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 June 30, 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 Identification No.)
incorporation or organization)
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 August 5, 2004 there were 5,932,566 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
June 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2004 and 2003 2
Condensed Consolidated Statements of Comprehensive
Income for the Three and Six Months Ended June 30,
2004 and 2003 3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 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 8
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 15
Signatures 15
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
June 30, 2004 and December 31, 2003
(Dollars in thousands, except share data)
6/30/2004 12/31/2003
_________ __________
Assets: (Unaudited)
Cash and due from banks $ 47,347 $ 30,569
Federal funds sold 41,066 29,382
________ ________
Total cash and cash equivalents 88,413 59,951
Investment securities available for sale,
at fair value (cost of $142,244 in 2004
and $103,206 in 2003) 146,356 110,096
Investment securities held to maturity,
at cost (fair value of $155,564 in 2004
and $179,559 in 2003) 162,222 185,781
Loans, net 433,324 408,100
Premises and equipment, net 12,407 12,420
Accrued interest receivable 5,615 5,959
Goodwill, net 253 253
Other assets 3,395 3,619
________ ________
Total assets $851,985 $786,179
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $140,871 $117,893
Interest-bearing checking 97,166 87,918
Money market accounts 82,701 72,218
Savings 33,933 32,240
Time 354,022 344,520
________ ________
Total deposits 708,693 654,789
Securities sold under agreements to repurchase 69,836 60,210
Accrued interest payable 567 618
Accounts payable and accrued liabilities 3,489 4,464
________ ________
Total liabilities 782,585 720,081
________ ________
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.08 par value, 15,000,000 authorized
shares, 6,487,341 issued (6,390,242 in 2003) 519 511
Additional paid-in capital 47,243 45,818
Retained earnings 25,656 22,037
Accumulated other comprehensive income 2,750 4,500
Treasury stock, 554,775 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 69,400 66,098
________ ________
Total liabilities and stockholders' equity $851,985 $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 and six months ended June 30, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
__________________ __________________
2004 2003 2004 2003
____ ____ ____ ____
Interest income:
Interest and fees on loans $6,633 $5,998 $13,089 $11,834
Interest on investment securities 3,784 3,489 7,518 6,767
Interest on federal funds sold
and due from banks 156 154 290 281
______ ______ _______ _______
Total interest income 10,573 9,641 20,897 18,882
______ ______ _______ _______
Interest expense:
Interest on deposits 2,700 2,782 5,413 5,544
Interest on securities sold under
agreements to repurchase 179 200 343 390
______ ______ _______ _______
Total interest expense 2,879 2,982 5,756 5,934
______ ______ _______ _______
Net interest income 7,694 6,659 15,141 12,948
Provision for loan losses 125 135 140 135
______ ______ _______ _______
Net interest income
after provision 7,569 6,524 15,001 12,813
______ ______ _______ _______
Non-interest income:
Service charges on deposit accounts 579 633 1,163 1,266
Other fees and service charges 140 157 270 303
Securities gains - 139 - 139
______ ______ _______ _______
Total non-interest income 719 929 1,433 1,708
______ ______ _______ _______
Non-interest expense:
Salaries and employee benefits 2,612 2,365 5,260 4,697
Occupancy 331 312 643 606
Data processing 298 278 597 535
Furniture and equipment 205 186 402 371
Insurance 107 104 209 201
Professional fees 91 84 252 108
Stationery and supplies 65 69 133 129
Administrative service charges 62 55 123 101
Telephone and fax 38 46 48 87
Other 299 262 568 497
______ ______ _______ _______
Total non-interest expense 4,108 3,761 8,235 7,332
______ ______ _______ _______
Income before income taxes 4,180 3,692 8,199 7,189
Provision for income taxes 1,374 1,181 2,688 2,217
______ ______ _______ _______
Net income $2,806 $2,511 $ 5,511 $ 4,972
====== ====== ======= =======
Earnings per common and common equivalent share:
Basic $.47 $.44 $.93 $.87
Diluted $.45 $.41 $.89 $.82
Weighted average number of shares
and common equivalent shares:
Basic 5,922,699 5,737,604 5,900,944 5,724,230
Diluted 6,198,109 6,130,963 6,184,691 6,099,563
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, 2004 and 2003
(In thousands)
(Unaudited)
Three months ended
June 30,
__________________
2004 2003
____ ____
Net income $2,806 $2,511
______ ______
Other comprehensive (loss)income, net of tax:
Unrealized holding (loss)gain arising
during the period (net of tax (benefit)expense
of ($1,531) in 2004 and $289 in 2003) (2,606) 492
Reclassification adjustment for gains
realized in net income (net of tax expense
of $0 in 2004 and $51 in 2003) - (88)
______ ______
Other comprehensive (loss)income (2,606) 404
______ ______
Comprehensive income $ 200 $2,915
====== ======
Six months ended
June 30,
__________________
2004 2003
____ ____
Net income $5,511 $4,972
Other comprehensive (loss)income, net of tax:
Unrealized holding (loss)gain arising
during the period (net of tax (benefit)expense
of ($1,028) in 2004 and $395 in 2003) (1,750) 673
Reclassification adjustment for gains
realized in net income (net of tax expense
of $0 in 2004 and $51 in 2003) - (88)
______ ______
Other comprehensive (loss)income (1,750) 585
______ ______
Comprehensive income $3,761 $5,557
====== ======
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, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
____ ____
Cash flows from operating activities:
Net income $ 5,511 $ 4,972
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 140 135
Depreciation, amortization and accretion, net 387 583
Gain on sale of investment securities - (139)
Gain on sale of premises and equipment - (1)
Change in accrued interest receivable 344 55
Change in other assets 224 (577)
Change in accounts payable and accrued liabilities 649 (7)
Change in accrued interest payable (51) (27)
_______ _______
Net cash provided by operating activities 7,204 4,994
_______ _______
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 22,943 52,549
Proceeds from maturities and sales of investment
securities available for sale 18,380 134,486
Prepayments from mortgage backed securities
held to maturity 775 1,346
Prepayments from mortgage backed securities
available for sale 3,372 9,660
Purchases of investment securities
held to maturity - (114,012)
Purchases of investment securities
available for sale (60,994) (87,467)
Net change in loans (25,364) (22,976)
Purchases of premises and equipment (329) (319)
Sales of premises and equipment - 1
_______ _______
Net cash used in investing activities (41,217) (26,732)
_______ _______
Cash flows from financing activities:
Net change in deposits 53,904 49,853
Net change in securities sold under
agreements to repurchase 9,626 2,803
Dividends paid (2,173) (1,739)
Proceeds from issuance of stock 1,118 377
_______ _______
Net cash provided by financing activities 62,475 51,294
_______ _______
Increase in cash and cash equivalents 28,462 29,556
Cash and cash equivalents at beginning of period 59,951 60,533
_______ _______
Cash and cash equivalents at end of period $88,413 $90,089
======= =======
Supplemental disclosures:
Interest paid (net of amounts credited
to deposit accounts) $ 1,343 $ 989
======= =======
Income taxes paid $ 2,325 $ 2,136
======= =======
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 six month
period ended June 30, 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 and six month periods ended June 30, 2004 compared to the
same periods in the prior year:
Three Months Ended Six Months Ended
June 30, June 30,
__________________ __________________
2004 2003 2004 2003
____ ____ ____ ____
(Dollars in thousands)
Net income as reported $2,806 $2,511 $5,511 $4,972
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (1) (85) (128) (131) (158)
______ ______ ______ ______
Pro forma net income $2,721 $2,383 $5,380 $4,814
====== ====== ====== ======
5
Earnings per share, basic
as reported $ .47 $ .44 $ .93 $ .87
Earnings per share, basic
pro forma $ .46 $ .42 $ .91 $ .84
Earnings per share, diluted
as reported $ .45 $ .41 $ .89 $ .82
Earnings per share, diluted
pro forma $ .44 $ .39 $ .87 $ .79
(1) The fair value of each option has been estimated on June 30, 2004
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 and six months ended June 30, 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 (EPS)(in thousands, except
per share amounts):
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $2,806 5,923 $.47 $2,511 5,738 $.44
Effect of
Dilutive
Options - 275 (.02) - 393 (.03)
______ _____ ____ ______ _____ ____
Diluted EPS $2,806 6,198 $.45 $2,511 6,131 $.41
====== ===== ==== ====== ===== ====
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $5,511 5,901 $.93 $4,972 5,724 $.87
Effect of
Dilutive
Options - 284 (.04) - 376 (.05)
______ _____ ____ ______ _____ ____
Diluted EPS $5,511 6,185 $.89 $4,972 6,100 $.82
====== ===== ==== ====== ===== ====
6
Options to purchase 76,875 and 2,500 shares of common stock at $26.66 and
$25.94 per share were outstanding at June 30, 2004, and 76,875 shares of
common stock at $26.66 per share were outstanding at June 30, 2003, which
were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of
the common shares.
4. COMMITMENTS AND CONTINGENCIES
Standby letters of credit are conditional commitments issued by Commercial
Bank of Florida ("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 $5.4 million as of June 30, 2004 as compared to $4.4 million as
of December 31, 2003. Approximately $4.3 million of the standby letters
of credit outstanding at June 30, 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.
5. NEW ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standard Board (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. During December 2003, the
FASB issued FIN 46R, which deferred certain portions created prior to
February 1, 2003 until the first reporting period ended after March 15,
2004. The provisions of this interpretation have not had a significant
impact on the Company's consolidated financial condition or results of
operations.
7
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 and Six Months Ended June 30, 2004 and 2003
The Company's net income reported for the three months ended June 30, 2004,
was $2.81 million, a 12% increase over the three months ended June 30,
2003 of $2.51 million. Basic and diluted earnings per share were $.47 and
$.45, respectively, for the three months ended June 30, 2004, as compared
to $.44 and $.41, respectively, for the three months ended June 30, 2003.
Results for the six months ended June 30, 2004, showed net income of $5.51
million, an 11% increase over net income for the six months ended June 30,
2003 of $4.97 million. Basic and diluted earnings per share were $.93 and
$.89, respectively, for the six months ended June 30, 2004 as compared to
$.87 and $.82, respectively, for the six months ended June 30, 2003.
The Company's second quarter tax-equivalent net interest income increased
16% to $8.0 million, from $6.9 million for the corresponding quarter in
2003. The increase is the result of growth in average earning assets, which
have increased 11% to $778 million for the second quarter of 2004, as
compared to $698 million for the second 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 June 30, 2004 was 4.12%, as compared to
3.96% for the same period in 2003. The increase in yield is the result
of an increase in gross loans and a decrease in the cost of funds as
compared to the same period in 2003.
Tax-equivalent net interest income for the six months ended June 30, 2004
increased 17% to $15.7 million from the same six month period one year
ago. The net interest yield for the six months ended June 30, 2004 was
4.13% as compared to 3.96% for the same period in 2003. 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 $210,000, or 23%, for the second quarter
of 2004, and $275,000, or 19%, for the six months ended June 30, 2004, as
compared to the corresponding periods in 2003. The decrease in the second
8
quarter is due to a decrease in service charges on deposit accounts of
$54,000 and security gains in 2003 of $139,000. The decrease in the six
months ended June 30, 2004 is also due to a decrease in service charges
on deposit accounts of $103,000 and security gains in 2003 of $139,000.
Non-interest expenses for the second quarter of 2004 increased $347,000,
or 9% from the same quarter in 2003, due primarily to increases in
salaries and employee benefits, audit fees and donation expenses.
Salaries and employee benefits increased $247,000, or 10%, due to an
increase in the number of officers, an increase of $55,000 for employee
benefits including medical insurance premiums and 401K contributions and
normal salary increases. Audit fees increased by $26,000 due to Sarbanes-
Oxley 404 requirements and donation expense increased $24,000 for
charitable gifts to several South Florida organizations.
Non-interest expenses for the six months ended June 30, 2004 increased
$903,000, or 12%, from the six months ended June 30, 2003 due to an
increase in salaries and employee benefits, professional fees, data
processing, occupancy and donation expenses. Salaries and employee
benefits increased $563,000, or 12%, due to an increase in the number of
officers, an increase of $96,000 for employee benefits including medical
insurance premiums and 401K contributions and normal salary increases.
Professional fees increased $144,000 due to several SEC filings, including
the 2004 Employee and Outside Director Stock Options Plans and an S-8,
legal matters in the normal course of business and increased audit fees
due to Sarbanes-Oxley 404 requirements. Data processing increased $62,000,
or 12%, due to increases from our service provider for new platforms,
increased number of accounts processed and regular contractual increases.
Occupancy increased $37,000, or 6%, due to increased real estate taxes and
repairs. Donation expense increased $31,000 due to charitable gifts to
several South Florida organizations.
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 $5.15 million at June 30, 2004, as compared with $4.87
million at December 31, 2003. For the six months ended June 30, 2004, the
allowance for loan losses was increased with a provision for loan losses
of $140,000 and increased by approximately $137,000 in net recoveries.
For the six months ended June 30, 2003, the allowance was increased with a
provision for loan losses of $135,000 and decreased by approximately
$91,000 in net charge-offs. The allowance as a percentage of total loans
has decreased to 1.17% at June 30, 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 $288.4 million, or 66%, of total loans was secured by non-
residential real estate, and $98.5 million, or 22%, of total loans was
secured by residential real estate as of June 30, 2004. 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, 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
9
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 $127 million,
and Federal Funds purchased lines available at correspondent banks
amounting to $23 million as of June 30, 2004.
The Bank's primary use of funds is to originate loans and purchase
investment securities. The Bank purchased $61 million of investment
securities during the first six months of 2004, and loans increased by $25
million. Funding for the above came from increases in deposits of $54
million, an increase in securities sold under agreements to repurchase of
$10 million and increases from proceeds of maturities of investment
securities of $45 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 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 12.62%, 13.97%, and 7.76%, respectively, as of June 30, 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
10
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 June 30, 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 $ 41,066 $ - $ - $ - $ 41,066
Investment securities 5,393 11,079 7,997 279,639 304,108
Gross loans
(excluding non-accrual) 81,168 48,219 _ 68,130 241,767 439,284
________ ________ ________ ________ ________
Total interest-
earning assets $127,627 $ 59,298 $ 76,127 $521,406 $784,458
======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $ - $ - $ - $ 97,166 $ 97,166
Money market - 20,675 20,675 41,351 82,701
Savings - - - 33,933 33,933
Time deposits 83,272 79,424 80,210 111,116 354,022
Borrowed funds 75,591 - - - 75,591
________ ________ ________ ________ ________
Total interest-bearing
liabilities $158,863 $100,099 $100,885 $283,566 $643,413
======== ======== ======== ======== ========
Interest sensitivity gap ($ 31,236)($ 40,801)($ 24,758)$237,840 $141,045
======== ======== ======== ======== ========
Cumulative gap ($ 31,236)($ 72,037)($ 96,795)$141,045
======== ======== ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 80% 72% 73% 122%
Cumulative gap as a percentage
of total interest-
earning assets (4.0%) (9.2%) (12.3%) 18.0%
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 a decrease to net interest income of 6.70%, 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 1.36%. 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, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15 2004, the Company held an annual meeting of the stockholders
for holders of the Common Stock to vote on the following matters: (1) to
elect seven persons to the Company's Board of Directors, (2) to approve
the Company's 2004 Outside Directors Stock Option Plan and (3) to approve
the Company's 2004 Employee Stock Option Plan.
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 5,113,523 130,195
Jack J. Partagas 5,113,523 130,195
Cromwell A. Anderson 5,149,010 94,708
Robert Namoff 5,217,341 26,377
Sherman Simon 5,149,010 94,708
Michael W. Sontag 5,217 341 26,377
Martin Yelen 5,149,732 93,986
With respect to the approval of the Company's 2004 Outside Directors
Stock Option Plan, 2,869,011 votes were cast for this matter, 797,938
votes were cast against this matter and there were 15,567 abstentions
and 1,561,202 broker non-votes.
With respect to the approval of the Company's 2004 Employee Stock Option
Plan, 2,987,076 votes were cast for this matter, 681,075 votes were cast
against this matter and there were 14,365 abstentions and 1,561,202 broker
non-votes.
14
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 April 14, 2004 to announce first quarter 2004
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)
August 6, 2004
By:/s/ Barbara E. Reed
______________________
Barbara E. Reed
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
August 6, 2004
15
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: August 6, 2004 COMMERCIAL BANKSHARES, INC.
/s/ Joseph W. Armaly
____________________
Joseph W. Armaly
Chief Executive Officer
16
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: August 6, 2004 COMMERCIAL BANKSHARES, INC.
/s/ Barbara E. Reed
___________________
Barbara E. Reed
Chief Financial Officer
17
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, June 30,
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
August 6, 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, June 30,
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
August 6, 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.
18