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EX-32.1 - COMMERCIAL BANCSHARES INC \OH\v183729_ex32-1.htm
EX-31.2 - COMMERCIAL BANCSHARES INC \OH\v183729_ex31-2.htm
EX-32.2 - COMMERCIAL BANCSHARES INC \OH\v183729_ex32-2.htm
EX-31.1 - COMMERCIAL BANCSHARES INC \OH\v183729_ex31-1.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, 2010.  Commission File Number 000-27894

COMMERCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
   
OHIO
34-1787239
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)

118 S. Sandusky Avenue, Upper Sandusky, Ohio 43351
(Address of principal executive offices including zip code)
Registrant’s telephone number, including area code: (419) 294-5781

N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

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 o No o

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 o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No þ

As of May 6, 2010, the latest practicable date, there were 1,138,497 outstanding of the registrant’s common stock, no par value.

 

 

COMMERCIAL BANCSHARES, INC.

INDEX

   
Page
     
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (unaudited)
 
     
 
Consolidated Balance Sheets
3
     
 
Consolidated Statements of Income
4
     
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity
5
     
 
Condensed Consolidated Statements of Cash Flows
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of
 
 
Financial Condition and Results of Operations
12
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
19
     
Item 4.
Controls and Procedures
19
     
PART II - OTHER INFORMATION
 
     
  Item 1.
Legal Proceedings
20
     
  Item 2.
Unregistered Sales of Securities and Use of Proceeds
20
     
  Item 3.
Defaults Upon Senior Securities
20
     
  Item 4.
Other Information
20
     
  Item 5.
Exhibits
21
     
SIGNATURES
22
     
EXHIBIT:
13a-14(a) 302 Certification
23
 
13a-14(a) 906 Certification
25

 
2.

 

COMMERCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 

(Amounts in thousands)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Cash and cash equivalents
  $ 5,741     $ 4,844  
Federal funds sold
    17,675       7,402  
Cash equivalents and federal funds sold
    23,416       12,246  
                 
Securities available for sale
    37,395       36,733  
Total loans
    219,297       228,008  
Allowance for loan losses
    (2,681 )     (2,744 )
Loans, net
    216,616       225,264  
Premises and equipment, net
    7,888       7,983  
Accrued interest receivable
    1,412       1,147  
Other assets
    10,606       10,907  
                 
Total assets
  $ 297,333     $ 294,280  
                 
LIABILITIES
               
Deposits
               
Noninterest bearing demand
  $ 27,008     $ 31,385  
Interest bearing demand
    99,382       94,364  
Savings and time deposits
    101,658       101,660  
Time deposits $100,000 and greater
    39,197       37,300  
Total deposits
    267,245       264,709  
FHLB advances
    5,000       5,000  
Accrued interest payable
    231       239  
Other liabilities
    1,921       1,637  
Total liabilities
    274,397       271,585  
                 
SHAREHOLDERS' EQUITY
               
Common stock, no par value; 4,000,000 shares authorized, 1,181,038 shares issued in 2010 and 2009
    11,292       11,266  
Retained earnings
    12,681       12,278  
Unearned compensation
    (26 )     (26 )
Deferred compensation plan shares, at cost; 24,804 shares in 2010, and 22,702 shares in 2009
    (517 )     (494 )
Treasury stock; 42,541 shares in 2010 and 2009
    (1,163 )     (1,163 )
Accumulated other comprehensive income
    669       834  
Total shareholders' equity
    22,936       22,695  
                 
Total liabilities and shareholders' equity
  $ 297,333     $ 294,280  

See notes to the consolidated financial statements.

 
3.

 

COMMERCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 

(Amounts in thousands, except per share data)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
Interest income
           
Interest and fees on loans
  $ 3,571     $ 3,371  
Interest on securities:
               
Taxable
    158       199  
Nontaxable
    180       193  
Federal funds sold
    6       6  
Total interest income
    3,915       3,769  
Interest expense
               
Interest on deposits
    928       1,384  
Interest on borrowings
    41       41  
Total interest expense
    969       1,425  
                 
Net interest income
    2,946       2,344  
Provision for loan losses
    245       284  
                 
Net interest income after provision for loan losses
    2,701       2,060  
                 
Noninterest income
               
Service fees and overdraft charges
    419       421  
Gains (losses) on repossessed asset sales, net
    (135 )     2  
Other income
    146       143  
Total noninterest income
    430       566  
                 
Noninterest expense
               
Salaries and employee benefits
    1,301       1,273  
Premises and equipment
    342       402  
OREO and miscellaneous loan expense
    44       25  
Professional fees
    118       96  
Data processing
    63       62  
Software maintenance
    74       70  
Advertising and promotional
    49       47  
FDIC deposit insurance
    138       95  
Franchise tax
    70       69  
Other operating expense
    266       290  
Total noninterest expense
    2,465       2,429  
                 
Income before income taxes
    666       197  
Income tax expense (credit)
    149       (14 )
                 
Net income
  $ 517     $ 211  
                 
Basic earnings per common share
  $ 0.45     $ 0.19  
Diluted earnings per common share
  $ 0.45     $ 0.19  

See notes to the consolidated financial statements.

 
4.

 

COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Unaudited)
 

(Amounts in thousands, except per share data)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
Balance at beginning of period
  $ 22,695     $ 21,305  
                 
Comprehensive income
               
Net income
    517       211  
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects
    (165 )     504  
Total comprehensive income
    352       715  
                 
Stock-based compensation
    3        
                 
Dividends paid ($0.10 and $0.19 per share in 2010 and 2009)
    (114 )     (216 )
                 
Balance at end of period
  $ 22,936     $ 21,804  

See notes to the consolidated financial statements.

 
5.

 

COMMERCIAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 


   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
($ in thousands)
 
Cash flows from operating activities
           
Net income
  $ 517     $ 211  
Adjustments
    380       (777 )
Net cash from operating activities
    897       (566 )
                 
Cash flows from investing activities
               
Purchases of securities available for sale
    (2,000 )     (1,335 )
Calls, maturities and repayments on available for sale securities
    1,038       2,355  
Net change in loans
    8,531       (341 )
Proceeds from sale of OREO and repossessed assets
    362       24  
Additions to premises and equipment
    (80 )     (36 )
Net cash from investing activities
    7,851       667  
                 
Cash flows from financing activities
               
Net change in deposits
    2,536       9,142  
Cash dividends paid
    (114 )     (216 )
Net cash from financing activities
    2,422       8,926  
                 
Net change in cash, cash equivalents and federal funds sold
    11,170       9,027  
                 
Cash, cash equivalents and federal funds sold at beginning of period
    12,246       8,934  
                 
Cash, cash equivalents and federal funds sold at end of period
  $ 23,416     $ 17,961  
                 
Supplemental disclosures
               
Cash paid for interest
  $ 978     $ 1,430  
Cash paid for income taxes
    0       100  
Non-cash transfer of loans to OREO and repossessed assets
    210       1,149  

See notes to the consolidated financial statements.

 
6.

 

COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial statements include the accounts of Commercial Bancshares, Inc. (the “Corporation”) and its wholly owned subsidiaries, Commercial Financial and Insurance Agency, LTD (“Commercial Financial”) and The Commercial Savings Bank (the “Bank”).  The Bank also owns a 49.9% interest in Beck Title Agency, Ltd., which is accounted for by using the equity method of accounting. All significant inter-company balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared without audit.  In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the Corporation’s financial position at March 31, 2010, 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, 2009, contains consolidated financial statements and related footnote disclosures, which should be read in conjunction with the accompanying consolidated financial statements.  The results of operations for the period ended March 31, 2010 are not necessarily indicative of the operating results for the full year or any future interim period.

NOTE 2 – EARNINGS PER SHARE

Weighted average shares used in determining basic and diluted earnings per share for the three months ended March 31:

   
2010
   
2009
 
                 
Weighted average shares outstanding during the period
    1,138,497       1,136,397  
Dilutive effect of exercisable stock options
    0       0  
Weighted average shares considering dilutive effect
    1,138,497       1,136,397  
                 
Anti-dilutive stock options not considered in computing diluted earnings per share
    20,230       6,602  

NOTE 3 – LOANS

Loans (in thousands):
 
March 31, 2010
   
December 31, 2009
 
                 
Commercial and agricultural loans
  $ 160,646     $ 168,611  
Residential real estate loans
    9,279       9,296  
Construction loans
    3,001       2,529  
Consumer loans
    23,248       23,721  
Home equity loans
    22,375       22,685  
Indirect finance loans
    748       1,166  
Total loans
  $ 219,297     $ 228,008  

Total loans included loans to farmers for agricultural purposes of approximately $25,202,000 and $25,602,000 at March 31, 2010 and December 31, 2009, respectively.

 
7.

 

COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Activity in the allowance for loan losses (in thousands) for the three months ended March 31:

   
2010
   
2009
 
Beginning balance
  $ 2,744     $ 2,483  
Provision for loan loss
    245       284  
Loans charged-off
    (322 )     (447 )
Recoveries of loans previously charged-off
    14       28  
Ending balance
  $ 2,681     $ 2,348  

Impaired loans (in thousands):
 
   
March 31, 2010
   
December 31, 2009
 
Period-end loans with no allocated allowance
  $ 861     $ 943  
Period-end loans with allocated allowance
    587       785  
Total
  $ 1,448     $ 1,728  
                 
Amount of allowance for loan loss allocated
  $ 91     $ 88  

Nonperforming loans (in thousands):
 
   
March 31, 2010
   
December 31, 2009
 
Loans past due over 90 days still on accrual
  $ 0     $ 0  
Nonaccrual loans
    1,922       2,641  

The impaired and nonperforming loans have been considered in management’s evaluation of the adequacy of the allowance for loan losses.

NOTE 4 – OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) for the three months ended March 31:

   
2010
   
2009
 
   
($ in thousands)
 
Unrealized holding gains (losses) on securities available for sale
  $ (249 )   $ 763  
Less: Reclassification adjustment for losses (gains) recognized in income
           
Net unrealized holding gains (losses)
    (249 )     763  
Tax effect
    (84 )     259  
Other comprehensive income (loss)
  $ (165 )   $ 504  

 
8.

 

COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 5 – FAIR VALUES AND MEASUREMENTS OF FINANCIAL INSTRUMENTS
 
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, and the valuation techniques used by the Corporation to determine those fair values.
 
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.
 
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly.  These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
 
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
 
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and liabilities, (in thousands) measured at fair value on a recurring basis for the periods shown:

   
Quoted Prices in
   
Significant
   
Significant
       
   
Active Markets
   
Observable
   
Unobservable
       
   
For Identical
   
Inputs
   
Inputs
       
March 31, 2010
 
Assets (Level 1)
   
(Level 2)
   
(Level 3)
   
Balance
 
Assets:  Securities available for Sale
  $     $ 37,395     $     $ 37,395  
Liabilities
  $     $     $     $  
                                 
December 31, 2009
                               
Assets:  Securities available for Sale
  $     $ 36,733     $     $ 36,733  
Liabilities
  $     $     $     $  

Securities characterized as having Level 2 inputs consist of obligations of U.S. government and federal agencies, securities from government-sponsored organizations and obligations of state and political subdivisions.

The Corporation also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis.  Such assets consist primarily of impaired loans and other real estate owned.  The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically, discounted cash flow projections.

Impaired loans are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to non-recurring fair value adjustments to reflect (1) partial write downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.

 
9.

 

COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Impaired loans valued using Level 3 inputs totaled $1,357,000 and $1,640,000 at March 31, 2010 and December 31, 2009, respectively.  The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams and estimated realizable values of available collateral (typically based on outside appraisals).

Other real estate owned (“OREO”) acquired through or instead of loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  Management considers third party appraisals as well as independent fair market value assessments from realtors or persons involved in selling OREO when determining the fair value of particular properties.  Accordingly, the valuations of OREO and repossessed assets are subject to significant judgment.  If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.  Operating costs incurred after acquisition are expensed.  OREO and other repossessed assets included in other assets totaled $832,000 and $1,142,000 at March 31, 2010 and December 31, 2009, respectively.

The estimated fair values of financial instruments (in thousands):

   
March 31, 2010
   
December 31, 2009
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
Financial assets
 
Amount
   
Fair Value
   
Amount
   
Fair Value
 
                                 
Cash equivalents and federal funds sold
  $ 23,416     $ 23,416     $ 12,246     $ 12,246  
Investment securities available for sale
    37,395       37,395       36,733       36,733  
Loans, net of allowance for loan losses
    216,616       212,592       225,264       223,395  
Accrued interest receivable
    1,412       1,412       1,147       1,147  
                                 
Financial liabilities
                               
                                 
Demand and savings deposits
  $ (141,950 )   $ (141,950 )   $ (140,373 )   $ (140,373 )
Time deposits
    (125,295 )     (124,338 )     (124,336 )     (124,390 )
FHLB advances
    (5,000 )     (5,094 )     (5,000 )     (5,000 )
Accrued interest payable
    (231 )     (231 )     (239 )     (239 )

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:

 
·
Cash equivalents and federal funds sold – The carrying amount is a reasonable estimate of fair value.
 
·
Investment securities – Fair value is based on quoted market prices in active markets for identical assets or similar assets in active markets.
 
·
Loans – Fair value is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
 
·
Accrued interest receivable – The fair value approximates the carrying value.
 
·
Demand and savings deposits – Fair value is the amount payable on demand at the reporting date.
 
·
Time deposits – Fair value is estimated using the rates currently offered for deposits of similar remaining maturities.
 
·
FHLB advances – Fair value is estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be made.
 
·
Accrued interest payable – The fair value approximates the carrying value.

 
10.

 

COMMERCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 6 – STOCK OPTIONS

The Corporation has two stock option plans, the 1997 Stock Option Plan and the 2009 Incentive Stock Option Plan.  No additional grants may be made under the 1997 Stock Option Plan.  The 2009 Plan, which is shareholder approved, permits the grant of stock options, restricted stock and certain other stock-based awards for up to 150,000 shares.  At March 31, 2010, a total of 129,800 shares remained available for issuance.  All stock options have an exercise price that is equal to the closing market value of the Corporation’s stock on the date the options are granted.  The Corporation measures compensation cost at the grant date based on the fair value of the award.  The fair value of each option award is estimated on the date of grant using an option valuation model that uses assumptions for the following:  dividend yield, expected volatility, risk-free interest rate, annual forfeiture rate, expected life of options and weighted average grant-date fair value.

On August 12, 2009, a total of 18,100 stock options with an exercise price of $12.30 were granted to executive officers and certain key employees.  The weighted average fair value of options granted was $2.08 per share.  These options will vest over three years and have a ten year maximum term.  At March 31, 2010, unrecognized compensation related to stock options was $30,000.  This cost is expected to be recognized as compensation expense over a remaining period of approximately 2.5 years.

On August 12, 2009, a total of 2,100 restricted stock awards were granted to executive officers with a grant date fair value of $12.30.  Restricted stock awards are recorded as deferred compensation, a component of shareholders’ equity, at fair value at the date of the grant and amortized to compensation expense over the vesting period.  At March 31, 2010, the unrecognized compensation cost for restricted awards was $20,000 which will be recognized as compensation expense over a remaining period of approximately 2.5 years.

 
11.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following review presents management’s discussion and analysis of the consolidated financial condition of Commercial Bancshares, Inc. and its wholly owned subsidiaries, Commercial Savings Bank and Commercial Financial Insurance Agency, LTD at March 31, 2010, compared to December 31, 2009, and the consolidated results of operations for the quarter ended March 31, 2010 compared to the same period in 2009. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements and related footnotes.

Despite the downturn in the economy, the Corporation produced healthy financial results for the first quarter of 2010.  Net earnings, after taxes, increased 145.02% to $517,000 at March 31, 2010 from $211,000 at March 31, 2009.   The increase in earnings was primarily due to an increase in net interest income resulting from a lower rate environment and Corporation’s actively managed deposit and loan pricing strategies.  Provisions made to the loan loss reserve totaled $245,000 in 2010 compared to $284,000 in 2009.  The Corporation’s return on average equity and return on average assets for the first quarter of 2010 was 9.11% and 0.72%, respectively, compared to 3.91% and 0.32% in 2009.  The increase in net interest income also had a favorable impact on the Corporation’s efficiency ratio along with management’s continued emphasis on operating leverage and expense control.  The Corporation’s efficiency ratio, on a fully taxable equivalent basis, was 71.12% for the three months ended March 31, 2010 compared to 81.00% for the three months ended March 31, 2009.  Basic and diluted earnings per common share in the first quarter of 2010 were $0.45, compared to $0.19 in the first quarter of 2009.

The Corporation is designated as a financial holding company by the Federal Reserve Bank of Cleveland.  This status can help the Corporation take advantage of changes in existing law made by the Financial Modernization Act of 1999.  As a result of being a financial holding company, the Corporation may be able to engage in an expanded array of activities determined to be financial in nature.  This will help the Corporation remain competitive in the future with other financial service providers in the markets in which the Corporation does business.  There are more stringent capital requirements associated with being a financial holding company.  The Corporation intends to maintain its categorization as a “well capitalized” bank, as defined by regulatory capital requirements.

Management believes there have been no changes with respect to its determinations regarding the Corporation’s critical accounting policies as disclosed in the Corporation’s annual report on Form 10-K for the fiscal year ended December 31, 2009.

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.

 
12.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
FINANCIAL CONDITION

Total assets increased $3,053,000 or 1.04% from $294,280,000 at December 31, 2009 to $297,333,000 at March 31, 2010.  Interest earning bank balances, which include the Bank’s deposits at the Federal Reserve Bank, and federal funds sold, increased $10,273,000, primarily attributable to excess cash generated by a decrease in net loans of $8,648,000 and an increase of $2,536,000 in deposit balances.

Available for sale securities are reported at their aggregate fair value and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes.  Investment securities available for sale increased 1.80% from $36,733,000 at year end to $37,395,000 at March 31, 2010, primarily due to purchases of U.S. government-sponsored agencies of $2,000,000 offset by calls, maturities and principal repayments of mortgage-backed and municipal securities along with an adjustment for the decline in market value.  

Gross loans at March 31, 2010 totaled $219,297,000, down $8,711,000 or 3.82% from $228,008,000 at December 31, 2009, primarily due to a decrease of $7,965,000 in commercial and agriculture loans.  Approximately $4,000,000 is due to the pay off of a short-term, cash-collateralized loan at the beginning of the year, reducing current balances, like amounts, in both commercial loans and noninterest bearing demand deposits.

The Corporation’s loan portfolio represents its largest and highest yielding assets.  It also contains the most risk of loss.  This risk is due mainly to changes in borrowers’ primary repayment capacity, general economic conditions and to collateral values that are subject to change over time.  These risks are managed with specific underwriting guidelines, loan review procedures, third party reviews and continued personnel training.   Executive management continues to monitor the current downturn in the real estate market as well as the overall economy and has implemented the following measures to proactively manage credit risk in the loan portfolios:

 
1)
Reviewed all underwriting guidelines for various loan portfolios and have strengthened underwriting guidelines for 1-4 family investment properties and home equity loans to address identified risks.

 
2)
Evaluated outside loan review parameters, engaging the services of a well-established firm to continue with such loan review, addressing not only specific loans but underwriting analysis, documentation, credit evaluation and risk identification.

 
3)
Increased the frequency of internal reviews of past due and delinquent loans to assess probable credit risks early in the delinquency process to minimize losses.

 
4)
Aggressively seeking ownership and control, when appropriate, of real estate properties which would otherwise go through time–consuming and costly foreclosure proceedings to effectively control the disposition of such collateral.

Although executive management continues to aggressively engage in other loss mitigation techniques such as tightening underwriting standards and lowering LTV ratios on in-house real estate lending, a prolonged economic slowdown would place significant pressure on consumers and businesses in the Corporation’s local markets.

The allowance for loan losses totaled $2,681,000 at March 31, 2010 compared to $2,744,000 at December 31, 2009.  The ratio of the allowance to total loans was 1.22% at March 31, 2010 compared to 1.20% at year end 2009.  The Corporation provided $245,000 to the allowance for loan losses during 2010 to maintain the balance at an adequate level following net charge-offs of $308,000.

 
13.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
The following summarizes the charge-off and recovery activity for the first quarter ended March 31, 2010 and the year-to-date charge-off and recovery activity for 2009.
 
Three Months Ended March 31, 2010
 
                     
Net Charge-offs
       
                     
as a Percent of
       
                           
YTD
   
Annualized
 
                     
Total
   
Average
   
Net
 
(Amounts in thousands)
 
Charge-offs
   
Recoveries
   
Net
   
Charge-offs
   
Loans
   
Charge-offs
 
Commercial
    201       2       199       64.76 %     0.09 %     0.37 %
Real estate
                      0.00 %     0.00 %     0.00 %
Home equity
    38             38       12.26 %     0.02 %     0.07 %
Consumer
    56       8       48       15.76 %     0.02 %     0.09 %
Indirect finance
    27       4       23       7.22 %     0.01 %     0.04 %
Total
    322       14       308       100.00 %     0.14 %     0.56 %

Year-End December 31, 2009

                     
Net Charge-offs
 
                     
as a Percent of
 
                           
YTD
 
                     
Total
   
Average
 
(Amounts in thousands)
 
Charge-offs
   
Recoveries
   
Net
   
Charge-offs
   
Loans
 
Commercial
    579       4       575       47.03 %     0.27 %
Real estate
    96             96       7.82 %     0.05 %
Home equity
    180             180       14.71 %     0.09 %
Consumer
    305       34       271       22.14 %     0.13 %
Indirect finance
    155       54       101       8.30 %     0.05 %
Total
    1,315       92       1,223       100.00 %     0.58 %
 
Nonaccrual loans at March 31, 2010 totaled $1,922,000, a decrease of $719,000 or 27.22% from $2,641,000 at year end 2009.  The allowance for loan losses specifically related to impaired loans at March 31, 2010 and December 31, 2009 was $91,000 and $88,000, respectively, having principal balances of $861,000 and $943,000.  The gross interest income that would have been recorded for the three months ended March 31, 2010 had nonaccrual loans been current totaled $58,000. The Corporation recognizes income on nonaccrual loans using the cash basis method.  Further, interest income on impaired loans is recognized only after all past due and current principal payments have been made.  For the current year, interest payments of $1,000 have been recorded on impaired loans.

Other assets totaled $19,906,000 at March 31, 2010, a decrease of $131,000 or 0.65% from $20,037,000 at year end 2009, primarily due to a decrease in OREO and repossessed assets of $310,000, offset by an increase in accrued interest receivable of $265,000.  Three properties, valued at $143,000, were placed into OREO during the first quarter of 2010, offset by the sale of five properties totaling $414,000.  The increase in accrued interest receivable is primarily attributable to semi-annual interest payments of tax-exempt securities rebuilding their balances to payout in June, 2010.

 
14.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Interest bearing deposit balances increased $6,913,000 from $233,324,000 at December 31, 2009 to $240,237,000 at March 31, 2010, primarily in interest bearing demand and money market accounts with increases of $2,658,000 and $2,360,000, respectively, as well as an increase of $1,897,000 in large certificate of deposit accounts, primarily due to an increase in public funds.  Noninterest demand accounts decreased $4,377,000 during the first quarter due to a match-funded loan of approximately $4,000,000 that paid off at the first of the year.

Shareholders’ equity increased $241,000 or 1.06%, primarily resulting from earnings of $517,000, less dividends of $114,000 and a decrease in the market value of securities available for sale, net of tax, of $165,000.

RESULTS OF OPERATIONS

Net income, after taxes, for the three months ended March 31, 2010 totaled $517,000, an increase of $306,000 from net income of $211,000 for the three months ended March 31, 2009.  The following discussion details the contributing factors influencing these operating results.

Interest and fee income for the first quarter of 2010 totaled $3,915,000, an increase of $146,000 or 3.87% from $3,769,000 in 2009.  Interest income on a fully taxable equivalent basis totaled $4,006,000 for the first quarter 2010, an increase of $144,000 or 3.73% from the same period in 2009.  The average tax equivalent yield earned during the quarter was 6.06%, a decrease of 38 basis points from 6.44% earned in 2009.  The most significant change was in the loan portfolio which comprised 81.52% and 80.51% of average earning assets in the first quarter of 2010 and 2009, respectively.  Average loans increased $22,545,000 or 11.51% from $195,903,000 in 2009 to $218,448,000 in 2010 while the average yield earned decreased 37 basis points.  Average securities available for sale, which comprised 13.45% and 15.50% of average earning assets in the first quarter of 2010 and 2009, respectively, decreased $1,668,000 or 4.42%, while the average tax equivalent yield earned, decreased 30 basis points.

Interest expense for the first quarter of 2010 was $969,000, a decrease of $456,000 or 32.00% from $1,425,000 in 2009.  Average interest bearing liabilities increased $19,061,000 or 8.61% from $221,289,000 in 2009 to $240,350,000 in 2010, while the average rate paid on outstanding balances decreased 97 basis points.  Average demand deposits, which comprised 40.16% and 32.19% of average interest bearing liabilities in the first quarter of 2010 and 2009, respectively, increased $25,294,000 or 35.51% while the average rate paid decreased 64 basis points.  Average time deposits, which comprised 51.52% and 58.99% of average interest bearing liabilities in 2010 and 2009, respectively, decreased $6,714,000 or 5.15% along with a decrease in the average interest rate paid of 105 basis points.  Average savings deposits, which comprised 6.24% and 6.56% of average interest bearing liabilities in 2010 and 2009, respectively, increased $481,000 or 3.31% with a decrease in the average interest paid of 1 basis point.

Net interest income on a fully taxable equivalent basis was $3,037,000 for the first quarter of 2010, an increase of $600,000 or 24.62% from $2,437,000 in 2009, resulting in an increase to the Corporation’s net interest margin of 54 basis points from 4.06% in 2009 to 4.60% in 2010.

Provisions made to the loan loss reserve during 2010 totaled $245,000, a decrease of $39,000 from $284,000 in 2009.  Net charge-offs for the three-month period ended March 31, 2010 totaled $308,000 compared to net charge-offs of $419,000 for the three-month period ended March 31, 2009.  Additional information relating to net charge-offs for the period ended March 31, 2010 and year-end 2009 is presented in the preceding chart.

 
15.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Yield Analysis
 
The following table presents an analysis of average yields earned on interest earning assets as well as the average rates paid on interest bearing liabilities on a fully taxable equivalent basis for the three months ended March 31:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
Average
         
Average
   
Average
         
Average
 
   
balance
   
Interest
   
yield/rate
   
balance
   
Interest
   
yield/rate
 
      
 
($ in thousands)
 
                                                 
Federal funds sold
  $ 13,474     $ 6       0.18 %   $ 9,709     $ 6       0.25 %
Securities (1)
    36,050       436       4.90       37,718       484       5.20  
Loans (2)
    218,448       3,564       6.62       195,903       3,372       6.99  
Total interest earning assets
    267,972       4,006       6.06 %     243,330       3,862       6.44 %
Other assets
    25,099                       22,901                  
Total assets
  $ 293,071                     $ 266,231                  
                                                 
Interest bearing deposits
  $ 235,350       928       1.60 %   $ 216,289       1,384       2.60 %
Borrowed funds
    5,000       41       3.32       5,000       41       3.32  
Total interest bearing liabilities
  $ 240,350       969       1.64 %   $ 221,289       1,425       2.61 %
Noninterest bearing demand deposits
    27,670                       21,281                  
Other liabilities
    2,019                       1,777                  
Shareholders’ equity
    23,032                       21,884                  
Total liabilities and shareholders’ equity
  $ 293,071                     $ 266,231                  
                                                 
Net interest income
          $ 3,037                     $ 2,437          
Interest rate spread
                    4.42 %                     3.83 %
Net interest margin (3)
                    4.60 %                     4.06 %
 

 
(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 $90,000 and $93,000 for 2010 and 2009, respectively.
 
(2)
Average balance is net of deferred loan fees of $56,000 and $68,000 for the three months ended March 31, 2010 and 2009, respectively as well as $94,000 and $596,000 of unearned income for the same years.  Interest income includes loan fees of $103,000 and $153,000 and deferred dealer reserve expense of $43,000 and $62,000 in 2010 and 2009, respectively.
 
(3)
Net interest income as a percentage of average interest earning assets.

Noninterest income totaled $430,000 for the first quarter of 2010, a decrease of $136,000 from $566,000 for the first quarter of 2009, primarily due to a net loss on the sales of OREO and other repossessed assets of $135,000.

Noninterest expense of $2,465,000 for the three-month period ended March 31, 2010, increased $36,000 or 1.48% from $2,429,000 in 2009, primarily due to the increase in FDIC deposit insurance premiums of $43,000 offset by a decrease of $60,000 in premises and equipment due to computer equipment becoming fully depreciated.

 
16.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The Corporation recorded net taxable income of $666,000 for the three-month period ended March 31, 2010, an increase of $469,000 from net taxable income of $197,000 in 2009.  Income tax expense for 2010 totaled $149,000, reflecting an effective tax rate of 22.37% compared to a tax credit of $14,000 in 2009.

LIQUIDITY

Liquidity is the ability to satisfy demands for deposit withdrawals, lending commitments and other corporate needs.  The Corporation’s liquidity primarily represented by cash, cash equivalents and federal funds sold, is a result of its operating, investing and financing activities, which are summarized in the Condensed Consolidated Statements of Cash Flows.  Primary sources of funds are deposits, prepayments and maturities of outstanding loans and securities.  While scheduled payments from the amortization of loans and securities are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  Funds are primarily used to meet ongoing commitments, satisfy operational expenses, payout maturing certificates of deposit and savings withdrawals and fund loan demand with excess funds being invested in short-term interest earning assets.  Additional funds are generated through Federal Home Loan Bank advances, overnight borrowings and other sources.

The Corporation’s liquidity ratio at March 31, 2010 was 9.81% compared to 5.72% at year-end 2009.  Another measure of liquidity is the relationship of net loans to deposits and borrowed funds with lower ratios indicating greater liquidity.  The ratio of net loans to deposits and borrowed funds was 79.57% at March 31, 2010 compared to 83.52% at December 31, 2009.  Management believes its sources of liquidity are adequate to meet the needs of the Corporation.

Net cash flows resulted in an increase of $11,170,000 in cash, cash equivalents and federal funds sold for the three-month period ended March 31, 2010 from $12,246,000 at year-end 2009, primarily due to loan maturities and repayments of $8,531,000 along with an increase in deposit balances of $2,535,000.  During the same period in 2009, cash, cash equivalents and federal funds sold increased $9,027,000, primarily due to an increase of $9,142,000 in deposit balances.

CAPITAL RESOURCES

Banking regulations have established minimum capital requirements for banks including risk-based capital ratios and leverage ratios.  Regulations require all banks to have a minimum total risk-based capital ratio of 8.0%, with half of the capital composed of core capital.  Minimum leverage ratio requirements range from 3.0% to 5.0% of total assets.  Core capital, or Tier I capital, includes common equity, perpetual preferred stock and minority interests that are held by others in consolidated subsidiaries minus intangible assets.  Supplementary capital, or Tier II capital, includes core capital and such items as mandatory convertible securities, subordinated debt and the allowance for loan losses, subject to certain limitations.  Qualified Tier II capital can equal up to 100% of an institution’s Tier I capital with certain limitations in meeting the total risk-based capital requirements.

The Bank’s leverage and risk-based capital ratios as of March 31, 2010 were 7.5% and 10.9% respectively, compared to leverage and risk-based capital ratios of 7.5% and 10.3% at year-end 2009.  The Bank exceeded minimum regulatory requirements to be considered well capitalized for both periods.  Should it become necessary to raise capital to expand the activities of the Corporation, there are sufficient un-issued shares to effect a merger, or solicit new investors.

 
17.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Corporation has certain obligations and commitments to make future payments under contracts.  Total aggregate contractual obligations and commitments at March 31, 2010:

Contractual obligations
     
(Amounts in thousands)
 
Payments Due by Period
 
         
Less Than
               
After
 
   
Total
   
One Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
                                         
Time deposits and certificates of deposit
  $ 125,295     $ 49,620     $ 56,672     $ 17,044     $ 1,959  
Borrowed funds
    5,000       5,000                    
Total
  $ 130,295     $ 54,620     $ 56,672     $ 17,044     $ 1,959  

Other commitments
     
(Amounts In thousands)
 
Amount of Commitment – Expiration by Period
 
         
Less Than
               
After
 
   
Total
   
One Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
                                         
Commitments to extend commercial credit
  $ 13,330     $ 10,141     $ 1,526     $ 491     $ 1,172  
                                         
Commitments to extend consumer credit
    11,675       372       1,207       4,157       5,939  
Standby letters of credit
    273       273                    
Total
  $ 25,278     $ 10,786     $ 2,733     $ 4,648     $ 7,111  

Other obligations and commitments include the deferred compensation plan, index plan reserve and split dollar life insurance.  The timing of payments for these plans is unknown.  See Note 1 of the 2009 Annual Report for additional details.

Items reported under “Contractual Obligations” represent standard bank financing activity under normal terms and practices.  Such funds normally rollover or are replaced by like items depending on the then-current financing needs.  Items reported under “Other Commitments” also represent standard bank activity, but for extending credit to bank customers.  Commercial credits generally represent lines of credit or approved loans with drawable funds still available under the contract terms.  On an on-going basis, about half of these amounts are expected to be drawn.  Consumer credits generally represent amounts drawable under revolving home equity lines or credit card programs.  Such amounts are usually deemed less likely to be drawn upon in total as consumers tend not to draw down all amounts on such lines.  Utilization rates tend to be fairly constant over time.  Standby letters of credit represent guarantees to finance specific projects whose primary source of financing comes from other sources.  In the unlikely event of the other source’s failure to provide sufficient financing, the bank would be called upon to fill the need.  The Corporation is also continually engaged in the process of approving new loans in a bidding competition with other banks.  Management and Board committees approve the terms of these potential new loans with conditions and/or counter terms made to the applicant customers.  Customers may accept the terms, make a counter proposal, or accept terms from a competitor.  These loans are not yet under contract, but offers have been tendered, and would be required to be funded if accepted.  Such agreements represent approximately $4,438,000 at March 31, 2010, for various possible maturity terms.

 
18.

 

COMMERCIAL BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 


Item 3 - Quantitative and Qualitative Disclosures about Market Risk

A significant market risk to which the Corporation is exposed is interest rate risk.  The business of the Corporation and the composition of its balance sheet consist of investments in interest earning assets (primarily loans and securities), which are funded by interest bearing liabilities (deposits and borrowings).  These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk.  Interest rate risk is managed regularly through the Corporation’s Asset/Liability Management Committee (ALCO).  The two primary methods to monitor and manage interest rate risk are rate-sensitivity gap analysis and review of the effects of various interest rate shock scenarios.  Based upon ALCO’s review, there has been no significant change in the interest rate risk of the Corporation since year-end 2009.  (See Quantitative and Qualitative Disclosures about Market Risk in the Annual Report to Shareholders for the year ended December 31, 2009.)

Item 4 - Controls and Procedures

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Corporation conducted an evaluation of its disclosure controls and procedures, pursuant to Securities Exchange Act of 1934.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
 
 
19.

 

COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 2010
PART II – OTHER INFORMATION

 
Item 1
Legal Proceedings:
There are no matters required to be reported under this item.

Item 1A
Risk Factors:
There have been no material changes from risk factors as previously disclosed in Part 1, Item 1.A. of Commercial Bancshares, Inc.’s 10-K filed on March 29, 2010.

Item 2
Unregistered Sales of Securities and Use of Proceeds:
The Corporation purchased 2,102 shares totaling $22,335 under the Commercial Savings Bank Deferred Compensation Plan, a nonqualified deferred compensation plan, to various members of the Board during the three-month period ended March 31, 2010.  Shares are purchased on the open market and are credited to the respective accounts of the deferred compensation plan participants.  These transactions were not registered, but were made in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933.

The following table reflects shares repurchased by the Corporation during the quarter ended March 31, 2010.

Period
 
Total
Number 
of Shares
Purchased
   
Average
Price 
Paid 
per 
Share
   
Total Number of
Shares 
Purchased as 
Part of Publicly
Announced Plans
or Programs
   
Maximum Number
of Shares that May 
Yet be Purchased 
Under the Plan
or Programs
 
1/1/10 - 1/31/10
    -0-       n/a       -0-       23,548  
                                 
2/1/10 - 2/28/10
    -0-       n/a       -0-       23,548  
                                 
3/1/10 - 3/31/10
    -0-       n/a       -0-       23,548  
                                 
Total
    -0-       n/a       -0-       23,548  

Item 3
Defaults upon Senior Securities:
There are no matters required to be reported under this item.

Item 4
Other Information:
There are no matters required to be reported under this item.
 
 
20.

 

COMMERCIAL BANCSHARES, INC.
FORM 10-Q
Quarter ended March 31, 2010
PART II – OTHER INFORMATION


Item 5
Exhibits:

Exhibit
   
Number
 
Description of Document
     
3.1.a.
 
Amended Articles of Incorporation of the Corporation
   
(incorporated by reference to Registrant’s Form 8-K dated April 27, 1995)
     
3.1.b.
 
Amendment to the Corporation’s Amended Articles of Incorporation to increase the number of shares authorized for the issuance to 4,000,000 common shares, no par value (incorporated by reference to Appendix I to Registrant’s Definitive Proxy Statement filed March 13, 1997)
     
3.2
 
Code of Regulations of the Corporation
   
(incorporated by reference to Registrant’s Form 8-K dated April 27, 1995)
     
4
 
Form of Certificate of Common Shares of the Corporation
   
(incorporated by reference to Registrant’s Form 8-K dated April 27, 1995)
     
11
 
Statement re computation of per share earnings (reference is hereby made to Note 2 of the Consolidated Financial Statements on page 8 hereof)
     
31.1
 
Certification by CEO Pursuant to Sarbanes Oxley Section 302
     
31.2
 
Certification by CFO Pursuant to Sarbanes Oxley Section 302
     
32.1
 
Certification by CEO Pursuant to Sarbanes Oxley Section 906
     
32.2
  
Certification by CFO Pursuant to Sarbanes Oxley Section 906
 
 
21.

 

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 6, 2010
 
/s/ Robert E. Beach
     
(Signature)
     
Robert E. Beach
     
President and Chief Executive Officer
       
Date:
May 6, 2010
 
/s/ Scott A. Oboy
     
(Signature)
     
Scott A. Oboy
     
Executive Vice President and Chief Financial Officer

 
22.