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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
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 .
___ ___
On May 7, 2004 there were 5,920,417 shares of common stock (par value
$.08 per share) outstanding.
TABLE OF CONTENTS
Description Page No.
___________ ________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 2004 and 2003 2
Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended March 31, 2004
and 2003 3
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2004 and 2003 4
Notes To Condensed Consolidated Financial Statements 5
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 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Exhibit 31.1 Certification of the Chief Executive Officer pursuant
to Rule 15A-14(A) or 15D-14(A) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of the Chief Financial Officer pursuant
to Rule 15A-14(A) or 15D-14(A) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of the Chief Executive Officer pursuant
to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350
of Chapter 63 of Title 18 of the United States Code
(18 U.S.C. 1350), as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of the Chief Financial Officer pursuant
to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350
of Chapter 63 of Title 18 of the United States Code
(18 U.S.C. 1350), as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
(Dollars in thousands, except share data)
3/31/2004 12/31/2003
_________ __________
Assets: (Unaudited)
Cash and due from banks $ 46,454 $ 30,569
Federal funds sold 63,376 29,382
________ ________
Total cash and cash equivalents 109,830 59,951
Investment securities available for sale,
at fair value (cost of $115,750 in 2004
and $103,206 in 2003) 124,002 110,096
Investment securities held to maturity,
at cost (fair value of $167,613 in 2004
and $179,559 in 2003) 168,337 185,781
Loans, net 422,443 408,100
Premises and equipment, net 12,488 12,420
Accrued interest receivable 4,276 5,959
Goodwill, net 253 253
Other assets 3,590 3,619
________ ________
Total assets $845,219 $786,179
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $131,372 $117,893
Interest-bearing checking 92,404 87,918
Money market accounts 77,916 72,218
Savings 33,486 32,240
Time 357,252 344,520
________ ________
Total deposits 692,430 654,789
Securities sold under agreements to repurchase 76,561 60,210
Accrued interest payable 606 618
Accounts payable and accrued liabilities 5,686 4,464
________ ________
Total liabilities 775,283 720,081
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.08 par value, 15,000,000 authorized
shares, 6,461,981 issued (6,390,242 in 2003) 517 511
Additional paid-in capital 47,031 45,818
Retained earnings 23,800 22,037
Accumulated other comprehensive income 5,356 4,500
Treasury stock, 554,775 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 69,936 66,098
________ ________
Total liabilities and stockholders' equity $845,219 $786,179
======== ========
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 months ended March 31, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
Three months ended
March 31,
__________________
2004 2003
____ ____
Interest income:
Interest and fees on loans $6,456 $5,836
Interest on investment securities 3,734 3,278
Interest on federal funds sold 134 127
______ ______
Total interest income 10,324 9,241
Interest expense:
Interest on deposits 2,713 2,762
Interest on securities sold under
agreements to repurchase 164 190
______ ______
Total interest expense 2,877 2,952
______ ______
Net interest income 7,447 6,289
Provision for loan losses 15 -
______ ______
Net interest income after provision 7,432 6,289
______ ______
Non-interest income:
Service charges on deposit accounts 584 633
Other fees and service charges 130 146
Securities gains, net - -
______ ______
Total non-interest income 714 779
______ ______
Non-interest expense:
Salaries and employee benefits 2,648 2,332
Occupancy 312 294
Data processing 299 257
Furniture and equipment 197 185
Insurance 102 97
Professional fees 125 (3)
Stationery and supplies 68 60
Administrative service charges 61 46
Telephone 10 41
Other 305 262
______ ______
Total non-interest expense 4,127 3,571
______ ______
Income before income taxes 4,019 3,497
Provision for income taxes 1,314 1,036
______ ______
Net income $2,705 $2,461
====== ======
Earnings per common and common equivalent share:
Basic $.46 $.43
Diluted $.44 $.40
Weighted average number of shares
and common equivalent shares:
Basic 5,876,224 5,710,710
Diluted 6,182,523 6,089,826
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 months ended March 31, 2004 and 2003
(In thousands)
(Unaudited)
Three months ended
March 31,
__________________
2004 2003
____ ____
Net income $2,705 $2,461
______ ______
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period (net of tax expense of
$503,000 in 2004 and $106,000 in 2003 856 181
______ ______
Other comprehensive income 856 181
______ ______
Comprehensive income $3,561 $2,642
====== ======
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 three months ended March 31, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
____ ____
Cash flows from operating activities:
Net income $ 2,705 $ 2,461
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 15 -
Depreciation, amortization and accretion, net 183 244
Gain on sale of premises and equipment - (1)
Change in accrued interest receivable 1,683 300
Change in other assets 29 12
Change in accounts payable and accrued liabilities 1,319 731
Change in accrued interest payable (12) (17)
________ _______
Net cash provided by operating activities 5,922 3,730
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 17,445 26,451
Proceeds from maturities of investment
Securities available for sale 19,535 69,478
Purchases of investment securities
held to maturity - (43,562)
Purchases of investment securities
available for sale (32,097) (58,280)
Net change in loans (14,358) (7,897)
Purchases of premises and equipment (235) (125)
Sales of premises and equipment - 1
Net cash used in investing activities (9,710) (13,934)
Cash flows from financing activities:
Net change in deposits 37,641 32,821
Net change in securities sold under
agreements to repurchase 16,351 3,981
Dividends paid (1,229) (870)
Proceeds from issuance of stock 904 154
________ _______
Net cash provided by financing activities 53,667 36,086
________ _______
Increase in cash and cash equivalents 49,879 25,882
Cash and cash equivalents at beginning of period 59,951 60,533
________ _______
Cash and cash equivalents at end of period $109,830 $86,415
======== =======
Supplemental disclosures:
Interest paid (net of amounts credited
to deposit accounts) $ 866 $ 514
======== =======
Income taxes paid $ - $ 1,216
======== =======
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 year ended December 31, 2003 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 three month period ended March 31,
2004, 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 Statement of Financial Accounting
Standard (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure an amendment of FASB Statement No. 123" for interim
financial statements are effective and were adopted by the Company on
January 1, 2003. See Note 5 for a discussion of SFAS No. 148, which requires
disclosure of pro forma net income and earnings per share as if the Company had
adopted the fair value method of accounting for stock-based awards.
The following table provides the newly required disclosures for the three month
period ended March 31, 2004 compared to the same period in the prior year:
Three Months Ended
March 31,
___________________
2004 2003
____ ____
(Dollars in thousands)
Net income as reported $2,705 $2,461
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1) (46) (30)
______ ______
Pro forma net income $2,659 $2,431
====== ======
5
Earnings per share, basic
as reported $ .46 $ .43
Earnings per share, basic
pro forma $ .45 $ .43
Earnings per share, diluted
as reported $ .44 $ .40
Earnings per share, diluted
pro forma $ .43 $ .40
(1) The fair value of each option has been estimated on the date of the grant
using the Black Scholes option pricing model.
3. PER SHARE DATA
Earnings per share have been computed by dividing net income by the weighted
average number of shares of common stock (basic earnings per share) and by the
weighted average number of shares of common stock plus dilutive shares of
common stock equivalents outstanding (diluted earnings per share). Common
stock equivalents include the effect of all outstanding stock options, using
the treasury stock method. Per share data and weighted average shares
outstanding have been adjusted for the three months ended March 31, 2003 for
the five-for-four stock split which was effective on January 2, 2004.
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
March 31, 2004 March 31, 2003
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $2,705 5,876 $.46 $2,461 5,711 $.43
Effect of
Dilutive
Options - 307 (.02) - 379 (.03)
______ _____ ____ ______ _____ ____
Diluted EPS $2,705 6,183 $.44 $2,461 6,090 $.40
====== ===== ==== ====== ===== ====
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 $4.8 million as
of March 31, 2004 as compared to $4.4 million as of December 31, 2003.
Approximately $1.0 million of the standby letters of credit outstanding at
March 31, 2004 were issued subsequent to December 31, 2003 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.
6
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, Financial Accounting Standard Board (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 did not 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 did not have a material
effect on the financial statements of the Company.
In December of 2002, the FASB issued 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.
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", an interpretation of FASB Statements
No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
This interpretation does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related
guarantee. This interpretation also incorporates, without change, the
7
guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees
of Indebtedness of Others", which is being superseded. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Although applicable to the Bank, FIN 45 has not had a
significant impact on its consolidated financial condition or results of
operations.
On January 17, 2003, the FASB issued 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 are effective for reporting periods ending after December 15,
2003 and are not expected to 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, 2003 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 Months Ended March 31, 2004 and 2003
The Company's net income reported for the three months ended March 31, 2004,
was $2.70 million, a 10% increase over the three months ended March 31, 2003
of $2.46 million. Basic and diluted earnings per share were $.46 and $.44,
respectively, for the three months ended March 31, 2004, as compared to $.43
and $.40, respectively, for the three months ended March 31, 2003.
The Company's first quarter tax-equivalent net interest income increased 18%
to $7.7 million, from $6.5 million for the corresponding quarter in 2003.
The increase is the result of growth in average earning assets, which have
increased 12% to $748 million for the first quarter of 2004, as compared to
$669 million for the first quarter of 2003. It is also the result of a
higher net interest yield. The tax-equivalent net interest yield for the
three months ended March 31, 2004 was 4.14%, as compared to 3.97% for the
same period in 2003. The increase in the net interest yield is the result
of an increase in loans and a reduction in the cost of funds. 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 decreased by $65,000, or 8%, for the first quarter of 2004,
as compared to the corresponding period in 2003. The decrease in the first
quarter is due to a decrease in service charges on deposit accounts of $49,000
and non-recurring income in 2003 of $19,000 for real estate tax reductions and
other credits.
Non-interest expenses for the first three months of 2004 increased $556,000,
or 16%, from the first three months of 2003, due primarily to an increase in
staff expenses, professional fees and data processing expense. Staff expenses
increased by $316,000, or 14%, due to an increase in the number of officers,
and increase in medical expense of $30,000 and normal salary increases.
Professional fees increased by $129,000 in 2004 due to several SEC filings
including the 2004 Employee and Outside Director Stock Option Plans and an S-8,
and legal matters in the normal course of business. No legal expenses were
9
incurred in the first quarter of 2003 due to sufficient accruals in 2002
to cover all year-end related work and no special legal projects during
the period. Data processing expense increased by $42,000, or 16%, due to
increases from our service provider for new platforms, increased number
of accounts processed and regular contractual increases.
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 $5.02 million at March 31, 2004, as compared with $4.87
million at December 31, 2003. For the three months ended March 31, 2004,
the allowance for loan losses was increased with a provision for loan losses
of $15,000 and increased by approximately $130,000 in net recoveries. For
the three months ended March 31, 2003, the allowance was decreased by
approximately $90,000 in net charge-offs. The allowance as a percentage
of total loans has decreased to 1.17% at March 31, 2004, from 1.18% at
December 31, 2003. 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 $280.5 million, or 66%, of total loans was secured by non-
residential real estate, and $91.3 million, or 21%, of total loans was
secured by residential real estate as of March 31, 2004. Virtually all
loans are within the Company's markets in Miami-Dade and Broward counties.
The Company had no non-accrual loans at March 31, 2004.
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 $126 million, and Federal Funds purchased lines available
at correspondent banks amounting to $23 million as of March 31, 2004.
The Bank's primary use of funds is to originate loans and purchase investment
securities. The Bank purchased $32.1 million of investment securities during
the first three months of 2004, and loans increased by $14.4 million. Funding
for the above came from increases in deposits of $37.6 million, an increase in
securities sold under agreements to repurchase of $16.4 million and increases
from proceeds of maturities of investment securities of $37.0 million.
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
10
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 12.48%,
13.79%, and 7.59%, respectively, as of March 31, 2004.
The Company's critical accounting policies are disclosed on page 16 of its
2003 Annual Report under the heading Management's Discussion and Analysis
of Financial Condition and Results of Operations, which report is filed with
the Annual Report on Form 10-K for the year ended December 31, 2003. On an
ongoing basis, the Company evaluates its estimates and assumptions, including
those related to valuation of the loan portfolio. Since the date of the 2003
Annual Report, there have been no material changes to the Company's critical
accounting policies.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
(within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended), representing the Company's expectations and beliefs concerning
future events. The actual results of the Company could differ materially
from those indicated by the forward-looking statement because of various
risks and uncertainties, including, without limitation, the Company's
effective and timely initiation and development of new client relationships,
the maintenance of existing client relationships and programs, the recruitment
and retention of qualified personnel, possible or proposed products, branch
offices, or strategic plans, the ability to increase sales of Company products
and to increase deposits, the adequacy of cash flows from operations and
available financing to fund capital needs and future 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 as well as other changes in competition, the extent of defaults,
the extent of losses given such defaults, the amount of lost interest income
that may result in the event of a severe recession, the status of the
national economy and the South Florida economy in particular, the impact that
changing interest rates have on the Company's net interest margin, changes in
governmental rules and regulations applicable to the Company and other risks in
the Company's filings with the Securities and Exchange commission. The Company
cautions that its discussion of these matters is further qualified, as these
risks and uncertainties are beyond the ability of the Company to control. In
many cases, the Company cannot predict the risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward-
looking statements.
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 March 31, 2004.
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 $ 63,376 $ - $ - $ - $ 63,376
Investment securities 9,846 3,585 6,722 268,367 288,520
Gross loans
(excluding non-accrual) 39,127 24,338 _ 77,646 287,161 428,272
________ ________ ________ ________ ________
Total interest-
earning assets $112,349 $ 27,923 $ 84,368 $555,528 $780,168
======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $ - $ - $ - $ 92,404 $ 92,404
Money market - 19,479 19,479 38,958 77,916
Savings - - - 33,486 33,486
Time deposits 62,927 71,497 114,103 108,725 357,252
Borrowed funds 81,986 - - - 81,986
________ ________ ________ ________ ________
Total interest-bearing
liabilities $144,913 $ 90,976 $133,582 $273,573 $643,044
======== ======== ======== ======== ========
Interest sensitivity gap ($ 32,564)($ 63,053)($ 49,214) $281,955 $137,124
======== ======== ======== ======== ========
Cumulative gap ($ 32,564)($ 95,617)($144,831) $137,124
======== ======== ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 78% 59% 61% 121%
Cumulative gap as a percentage
of total interest-
earning assets (4.2%) (12.3%) (18.6%) 17.6%
12
Management's assumptions reflect the Bank's estimate of the anticipated
repricing sensitivity of non-maturity deposit products. Money market accounts
have been allocated 25% to the "91-181 days" category, 25% to the "182-365
days" category, and 50% to the "over 1 year" category. Interest checking and
savings are allocated 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 March 31, 2004, the
Bank's simulation analysis projects an increase to net interest income of
2.11%, 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 decrease by 5.28%. 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 March 31, 2004 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to Rule 15A-
14(A) or 15D-14(A) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 15A-
14(A) or 15D-14(A) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Rule 13a-
14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. 1350), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Rule 13a-
14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. 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 on January 21, 2004 to announce fourth quarter and
2003 earnings for Commercial Bankshares, 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 BANKSHARES, INC.
By:/s/ Joseph W. Armaly
_______________________
Joseph W. Armaly
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
May 10, 2004
By:/s/ Barbara E. Reed
______________________
Barbara E. Reed
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
May 10, 2004
14
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 15A-14(A) OR
15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
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-15(e) and 15d-15(e)) 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) [Reserved.]
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 functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls 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: May 10, 2004 COMMERCIAL BANKSHARES, INC.
/s/ Joseph W. Armaly
____________________
Joseph W. Armaly
Chief Executive Officer
15
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 15A-14(A) OR
15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
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-15(e) and 15d-15(e)) 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. [Reserved.]
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 functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal controls 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: May 10, 2004 COMMERCIAL BANKSHARES, INC.
/s/ Barbara E. Reed
___________________
Barbara E. Reed
Chief Financial Officer
16
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 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, March 31, 2004 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
May 10, 2004
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
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 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, March 31, 2004 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
May 10, 2004
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.
17