OHIO
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34-1787239
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(State or other jurisdiction of
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(IRS Employer
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incorporation or organization)
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Identification No.)
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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 R 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 R 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 ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller Reporting Company R
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No R
As of August 12, 2011, the latest practicable date, there were 1,156,752 outstanding of the registrant’s common stock, no par value.
COMMERCIAL BANCSHARES, INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
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Item 1.
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Financial Statements (unaudited)
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Consolidated Balance Sheets
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3
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Consolidated Statements of Income
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4
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Condensed Consolidated Statements of Changes in Shareholders’ Equity
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5
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Condensed Consolidated Statements of Cash Flows
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6
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Notes to Consolidated Financial Statements
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7
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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18
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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28
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Item 4.
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Controls and Procedures
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28
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PART II - OTHER INFORMATION
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||
Item 1.
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Legal Proceedings
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29
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Item 2.
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Unregistered Sales of Securities and Use of Proceeds
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29
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Item 3.
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Defaults Upon Senior Securities
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29
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Item 4.
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Removed and Reserved
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29
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Item 5.
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Other Information
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29
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Item 6.
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Exhibits
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30
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SIGNATURES
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31
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EXHIBIT:
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13a-14(a) 302 Certification
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13a-14(a) 906 Certification
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2.
COMMERCIAL BANCSHARES, INC.
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CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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(Amounts in thousands)
June 30,
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December 31,
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|||||||
2011
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2010
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|||||||
ASSETS
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||||||||
Cash and cash equivalents
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$ | 6,035 | $ | 5,270 | ||||
Federal funds sold
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9,381 | 16,810 | ||||||
Cash equivalents and federal funds sold
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15,416 | 22,080 | ||||||
Securities available for sale
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34,149 | 33,843 | ||||||
Other investment securities
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2,259 | 2,260 | ||||||
Total loans
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223,838 | 230,658 | ||||||
Allowance for loan losses
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(3,536 | ) | (3,198 | ) | ||||
Loans, net
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220,302 | 227,460 | ||||||
Premises and equipment, net
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7,584 | 7,637 | ||||||
Accrued interest receivable
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1,160 | 1,288 | ||||||
Other assets
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10,124 | 9,835 | ||||||
Total assets
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$ | 290,994 | $ | 304,403 | ||||
LIABILITIES
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||||||||
Deposits
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||||||||
Noninterest-bearing demand
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$ | 32,649 | $ | 33,399 | ||||
Interest-bearing demand
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102,513 | 101,620 | ||||||
Savings and time deposits
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92,430 | 97,460 | ||||||
Time deposits $100,000 and greater
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36,207 | 44,765 | ||||||
Total deposits
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263,799 | 277,244 | ||||||
Accrued interest payable
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162 | 192 | ||||||
Other liabilities
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1,484 | 2,578 | ||||||
Total liabilities
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265,445 | 280,014 | ||||||
SHAREHOLDERS' EQUITY
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||||||||
Common stock, no par value; 4,000,000 shares authorized, 1,182,888 shares issued in 2011 and 2010
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11,494 | 11,440 | ||||||
Retained earnings
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14,848 | 13,936 | ||||||
Unearned compensation
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(28 | ) | (36 | ) | ||||
Deferred compensation plan shares; at cost, 38,864 shares in 2011, and 35,467 shares in 2010
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(670 | ) | (626 | ) | ||||
Treasury stock; 27,455 shares in 2011 and 31,543 shares in 2010
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(751 | ) | (862 | ) | ||||
Accumulated other comprehensive income
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656 | 537 | ||||||
Total shareholders' equity
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25,549 | 24,389 | ||||||
Total liabilities and shareholders' equity
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$ | 290,994 | $ | 304,403 |
See notes to the consolidated financial statements.
3.
COMMERCIAL BANCSHARES, INC.
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CONSOLIDATED STATEMENTS OF INCOME
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(Unaudited)
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(Amounts in thousands, except per share data)
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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|||||||||||||||
2011
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2010
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2011
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2010
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Interest income
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||||||||||||||||
Interest and fees on loans
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$ | 3,456 | $ | 3,579 | $ | 6,855 | $ | 7,151 | ||||||||
Interest on investment securities:
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||||||||||||||||
Taxable
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141 | 160 | 285 | 318 | ||||||||||||
Tax-exempt
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157 | 177 | 316 | 357 | ||||||||||||
Federal funds sold
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6 | 11 | 18 | 18 | ||||||||||||
Total interest income
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3,760 | 3,927 | 7,474 | 7,844 | ||||||||||||
Interest expense
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||||||||||||||||
Interest on deposits
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557 | 912 | 1,185 | 1,840 | ||||||||||||
Interest on borrowings
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— | 29 | — | 71 | ||||||||||||
Total interest expense
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557 | 941 | 1,185 | 1,911 | ||||||||||||
Net interest income
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3,203 | 2,986 | 6,289 | 5,933 | ||||||||||||
Provision for loan losses
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330 | 280 | 525 | 525 | ||||||||||||
Net interest income after provision for loan losses
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2,873 | 2,706 | 5,764 | 5,408 | ||||||||||||
Noninterest income
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||||||||||||||||
Service fees and overdraft charges
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391 | 434 | 753 | 853 | ||||||||||||
Losses on other repossessed asset sales, net
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— | (56 | ) | (27 | ) | (191 | ) | |||||||||
Other income
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167 | 173 | 320 | 317 | ||||||||||||
Total noninterest income
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558 | 551 | 1,046 | 979 | ||||||||||||
Noninterest expense
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||||||||||||||||
Salaries and employee benefits
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1,399 | 1,296 | 2,734 | 2,596 | ||||||||||||
Premises and equipment
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317 | 300 | 668 | 642 | ||||||||||||
OREO and miscellaneous loan expense
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81 | 136 | 128 | 180 | ||||||||||||
Professional fees
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105 | 99 | 275 | 217 | ||||||||||||
Data processing
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49 | 62 | 99 | 125 | ||||||||||||
Software maintenance
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95 | 78 | 183 | 152 | ||||||||||||
Advertising and promotional
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53 | 53 | 113 | 102 | ||||||||||||
FDIC deposit insurance
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109 | 140 | 223 | 278 | ||||||||||||
Franchise tax
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79 | 71 | 157 | 141 | ||||||||||||
Other operating expense
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298 | 294 | 556 | 559 | ||||||||||||
Total noninterest expense
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2,585 | 2,529 | 5,136 | 4,992 | ||||||||||||
Income before income taxes
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846 | 728 | 1,674 | 1,395 | ||||||||||||
Income tax expense
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218 | 171 | 429 | 320 | ||||||||||||
Net income
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$ | 628 | $ | 557 | $ | 1,245 | $ | 1,075 | ||||||||
Basic earnings per common share
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$ | 0.55 | $ | 0.49 | $ | 1.08 | $ | 0.94 | ||||||||
Diluted earnings per common share
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$ | 0.54 | $ | 0.49 | $ | 1.07 | $ | 0.94 |
See notes to the consolidated financial statements.
4.
COMMERCIAL BANCSHARES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
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IN SHAREHOLDERS’ EQUITY
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(Unaudited)
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(Amounts in thousands, except per share data)
Three Months Ended
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||||||||
June 30,
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||||||||
2011
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2010
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Balance at beginning of period
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$ | 24,962 | $ | 22,936 | ||||
Comprehensive income
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||||||||
Net income
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628 | 557 | ||||||
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects
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66 | 73 | ||||||
Total comprehensive income
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694 | 630 | ||||||
Stock-based compensation
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10 | 4 | ||||||
Issuance of treasury stock for deferred compensation plan
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23 | — | ||||||
Dividends paid ($0.12 and $0.10 per share in 2011 and 2010)
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(140 | ) | (114 | ) | ||||
Balance at end of period
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$ | 25,549 | $ | 23,456 |
Six Months Ended
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June 30,
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||||||||
2011
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2010
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Balance at beginning of period
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$ | 24,389 | $ | 22,695 | ||||
Comprehensive income
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||||||||
Net income
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1,245 | 1,075 | ||||||
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects
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119 | (92 | ) | |||||
Total comprehensive income
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1,364 | 983 | ||||||
Stock-based compensation
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18 | 6 | ||||||
Issuance of treasury stock for deferred compensation plan
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55 | — | ||||||
Dividends paid ($0.24 and $0.20 per share in 2011 and 2010)
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(277 | ) | (228 | ) | ||||
Balance at end of period
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$ | 25,549 | $ | 23,456 |
See notes to the consolidated financial statements.
5.
COMMERCIAL BANCSHARES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
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Six Months Ended
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June 30,
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||||||||
2011
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2010
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($ in thousands)
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Cash flows from operating activities
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Net income
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$ | 1,245 | $ | 1,075 | ||||
Adjustments
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(478 | ) | 1,186 | |||||
Net cash from operating activities
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767 | 2,261 | ||||||
Cash flows from investing activities
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||||||||
Securities available for sale:
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||||||||
Purchases
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(4,149 | ) | (4,000 | ) | ||||
Maturities and repayments
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3,913 | 2,772 | ||||||
Net change in loans
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6,555 | 5,320 | ||||||
Proceeds from sale of OREO and other repossessed assets
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187 | 571 | ||||||
Bank premises and equipment expenditures
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(270 | ) | (125 | ) | ||||
Net cash from investing activities
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6,236 | 4,538 | ||||||
Cash flows from financing activities
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||||||||
Net change in deposits
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(13,445 | ) | 6,214 | |||||
Repayments of FHLB advances
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— | (5,000 | ) | |||||
Cash dividends paid
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(277 | ) | (228 | ) | ||||
Issuance of treasury stock for deferred compensation plan
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55 | — | ||||||
Net cash from financing activities
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(13,667 | ) | 986 | |||||
Net change in cash equivalents and federal funds sold
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(6,664 | ) | 7,785 | |||||
Cash equivalents and federal funds sold at beginning of period
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22,080 | 12,246 | ||||||
Cash equivalents and federal funds sold at end of period
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$ | 15,416 | $ | 20,031 | ||||
Supplemental disclosures
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||||||||
Cash paid for interest
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$ | 1,215 | $ | 1,921 | ||||
Cash paid for income taxes
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950 | 90 | ||||||
Non-cash transfer of loans to foreclosed and other repossessed assets
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360 | 255 |
See notes to the consolidated financial statements.
6.
COMMERCIAL BANCSHARES, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Commercial Bancshares, Inc. (the “Corporation”) and its wholly owned subsidiaries, 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, 2011, and the results of operations and changes in cash flows for the periods presented have been made.
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, 2010, 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, 2011 are not necessarily indicative of the operating results for the full year or any future interim period.
Recent Accounting Pronouncements:
In June 2011, the FASB issued ASU 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income which gives an entity the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which option an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. This update eliminates that option. In addition, current U.S. GAAP does not require consecutive presentation of the statement of net income and other comprehensive income. Finally, current U.S. GAAP does not require an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income, which is required by the guidance in this update. These changes apply to both annual and interim financial statements. These improvements will help financial statement users better understand the causes of an entity’s change in financial position and results of operations. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. This guidance is not expected to have an impact on the Corporation’s financial condition or results of operations. We anticipate this statement will be adopted with our 2012 annual financial statements.
In May 2011, the FASB issued ASU 2011-04 Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs which presents common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is not expected to have an impact on the Corporation’s financial condition or results of operations.
7.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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In April 2011, the FASB issued ASU 2011-02 A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Management is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.
NOTE 2 EARNINGS PER SHARE
Weighted average shares used in determining basic and diluted earnings per share for the three months ended June 30:
2011
|
2010
|
|||||||
Weighted average shares outstanding during the period
|
1,155,216 | 1,138,497 | ||||||
Dilutive effect of stock options
|
8,613 | 0 | ||||||
Weighted average shares considering dilutive effect
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1,163,829 | 1,138,497 | ||||||
Anti-dilutive stock options not considered in computing diluted earnings per share
|
2,130 | 20,230 |
Weighted average shares used in determining basic and diluted earnings per share for the six months ended June 30:
2011
|
2010
|
|||||||
Weighted average shares outstanding during the period
|
1,154,276 | 1,138,497 | ||||||
Dilutive effect of stock options
|
7,877 | 0 | ||||||
Weighted average shares considering dilutive effect
|
1,162,153 | 1,138,497 | ||||||
Anti-dilutive stock options not considered in computing diluted earnings per share
|
2,130 | 20,230 |
NOTE 3 LOANS
(Amounts in thousands)
June 30, 2011
|
December 31, 2010
|
|||||||
Commercial loans
|
$ | 165,969 | $ | 172,424 | ||||
Residential real estate loans
|
11,419 | 11,261 | ||||||
Construction loans
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2,895 | 2,514 | ||||||
Consumer loans
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22,878 | 23,065 | ||||||
Home equity loans
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20,621 | 21,231 | ||||||
Indirect finance loans
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56 | 163 | ||||||
Total loans
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$ | 223,838 | $ | 230,658 |
At June 30, 2011 and December 31, 2010, total loans included loans to farmers for agricultural purposes of approximately $29,038,000 and $28,631,000, respectively.
8.
COMMERCIAL BANCSHARES, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4 CREDIT QUALITY INDICATORS
Amounts in thousands
Commercial Credit Exposure
Credit risk profile by credit worthiness category
Commercial
|
Commercial
|
|||||||||||||||||||||||||||||||
Commercial
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Commercial
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Real Estate
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Real Estate
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|||||||||||||||||||||||||||||
Operating
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Agricultural
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1-4 Family
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Other
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Category
|
06/30/11
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12/31/10
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06/30/11
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12/31/10
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06/30/11
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12/31/10
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06/30/11
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12/31/10
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1 – 2
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$ | 14 | $ | 275 | $ | 130 | $ | 130 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
3
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44 | 97 | 2,143 | 2,207 | 1,167 | 2,079 | 3,326 | 2,641 | ||||||||||||||||||||||||
4
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16,614 | 24,916 | 23,496 | 23,885 | 27,865 | 26,660 | 50,269 | 54,926 | ||||||||||||||||||||||||
5
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2,615 | 1,926 | 2,919 | 2,073 | 3,400 | 1,753 | 11,203 | 13,432 | ||||||||||||||||||||||||
6
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2,837 | 232 | 351 | 335 | 933 | 899 | 4,664 | 11,942 | ||||||||||||||||||||||||
7
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785 | 472 | — | — | 700 | 458 | 10,426 | 1,000 | ||||||||||||||||||||||||
8
|
— | — | — | — | — | — | 68 | 86 | ||||||||||||||||||||||||
Total
|
$ | 22,909 | $ | 27,918 | $ | 29,039 | $ | 28,630 | $ | 34,065 | $ | 31,849 | $ | 79,956 | $ | 84,027 |
Consumer Credit Exposure
Credit risk by credit worthiness category
Residential
|
Residential
|
|||||||||||||||
Real Estate, Construction
|
Real Estate, Other
|
|||||||||||||||
Category
|
06/30/11
|
12/31/10
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06/30/11
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12/31/10
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||||||||||||
1 – 2
|
$ | — | $ | — | $ | — | $ | — | ||||||||
3
|
— | — | 95 | 346 | ||||||||||||
4
|
2,821 | 2,514 | 9,641 | 9,257 | ||||||||||||
5
|
— | — | 160 | 1,287 | ||||||||||||
6
|
— | — | 237 | 154 | ||||||||||||
7
|
74 | — | 1,286 | 217 | ||||||||||||
8
|
— | — | — | — | ||||||||||||
Total
|
$ | 2,895 | $ | 2,514 | $ | 11,419 | $ | 11,261 |
Consumer Credit Exposure
Credit risk by credit worthiness category
Consumer - Equity
|
Consumer - Auto
|
Consumer - Other
|
||||||||||||||||||||||
Category
|
06/30/11
|
12/31/10
|
06/30/11
|
12/31/10
|
06/30/11
|
12/31/10
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||||||||||||||||||
1 – 2
|
$ | — | $ | — | $ | 61 | $ | 119 | $ | 1,366 | $ | 1,276 | ||||||||||||
3
|
191 | 178 | — | — | 12 | 14 | ||||||||||||||||||
4
|
19,512 | 20,259 | 8,835 | 10,218 | 12,394 | 11,341 | ||||||||||||||||||
5
|
593 | 507 | 6 | 123 | 116 | 47 | ||||||||||||||||||
6
|
69 | 246 | 6 | 43 | 7 | 8 | ||||||||||||||||||
7
|
256 | 41 | 46 | 37 | 85 | 2 | ||||||||||||||||||
8
|
— | — | — | — | — | — | ||||||||||||||||||
Total
|
$ | 20,621 | $ | 21,231 | $ | 8,954 | $ | 10,540 | $ | 13,980 | $ | 12,688 |
The Corporation’s strategy for credit risk management includes ongoing credit examinations and management reviews of loans exhibiting deterioration of credit quality. A deteriorating credit indicates an elevated likelihood of delinquency. When a loan becomes delinquent, its credit grade is reviewed and changed accordingly. Each downgrade to a classified credit results in a higher percentage of reserve to reflect the increased likelihood of loss for similarly graded credits. Further deterioration could result in a certain credit being deemed impaired resulting in a collateral valuation for purposes of establishing a specific reserve which reflects the possible extent of such loss for that credit.
9.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The Corporation uses a risk rating system, on a scale of 1 through 9, to grade each loan. A general description of the characteristics of the risk grades is as follows:
1 – Prime
|
All of the risks associated with this credit (based on each of the Bank’s creditworthiness criteria) are minimal or the loan is supported by pledged deposits, U.S. government securities, etc.
|
|
2 – Good
|
Most of the risks associated with this credit (based on each of the Bank’s creditworthiness criteria) are minimal.
|
|
3 – Satisfactory
|
Some of the risks associated with this credit (based on each of the Bank’s creditworthiness criteria) are minimal.
|
|
4 – Fair
|
The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is acceptable.
|
|
5 – Watch
|
The credits possess some of the credit deficiency or potential weakness which deserves close attention of management, but does not yet warrant substandard classification.
|
|
6 – Special Mention
|
The weighted overall risk associated with this credit is considered higher than normal (but still acceptable) or the loan possesses deficiencies which corrective action by the Bank would remedy, thereby reducing risk.
|
|
7 – Substandard
|
The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is considered undesirable, or the Bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.
|
|
8 – Doubtful
|
Weakness makes collection or liquidation in full (based on currently existing facts) improbable.
|
|
9 – Loss
|
|
This credit is of little value and not warranted as a bankable asset.
|
NOTE 5 ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands)
Commercial
|
Real Estate
|
Consumer
|
Total
|
|||||||||||||
June 30, 2011
|
||||||||||||||||
Beginning balance – January 1, 2011
|
$ | 2,307 | $ | 182 | $ | 709 | $ | 3,198 | ||||||||
Charge-offs
|
(181 | ) | — | (101 | ) | (282 | ) | |||||||||
Recoveries
|
9 | — | 86 | 95 | ||||||||||||
Provision
|
408 | 95 | 22 | 525 | ||||||||||||
Ending Balance – June 30, 2011
|
$ | 2,543 | $ | 277 | $ | 716 | $ | 3,536 | ||||||||
Allowance:
|
||||||||||||||||
Ending balance individually evaluated for impairment
|
$ | 401 | $ | — | $ | — | $ | 401 | ||||||||
Ending balance collectively evaluated for impairment
|
$ | 2,142 | $ | 277 | $ | 716 | $ | 3,135 | ||||||||
Loans:
|
||||||||||||||||
Ending balance individually evaluated for impairment
|
$ | 4,840 | $ | — | $ | — | $ | 4,840 | ||||||||
Ending balance collectively evaluated for impairment
|
$ | 161,129 | $ | 14,314 | $ | 43,555 | $ | 218,998 | ||||||||
December 31, 2010
|
||||||||||||||||
Beginning balance – January 1, 2010
|
$ | 1,927 | $ | 158 | $ | 659 | $ | 2,744 | ||||||||
Charge-offs
|
(610 | ) | (25 | ) | (404 | ) | (1,039 | ) | ||||||||
Recoveries
|
34 | — | 89 | 123 | ||||||||||||
Provision
|
956 | 49 | 365 | 1,370 | ||||||||||||
Ending Balance – December 31, 2010
|
$ | 2,307 | $ | 182 | $ | 709 | $ | 3,198 | ||||||||
Allowance:
|
||||||||||||||||
Ending balance individually evaluated for impairment
|
$ | 116 | $ | — | $ | 40 | $ | 156 | ||||||||
Ending balance collectively evaluated for impairment
|
$ | 2,191 | $ | 182 | $ | 669 | $ | 3,042 | ||||||||
Loans:
|
||||||||||||||||
Ending balance individually evaluated for impairment
|
$ | 1,774 | $ | — | $ | 90 | $ | 1,864 | ||||||||
Ending balance collectively evaluated for impairment
|
$ | 170,650 | $ | 13,775 | $ | 44,369 | $ | 228,794 |
10.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 6 SUMMARY OF IMPAIRED LOANS
(Amounts in thousands)
YTD
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
June 30, 2011
|
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Operating
|
$ | 324 | $ | 356 | $ | — | $ | 328 | $ | 11 | ||||||||||
Real estate, 1-4 family
|
— | — | — | — | — | |||||||||||||||
Real estate, other
|
1,351 | 1,351 | — | 1,357 | 12 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Real estate, 1-4 family
|
311 | 311 | 279 | 320 | 11 | |||||||||||||||
Real estate, other
|
2,854 | 3,116 | 122 | 1,592 | 70 | |||||||||||||||
Total
|
$ | 4,840 | $ | 5,134 | $ | 401 | $ | 3,597 | $ | 104 |
YTD
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
December 31, 2010
|
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
|||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Operating
|
$ | 331 | $ | 363 | $ | — | $ | 170 | $ | 26 | ||||||||||
Real estate, 1-4 family
|
53 | 106 | — | 53 | — | |||||||||||||||
Real estate, other
|
500 | 562 | — | 238 | 19 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Commercial
|
||||||||||||||||||||
Real estate, 1-4 family
|
405 | 452 | 71 | 112 | 29 | |||||||||||||||
Real estate, other
|
485 | 713 | 45 | 638 | 14 | |||||||||||||||
Consumer, other
|
90 | 90 | 40 | 8 | — | |||||||||||||||
Total
|
$ | 1,864 | $ | 2,286 | $ | 156 | $ | 1,219 | $ | 88 |
11.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 7 AGE ANALYSIS OF PAST DUE FINANCING RECEIVABLES
(Amounts in thousands)
Recorded
|
||||||||||||||||||||||||||||
30-59
|
60-89
|
> 90
|
Total
|
Investment
|
||||||||||||||||||||||||
Days
|
Days
|
Days
|
Total
|
Financing
|
> 90 Days
|
|||||||||||||||||||||||
June 30, 2011
|
Past Due
|
Past Due
|
Past Due
|
Past Due
|
Current
|
Receivables
|
and Accruing
|
|||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||||||
Operating
|
$ | 47 | $ | — | $ | 10 | $ | 57 | $ | 22,852 | $ | 22,909 | $ | — | ||||||||||||||
Agricultural
|
— | — | — | — | 29,039 | 29,039 | — | |||||||||||||||||||||
Real estate, 1-4 family
|
168 | 29 | 39 | 236 | 33,829 | 34,065 | — | |||||||||||||||||||||
Real estate, other
|
459 | 1 | 105 | 565 | 79,391 | 79,956 | — | |||||||||||||||||||||
Residential real estate
|
||||||||||||||||||||||||||||
Construction
|
— | — | — | — | 2,895 | 2,895 | — | |||||||||||||||||||||
Other
|
— | — | — | — | 11,419 | 11,419 | — | |||||||||||||||||||||
Consumer
|
||||||||||||||||||||||||||||
Equity
|
45 | 1 | 18 | 64 | 20,557 | 20,621 | — | |||||||||||||||||||||
Auto
|
9 | — | 14 | 23 | 8,931 | 8,954 | — | |||||||||||||||||||||
Other
|
14 | 10 | 9 | 33 | 13,947 | 13,980 | — | |||||||||||||||||||||
Total
|
$ | 742 | $ | 41 | $ | 195 | $ | 978 | $ | 222,860 | $ | 223,838 | $ | — |
Recorded
|
||||||||||||||||||||||||||||
30-59
|
60-89
|
> 90
|
Total
|
Investment
|
||||||||||||||||||||||||
Days
|
Days
|
Days
|
Total
|
Financing
|
> 90 Days
|
|||||||||||||||||||||||
December 31, 2010
|
Past Due
|
Past Due
|
Past Due
|
Past Due
|
Current
|
Receivables
|
and Accruing
|
|||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||||||
Operating
|
$ | 47 | $ | — | $ | 10 | $ | 57 | $ | 27,861 | $ | 27,918 | $ | — | ||||||||||||||
Agricultural
|
— | — | — | — | 28,631 | 28,631 | — | |||||||||||||||||||||
Real estate, 1-4 family
|
39 | — | 130 | 169 | 31,725 | 31,894 | — | |||||||||||||||||||||
Real estate, other
|
1,156 | 849 | 440 | 2,445 | 81,536 | 83,981 | — | |||||||||||||||||||||
Residential real estate
|
||||||||||||||||||||||||||||
Construction
|
— | — | — | — | 2,514 | 2,514 | — | |||||||||||||||||||||
Other
|
— | — | — | — | 11,261 | 11,261 | — | |||||||||||||||||||||
Consumer
|
||||||||||||||||||||||||||||
Equity
|
18 | 15 | 11 | 44 | 21,187 | 21,231 | — | |||||||||||||||||||||
Auto
|
— | — | — | — | 11,557 | 11,557 | — | |||||||||||||||||||||
Other
|
128 | — | 20 | 148 | 11,523 | 11,671 | — | |||||||||||||||||||||
Total
|
$ | 1,388 | $ | 864 | $ | 611 | $ | 2,863 | $ | 227,795 | $ | 230,658 | $ | — |
NOTE 8 FINANCING RECEIVABLES ON NONACCRUAL STATUS
(Amounts in thousands)
June 30, 2011
|
December 31, 2010
|
|||||||
Commercial
|
||||||||
Operating
|
$ | 322 | $ | 44 | ||||
Real estate, 1-4 family
|
484 | 130 | ||||||
Real estate, other
|
1,374 | 1,453 | ||||||
Residential real estate
|
||||||||
Other
|
194 | 216 | ||||||
Consumer
|
||||||||
Equity
|
166 | 55 | ||||||
Auto
|
32 | — | ||||||
Other
|
23 | 36 | ||||||
Total
|
$ | 2,595 | $ | 1,934 |
12.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 9 OTHER COMPREHENSIVE INCOME
Other comprehensive income (in thousands) for the three months ended June 30:
2011
|
2010
|
|||||||
Unrealized holding gains and losses on securities available for sale
|
$ | 100 | $ | 110 | ||||
Less reclassification adjustments for gains and losses later recognized in income
|
— | — | ||||||
Net unrealized gains and losses
|
100 | 110 | ||||||
Tax effect
|
34 | 37 | ||||||
Other comprehensive income
|
$ | 66 | $ | 73 |
Other comprehensive income (in thousands) for the six months ended June 30:
2011
|
2010
|
|||||||
Unrealized holding gains and losses on securities available for sale
|
$ | 180 | $ | (139 | ) | |||
Less reclassification adjustments for gains and losses later recognized in income
|
— | — | ||||||
Net unrealized gains and losses
|
180 | (139 | ) | |||||
Tax effect
|
61 | (47 | ) | |||||
Other comprehensive income (loss)
|
$ | 119 | $ | (92 | ) |
NOTE 10 FAIR VALUES AND MEASUREMENTS OF FINANCIAL INSTRUMENTS
The Corporation groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure assets and liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:
|
·
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
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 significant management judgment or estimation and considers factors specific to each asset or liability.
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and the valuation techniques used by the Corporation to determine those fair values.
13.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
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, 2011
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S. Government and federal agencies
|
$ | — | $ | 11,173 | $ | — | $ | 11,173 | ||||||||
State and political subdivisions
|
— | 15,502 | — | 15,502 | ||||||||||||
Mortgage-backed securities
|
— | 7,474 | — | 7,474 | ||||||||||||
Total Assets
|
$ | — | $ | 34,149 | $ | — | $ | 34,149 | ||||||||
Liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
December 31, 2010
|
||||||||||||||||
Assets
|
||||||||||||||||
U.S. Government and federal agencies
|
$ | — | $ | 9,065 | $ | — | $ | 9,065 | ||||||||
State and political subdivisions
|
— | 16,069 | — | 16,069 | ||||||||||||
Mortgage-backed securities
|
— | 8,709 | — | 8,709 | ||||||||||||
Total Assets
|
$ | — | $ | 33,843 | $ | — | $ | 33,843 | ||||||||
Liabilities
|
$ | — | $ | — | $ | — | $ | — |
Securities characterized as having Level 2 inputs generally consist of obligations of U.S. Government and federal agencies, government-sponsored organizations and obligations of state and political subdivisions. There were no significant transfers in or out of Levels 1 and 2 for the period ending June 30, 2011.
The Corporation also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2011, such assets consist primarily of impaired loans and other real estate owned. The Corporation has established the fair values of these assets using Level 3 inputs, specifically, discounted present value of cash flow projections.
The following table presents financial assets and liabilities measured on a nonrecurring basis:
Fair Value Measurements at Reporting Date Using
Balance at
|
||||||||||||||||
(In thousands)
|
June 30,
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
2011
|
||||||||||||||||
Impaired loans
|
$ | 4,840 | $ | — | $ | — | $ | 4,840 | ||||||||
Real estate acquired through foreclosure
|
214 | — | — | 214 |
Balance at
|
||||||||||||||||
(In thousands)
|
December 31,
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
2010
|
||||||||||||||||
Impaired loans
|
$ | 1,864 | $ | — | $ | — | $ | 1,864 | ||||||||
Real estate acquired through foreclosure
|
20 | — | — | 20 |
14.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
A loan is considered impaired when, based on current information and events it is probable the Corporation will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring 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. The Corporation establishes 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 other repossessed assets are subject to significant judgment. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Additionally, any operating costs incurred after acquisition are also expensed.
The estimated fair values of financial instruments (in thousands) were as follows:
June 30, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Amount
|
Fair Value
|
Amount
|
Fair Value
|
||||||||||||
Financial assets
|
||||||||||||||||
Cash equivalents and federal funds sold
|
$ | 15,416 | $ | 15,416 | $ | 22,080 | $ | 22,080 | ||||||||
Securities available for sale
|
34,149 | 34,149 | 33,843 | 33,843 | ||||||||||||
Other investment securities
|
2,259 | 2,259 | 2,260 | 2,260 | ||||||||||||
Loans, net of allowance for loan loss
|
220,302 | 227,331 | 227,460 | 225,298 | ||||||||||||
Accrued interest receivable
|
1,160 | 1,160 | 1,288 | 1,288 | ||||||||||||
Financial liabilities
|
||||||||||||||||
Demand and savings deposits
|
$ | (153,166 | ) | $ | (153,166 | ) | $ | (151,336 | ) | $ | (151,336 | ) | ||||
Time deposits
|
(110,633 | ) | (109,577 | ) | (125,908 | ) | (125,532 | ) | ||||||||
Accrued interest payable
|
(162 | ) | (162 | ) | (192 | ) | (192 | ) |
The following describes the valuation methodologies used by management to measure financial assets and liabilities at fair value. Where appropriate, the description includes information about the valuation models and key inputs to those models.
|
·
|
Cash equivalents and federal funds sold – The carrying value of cash, amounts due from banks and federal funds sold assumed to approximate fair value.
|
|
·
|
Investment securities – Fair value is based on quoted market prices in active markets for identical assets or similar assets in active markets. If quoted market prices are not available, with the assistance of an independent pricing service, management’s fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
|
|
·
|
Loans – The loan portfolio includes adjustable and fixed-rate loans, the fair value of which is estimated using discounted cash flow analyses. To calculate discounted cash flows, the loans are aggregated into pools of similar types and expected repayment terms. The expected cash flows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates offered to borrowers of similar credit characteristics. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
|
|
·
|
Accrued interest receivable – The fair value approximates the carrying value.
|
|
·
|
Demand and savings deposits – The fair value is equal to the amount payable on demand at the reporting date.
|
15.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
·
|
Time deposits – The fair value for fixed-rate time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for time deposits with similar terms and remaining maturities.
|
|
·
|
Accrued interest payable – The fair value approximates the carrying value.
|
NOTE 11 STOCK-BASED COMPENSATION
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 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, 2011, a total of 116,850 shares remained available for issuance. Stock-based compensation expense is based on the estimated fair value of the award at the date of grant. The fair value of each option award is estimated on the date of grant using an option-pricing model, requiring the use of subjective assumptions. The fair value is amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in personnel expense in the consolidated statements of income.
Assumptions are used in estimating the fair value of stock options granted. Expected stock volatility is based on several factors including the historical volatility of the Corporation’s stock, implied volatility determined from traded options and other factors. The Corporation uses historical data to estimate option exercises and employee terminations to estimate the expected life of options. The risk-free interest rate for the expected life of the options is based on the U.S. Treasury yield curve in effect on the date of grant. The expected dividend yield is based on the Corporation’s expected dividend yield over the life of the options.
Activity in the stock option plans for the six months ended June 30, 2011 was as follows:
Weighted
|
||||||||||||
Number
|
Average
|
Number
|
||||||||||
Of
|
Exercise
|
of Options
|
||||||||||
Stock Options
|
Options
|
Price
|
Exercisable
|
|||||||||
Outstanding options at December 31, 2010
|
31,330 | $ | 13.47 | 7,167 | ||||||||
Granted
|
— | — | ||||||||||
Exercised
|
— | — | ||||||||||
Forfeited
|
— | — | ||||||||||
Expired
|
— | — | ||||||||||
Outstanding options at June 30, 2011
|
31,330 | $ | 13.47 | 8,167 |
The following is a summary of outstanding and exercisable stock options as of June 30, 2011:
Number
|
Weighted Average
|
Number | ||||||||||
of Shares
|
Remaining
|
of Shares | ||||||||||
Exercise Price
|
Outstanding |
Contractual Life
|
Exercisable | |||||||||
$ 22.75
|
1,130 | 1.51 |
years
|
1,130 | ||||||||
$ 26.75
|
1,000 | 4.51 |
years
|
1,000 | ||||||||
$ 12.30
|
18,100 | 8.13 |
years
|
6,037 | ||||||||
$ 13.25
|
11,100 | 9.13 |
years
|
— | ||||||||
Total
|
31,330 | 8.13 |
years
|
8,167 |
16.
COMMERCIAL BANCSHARES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock option. At June 30, 2011, the aggregate intrinsic value of stock options outstanding and exercisable was $150,000 and $33,000, respectively, compared to an aggregate intrinsic value of $54,000 and $13,000 at December 31, 2010.
For the six-month period ended June 30, 2011 and 2010, the Corporation recognized compensation expense of $10,000 and $7,000, respectively, for the vesting of stock options. For the full year 2010, the Corporation recognized compensation expense of $18,000 for the vesting of stock options. At June 30, 2011, the Corporation had $30,000 of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through the third quarter 2013.
The following table summarizes information about the Corporation’s nonvested stock option activity for the six months ended June 30, 2011.
Number
|
Weighted
|
|||||||
Of
|
Average
|
|||||||
Nonvested Options
|
Options
|
Price
|
||||||
Nonvested options at December 31, 2010
|
24,163 | $ | 13.33 | |||||
Granted
|
— | 0.00 | ||||||
Vested
|
(1,000 | ) | 26.75 | |||||
Forfeited
|
— | 0.00 | ||||||
Nonvested options at June 30, 2011
|
23,163 | $ | 12.76 |
The fair value of restricted stock is equal to the fair market value of the Corporation’s common stock on the date of grant. Restricted stock awards are recorded as deferred compensation, a component of shareholders’ equity, and amortized to compensation expense over a three year vesting period. Compensation expense for restricted stock awards of approximately $8,000 and $4,000 was recorded during the six-month period ended June 30, 2011 and 2010, respectively. For the full year 2010, the Corporation recognized $11,000 in compensation expense for restricted stock awards. At June 30, 2011, the Corporation had $28,000 of unrecognized compensation expense related to restricted stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through the third quarter 2013.
17.
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, 2011, compared to December 31, 2010, and the consolidated results of operations for the three and six-month periods ended June 30, 2011 compared to the same periods in 2010. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements and related footnotes.
The Corporation’s net earnings, after taxes, for the six months ended June 30, 2011, increased 15.81% to $1,245,000 when compared to $1,075,000 for the six months ended June 30, 2010. The increase in earnings was primarily due to a decline in cost of funds, down 58 basis points to 0.99% for the six-month period ended June 30, 2011, from 1.57% for the same period last year. The decline in cost of funds was largely due to lowering the offering rates on new and maturing time deposits and other interest-bearing deposit accounts in response to the current rate environment and high level of on-balance sheet liquidity. Diluted earnings per common share increased to $1.07 per share for the six months ended June 30, 2011 from $0.94 per share for the six months ended June 30, 2010.
The Corporation’s return on average equity and return on average assets for the six months ended June 30, 2011 was 9.97% and 0.84%, respectively, compared to 9.33% and 0.73% in 2010. The Corporation’s efficiency ratio, on a fully taxable equivalent basis, was 68.51% for the six months ended June 30, 2011, a slight improvement from 70.44% for the six months ended June 30, 2010. The efficiency ratio measures the amount of expense incurred to generate a dollar of revenue and is calculated by dividing noninterest expense by the sum of taxable equivalent net interest income before provision and other noninterest income, excluding net gains (losses) on sales of investment securities and net gains (losses) on sales of fixed assets.
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, 2010.
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.
18.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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FINANCIAL CONDITION
Total assets decreased $13,409,000 or 4.41% to $290,994,000 at June 30, 2011, from $304,403,000 at December 31, 2010, largely due to a decline in net loans of $7,158,000 and a decline in cash equivalents and federal funds sold of $6,664,000. Total deposits decreased $13,445,000 or 4.85%, to $263,799,000 at June 30, 2011 from $277,244,000 at year-end 2010, primarily due to decreases in small and large certificates of deposit accounts of $14,608,000, partially offset by an increases in savings and money market balances. During the first half of 2011, high cost certificates of deposit were allowed to run off as total assets declined. The increases in low cost savings and money market balances appear to reflect customer preference for the liquidity these types of deposits provide over the rates currently offered for longer term certificates of deposit.
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 values. Investment securities increased $305,000 or 0.84% to $36,408,000 at June 30, 2011 from $36,103,000 at year-end 2010, predominantly due to purchases of U.S. government-sponsored agencies of $4,149,000 offset with calls, maturities and repayments of U.S. government-sponsored agencies as well as municipal and mortgaged-backed securities totaling $3,913,000.
Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Total loans receivable, before allowance for loan losses, decreased $6,820,000 or 2.96% to $223,838,000 at June 30, 2011 from $230,658,000 at December 31, 2010, predominantly in the commercial and agricultural loan portfolio, down $6,455,000 or 3.74% from year-end 2010. The decline in commercial and agricultural loans is driven by loan demand being outpaced by maturities and repayments.
The Corporation’s loan portfolio represents its largest and highest yielding assets. It also contains the most risk of loss. This risk is largely due 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 economic conditions 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:
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1)
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Reviewed all underwriting guidelines for various loan portfolios and have strengthened underwriting guidelines where needed.
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2)
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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.
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3)
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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.
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4)
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Aggressively seeks 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.
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5)
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Aggressively obtaining updated financial information on commercial credits and performing analytical reviews to determine debt source capacities in business performance trends.
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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.
19.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The allowance for loan losses is maintained to provide for losses that can reasonably be anticipated. The allowance is based on ongoing quarterly assessments of the probable losses inherent in the loan portfolio. The allowance for loan losses is increased by provisions charged to operations during the current period and reduced by loan charge-offs, net of recoveries. Loans are charged against the allowance when management believes that the collection of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, based on evaluations of the probability of collection. In evaluating the probability of collection, management is required to make estimates and assumptions that affect the reported amounts of loans, allowance for loan losses and the provision for credit losses charged to operations. Actual results could differ significantly from those estimates. These evaluations take into consideration such factors as the composition of the loan portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.
The allowance allocation for commercial and commercial real estate loans begins with a process of estimating the probable losses inherent for these types of loans. The estimates for these loans are established by category and based on an internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for the internal system of credit risk grades for commercial and commercial real estate loans is based on management’s experience with similarly graded loans as well as historical loss data.
The allowance allocation for consumer and consumer real estate loans which includes consumer mortgages, installment, home equity, automobile and others is established for each of the categories by estimating probable losses inherent in that particular category of consumer and consumer real estate loans. The estimated loan loss allocation rate for each category is based on management’s experience, discussions with banking regulators, consideration of actual loss rates, industry loss rates and loss rates of various peer banking groups. Consumer and consumer real estate loans are evaluated as a group by category (i.e. retail real estate, installment, etc.) rather than on an individual loan basis because these loans are smaller and homogeneous.
The estimated loan loss allocation for all three loan portfolio segments (commercial, residential real estate and consumer) and concentrations within those portfolios, is then adjusted for management’s estimate of probable losses for several “environmental” factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon monthly actual and quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes and prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influential factors. These environmental factors are considered for each of the three loan segments and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.
The significant increase in downgrades to substandard from year-end 2010 occurred predominantly in the Bank’s hospitality and hotel portfolios as a result of the struggling economy’s impact upon those industries in general and certain specific Bank credits. Management regularly reviews the updated financial position of all such loans in its portfolio and any deterioration in such position can result in a credit being downgraded even though, as is the case with these credits, there has been no history of delinquency and such loans are fully performing.
The allowance for loan losses totaled $3,536,000 at June 30, 2011, an increase of $338,000 or 10.57% from $3,198,000 at December 31, 2010. The ratio of annualized net charge-offs to average outstanding loans was 0.17% at June 30, 2011, compared to 0.41% at year-end 2010. The ratio of the allowance for loan losses to total loans was 1.58% at June 30, 2011, compared to 1.39% at year-end 2010. The increase to the allowance for loan losses from year-end was primarily due to the depreciation of the collateral value on an existing impaired credit of approximately $240,000. The Corporation provided $525,000 to the allowance for loan losses during the six months ended June 30, 2011 to maintain the balance at an adequate level following net charge-offs of $187,000.
Before loans are charged off, they typically go through a phase of nonperforming status. Various stages exist when dealing with such nonperformance. The first stage is simple delinquency, where customers consistently start paying late, 30, 60, 90 days at a time. These accounts are then put on a list of loans to “watch” as they continue to under-perform according to original terms. Repeat offenders are moved to nonaccrual status when their delinquencies have been frequent or sustained enough to assume that normal payments may never be reestablished. This prevents the Corporation from recognizing income it may never collect and may create small negative spikes in earnings as any accrued interest already on the books is reversed from prior earnings estimates.
Loans are placed on nonaccrual status when management believes the collection of interest is doubtful, or when accruals are continued on loans deemed by management to be fully collateralized and in the process of being collected. At June 30, 2011 and December 31, 2010, there were no 90 day delinquent loans that were on accrual status. In such cases, the loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond the due dates. When loans are charged off, any accrued interest recorded in the current fiscal year is charged against interest income. The remaining balance is treated as a loan charged off. Nonaccrual loans increased $661,000 or 34.18% to $2,595,000 at June 30, 2011, from $1,934,000 at December 31, 2010.
20.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The impairment of a loan occurs when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured as the difference between the recorded investment in the loan and the evaluation of the present value of expected future cash flows or the observable market price of the loan. Loans that are collateral dependent, that is, loans where repayment is expected to be provided solely by the underlying collateral, and for which management has determined foreclosure is probable, are measured for impairment based on the fair value of the collateral. Management’s general practice is to charge down impaired, nonperforming loans to the fair value of the underlying collateral of the loan so no specific loss allocations are necessary for these loans. The allowance for loan losses, specifically related to impaired loans at June 30, 2011 and December 31, 2010 was $401,000 and $156,000, respectively, related to loans with principal balances of $3,165,000 and $980,000. The recorded investment of impaired loans with no specific allowance was $1,675,000 at June 30, 2011, compared to $884,000 at December 31, 2010. Management has taken what it believes to be an aggressive stance on identifying problems with credits by identifying them as impaired early in its evaluation process. In addition, management has evaluated these credits and their ultimate collectability using both internal and external portfolio loan reviews, and believes any potential losses which may be incurred on these credits in the future are incorporated into its analysis of the adequacy of the Bank’s existing allowance for loan losses. Of the total impaired loans, four credits, totaling $2,999,000 are still performing but have either begun or are still exhibiting signs of financial difficulties.
The Corporation’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. If all loans on nonaccrual status had been performing in accordance with their original terms, the Corporation would have recorded interest income, with respect to such loans, of approximately $129,000 for the six months ended June 30, 2011 compared to actual payments recorded as interest income, with respect to such loans, of $22,000.
Accrued interest receivable decreased $128,000 or 9.94% to $1,160,000 at June 30, 2011 from $1,288,000 at December 31, 2010 primarily due to the semi-annual interest payments received on agricultural loans. Other assets totaled $10,124,000 at June 30, 2011, an increase of $289,000 or 2.94% from $9,835,000 at December 31, 2010, largely due to an increase of $133,000 in OREO and other repossessed assets as well as an increase of $140,000 in the cash surrender value of company-owned life insurance.
OREO and other repossessed assets are carried at the lower of cost or estimated fair market value less estimated expenses to be incurred to sell the property. OREO represents properties acquired by the Corporation through customer loan defaults. At June 30, 2011, the Corporation held four properties in OREO with a carrying value of $214,000 compared to two properties held in OREO at December 31, 2010 with a carrying value of $20,000. Other repossessed assets totaled $31,000 at June 30, 2011 compared to $92,000 at December 31, 2010.
Total deposits decreased $13,445,000 or 4.85%, to $263,799,000 at June 30, 2011 from $277,244,000 at December 31, 2010, predominantly in small and large certificate of deposit balances, down $6,050,000 and $8,558,000, respectively, offset with increases in savings and money market balances. The decline in deposits was primarily driven by ongoing downward pricing adjustments reflecting customer reluctance to extend CD maturities given the current low rate environment.
Shareholders’ equity increased $1,160,000 or 4.76% to $25,549,000 at June 30, 2011 from $24,389,000 at December 31, 2010. The increase in capital was primarily attributable to net income of $1,245,000, offset by dividends of $277,000 paid to shareholders, as well as an increase in the market value of investment securities, net of tax of $119,000 plus adjustments of $73,000 related to the issuance of treasury stock for the deferred compensation plan, employee compensation costs and stock option accounting. During the six months of 2011, the Corporation returned 22.26% of earnings through dividends of $277,000 at $0.24 per share. At June 30, 2011, total shareholders’ equity to total assets was 8.78% compared to 8.01% at December 31, 2010.
21.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Net income, after taxes for the three months ended June 30, 2011 increased $71,000 or 12.75% to $628,000 when compared to $557,000 for the same period in 2010. Diluted earnings per share increased to $0.54 per share for the three months ended June 30, 2011 from $0.49 per share for the same period in 2010. Net income, after taxes, for the six months ended June 30, 2011 increased $170,000 or 15.81% to $1,245,000 when compared to $1,075,000 for the six months ended June 30, 2010. Diluted earnings per share increased to $1.07 per share for the six months ended June 30, 2011 from $0.94 per share for the same period in 2010. The following discussion details the contributing factors influencing these operation results.
The largest component of the Corporation’s operating income is net interest income. The level of net interest income is dependent upon the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities as well as tax-exempt loans. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.
Net interest income for the three and six months ended June 30, 2011 was $3,283,000 and $6,450,000, respectively, an increase of $208,000 or 6.76% and $338,000 or 5.53% over the comparable periods a year ago. The increase in net interest income was largely driven by the rate payable on interest-bearing liabilities declining more rapidly than the yield on interest-earning assets. With approximately 74% of the loan portfolio in floating rate instruments at June 30, 2011, the effects of low market rates continue to impact loan yields. The Corporation has successfully sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans over the past year. The Corporation’s cost of funds continued to decline during 2011, positively impacting net interest margin.
Interest and fee income was $3,840,000 during the second quarter of 2011, a decrease of $176,000 or 4.38% compared to $4,016,000 during the second quarter of 2010. Average net loans, comprising 81.38% and 78.99% of average earning assets in the second quarter of 2011 and 2010, respectively, increased $1,981,000 or 0.90%, while the average tax-equivalent yield earned decreased 28 basis points. The decline in interest income was largely due to the downward repricing of variable rate loans. Average federal funds sold, comprising 4.79% and 7.53% of average earning assets in the second quarter of 2011 and 2010, respectively, decreased $7,878,000 or 37.69%, while the average yield earned decreased 3 basis points. Average investment securities, comprising 13.83% and 13.49% of average earning assets, in the second quarter of 2011 and 2010, respectively, increased $159,000 or 0.42%, while the average tax-equivalent yield earned decreased 51 basis points.
Interest and fee income for the six months ended June 30, 2011 was $7,635,000, a decrease of $388,000 or 4.84% compared to $8,023,000 for the six months ended June 30, 2010. Average net loans, comprising 80.12% and 80.22% of average earning assets for the six months ended June 30, 2011 and 2010, respectively, increased $2,220,000 or 1.01%, 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. Average investment securities, comprising 13.42% and 13.47% of average earning assets for the six months ended June 30, 2011 and 2010, respectively, increased $289,000 or 0.79%, while the average tax-equivalent yield earned decreased 52 basis points.
Interest expense was $557,000 during the second quarter of 2011, a decrease of $384,000 or 40.81% compared to $941,000 during the second quarter of 2010. Average interest-bearing demand deposits, comprising 44.53% and 40.69% of interest-bearing liabilities in the second quarter of 2011 and 2010, respectively, increased $3,848,000 or 3.80%, while the average rate paid decreased 28 basis points. Average time deposits, comprising 47.83% and 51.53% of interest-bearing liabilities in the second quarter of 2011 and 2010, respectively, decreased $15,378,000 or 11.98%, while the average rate paid decreased 65 basis points.
22.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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TABLE 1 YIELD ANALYSIS
The following table presents an analysis of average yields earned on interest-earning assets as well as the average rates paid on interest-bearing liabilities on a fully taxable equivalent basis for the three months ended June 30:
Three Months Ended June 30,
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2011
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2010
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Average
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Average
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Average
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Average
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(Amounts in thousands)
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balance
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Interest
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yield/rate
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balance
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Interest
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yield/rate
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Federal funds sold
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$ | 13,022 | $ | 6 | 0.18 | % | $ | 20,900 | $ | 11 | 0.21 | % | ||||||||||||
Investment securities:
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Taxable securities (1)
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21,723 | 141 | 2.60 | 19,337 | 160 | 3.32 | ||||||||||||||||||
Tax-exempt securities (1)
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15,889 | 235 | 5.93 | 18,116 | 262 | 5.80 | ||||||||||||||||||
Loans (2) (3) (4)
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221,358 | 3,458 | 6.27 | 219,377 | 3,583 | 6.55 | ||||||||||||||||||
Earning assets
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271,992 | 3,840 | 5.66 | % | 277,730 | 4,016 | 5.80 | % | ||||||||||||||||
Other assets
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23,808 | 24,278 | ||||||||||||||||||||||
Total assets
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$ | 295,800 | $ | 302,008 | ||||||||||||||||||||
Interest-bearing demand deposits
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$ | 105,238 | 35 | 0.13 | % | $ | 101,390 | 104 | 0.41 | % | ||||||||||||||
Savings deposits
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18,063 | 4 | 0.09 | 15,945 | 11 | 0.28 | ||||||||||||||||||
Time deposits
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113,030 | 518 | 1.84 | 128,408 | 797 | 2.49 | ||||||||||||||||||
Borrowed funds
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— | — | — | 3,462 | 29 | 3.36 | ||||||||||||||||||
Interest-bearing liabilities
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$ | 236,331 | 557 | 0.95 | % | $ | 249,205 | 941 | 1.51 | % | ||||||||||||||
Noninterest-bearing demand deposits
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32,093 | 27,225 | ||||||||||||||||||||||
Other liabilities
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1,852 | 2,161 | ||||||||||||||||||||||
Shareholders’ equity
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25,524 | 23,417 | ||||||||||||||||||||||
Total liabilities and
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shareholders’ equity
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$ | 295,800 | $ | 302,008 | ||||||||||||||||||||
Net interest income
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$ | 3,283 | $ | 3,075 | ||||||||||||||||||||
Interest rate spread
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4.71 | % | 4.29 | % | ||||||||||||||||||||
Net interest margin (5)
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4.84 | % | 4.44 | % |
(1)
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Average yields on all securities have been computed based on amortized cost. Income on tax-exempt securities has been computed on a 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 $80,000 and $89,000 for the three months ended June 30, 2011 and 2010, respectively.
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(2)
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Average balance is net of deferred loan fees of $124,000 and $54,000 for the three months ended June 30, 2011 and 2010, respectively. Unearned income was fully amortized at June 30, 2011 compared to a remaining balance of $71,000 at June 30, 2010.
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(3)
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Interest income includes loan fees of $130,000 and $136,000 for the three-month period ended June 30, 2011 and 2010, respectively, as well as $57,000 and $48,000 of deferred dealer reserve expense for the same years.
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(4)
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Average loan balances include nonaccruing loans.
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(5)
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Net interest income as a percentage of average interest-earning assets.
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23.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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TABLE 2 YIELD ANALYSIS
The following table presents an analysis of average yields earned on interest-earning assets as well as the average rates paid on interest-bearing liabilities on a fully taxable equivalent basis for the six months ended June 30:
Six Months Ended June 30,
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2011
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2010
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Average
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Average |
Average
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Average
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(Amounts in thousands)
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balance
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Interest
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yield/rate
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balance
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Interest
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yield/rate
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Federal funds sold
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$ | 17,821 | $ | 18 | 0.20 | % | $ | 17,207 | $ | 18 | 0.21 | % | ||||||||||||
Investment securities:
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Taxable securities (1)
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21,146 | 285 | 2.72 | 18,579 | 318 | 3.45 | ||||||||||||||||||
Tax-exempt securities (1)
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15,898 | 473 | 6.00 | 18,176 | 529 | 5.87 | ||||||||||||||||||
Loans (2) (3) (4)
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221,135 | 6,859 | 6.25 | 218,915 | 7,158 | 6.59 | ||||||||||||||||||
Earning assets
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276,000 | 7,635 | 5.58 | % | 272,877 | 8,023 | 5.93 | % | ||||||||||||||||
Other assets
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23,971 | 24,684 | ||||||||||||||||||||||
Total assets
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$ | 299,971 | $ | 297,561 | ||||||||||||||||||||
Interest-bearing demand deposits
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$ | 105,490 | 71 | 0.14 | % | $ | 98,974 | 237 | 0.48 | % | ||||||||||||||
Savings deposits
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17,614 | 11 | 0.13 | 15,471 | 22 | 0.29 | ||||||||||||||||||
Time deposits
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117,543 | 1,103 | 1.89 | 126,129 | 1,581 | 2.53 | ||||||||||||||||||
Borrowed funds
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— | — | — | 4,227 | 71 | 3.39 | ||||||||||||||||||
Interest-bearing liabilities
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$ | 240,647 | 1,185 | 0.99 | % | $ | 244,801 | 1,911 | 1.57 | % | ||||||||||||||
Noninterest-bearing demand deposits
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31,895 | 27,446 | ||||||||||||||||||||||
Other liabilities
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2,256 | 2,088 | ||||||||||||||||||||||
Shareholders’ equity
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25,173 | 23,226 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity
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$ | 299,971 | $ | 297,561 | ||||||||||||||||||||
Net interest income
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$ | 6,450 | $ | 6,112 | ||||||||||||||||||||
Interest rate spread
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4.59 | % | 4.36 | % | ||||||||||||||||||||
Net interest margin (5)
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4.71 | % | 4.52 | % |
(1)
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Average yields on all securities have been computed based on amortized cost. Income on tax-exempt securities has been computed on a 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 $161,000 and $179,000 for the six months ended June 30, 2011 and 2010, respectively.
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(2)
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Average balance is net of deferred loan fees of $115,000 and $55,000 for the six months ended June 30, 2011 and 2010, respectively, as well as $2,000 and $97,000 of unearned income for the same years.
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(3)
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Interest income includes loan fees of $229,000 and $240,000 for the six-month period ended June 30, 2011 and 2010, respectively, as well as $113,000 and $91,000 of deferred dealer reserve expense for the same years.
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(4)
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Average loan balances include nonaccruing loans.
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(5)
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Net interest income as a percentage of average interest-earning assets.
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Interest expense for the six months ended June 30, 2011 was $1,185,000, a decrease of $726,000 or 37.99% when compared to $1,911,000 for the six months ended June 30, 2010. Average interest-bearing demand deposits, comprising 43.84% and 40.43% of average interest-bearing liabilities for the six months ended June 30, 2011 and 2010, respectively, increased $6,516,000 or 6.58%, while the average rate paid decreased 34 basis points. Average time deposits, comprising 48.84% and 51.52% of interest-bearing liabilities for the six months ended June 30, 2011 and 2010, respectively, decreased $8,586,000 or 6.81%, while the average rate paid decreased 64 basis points.
24.
COMMERCIAL BANCSHARES, INC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The average tax equivalent yield on interest-earning assets for the three and six months ended June 30, 2011 was 5.66% and 5.58%, respectively, a decrease of 14 and 35 basis points from 5.80% and 5.93% for the same periods in 2010. The average rate paid on interest-bearing liabilities for the three and six months ended June 30, 2011 was 0.95% and 0.99%, respectively, a decrease of 56 and 58 basis points from 1.51% and 1.57% for the same periods in 2010. Net interest margin on a taxable equivalent basis for the three and six months ended June 30, 2011 was 4.84% and 4.71%, respectively, an increase of 40 and 19 basis points from 4.44% and 4.52% for the same periods in 2010. The increase in net interest margin is largely due to the continued reduction in deposit rates, particularly certificates of deposit, which resulted in a shift from higher cost deposit products to lower cost core deposits.
Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed adequate by management. In evaluating the allowance for loan losses, management considers factors that include loan growth, composition, diversification, or conversely, concentrations by industry, geography or collateral within the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. Provision for loan losses for the three and six months ended June 30, 2011, totaled $330,000 and $525,000, respectively, compared to $280,000 and $525,000 for the three and six months ended June 30, 2010. The elevated levels of the allowance for loan losses as a percentage to loans in 2011 are largely due to the increase in the allocated reserve percentages assigned to certain loan types as well as the increase in classified loans which reflects, in part, the impact of the recent recession on many of the Corporation’s commercial customers, especially those in the hospitality and food service industries.
Management considers the allowance for loan losses at June 30, 2011 adequate to cover loan losses based on its assessment of various factors affecting the loan portfolio, including the level of problem loans, overall delinquencies, business conditions, estimated collateral values and loss experience. A further decline in local and national economic conditions, or other factors, could result in a material increase in the allowance for loan losses which could adversely affect the Corporation’s financial condition and results of operations. Further information relating to factors affecting the allowance for loan losses is discussed under Financial Condition.
Noninterest income consists primarily of fees and commissions earned on services that are provided to the Corporation’s banking customers and, to a lesser extent, gains on sales of OREO and other repossessed assets and other miscellaneous income. Noninterest income for the three and six months ended June 30, 2011 was $558,000 and $1,046,000, respectively, an increase of $7,000 and $67,000 when compared to $551,000 and $979,000 for the three and six months ended June 30, 2010. Customer service fees and overdraft charges for the three and six months ended June 30, 2011 were $391,000 and $753,000, respectively, a decrease of $43,000 and $100,000 when compared to $434,000 and $853,000 for the same periods in 2010. The decrease in service fees for the three and six-month period is due in part to the impact of Regulation E rules pertaining to overdraft fees. In the third quarter of 2010, the Federal Reserve issued a revision to Regulation E which prohibited financial institutions from charging a customer fees for paying overdrafts on ATMs and one-time debit card transactions unless that customer consented, or opted in to the overdraft service for those types of transactions. Of the transaction accounts eligible for this overdraft service, only 15.90% of the customers accepted or opted in to the program. Offsetting the decrease in noninterest income was the reduction of losses on the disposition of OREO and other repossessed assets of $56,000 and $164,000 for the three and six months ended June 30, 2011, respectively, when compared to the same periods in 2010.
Noninterest expense consists primarily of personnel, occupancy, equipment and other expenses. Noninterest expense for the three and six months ended June 30, 2011, totaled $2,585,000 and $5,136,000, respectively, an increase of $56,000 and $144,000 when compared to $2,529,000 and $4,992,000 for the same periods in 2010. Salaries and employee benefits totaled $1,399,000 and $2,734,000 for the three and six months ended June 30, 2011, respectively, an increase of $103,000 and $138,000 when compared to $1,296,000 and $2,596,000 for the three and six months ended June 30, 2010. The increase in personnel expense is primarily the result of planned increases in salaries and benefits as well as an increase in accrued bonuses and stock-based compensation expense. Professional fees totaled $105,000 and $275,000 for the three and six months ended June 30, 2011, respectively, an increase of $6,000 and $58,000 when compared to $99,000 and $217,000 for the same periods in 2010. The increase in professional fees is primarily due to legal expenses relating to the workout of one problem loan. Offsetting the increase in noninterest expense is the decrease in OREO and miscellaneous loan expense as well as a decrease in FDIC deposit insurance. OREO and miscellaneous expense totaled $81,000 and $128,000 for the three and six months ended June 30, 2011, respectively, a decrease of $55,000 and $52,000 when compared to $136,000 and $180,000 for the same periods in 2010. The decrease in OREO and miscellaneous loan expense is predominately due to the decline in OREO and repossessed asset balances in 2011. Average OREO and repossessed assets for the six months ended June 30, 2011 totaled $182,000, a decrease of $682,000 from average OREO and repossessed assets of $864,000 for the six months ended June 30, 2010. FDIC deposit insurance totaled $109,000 and $223,000 for the three and six months ended June 30, 2011, respectively, a decrease of $31,000 and $55,000 when compared to $140,000 and $278,000 for the three and six months ended June 30, 2010. The decrease in FDIC deposit insurance is primarily due to a decline in average deposit balances.
25.
COMMERCIAL BANCSHARES, INC.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
|
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The Corporation recorded a provision for income taxes of $218,000 and $429,000 for the three and six months ended June 30, 2011, respectively, an increase of $47,000 and $109,000 when compared to $171,000 and $320,000 for the same periods in 2010. The increase in income tax expense was largely driven by an increase in pre-tax income offset by earning adjustments relating to tax-exempt loans, investments and company-owned life insurance. The Corporation’s effective tax rate increased to 25.77% and 25.63% for the three and six months ended June 30, 2011, respectively, when compared to 23.49% and 22.94% for the same periods in 2010.
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. The Corporation’s principal sources of funds are deposits, prepayments and maturities of outstanding loans and investment 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, 2011 was 8.13% compared to 10.09% at year-end 2010. Another measure of liquidity is the relationship of net loans to deposits and borrowed funds with lower ratios indicating greater liquidity. At June 30, 2011, the ratio of net loans to deposits and borrowed funds rose to 83.51% compared to 82.04% at December 31, 2010 primarily due to declining deposit balances. Management believes its sources of liquidity are adequate to meet the needs of the Corporation.
Net cash flows resulted in a decrease of $6,664,000 in cash equivalents and federal funds sold for the six-month period ended June 30, 2011 compared to an increase in cash equivalents and federal funds sold of $7,785,000 for the six-month period ended June 30, 2010. In 2011, total cash from operating activities of $767,000, proceeds from maturities and repayments of securities of $3,913,000, net cash repayments received on loans of $6,555,000 and proceeds from the sale of OREO and other repossessed assets of $187,000 was used to fund security purchases of $4,149,000, pay dividends of $277,000, satisfy deposit withdrawals of $13,445,000 and fund capital purchases of $270,000. In 2010, total cash from operating activities of $2,261,000, proceeds from maturities and repayments of securities of $2,772,000, net cash repayments received on loans of $5,320,000, proceeds from the sale of OREO and other repossessed assets of $571,000 along with an increase in deposit balances of $6,214,000 was used to fund security purchases of $4,000,000, pay down FHLB advances of $5,000,000 and pay dividends of $228,000.
26.
COMMERCIAL BANCSHARES, INC.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
|
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 at June 30, 2011 were 8.3% and 12.1%, respectively, compared to leverage and risk-based capital ratios of 7.6% and 11.3% at year-end 2010. 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.
TABLE 3 CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Corporation has certain obligations and commitments to make future payments under contract. The following table presents the Corporation’s contractual obligations and commitments (in thousands) at June 30, 2011:
Contractual obligations
Payments Due by Period
|
||||||||||||||||||||
Less Than
|
After
|
|||||||||||||||||||
Total
|
One Year
|
1-3 Years
|
3-5 Years
|
5 Years
|
||||||||||||||||
Time deposits and certificates of deposit
|
$ | 110,632 | $ | 58,682 | $ | 39,785 | $ | 11,217 | $ | 948 | ||||||||||
Borrowed funds
|
— | — | — | — | — | |||||||||||||||
Total contractual obligations
|
$ | 110,632 | $ | 58,682 | $ | 39,785 | $ | 11,217 | $ | 948 |
Other commitments
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
|
$ | 20,562 | $ | 11,869 | $ | 1,019 | $ | 2,255 | $ | 5,419 | ||||||||||
Commitments to extend consumer credit
|
11,748 | 426 | 3,197 | 3,265 | 4,860 | |||||||||||||||
Standby letters of credit
|
523 | 213 | 310 | — | — | |||||||||||||||
Total other commitments
|
$ | 32,833 | $ | 12,508 | $ | 4,526 | $ | 5,520 | $ | 10,279 |
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 2010 Annual Report for additional details.
27.
COMMERCIAL BANCSHARES, INC.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
|
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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, approximately 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 $10,371,000 at June 30, 2011 for various possible maturity terms.
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 2010. (See Quantitative and Qualitative Disclosures about Market Risk in the Annual Report to Shareholders for the year ended December 31, 2010.)
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, 2011 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
28.
COMMERCIAL BANCSHARES, INC.
|
FORM 10-Q
|
Quarter ended June 30, 2011
|
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, 2011.
Item 2
|
Unregistered Sales of Securities and Use of Proceeds:
|
For the three months ended June 30, 2011, a total of 1,646 shares were issued from treasury to the Commercial Bancshares, Inc., Deferred Compensation Plan (the “Plan”) at a total cost of $44,985. Additionally, the Corporation delivered 691 shares totaling $11,950 under the Plan to various members of the Board. 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, 2011, including any shares purchased as part of a repurchase program approved by the Corporation’s Board of Directors in June 2009.
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
(or Approximate
Dollar Value)
of Shares that May
Yet be Purchased
Under the Plans
or Programs
|
||||||||||||
4/1/11 - 4/30/11
|
-0- | n/a | -0- | 23,548 | ||||||||||||
5/1/11 - 5/31/11
|
-0- | n/a | -0- | 23,548 | ||||||||||||
6/1/11 - 6/30/11
|
-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
|
Removed and Reserved
|
Item 5
|
Other Information:
|
There are no matters required to be reported under this item.
29.
COMMERCIAL BANCSHARES, INC.
|
FORM 10-Q
|
Quarter ended June 30, 2011
|
PART II – OTHER INFORMATION
|
Item 6
|
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 7 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
|
30.
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, 2011
|
/s/ Robert E. Beach
|
||
(Signature)
|
||||
Robert E. Beach
|
||||
President and Chief Executive Officer
|
||||
Date:
|
August 12, 2011
|
/s/ Scott A. Oboy
|
||
(Signature)
|
||||
Scott A. Oboy
|
||||
Executive Vice President and Chief Financial Officer
|
31.