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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number 00-22246
COMMERCIAL BANKSHARES, INC.
_________________________________________________________________
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0050176
_________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1550 S.W. 57th Avenue, Miami, Florida 33144
_________________________________________________________________
(Address of principal executive offices) (Zip Code)
(305) 267-1200
_________________________________________________________________
(Registrant's Telephone Number, including area code)
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 (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
___ ___
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No .
___ ___
CLASS OUTSTANDING AT AUGUST 12, 2003
_____ ______________________________
COMMON STOCK, PAR VALUE $.08 PER SHARE 4,624,981 SHARES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(Dollars in thousands, except share data)
6/30/2003 12/31/2002
_________ __________
Assets: (Unaudited)
Cash and due from banks $ 37,480 $ 31,108
Federal funds sold 52,609 29,425
________ ________
Total cash and cash equivalents 90,089 60,533
Investment securities available for sale,
at fair value (cost of $113,849 in 2003
and $175,597 in 2002) 122,011 182,831
Investment securities held to maturity,
at cost (fair value of $155,109 in 2003
and $90,019 in 2002) 153,350 88,307
Loans, net 368,607 345,766
Premises and equipment, net 12,610 12,591
Accrued interest receivable 4,273 4,328
Goodwill, net 253 253
Other assets 4,492 3,915
________ ________
Total assets $755,685 $698,524
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $110,227 $ 99,018
Interest-bearing checking 85,995 81,978
Money market accounts 72,576 62,096
Savings 33,287 28,633
Time 328,994 309,501
________ ________
Total deposits 631,079 581,226
Securities sold under agreements
to repurchase 56,508 53,705
Accrued interest payable 597 624
Accounts payable and accrued liabilities 4,706 4,364
________ ________
Total liabilities 692,890 639,919
________ ________
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.08 par value, 15,000,000
Authorized shares, 5,047,513 issued
(5,006,670 in 2002) 404 401
Additional paid-in capital 45,027 44,653
Retained earnings 18,831 15,603
Accumulated other comprehensive income 5,301 4,716
Treasury stock, 443,820 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 62,795 58,605
________ ________
Total liabilities and stockholders' equity $755,685 $698,524
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
Three months Six months
Ended ended
June 30, June 30,
________________ _________________
2003 2002 2003 2002
____ ____ ____ ____
Interest income:
Interest and fees on loans $5,998 $6,358 $11,834 $12,771
Interest on investment securities 3,489 2,542 6,767 4,716
Interest on federal funds sold 154 118 281 267
______ ______ _______ _______
Total interest income 9,641 9,018 18,882 17,754
______ ______ _______ _______
Interest expense:
Interest on deposits 2,782 2,535 5,544 5,210
Interest on securities sold under
agreements to repurchase 200 263 390 489
______ ______ _______ _______
Total interest expense 2,982 2,798 5,934 5,699
______ ______ _______ _______
Net interest income 6,659 6,220 12,948 12,055
Provision for loan losses 135 75 135 150
______ ______ _______ _______
Net interest income
after provision 6,524 6,145 12,813 11,905
______ ______ _______ _______
Non-interest income:
Service charges on deposit accounts 633 647 1,266 1,314
Other fees and service charges 157 151 303 292
Securities gains(losses) 139 (7) 139 33
______ ______ _______ _______
Total non-interest income 929 791 1,708 1,639
______ ______ _______ _______
Non-interest expense:
Salaries and employee benefits 2,365 2,317 4,697 4,675
Occupancy 312 320 606 619
Data processing 278 272 535 585
Furniture and equipment 186 191 371 366
Insurance 104 85 201 165
Stationery and supplies 69 66 129 131
Administrative service charges 55 60 101 114
Telephone and fax 46 55 87 111
Other 346 320 605 655
______ ______ _______ _______
Total non-interest expense 3,761 3,686 7,332 7,421
______ ______ _______ _______
Income before income taxes 3,692 3,250 7,189 6,123
Provision for income taxes 1,181 978 2,217 1,827
______ ______ _______ _______
Net income $2,511 $2,272 $ 4,972 $ 4,296
====== ====== ======= =======
Earnings per common and common equivalent share:
Basic $.55 $.50 $1.09 $.95
Diluted $.51 $.48 $1.02 $.91
Weighted average number of shares
and common equivalent shares:
Basic 4,596,892 4,535,568 4,583,518 4,530,338
Diluted 4,911,579 4,761,134 4,883,784 4,735,927
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended June 30, 2003 and 2002
(In thousands)
(Unaudited)
Three months ended
June 30,
__________________
2003 2002
____ ____
Net income $2,511 $2,272
______ ______
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period (net of tax expense(benefit)
of $289,000 in 2003 and $1,005,000 in 2002) 492 1,712
Reclassification adjustment for (gains)losses
realized in net income (net of tax expense(ben-
efit) of $51,000 in 2003 and ($3,000) in 2002) (88) 4
______ ______
Other comprehensive income 404 1,716
______ ______
Comprehensive income $2,915 $3,988
====== ======
Six months ended
June 30,
________________
2003 2002
____ ____
Net income $4,972 $4,296
______ ______
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period (net of tax expense(benefit)
of $395,000 in 2003 and $743,000 in 2002) 673 1,265
Reclassification adjustment for gains
realized in net income (net of tax expense(ben-
efit) of $51,000 in 2003 and $12,000 in 2002) (88) (21)
______ ______
Other comprehensive income 585 1,244
______ ______
Comprehensive income $5,557 $5,540
====== ======
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2003 and 2002
(In thousands)
Unaudited)
2003 2002
____ ____
Cash flows from operating activities:
Net income $ 4,972 $ 4,296
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 135 150
Depreciation, amortization and accretion, net 583 321
Gain on sale of investment securities (139) (33)
Gain on sale of premises and equipment (1) (1)
Change in accrued interest receivable 55 (620)
Change in other assets (577) (633)
Change in accounts payable and accrued liabilities (7) 1,321
Change in accrued interest payable (27) (84)
_______ _______
Net cash provided by operating activities 4,994 4,717
_______ _______
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 53,895 16,690
Proceeds from maturities and sales of investment
Securities available for sale 144,146 27,816
Purchases of investment securities
held to maturity (114,012) (36,286)
Purchases of investment securities
available for sale (87,467) (37,438)
Net change in loans (22,976) (9,095)
Purchases of premises and equipment (319) (303)
Sales of premises and equipment 1 1
_______ _______
Net cash used in investing activities (26,732) (38,615)
_______ _______
Cash flows from financing activities:
Net change in deposits 49,853 26,434
Net change in securities sold under
agreements to repurchase 2,803 11,149
Dividends paid (1,739) (1,553)
Proceeds from issuance of stock 377 416
Purchase of treasury stock - (40)
_______ _______
Net cash provided by financing activities 51,294 36,406
_______ _______
Increase in cash and cash equivalents 29,556 2,508
Cash and cash equivalents at beginning of period 60,533 68,200
_______ _______
Cash and cash equivalents at end of period $90,089 $70,708
======= =======
Supplemental disclosures:
Interest paid (net of amounts credited
to deposit accounts) $ 989 $ 863
======= =======
Income taxes paid $ 2,136 $ 1,948
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements,
which are for interim periods, do not include all disclosures provided
in the annual consolidated financial statements. These financial
statements and the footnotes thereto should be read in conjunction
with the annual consolidated financial statements for the years ended
December 31, 2002, 2001, and 2000 for Commercial Bankshares, Inc. (the
"Company").
All material intercompany balances and transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary for
a fair presentation of the financial statements. Those adjustments are
of a normal recurring nature. The results of operations for the six month
period ended June 30, 2003, are not necessarily indicative of the results
to be expected for the full year.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the statements of financial condition
and revenues and expenses for the periods covered. Actual results could
differ from those estimates and assumptions.
2. STOCK OPTIONS
The new disclosure requirements under SFAS No. 148 for interim financial
statements are effective and were adopted by the Company on January 1,
2003. The following table provides the newly required disclosures for
the three and six-month periods ended June 30, 2003 compared to the same
periods in the prior year:
Three Months Ended Six Months Ended
June 30, June 30,
__________________ ________________
2003 2002 2003 2002
____ ____ ____ ____
(Dollars in thousands)
Net income as reported $2,511 $2,272 $4,972 $4,296
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (1) (128) (137) (158) (162)
______ ______ ______ ______
Pro forma net income $2,383 $2,135 $4,814 $4,134
====== ====== ====== ======
Earnings per share, basic
as reported $ .55 $ .50 $ 1.09 $ .95
Earnings per share, basic
pro forma $ .52 $ .47 $ 1.05 $ .91
Earnings per share, diluted
as reported $ .51 $ .48 $ 1.02 $ .91
Earnings per share, diluted
pro forma $ .49 $ .45 $ .99 $ .87
(1) The fair value of each option has been estimated on the date of the
grant using the Black Scholes option pricing model.
5
3. PER SHARE DATA
Earnings per share have been computed by dividing net income by the
weighted average number of common shares (basic earnings per share) and
by the weighted average number of common shares plus dilutive common
share equivalents outstanding (diluted earnings per share). Common stock
equivalents include the effect of all outstanding stock options, using the
treasury stock method.
The following tables reconcile the weighted average shares used to
calculate basic and diluted earnings per share (in thousands, except
per share amounts):
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $2,511 4,597 $.55 $2,272 4,536 $.50
Effect of
Dilutive
Options - 315 (.04) - 225 (.02)
______ _____ ____ ______ _____ ____
Diluted EPS $2,511 4,912 $.51 $2,272 4,761 $.48
====== ===== ==== ====== ===== ====
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $4,972 4,584 $1.09 $4,296 4,530 $.95
Effect of
Dilutive
Options - 300 (.07) - 206 (.04)
______ _____ ____ ______ _____ ____
Diluted EPS $4,972 4,884 $1.02 $4,296 4,736 $.91
====== ===== ==== ====== ===== ====
Options to purchase 64,500 and 79,375 shares of common stock at $33.32 and
$22.80 per share were outstanding at June 30, 2003 and June 30, 2002,
respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market
price of the common shares.
6
4. COMMITMENTS AND CONTINGENCIES
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The Bank
had outstanding standby letters of credit in the amount of $4.4 million
as of June 30, 2003 as compared to $4.1 million as of December 31, 2002.
Approximately $949,000 of the standby letters of credit outstanding at
June 30, 2003 were issued subsequent to December 31, 2002 and are being
carried at fair value. The Bank's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for standby
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in establishing
conditional obligations as those for on-balance sheet instruments. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Collateral
held varies but may include cash, or the goods acquired by the customer
for which the standby letter of credit was issued. Since certain letters
of credit are expected to expire without being drawn upon, they do not
necessarily represent future cash requirements.
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires than an issuer
classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. This statement is effective for
financial instruments entered into or modified after May 31, 2003. The
provisions of this statement are not expected to have a material effect
on the financial statements of the Company.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". The provisions of
this statement amend and clarify financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The
provisions of this statement are not expected to have a material effect
on the financial statements of the Company.
In December of 2002, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure an amendment of FASB
Statement No. 123". Under SFAS No. 148, alternative methods of transition
are provided for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of FASB No. 123, "Accounting for
Stock Based Compensation" to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. As permitted by SFAS No. 123, the Bank continues to follow the
intrinsic value method of accounting for stock-based compensation under
the provision of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees". Accordingly, the alternative
methods of transition for the fair value based method of accounting for
stock-based employee compensation provided by SFAS No. 148 do not apply
to the Bank. The Bank is required under the provisions of SFAS No. 148
amending SFAS No. 123 and APB No. 28, "Interim Financial Reporting", to
provide additional disclosure in both annual and interim financial
statements. The new disclosure requirements are included in Note 2.
7
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 addresses the treatment of goodwill
related to branch acquisitions. It requires that goodwill meeting
certain criteria be accounted for under SFAS No. 142, "Goodwill and
Other Intangible Assets." The Company adopted SFAS No. 142 in January
2002 and adopted SFAS No. 147 in the fourth quarter of 2002. The
implementation of this statement did not have a material effect on the
Company's financial position, results of operations or cash flows.
On January 17, 2003, the FASB issued FAS Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of
ARB 51" ("FIN 46"). The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved
through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This
new model for consolidation applies to an entity which either (1) the
equity investors (if any) do not have a controlling financial interest
or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The provisions of this
interpretation will not have a material effect on the financial statements
of the Company.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated
results of operations and financial condition should be read in
conjunction with the unaudited interim consolidated financial statements
and the related notes included herein and the consolidated financial
statements for the year ended December 31, 2002 appearing in the
Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
CORPORATE OVERVIEW
Commercial Bankshares, Inc. (the "Company"), a Florida corporation
organized in 1988, is a bank holding company whose wholly-owned
subsidiary and principal asset is the Commercial Bank of Florida (the
"Bank"). The Company, through its ownership of the Bank, is engaged
in a commercial banking business. Its primary source of earnings is
derived from income generated by its ownership and operation of the Bank.
The Bank is a Florida chartered banking corporation with fourteen branch
locations throughout Miami-Dade and Broward counties in South Florida.
The Bank primarily focuses on providing personalized banking services to
businesses and individuals within the market areas where its banking
offices are located.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2003 and 2002
The Company's net income reported for the quarter ended June 30, 2003,
was $2.51 million, an 11% increase over the quarter ended June 30, 2002
of $2.27 million. Basic and diluted earnings per share were $.55 and
$.51, respectively, for the second quarter of 2003, as compared to $.50
and $.48, respectively, for the second quarter of 2002.
For the six months ended June 30, 2003, the Company's net income was
$4.97 million, a 16% increase over the six months ended June 30, 2002
of $4.30 million. Basic and diluted earnings per share were $1.09 and
$1.02, respectively, for the six months ended June 30, 2003 as compared
to $.95 and $.91, respectively, for the six months ended June 30, 2002.
The Company's second quarter tax-equivalent net interest income increased
6% to $6.90 million, from $6.52 million in the corresponding quarter in
2002. The increase is due primarily to an increase in average earning
assets of $136 million partially offset by a decrease in the net interest
margin. The annualized net interest margin for the quarter ended June 30,
2003 was 3.96%. This compares to 4.66% for the quarter ended June 30, 2002.
The decrease in the net interest margin is the result of the significant
inflow of deposits, some of which are temporarily invested in short-term
instruments. Tax equivalent net interest income for the six months ended
June 30, 2003 increased 6% to $13.4 million. The net interest margin for
the six months ended June 30, 2003 was 3.96%, as compared to 4.62% for the
same period in 2002. The net interest margin has been calculated on a tax-
equivalent basis, which includes an adjustment for interest on tax-exempt
securities.
Non-interest income for the second quarter of 2003 increased by $138,000,
or 17%, and increased by $69,000, or 4%, for the first six months of 2003,
from the corresponding periods of 2002. The increase in quarter activity
is due to an increase in net gain on sale of investments of $146,000. The
increase in year to date activity is primarily due to an increase in net
gain on sale of investments of $106,000, partially offset by a decrease in
account activity charges of $37,000.
9
Non-interest expenses for the second quarter 2003 increased $75,000, or 2%,
from the same quarter in 2002, due to an increase in staff expenses of
$48,000, legal and professional fees of $21,000 and insurance expense of
$19,000, partially offset by a decrease in miscellaneous expense of
$24,000. Expenses for the six months ended June 30, 2003 decreased $89,000,
or 1%, from the six months ended June 30, 2002, due to decreases in data
processing of $50,000, legal and professional of $52,000 and telephone and
fax of $24,000, partially offset by increases in staff expenses of $22,000
and insurance of $36,000.
Company management continually reviews and evaluates the allowance for
loan losses. In evaluating the adequacy of the allowance for loan losses,
management considers the results of its methodology, along with other
factors such as the amount of non-performing loans and the economic
conditions affecting the Company's markets and customers. The allowance
for loan losses was $4.80 million at June 30, 2003, as compared with
$4.75 million at December 31, 2002. For the six months ended June 30,
2003, the allowance for loan losses was increased with a provision for
loan losses of $135,000 and decreased by approximately $91,000 in net
charge-offs. For the six months ended June 30, 2002, the allowance was
increased with a provision for loan losses of $150,000 and decreased by
approximately $60,000 in net charge-offs. The allowance as a percentage
of total loans has decreased to 1.28% at June 30, 2003, from 1.35% at
December 31, 2002. Based on the nature of the loan portfolio and
prevailing economic factors, management believes that the current level
of the allowance for loan losses is sufficient to absorb probable losses
in the loan portfolio.
Approximately $243.9 million, or 65%, of total loans was secured by non-
residential real estate, and $78.2 million, or 21%, of total loans was
secured by residential real estate as of June 30, 2003. Virtually all
loans are within the Company's markets in Miami-Dade and Broward counties.
The Company had no non-accrual loans at June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash flow requirements
to meet immediate and ongoing future needs for loan demand, deposit
withdrawals, maturing liabilities, and expenses. In evaluating actual
and anticipated needs, management seeks to obtain funds at the most
economical cost. Management believes that the level of liquidity is
sufficient to meet future funding requirements.
For banks, liquidity represents the ability to meet both loan commitments
and withdrawals of deposited funds. Funds to meet these needs can be
obtained by converting liquid assets to cash or by attracting new deposits
or other sources of funding. Many factors affect a bank's ability to meet
liquidity needs. The Bank's principal sources of funds are deposits,
repurchase agreements, payments on loans, maturities and sales of
investments. As an additional source of funds, the Bank has credit
availability with the Federal Home Loan Bank amounting to $113 million,
and Federal Funds purchased lines available at correspondent banks
amounting to $23 million as of June 30, 2003.
The Bank's primary use of funds is to originate loans and purchase
investment securities. The Bank purchased $201.5 million of investment
securities during the first six months of 2003, and loans increased by
$23.0 million. Funding for the above came primarily from increases in
deposits of $49.9 million, increases in securities sold under agreements
to repurchase of $2.8 million and increases from proceeds from maturities
and sales of investment securities of $198.0 million.
10
In accordance with risk-based capital guidelines issued by the Federal
Reserve Board, the Company and the Bank are each required to maintain a
minimum ratio of total capital to risk weighted assets of 8%. Additionally,
all bank holding companies and member banks must maintain "core" or
"Tier 1" capital of at least 3% of total assets ("leverage ratio").
Member banks operating at or near the 3% capital level are expected to
have well diversified risks, including no undue interest rate risk
exposure, excellent control systems, good earnings, high asset quality,
high liquidity, and well managed on- and off-balance sheet activities,
and in general be considered strong banking organizations with a composite
1 rating under the CAMELS rating system of banks. For all but the most
highly rated banks meeting the above conditions, the minimum leverage ratio
is to be 3% plus an additional 100 to 200 basis points. The Tier 1 Capital,
Tier 2 Capital, and Leverage Ratios of the Company were 12.67%, 14.04%, and
7.52%, respectively, as of June 30, 2003.
FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q
may include "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including in particular the statements
about the Company's plans, strategies and prospects. These statements
are based on the Company's current plans and expectations and involve
risks and uncertainties that could cause actual future activities and
results to be materially different from those set forth in these forward-
looking statements. Important factors that could cause actual results to
differ materially from the Company's forward-looking statements are set
forth below and elsewhere in this Quarterly Report on Form 10-Q. Such
factors include, among others:
- the general state of the economy and, together with all aspects
of the Company's business that are affected by changes in the
economy, the impact that changing rates have on the Company's
net interest margin;
- the Company's ability to increase the loan portfolio, and in
particular its secured loan portfolio;
- the Company's ability to access cost-effective funding to fund
marginal loan growth;
- changes in management's estimate of the adequacy of the allowance
for loan losses;
- changes in the overall mix of the Company's loan and deposit
products;
- the impact of repricing and competitors' pricing initiatives on
loan and deposit products; and
- the extent of defaults, the extent of losses given default, and
the amount of lost interest income that may result in the event
of a severe recession.
The Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances after the date of
this filing.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK
Changes in interest rates can substantially impact the Company's long-
term profitability and current income. An important part of management's
efforts to maintain long-term profitability is the management of interest
rate risk. The goal is to maximize net interest income within acceptable
levels of interest rate risk and liquidity. Interest rate exposure is
managed by monitoring the relationship between interest-earning assets
and interest-bearing liabilities, focusing on the size, maturity or
repricing date, rate of return and degree of risk. The Asset/Liability
Management Committee of the Bank oversees the interest rate risk management
and reviews the Bank's asset/liability structure on a quarterly basis.
The Bank uses interest rate sensitivity or GAP analysis to monitor the
amount and timing of balances exposed to changes in interest rates. The
GAP analysis is not relied upon solely to determine future reactions to
interest rate changes because it is presented at one point in time and
could change significantly from day-to-day. Other methods such as
simulation analysis are utilized in evaluating the Bank's interest rate
risk position. The table presented below shows the Bank's GAP analysis
at June 30, 2003.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
Term to Repricing
______________________________________________
Over 1 Year
90 Days 91-181 182-365 & Non-rate
or Less Days Days Sensitive Total
_______ ____ ____ _________ _____
Interest-earning assets:
Federal funds sold $52,609 $ - $ - $ - $ 52,609
Investment securities 93,741 38,674 59,000 80,838 272,253
Gross loans
(excluding non-accrual) 75,854 32,739 58,879 206,627 374,099
________ _______ ________ ________ ________
Total interest-
earning assets $222,204 $71,413 $117,879 $287,465 $698,961
======== ======= ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $ - $21,499 $ 21,499 $ 42,997 $ 85,995
Money market - 18,144 18,144 36,288 72,576
Savings - - - 33,287 33,287
Time deposits 62,403 51,822 86,514 128,255 328,994
Borrowed funds 59,645 - - - 59,645
________ _______ ________ ________ ________
Total interest-bearing
liabilities $122,048 $91,465 $126,157 $240,827 $580,497
======== ======= ======== ======== ========
Interest sensitivity gap $100,156 ($20,052)($ 8,278) $ 46,638 $118,464
======== ======= ======== ======== ========
Cumulative gap $100,156 $80,104 $ 71,826 $118,464
======== ======= ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 182% 138% 121% 120%
Cumulative gap as a percentage
of total interest-
earning assets 14.3% 11.5% 10.3% 16.9%
12
Management's assumptions reflect the Bank's estimate of the anticipated
repricing sensitivity of non-maturity deposit products. Savings have
been allocated to the "over 1 year" category, and interest checking and
money market, 25% to the "91-181 days" category, 25% to the "182-365
days" category, and 50% to the "over 1 year" category.
The Bank uses simulation analysis to quantify the effects of various
immediate parallel shifts in interest rates on net interest income over
the next 12 month period. Such a "rate shock" analysis requires key
assumptions which are inherently uncertain, such as deposit sensitivity,
cash flows from investments and loans, reinvestment options, management's
capital plans, market conditions, and the timing, magnitude and frequency
of interest rate changes. As a result, the simulation is only a best-
estimate and cannot accurately predict the impact of the future interest
rate changes on net income. As of June 30, 2003, the Bank's simulation
analysis projects a decrease to net interest income of .05%, assuming an
immediate parallel shift downward in interest rates by 200 basis points.
If rates rise by 200 basis points, the simulation analysis projects net
interest income would increase by 1.81%. These projected levels are
within the Bank's policy limits.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company has carried out an evaluation, under the supervision and
with the participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered
by this Quarterly Report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered
by this Quarterly Report in timely alerting them as to material information
relating to the Company (including its consolidated subsidiary) required to
be included in this Quarterly Report.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal control
over financial reporting during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2003, the Company held an annual meeting of the stockholders
for holders of the Common Stock to vote on the following matters: (1) to
elect eight persons to the Company's Board of Directors, and (2) to
approve an amendment to the Company's Articles of Incorporation, as
amended, to increase from 6,250,000 to 15,000,000 the number of authorized
shares of Common Stock.
The following table sets forth the votes for and votes withheld with respect
to the election of the directors:
Director Nominee Votes Cast For Votes Withheld
________________ ______________ ______________
Joseph W. Armaly 3,660,080 149,465
Jack J. Partagas 3,711,931 97,614
Cromwell A. Anderson 3,695,872 113,673
Richard J. Bischoff 3,713,003 96,542
Robert Namoff 3,722,221 87,324
Sherman Simon 3,643,443 166,102
Michael W. Sontag 3,722 221 87,324
Martin Yelen 3,695,872 113,673
With respect to the approval of the amendment to the Company's Articles
of Incorporation, as amended, in order to increase the number of authorized
shares of Common Stock, 3,630,399 votes were cast for this matter, 169,975
votes were cast against this matter and there were 9,170 abstentions and
0 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K was filed during the quarter ended June 30, 2003 to
announce first quarter 2003 earnings for Commercial Bankshares,
Inc. on April 16, 2003.
14
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 BANKSHARES, INC.
By:/s/ Joseph W. Armaly
____________________
Joseph W. Armaly
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
August 13, 2003
By:/s/ Barbara E. Reed
___________________
Barbara E. Reed
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
August 13, 2003
15
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
I, Joseph W. Armaly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial
Bankshares, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. [Intentionally omitted];
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
as of the end of the period covered by this report based on our
evaluation; and
d. Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Dated: August 13, 2003 COMMERCIAL BANKSHARES, INC.
/s/ Joseph W. Armaly
____________________
Joseph W. Armaly
Chief Executive Officer
16
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
I, Barbara E. Reed, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial
Bankshares, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiary, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b. [Intentionally omitted];
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report, based on our
evaluation; and
d. Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Dated: August 13, 2003 COMMERCIAL BANKSHARES, INC.
/s/ Barbara E. Reed
___________________
Barbara E. Reed
Chief Financial Officer
17
Exhibit 32.1
EXHIBIT 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-
Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc.,
(the "Company") on Form 10-Q for the quarter ended, June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Joseph W. Armaly, Chief Executive Officer of the Company, certify, pursuant
to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods
expressed in the Report.
/s/ Joseph W. Armaly
______________________
Joseph W. Armaly
Chief Executive Officer
August 13, 2003
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
Exhibit 32.2
EXHIBIT 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-
Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc.,
(the "Company") on Form 10-Q for the quarter ended, June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Barbara E. Reed, Chief Financial Officer of the Company, certify, pursuant
to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company as of the dates and for the periods
expressed in the Report.
/s/ Barbara E. Reed
_____________________
Barbara E. Reed
Chief Financial Officer
August 13, 2003
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
18