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EXCEL - IDEA: XBRL DOCUMENT - COMMERCIAL BANCSHARES INC \OH\ | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - COMMERCIAL BANCSHARES INC \OH\ | v311022_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - COMMERCIAL BANCSHARES INC \OH\ | v311022_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - COMMERCIAL BANCSHARES INC \OH\ | v311022_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - COMMERCIAL BANCSHARES INC \OH\ | v311022_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 March 31, 2012. Commission File Number 000-27894
COMMERCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
OHIO | 34-1787239 |
(State or other jurisdiction of | (IRS Employer |
incorporation or organization) | Identification No.) |
118 S. Sandusky Avenue, Upper Sandusky, Ohio 43351
(Address of principal executive offices including zip code)
Registrant’s telephone number, including area code: (419) 294-5781
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes 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 ¨ | Accelerated filer ¨ | ||
Non-accelerated filer ¨ | Smaller Reporting Company R |
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 May 14, 2012, the latest practicable date, there were 1,165,491 outstanding of the registrant’s common stock, no par value.
COMMERCIAL BANCSHARES, INC.
INDEX
Page | |||
PART I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (unaudited) | 3 | |
Consolidated Balance Sheets | 3 | ||
Consolidated Statements of Income | 4 | ||
Consolidated Statements of Comprehensive Income | 5 | ||
Condensed Consolidated Statements of Changes in Shareholders’ Equity | 6 | ||
Condensed Consolidated Statements of Cash Flows | 7 | ||
Notes to Consolidated Financial Statements | 8 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 | |
Item 4. | Controls and Procedures | 29 | |
Part II - Other Information | |||
Item 1. | Legal Proceedings | 30 | |
Item 2. | Unregistered Sales of Securities and Use of Proceeds | 30 | |
Item 3. | Defaults upon Senior Securities | 30 | |
Item 4. | Mine Safety Disclosures | 30 | |
Item 5. | Other Information | 30 | |
Item 6. | Exhibits | 31 | |
SIGNATURES | 32 | ||
EXHIBIT: | 13a-14(a) 302 Certification | ||
13a-14(a) 906 Certification |
2. |
COMMERCIAL BANCSHARES, INC. |
CONSOLIDATED BALANCE SHEETS |
(Amounts in thousands)
(Unaudited) | ||||||
March 31, | December 31, | |||||
2012 | 2011 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 5,842 | $ | 5,435 | ||
Federal funds sold | 27,850 | 5,288 | ||||
Cash equivalents and federal funds sold | 33,692 | 10,723 | ||||
Securities available for sale | 21,953 | 24,852 | ||||
Other investment securities | 2,259 | 2,259 | ||||
Total loans | 230,832 | 234,873 | ||||
Allowance for loan losses | (3,908 | ) | (3,779 | ) | ||
Loans, net | 226,924 | 231,094 | ||||
Premises and equipment, net | 7,287 | 7,406 | ||||
Accrued interest receivable | 1,315 | 1,275 | ||||
Other assets | 9,783 | 10,170 | ||||
Total assets | $ | 303,213 | $ | 287,779 | ||
LIABILITIES | ||||||
Deposits | ||||||
Noninterest-bearing demand | $ | 41,384 | $ | 38,189 | ||
Interest-bearing demand | 117,283 | 103,774 | ||||
Savings and time deposits | 86,132 | 86,918 | ||||
Time deposits $100,000 and greater | 29,209 | 30,247 | ||||
Total deposits | 274,008 | 259,128 | ||||
Accrued interest payable | 108 | 106 | ||||
Other liabilities | 1,470 | 1,546 | ||||
Total liabilities | 275,586 | 260,780 | ||||
SHAREHOLDERS' EQUITY | ||||||
Common stock, no par value; 4,000,000 shares authorized, 1,186,638 shares issued in 2012 and 2011 | 11,646 | 11,621 | ||||
Retained earnings | 16,661 | 16,058 | ||||
Unearned compensation | (66 | ) | (76 | ) | ||
Deferred compensation plan shares; at cost, 42,600 shares in 2012, and 41,606 shares in 2011 | (735 | ) | (717 | ) | ||
Treasury stock; 22,375 shares in 2012 and 23,913 shares in 2011 | (612 | ) | (654 | ) | ||
Accumulated other comprehensive income | 733 | 767 | ||||
Total shareholders' equity | 27,627 | 26,999 | ||||
Total liabilities and shareholders' equity | $ | 303,213 | $ | 287,779 |
See notes to the consolidated financial statements.
3. |
COMMERCIAL BANCSHARES, INC. |
CONSOLIDATED STATEMENTS OF INCOME |
(Unaudited) |
(Amounts in thousands, except per share data)
Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
Interest income | ||||||
Interest and fees on loans | $ | 3,391 | $ | 3,400 | ||
Interest on investment securities: | ||||||
Taxable | 90 | 143 | ||||
Tax-exempt | 136 | 159 | ||||
Federal funds sold | 10 | 12 | ||||
Total interest income | 3,627 | 3,714 | ||||
Interest expense | ||||||
Interest on deposits | 383 | 628 | ||||
Total interest expense | 383 | 628 | ||||
Net interest income | 3,244 | 3,086 | ||||
Provision for loan losses | 150 | 195 | ||||
Net interest income after provision for loan losses | 3,094 | 2,891 | ||||
Noninterest income | ||||||
Service fees and overdraft charges | 361 | 362 | ||||
Other income | 181 | 152 | ||||
Total noninterest income | 542 | 514 | ||||
Noninterest expense | ||||||
Salaries and employee benefits | 1,448 | 1,335 | ||||
Premises and equipment | 317 | 350 | ||||
OREO and miscellaneous loan expense | 41 | 47 | ||||
Professional fees | 118 | 170 | ||||
Data processing | 49 | 50 | ||||
Software maintenance | 97 | 88 | ||||
Advertising and promotional | 56 | 60 | ||||
FDIC deposit insurance | 54 | 113 | ||||
Franchise tax | 79 | 79 | ||||
Losses on repossessed asset sales, net | 2 | 26 | ||||
Other operating expense | 309 | 258 | ||||
Total noninterest expense | 2,570 | 2,576 | ||||
Income before income taxes | 1,066 | 829 | ||||
Income tax expense | 303 | 212 | ||||
Net income | $ | 763 | $ | 617 | ||
Basic earnings per common share | $ | 0.66 | $ | 0.53 | ||
Diluted earnings per common share | $ | 0.65 | $ | 0.53 |
See notes to the consolidated financial statements.
4. |
COMMERCIAL BANCSHARES, INC. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(Unaudited) |
(Amounts in thousands)
Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
Net Income | $ | 763 | $ | 617 | ||
Unrealized holding gain (loss) on securities: | ||||||
Net gain (loss) arising during period | (52 | ) | 80 | |||
Reclassification to net income of net realized loss | — | — | ||||
Net securities gain/(loss) during the period | (52 | ) | 80 | |||
Tax effect | (18 | ) | 27 | |||
Other comprehensive income/(loss), net of tax | (34 | ) | 53 | |||
Comprehensive income, net of tax | $ | 729 | $ | 670 |
See notes to the consolidated financial statements.
5. |
COMMERCIAL BANCSHARES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES |
IN SHAREHOLDERS’ EQUITY |
(Unaudited) |
(Amounts in thousands, except per share data)
Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
Balance at beginning of period | $ | 26,999 | $ | 24,389 | ||
Comprehensive income | ||||||
Net income | 763 | 617 | ||||
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects | (34 | ) | 53 | |||
Total comprehensive income | 729 | 670 | ||||
Stock-based compensation | 17 | 8 | ||||
Deferred compensation plan activity | 28 | 32 | ||||
Dividends paid ($0.125 and $0.120 per share in 2012 and 2011) | (146 | ) | (137 | ) | ||
Balance at end of period | $ | 27,627 | $ | 24,962 |
See notes to the consolidated financial statements.
6. |
COMMERCIAL BANCSHARES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
($ in thousands) | ||||||
Cash flows from operating activities | ||||||
Net income | $ | 763 | $ | 617 | ||
Adjustments | 615 | (610 | ) | |||
Net cash from operating activities | 1,378 | 7 | ||||
Cash flows from investing activities | ||||||
Securities available for sale: | ||||||
Purchases | $ | — | $ | (2,119 | ) | |
Maturities and repayments | 2,807 | 916 | ||||
Net change in loans | 4,053 | 8,384 | ||||
Proceeds from sale of OREO and other repossessed assets | 14 | 126 | ||||
Bank premises and equipment expenditures | (45 | ) | (169 | ) | ||
Net cash from investing activities | 6,829 | 7,138 | ||||
Cash flows from financing activities | ||||||
Net change in deposits | 14,880 | (3,611 | ) | |||
Cash dividends paid | (146 | ) | (137 | ) | ||
Deferred compensation plan activity | 28 | 32 | ||||
Net cash used in financing activities | 14,762 | (3,716 | ) | |||
Net change in cash equivalents and federal funds sold | 22,969 | 3,429 | ||||
Cash equivalents and federal funds sold at beginning of period | 10,723 | 22,080 | ||||
Cash equivalents and federal funds sold at end of period | $ | 33,692 | $ | 25,509 | ||
Supplemental disclosures | ||||||
Cash paid for interest | $ | 381 | $ | 640 | ||
Cash paid for income taxes | — | 625 | ||||
Non-cash transfer of loans to foreclosed and other repossessed assets | 16 | 181 |
See notes to the consolidated financial statements.
7. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Commercial Bancshares, Inc. (the “Corporation”) and its wholly owned subsidiaries, Commercial Financial and Insurance Agency, LTD (“Commercial Financial”) and The Commercial Savings Bank (the “Bank”). The Bank also owns a 49.9% interest in Beck Title Agency, Ltd., which is accounted for by using the equity method of accounting. All significant intercompany 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 March 31, 2012, 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, 2011, 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 March 31, 2012 are not necessarily indicative of the operating results for the full year or any future interim period.
NOTE 2 EARNINGS PER SHARE
Weighted average shares used in determining basic and diluted earnings per share for the three months ended March 31:
2012 | 2011 | |||||
Weighted average shares outstanding during the period | 1,164,060 | 1,153,326 | ||||
Dilutive effect of stock options | 10,280 | 7,087 | ||||
Weighted average shares considering dilutive effect | 1,174,340 | 1,160,413 | ||||
Anti-dilutive stock options not considered in computing diluted earnings per share | 2,130 | 2,130 |
8. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 3 ALLOWANCE FOR LOAN LOSSES
The following table details the changes in the allowance for loan losses by portfolio segment (in thousands) for the three months ended March 31, 2012 and 2011.
Commercial | Real Estate | Consumer | Total | |||||||||
For the Three Months Ended March 31, 2012 | ||||||||||||
Beginning balance – January 1, 2012 | $ | 2,849 | $ | 278 | $ | 652 | $ | 3,779 | ||||
Charge-offs | — | — | (42 | ) | (42 | ) | ||||||
Recoveries | 3 | — | 18 | 21 | ||||||||
Net (charge-offs) recoveries | 3 | — | (24 | ) | (21 | ) | ||||||
Provision | 150 | — | — | 150 | ||||||||
Ending Balance – March 31, 2012 | $ | 3,002 | $ | 278 | $ | 628 | $ | 3,908 | ||||
For the Three Months Ended March 31, 2011 | ||||||||||||
Beginning balance – January 1, 2011 | $ | 2,307 | $ | 182 | $ | 709 | $ | 3,198 | ||||
Charge-offs | (107 | ) | — | (86 | ) | (193 | ) | |||||
Recoveries | 6 | — | 36 | 42 | ||||||||
Net (charge-offs) recoveries | (101 | ) | — | (50 | ) | (151 | ) | |||||
Provision | 179 | 5 | 11 | 195 | ||||||||
Ending Balance – March 31, 2011 | $ | 2,385 | $ | 187 | $ | 670 | $ | 3,242 |
The following table presents an analysis of the allowance for loan losses and recorded investment in loans (in thousands) by portfolio segment as of March 31, 2012 and December 31, 2011.
Collectively evaluated | Individually evaluated | Total | ||||||||||||||||
Allowance | Recorded | Allowance | Recorded | Allowance | Recorded | |||||||||||||
for loan | investment | for loan | investment | for loan | investment | |||||||||||||
losses | in loans | losses | in loans | losses | in loans | |||||||||||||
March 31, 2012 | ||||||||||||||||||
Commercial | $ | 2,461 | $ | 166,298 | $ | 541 | $ | 9,437 | $ | 3,002 | $ | 175,735 | ||||||
Real estate | 278 | 14,975 | — | — | 278 | 14,975 | ||||||||||||
Consumer | 628 | 40,122 | — | — | 628 | 40,122 | ||||||||||||
Total | $ | 3,367 | $ | 221,395 | $ | 541 | $ | 9,437 | $ | 3,908 | $ | 230,832 | ||||||
December 31, 2011 | ||||||||||||||||||
Commercial | $ | 2,398 | $ | 170,002 | $ | 451 | $ | 7,400 | $ | 2,849 | $ | 177,402 | ||||||
Real estate | 278 | 15,456 | — | — | 278 | 15,456 | ||||||||||||
Consumer | 652 | 42,015 | — | — | 652 | 42,015 | ||||||||||||
Total | $ | 3,328 | $ | 227,473 | $ | 451 | $ | 7,400 | $ | 3,779 | $ | 234,873 |
NOTE 4 CREDIT QUALITY INDICATORS
As part of its monitoring process, the Corporation utilizes a risk rating system which quantifies the risk the Corporation estimates it has assumed when entering into a loan transaction and during the life of that loan. The system rates the strength of the borrower and the transaction and is designed to provide a program for risk management and early detection of problems. Loans are graded on a scale of 1 through 9, with a grade of 5 or below classified as “Pass” rated credits. Following is a description of the general characteristics of risk grades 6 through 9:
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. |
9. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
7 – Substandard | The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is considered undesirable, the credit demonstrates a well-defined weakness 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. Accordingly, the Bank does not carry any loans on the books that are graded 9 – loss, instead these loans are charged-off. |
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.
The following tables present the risk category of loans by class of loans based on the most recent analysis performed at March 31, 2012 and December 31, 2011.
Commercial Credit Exposure (amounts in thousands)
Credit risk profile by credit worthiness category
Commercial | Commercial | ||||||||||||||||||||||||
Commercial | Commercial | Real Estate | Real Estate | ||||||||||||||||||||||
Operating | Agricultural | 1-4 Family | Other | ||||||||||||||||||||||
Category | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | |||||||||||||||||
Pass | $ | 24,815 | $ | 25,323 | $ | 26,598 | $ | 27,650 | $ | 34,722 | $ | 33,854 | $ | 72,073 | $ | 71,921 | |||||||||
6 | 95 | 1,234 | 310 | 320 | 597 | 608 | 4,402 | 4,452 | |||||||||||||||||
7 | 649 | 873 | — | — | 1,797 | 1,386 | 9,677 | 9,781 | |||||||||||||||||
8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Total | $ | 25,559 | $ | 27,430 | $ | 26,908 | $ | 27,970 | $ | 37,116 | $ | 35,848 | $ | 86,152 | $ | 86,154 |
Consumer Credit Exposure (amounts in thousands)
Credit risk by credit worthiness category
Residential | Residential | |||||||||||
Real Estate, Construction | Real Estate, Other | |||||||||||
Category | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | ||||||||
Pass | $ | 2,849 | $ | 3,437 | $ | 10,586 | $ | 10,434 | ||||
6 | — | — | 203 | 205 | ||||||||
7 | 73 | 73 | 1,264 | 1,307 | ||||||||
8 | — | — | — | — | ||||||||
Total | $ | 2,922 | $ | 3,510 | $ | 12,053 | $ | 11,946 |
Consumer Credit Exposure (amounts in thousands)
Credit risk by credit worthiness category
Consumer - Equity | Consumer - Auto | Consumer - Other | ||||||||||||||||
Category | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | 03/31/12 | 12/31/11 | ||||||||||||
Pass | $ | 18,823 | $ | 19,565 | $ | 7,720 | $ | 8,365 | $ | 13,185 | $ | 13,673 | ||||||
6 | 67 | 68 | 1 | 2 | 6 | 6 | ||||||||||||
7 | 177 | 185 | 40 | 46 | 103 | 105 | ||||||||||||
8 | — | — | — | — | — | — | ||||||||||||
Total | $ | 19,067 | $ | 19,818 | $ | 7,761 | $ | 8,413 | $ | 13,294 | $ | 13,784 |
10. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 5 SUMMARY OF IMPAIRED LOANS
The following tables set forth certain information regarding the Corporation’s impaired loans (in thousands), segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2012 and December 31, 2011.
Unpaid | |||||||||
Recorded | Principal | Related | |||||||
March 31, 2012 | Investment | Balance | Allowance | ||||||
With no related allowance recorded: | |||||||||
Commercial | |||||||||
Operating | $ | 139 | $ | 139 | $ | — | |||
Real estate, other | 3,867 | 3,867 | — | ||||||
With an allowance recorded: | |||||||||
Commercial | |||||||||
Operating | 170 | 170 | 94 | ||||||
Real estate, 1-4 family | 269 | 269 | 200 | ||||||
Real estate, other | 4,992 | 4,992 | 247 | ||||||
Total | $ | 9,437 | $ | 9,437 | $ | 541 |
Unpaid | |||||||||
Recorded | Principal | Related | |||||||
December 31, 2011 | Investment | Balance | Allowance | ||||||
With no related allowance recorded: | |||||||||
Commercial | |||||||||
Operating | $ | 149 | $ | 181 | $ | — | |||
Real estate, other | 3,668 | 3,668 | — | ||||||
With an allowance recorded: | |||||||||
Commercial | |||||||||
Operating | 177 | 177 | 94 | ||||||
Real estate, 1-4 family | 283 | 283 | 200 | ||||||
Real estate, other | 3,123 | 3,123 | 157 | ||||||
Total | $ | 7,400 | $ | 7,432 | $ | 451 |
The following table presents the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class for the three months ended March 31, 2012 and 2011.
For the Three Months | For the Three Months | |||||||||||
Ended March 31, 2012 | Ended March 31, 2011 | |||||||||||
Average | Total interest | Average | Total interest | |||||||||
recorded | income | recorded | income | |||||||||
(In thousands) | investment | recognized | investment | recognized | ||||||||
With no related allowance recorded: | ||||||||||||
Commercial | ||||||||||||
Operating | $ | 139 | $ | 2 | $ | 330 | $ | 6 | ||||
Real estate, other | 3,879 | 56 | 463 | 3 | ||||||||
With an allowance recorded: | ||||||||||||
Commercial | ||||||||||||
Operating | 172 | — | — | — | ||||||||
Real estate, 1-4 family | 274 | — | 325 | 7 | ||||||||
Real estate, other | 5,011 | 28 | 1,699 | 21 | ||||||||
Total | $ | 9,475 | $ | 86 | $ | 2,817 | $ | 37 |
11. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 6 TROUBLED DEBT RESTRUCTURINGS
The following table summarizes information relative to loan modifications (in thousands) determined to be troubled debt restructurings during 2012.
For the Three Months | ||||||
Ended March 31, 2012 | ||||||
Number | Recorded | |||||
Of TDRs | Investment | |||||
Commercial operating | 1 | $ | 15 | |||
Commercial real estate, 1-4 family | — | — | ||||
Commercial real estate, other | 1 | 2,128 | ||||
Total | 2 | $ | 2,143 |
A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of concessions when modifying a loan. Loan terms that may be modified due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, a reduction in the face amount of the debt, a reduction of the accrued interest, temporary interest-only payments, or re-aging, extensions, deferrals, renewals and rewrites. In mitigation, additional collateral, a co-borrower or a guarantor may be requested.
During the three months ended March 31, 2012, the Corporation had $2,143,000 in modified loans representing 2 credit relationships in which economic concessions were granted to borrowers to better align the terms of their loans with their current ability to pay. These actions were taken to help financially stressed borrowers maintain their homes or businesses. During 2011, the Corporation had $4,132,000 in modified loans representing 5 credit relationships with 3 of these loans, totaling $3,901,000 in accruing status at year-end. There have been no financing receivables modified as troubled debt restructurings within the previous twelve months that have subsequently defaulted during the three months ended March 31, 2012.
Loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have in some cases been taken against the outstanding loan balance. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these determinations.
12. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 7 AGE ANALYSIS OF PAST DUE FINANCING RECEIVABLES
The following table presents the loan portfolio summarized (in thousands) by aging categories at March 31, 2012 and December 31, 2011.
Recorded | ||||||||||||||||||||||||||||
30-59 | 60-89 | >90 | Total | Investment | ||||||||||||||||||||||||
Days | Days | Days | Total | Financing | > 90 Days | |||||||||||||||||||||||
March 31, 2012 | Past Due | Past Due | Past Due | Past Due | Current | Receivables | and Accruing | |||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||
Operating | $ | 17 | $ | — | $ | 6 | $ | 23 | $ | 25,536 | $ | 26,559 | $ | — | ||||||||||||||
Agricultural | — | — | — | — | 26,908 | 26,908 | — | |||||||||||||||||||||
Real estate, 1-4 family | — | — | — | — | 37,116 | 37,116 | — | |||||||||||||||||||||
Real estate, other | — | — | 429 | 429 | 85,723 | 86,152 | — | |||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||
Construction | — | — | — | — | 2,922 | 2,922 | — | |||||||||||||||||||||
Other | — | 132 | — | 132 | 11,921 | 12,053 | — | |||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Equity | — | — | — | — | 19,067 | 19,067 | — | |||||||||||||||||||||
Auto | 15 | — | 7 | 22 | 7,739 | 7,761 | — | |||||||||||||||||||||
Other | 34 | 24 | 34 | 92 | 13,202 | 13,294 | — | |||||||||||||||||||||
Total | $ | 66 | $ | 156 | $ | 476 | $ | 698 | $ | 230,134 | $ | 230,832 | $ | — |
Recorded | ||||||||||||||||||||||||||||
30-59 | 60-89 | >90 | Total | Investment | ||||||||||||||||||||||||
Days | Days | Days | Total | Financing | > 90 Days | |||||||||||||||||||||||
December 31, 2011 | Past Due | Past Due | Past Due | Past Due | Current | Receivables | and Accruing | |||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||
Operating | $ | 14 | $ | 93 | $ | 15 | $ | 122 | $ | 27,308 | $ | 27,430 | $ | — | ||||||||||||||
Agricultural | — | — | — | — | 27,970 | 27,970 | — | |||||||||||||||||||||
Real estate, 1-4 family | 45 | 1 | — | 46 | 35,802 | 35,848 | — | |||||||||||||||||||||
Real estate, other | 121 | — | 309 | 430 | 85,724 | 86,154 | — | |||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||
Construction | — | — | — | — | 3,510 | 3,510 | — | |||||||||||||||||||||
Other | 28 | — | — | 28 | 11,918 | 11,946 | — | |||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Equity | 27 | — | — | 27 | 19,791 | 19,818 | — | |||||||||||||||||||||
Auto | 17 | — | 19 | 36 | 8,377 | 8,413 | — | |||||||||||||||||||||
Other | 20 | 5 | 35 | 60 | 13,724 | 13,784 | — | |||||||||||||||||||||
Total | $ | 272 | $ | 99 | $ | 378 | $ | 749 | $ | 234,124 | $ | 234,873 | $ | — |
NOTE 8 FINANCING RECEIVABLES ON NONACCRUAL STATUS
The following table summarizes loans (in thousands) on nonaccrual status.
March 31, 2012 | December 31, 2011 | |||||||
Commercial | ||||||||
Operating | $ | 396 | $ | 433 | ||||
Real estate, 1-4 family | 368 | 384 | ||||||
Real estate, other | 2,877 | 761 | ||||||
Residential real estate | ||||||||
Other | 287 | 192 | ||||||
Consumer | ||||||||
Equity | 6 | 12 | ||||||
Auto | 17 | 30 | ||||||
Other | 39 | 40 | ||||||
Total | $ | 3,990 | $ | 1,852 |
13. |
COMMERCIAL BANCSHARES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 9 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 Corporation utilizes a third party pricing service to assist in estimating the fair value of financial instruments. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Corporation has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.
Treasuries are priced through a commonly used industry standard calculating source (Bloomberg); for each holding, the price pulled is the actual market bid price at the exact time of pricing. Non-callable agencies are priced through Bloomberg. Matrixes are collected from primary dealers and used to compile an average matrix. Callable agencies are priced running an industry standard calculating source (Bloomberg) with an Option-Adjusted Spread matrix based on current new issue spreads and adjusted accordingly for premiums and discounts. Municipal securities are priced using a matrix-based method denoting quality and maturity breakdowns. Each municipal is assigned a municipal pricing code. The municipal trading desk creates a monthly municipal pricing matrix that has 51 separate market codes. Each municipal is then priced according to its coupon and the maturity/call dates producing the worst-yield. Fixed-rate and adjustable-rate mortgage-backed securities are priced individually using the Reuters pricing service.
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, and the valuation techniques used by the Corporation to determine those fair values.
14. |
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 | ||||||||||||||
March 31, 2012 | Assets (Level 1) | (Level 2) | (Level 3) | Balance | ||||||||||||
Assets | ||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | 2,037 | $ | — | $ | 2,037 | ||||||||
State and political subdivisions | — | 13,956 | — | 13,956 | ||||||||||||
Mortgage-backed securities | — | 5,960 | — | 5,960 | ||||||||||||
Total Assets | $ | — | $ | 21,953 | $ | — | $ | 21,953 | ||||||||
Liabilities | $ | — | $ | — | $ | — | $ | — | ||||||||
December 31, 2011 | ||||||||||||||||
Assets | ||||||||||||||||
U.S. Government and federal agencies | $ | — | $ | 4,066 | $ | — | $ | 4,066 | ||||||||
State and political subdivisions | — | 14,372 | — | 14,372 | ||||||||||||
Mortgage-backed securities | — | 6,414 | — | 6,414 | ||||||||||||
Total Assets | $ | — | $ | 24,852 | $ | — | $ | 24,852 | ||||||||
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 transfers in and out of Levels 1 and 2 for the period ending March 31, 2012.
The Corporation also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At March 31, 2012, such assets consist primarily of impaired loans and other real estate owned. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically, discounted 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) | March 31, | Level 1 | Level 2 | Level 3 | ||||||||||||
2012 | ||||||||||||||||
Impaired loans | $ | 9,437 | $ | — | $ | — | $ | 9,437 | ||||||||
Real estate acquired through foreclosure | — | — | — | — |
Balance at | ||||||||||||||||
(In thousands) | December 31, | Level 1 | Level 2 | Level 3 | ||||||||||||
2011 | ||||||||||||||||
Impaired loans | $ | 7,400 | $ | — | $ | — | $ | 7,400 | ||||||||
Real estate acquired through foreclosure | — | — | — | — |
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).
15. |
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
March 31, 2012 | ||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||
In Active | Other | Significant | ||||||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Identical Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash equivalents and federal funds sold | $ | 33,692 | $ | 33,692 | $ | 33,692 | $ | -- | $ | -- | ||||||||||
Securities available for sale | 21,953 | 21,953 | -- | 21,953 | -- | |||||||||||||||
Other investment securities | 2,259 | 2,259 | -- | -- | 2,259 | |||||||||||||||
Loans, net of allowance for loan loss | 226,924 | 221,137 | -- | -- | 221,137 | |||||||||||||||
Accrued interest receivable | 1,315 | 1,315 | 1,315 | -- | -- | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | $ | (41,384 | ) | $ | (41,384 | ) | $ | (41,384 | ) | $ | -- | $ | -- | |||||||
Interest-bearing deposits | (137,780 | ) | (137,780 | ) | -- | -- | (137,780 | ) | ||||||||||||
Time deposits | (94,844 | ) | (94,820 | ) | -- | -- | (94,820 | ) | ||||||||||||
Accrued interest payable | (108 | ) | (108 | ) | (108 | ) | -- | -- |
December 31, 2011 | ||||||||
Carrying | Estimated | |||||||
Financial assets | Amount | Fair Value | ||||||
Cash equivalents and federal funds sold | $ | 10,723 | $ | 10,723 | ||||
Securities available for sale | 24,852 | 24,852 | ||||||
Other investment securities | 2,259 | 2,259 | ||||||
Loans, net of allowance for loan loss | 231,094 | 224,230 | ||||||
Accrued interest receivable | 1,275 | 1,275 | ||||||
Financial liabilities | ||||||||
Demand and savings deposits | $ | (160,626 | ) | $ | (160,626 | ) | ||
Time deposits | (98,502 | ) | (97,712 | ) | ||||
Accrued interest payable | (106 | ) | (106 | ) |
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 non-performing 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. | |
· | 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. |
16. |
COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 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 Stock Option Plan. The 2009 Plan, which is shareholder approved, permits the grant of stock options, restricted stock and certain other stock-based awards for up to 150,000 shares. At March 31, 2012, a total of 103,300 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 related to employees is included in personnel expense while compensation expense related to directors is included in other operating expense.
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.
The Corporation did not grant any stock options during the first quarter of 2012. Assumptions used in estimating the fair value for options granted during 2011 was as follows:
Dividend yield | 3.32 | % | ||
Risk-free interest rate | 1.65 | % | ||
Expected volatility | 24.14 | % | ||
Weighted average expected life | 8 yrs | |||
Weighted average per share fair value of options | $ | 2.94 |
Activity in the stock option plan for the three months ended March 31, 2012 was as follows:
Weighted | ||||||||||||
Number | Average | Number | ||||||||||
Of | Exercise | of Options | ||||||||||
Stock Options | Options | Price | Exercisable | |||||||||
Outstanding options at January 1, 2012 | 40,330 | $ | 14.45 | 17,105 | ||||||||
Granted | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | — | — | ||||||||||
Expired | — | — | ||||||||||
Outstanding options at March 31, 2012 | 40,330 | $ | 14.45 | 17,105 |
The following is a summary of outstanding and exercisable stock options as of March 31, 2012.
Weighted Average | ||||||||
Number | Remaining | |||||||
Exercise Price | of Shares | Contractual Life | ||||||
$22.75 | 1,130 | 0.76 years | ||||||
$26.75 | 1,000 | 3.76 years | ||||||
$12.30 | 17,300 | 7.37 years | ||||||
$13.25 | 11,100 | 8.38 years | ||||||
$17.40 | 9,800 | 9.37 years | ||||||
Total | 40,330 | 7.86 years |
17. |
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 March 31, 2012, the aggregate intrinsic value of stock options outstanding and exercisable was $222,000 and $107,000, respectively compared to an aggregate intrinsic value of $165,000 and $85,000 at December 31, 2011.
For the three-month period ended March 31, 2012 and 2011, the Corporation recognized compensation expense of $7,000 and $5,000, respectively, for the vesting of stock options. At March 31, 2012, the Corporation had $37,000 of unrecognized compensation expense related to stock options that is expected to be recognized over a remaining weighted average vesting period of 21.9 months.
The following table summarizes information about the Corporation’s nonvested stock option activity for the three months ended March 31, 2012.
Number | Weighted | |||||||
Of | Average | |||||||
Nonvested Options | Options | Price | ||||||
Nonvested options at January 1, 2012 | 23,225 | $ | 14.75 | |||||
Granted | — | 0.00 | ||||||
Vested | — | 0.00 | ||||||
Forfeited | — | 0.00 | ||||||
Nonvested options at March 31, 2012 | 23,225 | $ | 14.75 |
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 the vesting period. Compensation expense for restricted stock awards of approximately $10,000 and $4,000 was recorded during the three-month period ended March 31, 2012 and 2011, respectively. At March 31, 2012, the Corporation had $66,000 of unrecognized compensation expense related to restricted stock options that is expected to be recognized over a remaining weighted average vesting period of 24.8 months.
A summary of restricted stock award activity for the period is presented below:
Weighted | ||||||||
Non-vested | Average | |||||||
Number of | Grant Date | |||||||
Restricted Stock | Shares | Fair Value | ||||||
Nonvested balance at January 1, 2012 | 7,700 | $ | 15.01 | |||||
Granted | — | — | ||||||
Vested | — | — | ||||||
Forfeited/expired | — | — | ||||||
Nonvested balance at March 31, 2012 | 7,700 | $ | 15.01 |
18. |
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 and Insurance Agency, LTD at March 31, 2012, compared to December 31, 2011, and the consolidated results of operations for the quarter ended March 31, 2012 compared to the same period in 2011. 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, increased 23.66% to $763,000 at March 31, 2012, from $617,000 at March 31, 2011. The increase in earnings was primarily due to a decline in cost of funds, down 37 basis points to 0.67% at March 31, 2012, from 1.04% a year ago. 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 prolonged low interest rate environment and high level of liquidity.
The Corporation’s return on average equity and return on average assets for the first quarter of 2012 was 11.14% and 1.03%, respectively, compared to 10.08% and 0.82% in 2011. The Corporation’s efficiency ratio, on a fully taxable equivalent basis, was 66.62% for the three months ended March 31, 2012, a slight improvement from 69.77% for the three months ended March 31, 2011. 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. Diluted earnings per common share increased to $0.65 per share for the three months ended March 31, 2012 from $0.53 per share for the three months ended March 31, 2011.
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, 2011.
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.
19. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $15,434,000 or 5.36% to $303,213,000 at March 31, 2012, from $287,779,000 at December 31, 2011. Interest-earning bank balances, which include the Bank’s deposits at Federal Reserve Bank and federal funds sold, increased $22,562,000.
Securities available for sale are carried at fair value, with unrealized gains or losses based on the difference between amortized cost and fair value, reported net of deferred tax, as accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Declines in the fair value of individual available for sale securities below their cost that are other-than temporary result in write downs of the individual securities to their fair values. Investment securities decreased $2,899,000 or 10.69% to $24,212,000 at March 31, 2012, from $27,111,000 at year-end 2011, predominantly due to the call of $2,380,000 in U.S. government-sponsored agencies and municipal securities along with principal pay downs and prepayments of mortgage-backed securities of $427,000.
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 $4,041,000 or 1.72% to $230,832,000 at March 31, 2012, from $234,873,000 at December 31, 2011, predominantly in the commercial and agricultural loan portfolio, down $1,667,000 from year-end 2011. The decrease in commercial and agricultural loans was primarily due to the competitive rate environment and the continued softening in loan demand as economic recovery in commercial markets remains sluggish.
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 has implemented the following measures to proactively manage credit risk in the loan portfolios:
1) | Reviewed all underwriting guidelines for various loan portfolios and have strengthened underwriting guidelines where needed. |
2) | Evaluated outside loan review parameters, engaging the services of a well-established firm to continue with such loan review, addressing not only specific loans but underwriting analysis, documentation, credit evaluation and risk identification. |
3) | Increased the frequency of internal reviews of past due and delinquent loans to assess probable credit risks early in the delinquency process to minimize losses. |
4) | Aggressively 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. |
5) | Aggressively obtaining updated financial information on commercial credits and performing analytical reviews to determine debt source capacities in business performance trends. |
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 qualitative factors as historical loss experience, delinquency and non-performing loan trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, financial information, documentation exceptions and current economic conditions that may affect the borrowers’ ability to pay.
20. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, observations and comments of 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 allowance for loan losses totaled $3,908,000 at March 31, 2012, an increase of $129,000 from $3,779,000 at December 31, 2011. The ratio of annualized net charge-offs to average outstanding loans was 0.03% at March 31, 2012, compared to 0.18% at year-end 2011. The ratio of the allowance for loan losses to total loans was 1.69% at March 31, 2012, compared to 1.61% at year-end 2011. The Corporation provided $150,000 to the allowance for loan losses during the three months ended March 31, 2012 to maintain the balance at an adequate level following net charge-offs of $20,000.
Before loans are charged off, they typically go through a phase of non-performing status. Various stages exist when dealing with such non-performance. 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.
The Corporation classifies its loan portfolios using internal credit quality ratings. These ratings include pass, special mention and classified. Loans with a pass rating represent those not classified on the Corporation’s rating scale for problem credits, as minimal credit risk has been identified. Special mention loans are those that have a potential for weakness deserving management’s close attention. Classified loans are those where a well-defined weakness has been identified that may put full collection of contractual cash flows at risk. During the three-month period ended March 31, 2012, total classified loans remained relatively unchanged from year-end 2011. 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.
Loans are placed on nonaccrual status when management believes the collection of interest is doubtful, or when loans are past due as to principal and interest 90 days or more, except in certain circumstances when interest accruals are continued on loans deemed by management to be fully collateralized and in the process of being collected. At March 31, 2012 and December 31, 2011, 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.
21. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, non-performing 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 March 31, 2012 and December 31, 2011 was $541,000 and $451,000, respectively, related to loans with principal balances of $5,431,000 and $3,583,000. The allowance for loan losses with no related allowance recorded at March 31, 2012 was $4,006,000, compared to $3,817,000 at December 31, 2011. 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. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. The Corporation did not receive any interest payments related to these loans during the three months ended March 31, 2012, compared to interest payments of $31,000 received during 2011.
Management has taken what it believes to be a proactive position on identifying problems with 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 allowance for loan losses.
A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. That concession is either imposed by court order, law or stems from an agreement between the creditor and the borrower. At March 31, 2012, approximately $8,010,000 in loans had terms modified, with $5,133,000 of these modified loans in accruing status. The $8,010,000 in modified loans represents 8 credit relationships in which economic concessions were granted to borrowers to better align the terms of their loans with their current ability to pay. Of this total, $5,594,000 represents 3 hotel loans. All three borrowers began experiencing financial difficulties primarily relating to occupancy problems common in the industry. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings as of March 31, 2012.
Once a loan is classified as a TDR, this classification will remain until documented improvement in the financial position of the account supports confidence that all principal and interest will be paid according to terms. Additionally, the customer must have reestablished a track record of timely payments according to the restructured contract terms prior to consideration of removing the loan from TDR status.
Total non-performing loans include impaired loans on nonaccrual status along with those loans still accruing that are contractually past due 90 days or more. Non-performing loans totaled $3,990,000 at March 31, 2012, an increase of $2,138,000 from $1,852,000 at December 31, 2011. The increase in nonaccrual loans was primarily due to one large commercial real estate credit of $2,128,000. At March 31, 2012, non-performing commercial loans made up 91.25% or $3,641,000 of all non-performing loans while non-performing real estate and consumer loans totaled $287,000 and $62,000, respectively. The ratio of non-performing loans to total loans was 1.73% at March 31, 2012 compared to 0.79% at December 31, 2011.
Other assets of $18,385,000 decreased $466,000 or 2.47% at March 31, 2012 from $18,851,000 at December 31, 2011. The decrease in other assets is primarily due to the decrease in accounts receivable reflecting the receipt of health insurance costs relating to participants exceeding the stop/gap limits during 2011.
22. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Corporation had no OREO properties at March 31, 2012 or December 31, 2011. Other repossessed assets totaled $31,000 at March 31, 2012 compared to $47,000 at December 31, 2011.
Total deposits increased $14,880,000 or 5.74% to $274,008,000 at March 31, 2012 from $259,128,000 at December 31, 2011, predominantly in interest-bearing demand deposit accounts, up $13,509,000 or 13.02%. The increases in low cost savings demand deposit and money market accounts from year-end 2011 appear to reflect customer preference for the liquidity these types of deposits provide over the rates currently offered on longer term certificates of deposit.
Shareholders’ equity increased $628,000 or 2.33% to $27,627,000 at March 31, 2012 from $26,999,000 at December 31, 2011. The increase in capital represents current earnings of $763,000, plus adjustments related to employee compensation costs, deferred compensation plan and treasury stock activity of $45,000, less dividends of $146,000. Included in shareholders’ equity is accumulated other comprehensive income which includes the net after-tax impact of unrealized gains on investment securities classified as available for sale which decreased $34,000 during 2012. Such unrealized gains or losses are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available for sale. During the three months of 2012, the Corporation returned 19.13% of earnings through dividends of $146,000 at $0.125 per share.
RESULTS OF OPERATIONS
Net income, after taxes for the three months ended March 31, 2012 increased $146,000 or 23.66% to $763,000 when compared to $617,000 for the same period in 2011. Diluted earnings per share increased to $0.65 per share for the three months ended March 31, 2012 from $0.53 for the same period in 2011. The following discussion details the contributing factors influencing these operating 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. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis.
Net interest income increased $149,000 or 4.70% to $3,316,000 at March 31, 2012, compared to $3,167,000 in 2011. 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. The interest rate spread and net interest margin (on a tax-equivalent basis) at March 31, 2012 was 4.76% and 4.86%, respectively, compared to 4.46% and 4.59% for the same period in 2011. With approximately 71% of the loan portfolio in floating rate instruments at March 31, 2012, 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. Loans yielded 5.97% during the three months ended March 31, 2012, compared to 6.25% for the same period last year. The Corporation’s cost of funds continued to decline during 2012, positively impacting net interest margin. The Corporation’s average cost of funds was 0.67% for the three months ended March 31, 2012, compared to 1.04% for the same period last year.
Interest and fee income for the first quarter of 2012 totaled $3,699,000, a decrease of $96,000 or 2.53% compared to $3,795,000 for the first quarter of 2011. Average net loans, comprising 83.37% and 78.88% of average earning assets at March 31, 2012 and 2011, respectively, increased $7,702,000 or 3.49%, while the average tax-equivalent yield earned decreased 28 basis points. The decline in interest income on loans was largely due to the downward repricing of variable rate loans. Average federal funds sold, comprising 7.23% and 8.10% of average earning assets at March 31, 2012 and 2011, respectively, decreased $2,836,000 or 12.51%. Average securities available for sale, comprising 9.39% and 13.02% of average earning assets at March 31, 2012 and 2011, respectively, decreased $10,719,000 or 29.39% while the average tax-equivalent yield earned increased 37 basis points.
23. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table that follows presents the Corporation’s (i) average assets, liabilities and shareholders’ equity, (ii) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (iv) interest rate spread (the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities), and (v) net interest margin (net interest income as a percentage of total average interest-earning assets).
TABLE 1 YIELD ANALYSIS
For the three-month period ended March 31, 2012 and 2011.
(In thousands)
Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
($ in thousands) | balance | Expense | Rate | balance | Expense | Rate | ||||||||||||||||||
Federal funds sold | $ | 19,838 | $ | 10 | 0.20 | % | $ | 22,674 | $ | 12 | 0.21 | % | ||||||||||||
Investment securities: | ||||||||||||||||||||||||
Taxable securities (1) | 11,711 | 90 | 3.09 | 20,562 | 143 | 2.82 | ||||||||||||||||||
Tax-exempt securities (1) | 14,040 | 205 | 5.87 | 15,908 | 238 | 6.07 | ||||||||||||||||||
Loans (2) (3) | 228,611 | 3,394 | 5.97 | 220,909 | 3,402 | 6.25 | ||||||||||||||||||
Earning assets | 274,200 | 3,699 | 5.43 | % | 280,053 | 3,795 | 5.50 | % | ||||||||||||||||
Other assets | 23,982 | 24,135 | ||||||||||||||||||||||
Total assets | $ | 298,182 | $ | 304,188 | ||||||||||||||||||||
Interest-bearing demand deposits | $ | 111,224 | 28 | 0.10 | % | $ | 105,744 | 37 | 0.14 | % | ||||||||||||||
Savings deposits | 19,629 | 2 | 0.04 | 17,159 | 7 | 0.17 | ||||||||||||||||||
Time deposits | 97,552 | 353 | 1.46 | 122,107 | 584 | 1.94 | ||||||||||||||||||
Interest-bearing liabilities | $ | 228,405 | 383 | 0.67 | % | $ | 245,010 | 628 | 1.04 | % | ||||||||||||||
Noninterest-bearing demand deposits | 40,546 | 31,695 | ||||||||||||||||||||||
Other liabilities | 1,684 | 2,663 | ||||||||||||||||||||||
Shareholders’ equity | 27,547 | 24,820 | ||||||||||||||||||||||
Total liabilities and | ||||||||||||||||||||||||
shareholders’ equity | $ | 298,182 | $ | 304,188 | ||||||||||||||||||||
Net interest income | $ | 3,316 | $ | 3,167 | ||||||||||||||||||||
Interest rate spread | 4.76 | % | 4.46 | % | ||||||||||||||||||||
Net interest margin (5) | 4.86 | % | 4.59 | % |
(1) | 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% federal tax rate and a 20% disallowance of interest expense deductibility under TEFRA rules. The amount of such adjustment was $72,000 and $81,000 for 2012 and 2011, respectively. |
(2) | Average balance is net of deferred loan fees of $283,000 and $105,000 for the three months ended March 31, 2012 and 2011, respectively. Unearned income was fully amortized at March 31, 2012 compared to a remaining balance of $3,000 at March 31, 2011. |
(3) | Interest income includes loan fees of $123,000 and $99,000 for the three-month period ended March 31, 2012 and 2011, respectively, as well as $54,000 and $57,000 of deferred dealer reserve expense for the same years. |
(4) | Average loan balances include nonaccruing loans. |
(5) | Net interest income as a percentage of average interest-earning assets. |
24. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense totaled $383,000 during the first quarter of 2012, a decrease of $245,000 or 39.01% compared to $628,000 during the first quarter of 2011. Average interest-bearing demand deposits, comprising 48.70% and 43.16% of interest-bearing liabilities in the first quarter of 2012 and 2011, respectively, increased $5,480,000 or 5.18% while the average rate paid decreased 4 basis points. Average time deposits, comprising 42.71% and 49.84% of interest-bearing liabilities at March 31, 2012 and 2011, respectively, decreased $24,555,000 or 20.11% while the average rate paid decreased 48 basis points.
Provisions for loan losses are charged against 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, estimated value of underlying collateral, prevailing economic conditions and other relevant factors. The provision charged against income during the first quarter of 2012 was $150,000, compared to $195,000 during the same period a year ago. Impacting the provision for loan losses in any accounting period are several matters including the amount of loan growth during the period, broken down by loan type, the level of charge-offs during the period, the changes in the amount of impaired loans, changes in risk ratings assigned to loans, specific loan impairments, credit quality, and ultimately, the results of management’s quarterly assessment of the inherent risks of the loan portfolio.
Management considers the allowance for loan losses at March 31, 2012 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 commission-based income. Noninterest income for the three months ended March 31, 2012 totaled $542,000, an increase of $28,000 or 5.45% from noninterest income of $514,000 for the three months ended March 31, 2011. The increase in noninterest income was largely due to an increase in third-party originations reflecting an increase in residential mortgage production compared to the prior year.
Noninterest expense consists primarily of personnel, occupancy, equipment and other expenses. Noninterest expense for the three months ended March 31, 2012 totaled $2,570,000, a decrease of $6,000 or 0.23% when compared to $2,576,000 for the three months ended March 31, 2011.
Salaries and employee benefits increased $113,000 or 8.46%, predominantly due to planned increases in salaries and benefits as well as an increase in hospitalization insurance. Other operating expenses increased $51,000 or 19.77%, largely due to increased club account expenses and office supplies. Offsetting the increase in noninterest expense is the decrease in FDIC deposit insurance of $59,000 or 52.21%, primarily due to changes made by the FDIC in the method of calculating assessment rates under the Dodd-Frank Act. Professional fees decreased $52,000 or 30.59%, primarily reflecting a decrease in legal expenses associated with problem credits.
The Corporation generated income before taxes of $1,066,000, resulting in a tax provision of $303,000 for the first quarter of 2012 compared to income before taxes of $829,000 with a tax provision of $212,000 for the first quarter of 2011. The increase in income tax expense was largely driven by an increase in pre-tax income offset by earning adjustments relating to tax-free revenue. The Corporation’s effective tax rate for the first quarter of 2012 was 28.42% compared to 25.57% for the first quarter of 2011. The difference between the Corporation’s effective tax rate and the statutory rate is primarily attributable to the Corporation’s tax-exempt income. Tax-exempt income includes income earned on certain municipal investments that qualify for state and/or federal income tax exemption and the Corporation’s earnings on Bank-owned life insurance policies, which are exempt from federal taxation.
25. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 equivalents and federal funds sold, is a result of its operating, investing and financing activities, which are summarized in the Condensed Consolidated Statements of Cash Flows. Primary sources of funds are deposits, prepayments and maturities of outstanding loans and securities. While scheduled payments from the amortization of loans and securities are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Funds are primarily used to meet ongoing commitments, satisfy operational expenses, payout maturing certificates of deposit and savings withdrawals and fund loan demand, with excess funds being invested in short-term interest-earning assets. Additional funds are generated through Federal Home Loan Bank advances, overnight borrowings and other sources.
The Corporation’s liquidity ratio at March 31, 2012 was 12.80% compared to 6.42% at year-end 2011. Another measure of liquidity is the relationship of net loans to deposits and borrowed funds with lower ratios indicating greater liquidity. At March 31, 2012, the ratio of net loans to deposits and borrowed funds was 82.82% compared to 89.18% at December 31, 2011. Management believes its sources of liquidity are adequate to meet the needs of the Corporation.
Net cash flows resulted in an increase of $22,969,000 in cash equivalents and federal funds sold for the three-month period ended March 31, 2012 compared to an increase in cash equivalents and federal funds sold of $3,429,000 for the three-month period ended March 31, 2011. In 2012, total cash from operating activities of $1,377,000, proceeds from maturities and repayments of securities of $2,807,000 and net cash repayments received on loans of $4,053,000 along with an increase in deposit balances of $14,881,000 was used to fund capital expenditures of $45,000 and pay dividends of $146,000 with excess funds invested in federal funds sold and deposited in interest-bearing deposit accounts with other financial institutions.
In 2011, total cash from operating activities of $7,000, proceeds from maturities and repayments of securities of $916,000 and net cash repayments received on loans of $8,384,000 was used to fund security purchases of $2,119,000, pay dividends of $137,000 and satisfy deposit withdrawals of $3,611,000.
CAPITAL RESOURCES
Banking regulations have established minimum capital requirements for banks including risk-based capital ratios and leverage ratios. Regulations require all banks to have a minimum total risk-based capital ratio of 8.0%, with half of the capital composed of core capital. Minimum leverage ratio requirements range from 3.0% to 5.0% of total assets. Conceptually, risk-based capital requirements assess the riskiness of a financial institution’s balance sheet and off-balance sheet commitments in relation to its capital. Core capital, or Tier 1 capital, includes common equity, perpetual preferred stock and minority interests that are held by others in consolidated subsidiaries minus intangible assets. Supplementary capital, or Tier 2 capital, includes core capital and such items as mandatory convertible securities, subordinated debt and the allowance for loan and leases losses, subject to certain limitations. Qualified Tier 2 capital can equal up to 100% of an institution’s Tier 1 capital with certain limitations in meeting the total risk-based capital requirements.
The Bank’s leverage and risk-based capital ratios at March 31, 2012 were 8.9% and 12.5% respectively, compared to leverage and risk-based capital ratios of 8.9% and 12.0% at year-end 2011. 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.
26. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 2 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 March 31, 2012:
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 | $ | 94,844 | $ | 39,066 | $ | 42,657 | $ | 9,124 | $ | 3,997 | ||||||||||
Borrowed funds | — | — | — | — | — | |||||||||||||||
Total contractual obligations | $ | 94,844 | $ | 39,066 | $ | 42,657 | $ | 9,124 | $ | 3,997 |
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 | $ | 23,197 | $ | 13,471 | $ | 939 | $ | 1,789 | $ | 6,998 | ||||||||||
Commitments to extend consumer credit | 13,164 | 1,231 | 2,957 | 3,121 | 5,855 | |||||||||||||||
Standby letters of credit | 262 | 252 | 10 | — | — | |||||||||||||||
Total other commitments | $ | 36,623 | $ | 14,954 | $ | 3,906 | $ | 4,910 | $ | 12,853 |
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 2011 Annual Report for additional details.
Items reported under “Contractual Obligations” represent standard bank financing activity under normal terms and practices. Such funds normally rollover or are replaced by like items depending on the then-current financing needs. Items reported under “Other Commitments” also represent standard bank activity, but for extending credit to bank customers. Commercial credits generally represent lines of credit or approved loans with drawable funds still available under the contract terms. On an on-going basis, 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 $9,333,000 at March 31, 2012 in varying maturity terms.
27. |
COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates and prices. Management seeks to reduce fluctuations in its net interest margin and to optimize net interest income with acceptable levels of risk through periods of changing interest rates. Accordingly, the Corporation’s interest rate sensitivity and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”). ALCO establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive view of the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships. ALCO continuously monitors and manages the balance between interest rate sensitive assets and liabilities. The objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may lengthen or shorten the duration of assets or liabilities. Management considers market interest rate risk to be one of the Corporation’s most significant ongoing business risk considerations.
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 2011. (See Quantitative and Qualitative Disclosures about Market Risk in the Annual Report to Shareholders for the year ended December 31, 2011.)
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 March 31, 2012 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 March 31, 2012
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 19, 2012. |
Item 2 Unregistered Sales of Securities and Use of Proceeds
For the three months ended March 31, 2012, a total of 1,538 shares were issued from treasury to the Commercial Bancshares, Inc., Deferred Compensation Plan (the “Plan”) at a total cost of $42,034. Additionally, the Corporation delivered 544 shares totaling $9,395 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 March 31, 2012, 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 | ||||||
01/01/12 - 01/31/12 | -0- | n/a | -0- | 23,548 | ||||||
02/01/12 - 02/29/12 | -0- | n/a | -0- | 23,548 | ||||||
03/01/12 - 03/31/12 | -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 Mine Safety Disclosures
Not applicable
Item 5 Other Information
There are no matters required to be reported under this item.
29. |
COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 2012
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: | May 14, 2012 | /s/ Robert E. Beach | |
(Signature) | |||
Robert E. Beach | |||
President and Chief Executive Officer | |||
Date: | May 14, 2012 | /s/ Scott A. Oboy | |
(Signature) | |||
Scott A. Oboy | |||
Executive Vice President and Chief Financial Officer |
31. |