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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 September 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 November 1, 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
September 30, 2004 (unaudited) and December 31, 2003 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2004 and
2003 (unaudited) 2
Condensed Consolidated Statements of Comprehensive
Income for the Three and Nine Months Ended September
30, 2004 and 2003 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (unaudited) 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 6. Exhibits 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 1. FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
(Dollars in thousands, except share data)
9/30/2004 12/31/2003
___________ ___________
Assets: (Unaudited)
Cash and due from banks $ 43,376 $ 30,569
Federal funds sold 41,143 29,382
________ ________
Total cash and cash equivalents 84,519 59,951
Investment securities available for sale,
at fair value (cost of $170,170 in 2004
and $103,206 in 2003) 177,695 110,096
Investment securities held to maturity,
at cost (fair value of $149,145 in 2004
and $179,559 in 2003) 151,788 185,781
Loans, net 434,956 408,100
Premises and equipment, net 12,355 12,420
Accrued interest receivable 4,424 5,959
Goodwill, net 253 253
Other assets 3,890 3,619
________ ________
Total assets $869,880 $786,179
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $143,440 $117,893
Interest-bearing checking 96,754 87,918
Money market accounts 82,254 72,218
Savings 34,296 32,240
Time 353,241 344,520
________ ________
Total deposits 709,985 654,789
Securities sold under agreements to repurchase 73,149 60,210
Accrued interest payable 586 618
Due to broker on investments not yet settled 7,625 -
Accounts payable and accrued liabilities 5,135 4,464
________ ________
Total liabilities 796,480 720,081
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.08 par value, 15,000,000 authorized
shares, 6,487,341 issued (6,336,358 in 2003) 519 511
Additional paid-in capital 47,243 45,818
Retained earnings 27,505 22,037
Accumulated other comprehensive income 4,901 4,500
Treasury stock, 554,775 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 73,400 66,098
________ ________
Total liabilities and stockholders' equity $869,880 $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 nine months ended September 30, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
__________________ __________________
2004 2003 2004 2003
Interest income:
Interest and fees on loans $6,793 $6,032 $19,882 $17,866
Interest on investment
securities 3,770 3,840 11,288 10,607
Interest on federal funds sold
and due from banks 233 156 523 437
______ ______ ______ ______
Total interest income 10,796 10,028 31,693 28,910
Interest expense:
Interest on deposits 2,707 2,710 8,120 8,254
Interest on securities sold
under agreements to repurchase 199 168 542 558
______ ______ ______ ______
Total interest expense 2,906 2,878 8,662 8,812
______ ______ ______ ______
Net interest income 7,890 7,150 23,031 20,098
Provision for loan losses 110 - 250 135
______ ______ ______ ______
Net interest income
after provision 7,780 7,150 22,781 19,963
______ ______ ______ ______
Non-interest income:
Service charges on deposit
accounts 573 636 1,736 1,902
Other fees and service charges 142 136 412 439
Securities gains - - - 139
______ ______ ______ ______
Total non-interest income 715 772 2,148 2,480
______ ______ ______ ______
Non-interest expense:
Salaries and employee benefits 2,640 2,593 7,900 7,290
Occupancy 346 336 989 942
Data processing 286 286 883 821
Furniture and equipment 210 202 612 573
Insurance 101 104 310 305
Professional fees 125 75 377 183
Stationery and supplies 68 59 201 188
Administrative service charges 69 66 192 167
Telephone and fax 53 50 101 137
Other 304 294 872 791
______ ______ ______ ______
Total non-interest expense 4,202 4,065 12,437 11,397
______ ______ ______ ______
Income before income taxes 4,293 3,857 12,492 11,046
Provision for income taxes 1,435 1,243 4,123 3,460
______ ______ ______ ______
Net income $2,858 $2,614 $8,369 $7,586
====== ====== ====== ======
Earnings per common and common equivalent share:
Basic $.48 $.45 $1.42 $1.32
Diluted $.46 $.43 $1.35 $1.25
Weighted average number of shares
and common equivalent shares:
Basic 5,932,566 5,764,698 5,908,056 5,738,239
Diluted 6,238,854 6,107,315 6,201,413 6,082,329
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 nine months ended September 30, 2004 and 2003
(In thousands)
(Unaudited)
Three months ended
September 30,
__________________
2004 2003
____ ____
Net income $2,858 $2,614
______ ______
Other comprehensive income(loss), net of tax:
Unrealized holding gain(loss) arising
during the period (net of tax expense(benefit)
of $1,263 in 2004 and ($543) in 2003) 2,151 (924)
______ ______
Other comprehensive income(loss) 2,151 (924)
______ ______
Comprehensive income $5,009 $1,690
====== ======
Nine months ended
September 30,
__________________
2004 2003
____ ____
Net income $8,369 $7,586
______ ______
Other comprehensive income(loss), net of tax:
Unrealized holding gain(loss) arising
during the period (net of tax expense(benefit)
of $236 in 2004 and ($147) in 2003) 401 (251)
Reclassification adjustment for gains
realized in net income (net of tax expense
of $0 in 2004 and $0 in 2003) - (88)
______ ______
Other comprehensive income(loss) 401 (339)
______ ______
Comprehensive income $8,770 $7,247
====== ======
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 nine months ended September 30, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
____ ____
Cash flows from operating activities:
Net income $ 8,369 $ 7,586
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 250 135
Depreciation, amortization and accretion, net 582 841
Gain on sale of investment securities - (139)
Gain on sale of premises and equipment (1) (1)
Change in accrued interest receivable 1,535 (180)
Change in other assets (271) 10
Change in accounts payable and accrued liabilities 972 266
Change in accrued interest payable (32) (34)
_______ _______
Net cash provided by operating activities 11,404 8,484
_______ _______
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 33,167 97,939
Proceeds from maturities and sales of investment
securities available for sale 20,680 149,486
Prepayments from mortgage backed securities
held to maturity 988 1,934
Prepayments from mortgage backed securities
available for sale 4,534 13,749
Purchases of investment securities
held to maturity - (156,007)
Purchases of investment securities
available for sale (84,776) (152,158)
Net change in loans (27,106) (47,400)
Purchases of premises and equipment (455) (394)
Sales of premises and equipment 1 1
_______ _______
Net cash used in investing activities (52,967) (92,850)
_______ _______
Cash flows from financing activities:
Net change in deposits 55,196 72,673
Net change in securities sold under
agreements to repurchase 12,939 1,706
Dividends paid (3,122) (2,614)
Proceeds from issuance of stock 1,118 929
_______ _______
Net cash provided by financing activities 66,131 72,694
_______ _______
Increase(decrease) in cash and cash equivalents 24,568 (11,672)
Cash and cash equivalents at beginning of period 59,951 60,533
_______ _______
Cash and cash equivalents at end of period $84,519 $48,861
======= =======
Supplemental disclosures:
Interest paid (net of amounts credited
to deposit accounts) $ 1,801 $ 1,471
======= =======
Income taxes paid $ 3,980 $ 3,371
======= =======
Securities purchased pending settlement $ 7,625 $ -
======= =======
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 nine
month period ended September 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 following table provides the Statement of Financial Accounting
Standard (SFAS) No. 148 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 for the three and nine month periods
ended September 30, 2004 compared to the same periods in the prior year:
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ _________________
2004 2003 2004 2003
____ ____ ____ ____
(Dollars in thousands)
Net income as reported $2,858 $2,614 $8,369 $7,586
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects (1) (45) (34) (176) (191)
______ ______ ______ ______
Pro forma net income $2,813 $2,580 $8,193 $7,395
====== ====== ====== ======
5
Earnings per share, basic
as reported $ .48 $ .45 $ 1.42 $ 1.32
Earnings per share, basic
pro forma $ .47 $ .45 $ 1.39 $ 1.29
Earnings per share, diluted
as reported $ .46 $ .43 $ 1.35 $ 1.25
Earnings per share, diluted
pro forma $ .45 $ .42 $ 1.32 $ 1.22
(1) The fair value of each option has been estimated on September
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
nine months ended September 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
September 30, 2004 September 30, 2003
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $2,858 5,933 $.48 $2,614 5,765 $.45
Effect of
Dilutive
Options - 306 (.02) - 342 (.02)
______ _____ ____ ______ _____ ____
Diluted EPS $2,858 6,239 $.46 $2,614 6,107 $.43
====== ===== ==== ====== ===== ====
Nine Months Ended Nine Months Ended
September 30, 2004 Septemer 30, 2003
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $8,369 5,908 $1.42 $7,586 5,738 $1.32
Effect of
Dilutive
Options - 293 (.07) - 344 (.07)
______ _____ ____ ______ _____ ____
Diluted EPS $8,369 6,201 $1.35 $7,586 6,082 $1.25
====== ===== ==== ====== ===== ====
6
Options to purchase 76,875 and 2,500 shares of common stock at $26.66 and
$25.94, respectively, per share were outstanding at September 30, 2004,
and 80,625 shares of common stock at $26.66 per share were outstanding at
September 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 $5.6 million as of September 30, 2004 as compared to $4.4
million as of December 31, 2003. Approximately $5.5 million of the
standby letters of credit outstanding at September 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. SUBSEQUENT EVENTS
On October 14, 2004 Commercial Bankshares, Inc. announced that its Board
of Directors had authorized a stock repurchase program allowing the Company
to repurchase up to $4 million of its common stock in open market and
negotiated transactions during the next 24 months. Stock may be
repurchased, from time to time, at such prices and on such conditions as
the Executive Management of the Company determines to be advantageous.
To date, there have been no purchases under this plan.
6. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF issue No. 03-1 (EITF 03-1), "The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments."
The consensus provided guidance for the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS 115, "Accounting for
Certain Investment in Debt and Equity Securities" and to equity
securities accounted for under the cost method. The guidance was
effective for other-than-temporary impairment evaluations made in
reporting periods beginning after June 15, 2004. In September 2004, the
Financial Accounting Standards Board (FASB) issued a final FASB Staff
Position, FSP EITF Issue 03-1-1, which delayed the effective date for
the measurement and recognition guidance of EITF 03-1. We are not able
to evaluate the impact of adopting EITF 03-1 until final guidance has
been issued.
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 Nine Months Ended September 30, 2004 and 2003
The Company's net income for the three months ended September 30, 2004,
was $2.86 million, a 10% increase over net income for the same three
month period ended September 30, 2003 of $2.61 million. Basic and
diluted earnings per share were $.48 and $.46, respectively, for the
three months ended September 30, 2004, as compared to $.45 and $.43,
respectively, for the three months ended September 30, 2003.
Results for the nine months ended September 30, 2004, showed net income
of $8.37 million, a 10% increase over net income for the nine months
ended September 30, 2003 of $7.59 million. Basic and diluted earnings
per share were $1.42 and $1.35, respectively, for the nine months ended
September 30, 2004 as compared to $1.32 and $1.25, respectively, for
the nine months ended September 30, 2003.
The Company's third quarter tax-equivalent net interest income increased
11% to $8.2 million, from $7.4 million in the third quarter in 2003. The
increase is the result of growth in average earning assets, which have
increased 11% to $791 million for the third quarter of 2004, as compared
to $715 million for the third quarter of 2003. The tax-equivalent net
interest yield for the three months ended September 30, 2004 was 4.13%,
as compared to 4.10% for the same period in 2003.
Tax-equivalent net interest income for the nine months ended September 30,
2004 increased 15% to $23.9 million from the same nine month period one
year ago. The net interest yield for the nine months ended September 30,
2004 was 4.13% as compared to 4.01% for the same period in 2003. The
increase in yield is the result of a decrease in the cost of funds for
the nine months ended September 30, 2004. 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 $57,000, or 7%, for the third quarter of
2004, and $332,000, or 13%, for the nine months ended September 30, 2004,
8
as compared to the corresponding periods in 2003. The decrease in the
third quarter is due to a decrease in service charges on deposit accounts
of $64,000. The decrease in the nine months ended September 30, 2004 is
also due to a decrease in service charges on deposit accounts of $166,000
and security gains in 2003 of $139,000.
Non-interest expenses for the third quarter of 2004 increased $137,000,
or 3% from the same quarter in 2003, due primarily to increases in
salaries and employee benefits and professional fees. Salaries and
employee benefits increased $47,000, or 2%, due to an increase in
officer salaries of $12,000, and an increase in medical insurance
premiums and retirement plan contributions of $33,000. Professional
fees increased by $50,000 due to additional audit and consulting fees
related to Sarbanes-Oxley 404 requirements.
Non-interest expenses for the nine months ended September 30, 2004
increased $1.04 million, or 9%, from the nine months ended September 30,
2003 due to an increase in salaries and employee benefits, professional
fees, data processing, occupancy and donation expenses. Salaries
increased $444,000, or 7%, due to the addition of three officers and
due to normal salary increases. Employee benefits increased $128,000,
or 19%, due to increased medical insurance premiums and retirement plan
contributions. Professional fees increased $194,000, or 106%, 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 and consulting fees related to Sarbanes-
Oxley 404 requirements. Data processing increased $62,000, or 8%, due
to increases from our service provider for new platforms, increased
number of accounts processed and regular contractual increases.
Occupancy increased $47,000, or 5%, due to increased real estate taxes
and repairs. Donation expense increased $37,000, or 103%, 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 $5.26 million at September 30, 2004,
as compared with $4.87 million at December 31, 2003. For the nine months
ended September 30, 2004, the allowance for loan losses was increased
with a provision for loan losses of $250,000 and increased by
approximately $140,000 in net recoveries. For the nine months ended
September 30, 2003, the allowance was increased with a provision for
loan losses of $135,000 and decreased by approximately $90,000 in net
charge-offs. The allowance as a percentage of total loans has increased
to 1.19% at September 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 $287 million, or 65%, of total loans was secured by non-
residential real estate, and $99 million, or 22%, of total loans was
secured by residential real estate as of September 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 September 30, 2004.
9
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 $130 million,
and Federal Funds purchased lines available at correspondent banks
amounting to $23 million as of September 30, 2004.
The Bank's primary use of funds is to originate loans and purchase
investment securities. The Bank purchased $92 million of investment
securities during the first nine months of 2004, and loans increased
by $27 million. Funding for the above came from increases in deposits
of $55 million, an increase in securities sold under agreements to
repurchase of $13 million and increases from proceeds of maturities
and prepayments of investment securities of $59 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 12.83%, 14.22%, and 7.82%, respectively, as of September 30,
2004.
CRITICAL ACCOUNTING POLICIES
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.
10
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 September 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 $ 41,143 $ - $ - $ - $ 41,143
Investment securities 27,057 25,284 31,486 240,858 324,685
Gross loans
(excluding
non-accrual) 112,307 48,087 62,556 218,056 441,006
________ ________ ________ ________ ________
Total interest-
earning assets $180,507 $ 73,371 $ 94,042 $458,914 $806,834
======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing
checking $ - $ - $ - $ 96,754 $ 96,754
Money market - 20,564 20,564 41,126 82,254
Savings - - - 34,296 34,296
Time deposits 93,109 65,018 64,809 130,305 353,241
Borrowed funds 79,359 - - - 79,359
________ ________ ________ ________ ________
Total interest-bearing
liabilities $172,468 $ 85,582 $ 85,373 $302,481 $645,904
======== ======== ======== ======== ========
Interest sensitivity gap $ 8,039 ($ 12,211) $ 8,669 $156,433 $160,930
======== ======== ======== ======== ========
Cumulative gap $ 8,039 ($ 4,172) $ 4,497 $160,930
======== ======== ======== ========
Cumulative ratio of
interest-earning
assets to interest-
bearing liabilities 105% 98% 101% 125%
Cumulative gap as a
percentage of
total interest-
earning assets 1.0% (0.5%) 0.6% 19.9%
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 September 30, 2004, the Bank's
simulation analysis projects a decrease to net interest income of 8.02%,
assuming an immediate parallel shift downward in interest rates by 200
basis points. If rates rise by 200 basis points, the simulation analysis
projects net interest income would increase by 1.83%. 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 September 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 6. 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
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)
November 8, 2004
By:/s/ Barbara E. Reed
______________________
Barbara E. Reed
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
November 8, 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: November 8, 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: November 8, 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, September 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
November 8, 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, September 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
November 8, 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