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 March 31, 2009, compared to December 31, 2008, and the
consolidated results of operations for the quarter ended March 31, 2009 compared
to the same period in 2008. The purpose of this discussion is to provide the
reader with a more thorough understanding of the consolidated financial
statements and related footnotes.
Net income for the first quarter of 2009 was $211,000 compared to $240,000 for
the first quarter of 2008, a decrease of $29,000 or 12.08%. The earnings
resulted in a return on average equity of 3.91% in 2009 compared to 4.50% in
2008, and a return on average assets of 0.32% in 2009 compared to 0.36% in 2008.
Basic and diluted earnings per share was $0.19 for the first quarter of 2009
compared to $0.21 per share for the same period in 2008. Provisions made to the
loan loss reserve increased $149,000 to $284,000 for the first quarter of 2009
from $135,000 in 2008, primarily resulting from higher charge-offs of commercial
real estate due to declining real estate values and general economic
deterioration in local markets. The Corporation's efficiency ratio improved
slightly from 84.07% for the first quarter of 2008 to 83.55% for the first
quarter of 2009. The economic challenges faced in 2008 are expected to intensify
in 2009, further straining the operating environment for all businesses,
especially financial institutions as credit concerns mount in a recessionary
period. Future success lies in the ability to deliver competitive products and
services in a cost-effective way. The Corporation has been geared toward this
end by effectively leveraging human resources and aggressively managing
operating costs.
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.
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.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $9,556,000 or 3.68% in 2009 to $269,351,000 from
$259,795,000 at December 31, 2008. Cash and federal funds sold totaled
$17,961,000 at March 31, 2009, an increase of $9,027,000 from $8,934,000 at
year-end 2008. Because of the uncertainty in the current capital and funding
markets management has been maintaining an unusually high position of liquidity
in the form of cash and due from banks and interest-earning bank deposits
relative to prior periods and believes the Corporation's aggregate liquidity
position is sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term. Securities available for
sale totaled $38,038,000 at March 31, 2009, a decrease of $285,000 or 0.74% from
$38,323,000 at December 31, 2008 primarily due to scheduled pay downs and
prepayments of mortgage-backed securities. Securities are classified as
available for sale because it is management's intent to hold the securities for
an indefinite period of time and/or to use the securities as part of the
Corporation's asset/liability management strategy.
Gross loans at March 31, 2009 totaled $196,985,000, down $963,000 or 0.49% from
$197,948,000 at December 31, 2008. Commercial and agricultural loans increased
$149,000, consumer loans increased $1,153,000 and home equity loans increased
$298,000 reflecting the Corporation's continued focus on customers within local
markets. Offsetting this growth were declines in real estate loans of $1,020,000
as recessionary economic conditions continue to weaken the real estate market
throughout the state along with declines in indirect finance loans and indirect
out-of-state loans of $939,000 and $604,000 respectively, resulting from
management's decision to discontinue originations and allow these portfolios to
run-off.
The Corporation's loan portfolio represents its largest and highest yielding
assets. It also contains the most risk of loss. This risk is due mainly to
changes in borrowers' primary repayment capacity, general economic conditions
and to collateral values that are subject to change over time. These risks are
managed with specific underwriting guidelines, loan review procedures, third
party reviews and continued personnel training. Executive management has been
monitoring the current downturn in the real estate market and the overall
economy, and has implemented the following measures to proactively manage credit
risk in the loan portfolios:
1) Reviewed all underwriting guidelines for various loan portfolios and have
strengthened underwriting guidelines for 1-4 family investment properties
to address identified risks.
2) Evaluated outside loan review parameters, engaging the services of a
well-established firm to continue with such loan review, addressing not
only on specific loans but underwriting, analysis, documentation, credit
evaluation and risk identification.
3) Increased the frequency of internal reviews of past due and delinquent
loans to assess probable credit risks early in the delinquency process to
minimize losses.
4) Aggressively seeking ownership and control, when appropriate, of real
estate properties which would otherwise go through time-consuming and
costly foreclosure proceedings to effectively control the disposition of
such collateral.
Although Executive management has been diligent in assessing the situation and
providing a viable plan to minimize losses, a prolonged economic slowdown will
place significant pressure on consumers and businesses in the Corporation's
local markets.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The allowance for loan losses was $2,348,000 at March 31, 2009, a decrease of
$135,000 or 5.44% from $2,483,000 at December 31, 2008. The ratio of the
allowance to total loans was 1.19% at March 31, 2009 compared to 1.25% at
year-end 2008. The Corporation provided $284,000 to the allowance for loan
losses during 2009 to maintain the balance at an adequate level following net
charge-offs of $419,000. Annualized net charge-offs for 2009 is 0.86% compared
to 0.54% at year-end 2008 with increases primarily in the commercial portfolio.
The increase in commercial net charge-offs for the current period is primarily
due to large commercial real estate properties that were charged down when taken
into Other Real Estate Owned "OREO. "
The following summarizes the charge-off and recovery activity for the first
quarter ended March 31, 2009 and the year-to-date charge-off and recovery
activity for 2008.
Three Months Ended March 31, 2009
Net charge-offs as a
percent of Annualized
total total net
(Amounts in thousands) charge-offs recoveries net charge-offs loans charge-offs
Commercial 247 - 247 58.96 % 0.13 % 0.51 %
Real estate 56 - 56 13.48 % 0.03 % 0.12 %
Home equity - - - - - -
Consumer & credit cards 97 20 77 18.38 % 0.04 % 0.16 %
Indirect consumer finance 47 8 39 9.18 % 0.01 % 0.08 %
|
Total 447 28 419 100.00 % 0.21 % 0.86 %
Year-end December 31, 2008
Net charge-offs as
a percent of
total total
(Amounts in thousands) charge-offs recoveries net charge-offs loans
Commercial 690 94 596 56.47 % 0.31 %
Real estate 35 - 35 3.36 % 0.02 %
Home equity - - - - -
Consumer & credit cards 256 54 202 21.06 % 0.10 %
Indirect consumer finance 298 76 222 19.11 % 0.11 %
|
Total 1,279 224 1,055 100.00 % 0.54 %
The allowance for loan losses specifically related to impaired loans at
March 31, 2009 and December 31, 2008 was $272,000 and $375,000 respectively,
having principal balances of $1,345,000 and $1,588,000. Interest income on
impaired loans is recognized after all past due and current principal payments
have been made. For the current year, no interest payments have been recorded on
impaired loans.
Other assets totaled $9,639,000 at March 31, 2009, an increase of $1,523,000 or
18.77% from $8,116,000 at year-end 2008 primarily resulting from increases in
other real estate owned of $936,000 and repossessed assets of $142,000. OREO
represents properties acquired by the Corporation through loan defaults by
customers. OREO property is carried at the lower of cost or estimated fair
market value less estimated expenses to be incurred to sell the property. OREO
properties undergo periodic impairment evaluations using fair value estimates
and any adjustments to the carrying amount are included in noninterest expense.
During the first quarter six properties were taken into OREO with a carrying
value of $944,000, offset with the sale of two properties, valued at $18,000.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation's major source of funds is provided by core deposits from
individuals and businesses and consist of all noninterest and interest bearing
deposits excluding brokered deposits and certificates of deposits greater than
$100,000. Core deposits were 82.65% of total deposits at March 31, 2009 compared
to 82.20% at December 31, 2008. The flow of deposits is influenced significantly
by general economic conditions, changes in prevailing interest rates and
competition. The Bank offers a variety of deposit products in an attempt to
remain competitive and respond to changes in consumer demand. All deposit
products increased during the first quarter from $231,668,000 at December 31,
2008 to $240,809,000 at March 31, 2009 with the most significant increases in
certificate of deposits and noninterest bearing demand accounts with $4,156,000
and $2,389,000 respectively.
Shareholders' equity increased $499,000 or 2.34% primarily due to the increase
in the market value of securities available for sale, net of tax, of $504,000.
The Corporation paid a cash dividend for the first quarter of $0.19 per share.
Total shareholders' equity to total assets dropped slightly to 8.10% at
March 31, 2009 from 8.20% at December 31, 2008.
RESULTS OF OPERATIONS
Net income totaled $211,000 for the first quarter of 2009, a decrease of $29,000
from $240,000 during the first quarter of 2008. The Corporation ended the first
quarter with net income before taxes of $197,000, a decrease of $44,000 or
18.26% from the same period in 2008 primarily due to an increase in provision
expense of $149,000 offset by decreases in most overhead expenses. The following
discussion details the contributing factors influencing these operating results.
Interest income for the first quarter of 2009 was $3,769,000 compared to
$4,227,000 in the first quarter of 2008, a decrease of $458,000 or 10.84%.
Interest income on a fully taxable equivalent basis totaled $3,862,000, a
decrease of $465,000 or 10.75% from $4,327,000 in 2008. This decrease was due
primarily to the decrease in the average yield earned on loans during the
current quarter of 6.99% from the average yield earned in 2008 of 7.70%, a
decrease of 71 basis points on an average balance of $195,206,000 in 2009
compared to $193,082,000 in 2008, an increase of $2,124,000 or 1.10%. Average
securities available for sale of $38,415,000 in 2009, decreased $9,962,000 or
20.59% from $48,377,000 in 2008 primarily due to calls of U.S. Government
Agencies with very little change in the average yield paid, 1 basis point from
2008 to 2009.
Interest expense for the first quarter of 2009 was $1,425,000, a decrease of
$423,000 or 22.89% from $1,848,000 in 2008. Average interest bearing deposit
balances of $216,289,000 increased $2,899,000 or 1.36% from $213,390,000 in 2008
while the average rate paid on outstanding balances decreased 75 basis points
along with a decrease of $3,438,000 in average borrowed funds with a decrease of
7 basis points in the average rate paid.
Net interest income, on a fully taxable equivalent basis, totaled $2,437,000 for
the three-month period ended March 31, 2009 compared to $2,479,000 in 2008, a
decrease of $42,000 or 1.69%. The Corporation's net interest margin on a fully
taxable equivalent basis decreased 5 basis points to 4.06% for the three-month
period ended March 31, 2009 from 4.11% in 2008.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provisions made to the loan loss reserve during 2009 totaled $284,000, an
increase of $149,000 from $135,000 during 2008 primarily resulting from an
increase in commercial net charge-offs. Additional information relating to net
charge-offs for the period ended March 31, 2009 and year-end 2008 is presented
in the preceding chart.
Non-interest income during 2009 totaled $566,000, a decrease of $23,000 or 3.90%
from non-interest income of $589,000 during 2008. The most significant decrease
was in service and overdraft charges of $14,000 principally due to lower average
outstanding balances in demand deposit accounts during 2009 compared to 2008.
Non-interest expense during 2009 totaled $2,429,000, a decrease of $163,000 or
6.29% from $2,592,000 in 2008. The following discussion highlights the
significant changes in noninterest expense.
Personnel expense of $1,273,000 decreased $57,000 or 4.29% in 2009 from
$1,330,000 in 2008 primarily due to a decrease in salaries and related payroll
taxes resulting from the bank-wide restructuring in 2008 to improve the
Corporation's overall efficiency and profitability. Premises and equipment
expense of $402,000 during 2009 decreased $21,000 or 4.96% from $423,000 in 2008
primarily due to lower building and maintenance costs from the sale of the
Westerville office during the third quarter of 2008.
Professional fees represent legal, audit and outside consulting fees paid by the
Corporation. Professional fees totaled $96,000 for the first quarter of 2009 a
decrease of $130,000 from $226,000 in 2008 primarily resulting from the bank
wide performance study conducted during the first quarter 2008 along with legal
and consulting services used to assist with various projects.
Offsetting the decreases in noninterest expense was the increase in FDIC deposit
insurance of $78,000 due to the increase in deposit insurance premiums.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Yield Analysis
The following table provides an analysis of the average balances, yields and
rates on interest-earning assets and interest-bearing liabilities.
Three Months Ended March 31,
2009 2008
Average Average Average Average
balance Interest yield/rate balance Interest yield/rate
(Dollars in thousands)
Federal funds sold $ 9,709 $ 6 0.25 % $ 930 $ 7 3.01 %
Securities (1) 38,415 493 5.20 48,377 625 5.19
Loans (2) 195,206 3,363 6.99 193,082 3,695 7.70
Total interest-earning
assets 243,330 3,862 6.44 242,389 4,327 7.18
Other assets 22,901 25,885
Total assets $ 266,231 $ 268,274
Interest-bearing
deposits $ 216,289 1,384 2.60 % $ 213,390 1,777 3.35 %
Borrowed funds 5,000 41 3.32 8,438 71 3.39
Total interest-bearing
deposits and borrowings $ 221,289 1,425 2.61 $ 221,828 1,848 3.35
Noninterest-bearing
demand deposits 21,281 22,648
Other liabilities 1,777 2,341
Shareholders' equity 21,884 21,457
Total liabilities and
shareholders' equity $ 266,231 $ 268,274
Net interest income $ 2,437 $ 2,479
Interest rate spread 3.83 % 3.83 %
Net interest margin (3) 4.06 % 4.11 %
|
(1) Average yields
on all
securities have
been computed
based on
amortized cost.
Income on
tax-exempt
securities has
been computed on
a fully taxable
equivalent basis
using a 34% tax
rate and a 20%
disallowance of
interest expense
deductibility
under TEFRA
rules. The
amount of such
adjustment was
$93,000 and
$100,000 for
2009 and 2008,
respectively.
(2) Average balance
is net of
deferred loan
fees of $68,000
and $108,000 for
2009 and 2008
respectively, as
well as $596,000
and $1,590,000
of unearned
income for the
same years.
(3) Net interest
income as a
percentage of
average
interest-earning
assets.
Table of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
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, pay maturing certificates of deposit
and savings withdrawals and fund loan demand with excess funds invested in
short-term interest-earning assets. Additional funds are generated through
Federal Home Loan Bank advances and overnight borrowings. The Corporation's
liquidity ratio at March 31, 2009 was 9.50% compared to 6.02% at year-end 2008.
Management believes that its sources of liquidity are adequate to meet the needs
of the Corporation.
Net cash flows resulted in an increase of $9,027,000 in cash equivalents and
federal funds sold since December 31, 2008 primarily due to the increase in
deposit balances of $9,142,000 compared to the increase of $6,267,000 in cash
equivalents and federal funds during the same period a year ago. Last year the
increase was primarily due to maturities and repayments from securities
available for sale of $4,607,000, loan maturities and repayments of $3,558,000
and overnight borrowings of $2,800,000 offset by a decline in deposit balances
of $4,875,000.
CAPITAL RESOURCES
Banking regulations have established minimum capital requirements for banks
including risk-based capital ratios and leverage ratios. Regulations require all
banks to have a minimum total risk-based capital ratio of 8.0%, with half of the
capital composed of core capital. Minimum leverage ratio requirements range from
3.0% to 5.0% of total assets. Core capital, or Tier 1 capital, includes common
equity, perpetual preferred stock and minority interests that are held by others
in consolidated subsidiaries minus intangible assets. Supplementary capital, or
Tier 2 capital, includes core capital and such items as mandatory convertible
securities, subordinated debt and the allowance for loan losses, subject to
certain limitations. Qualified Tier 2 capital can equal up to 100% of an
institution's Tier 1 capital with certain limitations in meeting the total
risk-based capital requirements.
The Bank's leverage and risk-based capital ratios as of March 31, 2009 were 8.0%
and 11.0% respectively, compared to leverage and risk-based capital ratios of
7.7% and 11.0% respectively, at year-end 2008. The Bank exceeded 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 of Contents
COMMERCIAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has certain obligations and commitments to make future payments
under contracts. At March 31, 2009, the aggregate contractual obligations and
commitments are:
Contractual obligations
(In thousands)
Payments Due by Period
Less Than After
Total One Year 1-3 Years 3-5 Years 5 Years
Time deposits and
certificates of deposit $ 131,521 $ 82,035 $ 36,245 $ 13,108 $ 133
Borrowed funds 5,000 - 5,000 - -
Total $ 136,521 $ 82,035 $ 41,245 $ 13,108 $ 133
Other commitments
(In thousands)
Amount of Commitment - Expiration by Period
Less Than After
Total One Year 1-3 Years 3-5 Years 5 Years
Commitments to extend
commercial credit $ 8,241 $ 4,323 $ 2,120 $ - $ 1,798
Commitments to extend
consumer credit 11,553 369 82 4,417 6,685
Standby letters of
credit 150 150 - - -
Total $ 19,944 $ 4,842 $ 2,202 $ 4,417 $ 8,483
|
Other obligations/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 2008 Annual Report for additional details.
Items listed 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 then-current financing needs. Items shown
under "Other commitments" also represent standard bank activity, but for
extending credit to bank customers. Commercial credits generally represent lines
of credit or approved loans with drawable funds still available under the
contract terms. On an on-going basis, about half of these amounts are expected
to be drawn. Consumer credits generally represent amounts drawable under
revolving home equity lines or credit card programs. Such amounts are usually
. . .
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