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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
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 0-22246
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 May 1, 2005 there were 5,970,303 shares of common stock (par value
$.08 per share) outstanding.
TABLE OF CONTENTS
Description Page No.
___________ ________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of
March 31, 2005 (unaudited) and December 31, 2004 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2005 and 2004 (unaudited) 2
Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended March 31, 2005 and
2004 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (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 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 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 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.
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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004
(Dollars in thousands, except share data)
3/31/2005 12/31/2004
_________ __________
Assets: (Unaudited)
Cash and due from banks $ 32,896 $ 26,645
Interest-bearing due from banks 30,382 15,277
Federal funds sold 43,448 36,204
________ ________
Total cash and cash equivalents 106,726 78,126
Investment securities available for sale,
at fair value (cost of $187,547 in 2005
and $173,940 in 2004) 192,689 178,975
Investment securities held to maturity,
at cost (fair value of $146,294 in 2005
and $147,779 in 2004) 151,023 151,194
Loans, net 459,588 454,520
Premises and equipment, net 12,229 12,192
Accrued interest receivable 4,651 5,947
Other assets 6,436 6,836
________ ________
Total assets $933,342 $887,790
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $168,213 $137,469
Interest-bearing checking 104,249 104,929
Money market 90,494 83,928
Savings 36,117 34,296
Time 382,956 378,539
________ ________
Total deposits 782,029 739,161
Securities sold under agreements to repurchase 69,166 67,661
Accrued interest payable 729 673
Accounts payable and accrued liabilities 5,424 5,267
________ ________
Total liabilities 857,348 812,762
________ ________
Stockholders' equity:
Common stock, $.08 par value, 15,000,000
authorized shares, 6,517,479 issued
(6,489,041 in 2004) and 5,962,704
outstanding (5,934,266 in 2004) 521 519
Additional paid-in capital 47,759 47,373
Retained earnings 31,080 29,181
Accumulated other comprehensive income 3,402 4,723
Treasury stock, 554,775 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 75,994 75,028
________ ________
Total liabilities and stockholders' equity $933,342 $887,790
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
COMMERCIAL BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2005 and 2004
(Dollars in thousands, except share data)
(Unaudited)
Three months ended
March 31,
__________________
2005 2004
____ ____
Interest income:
Interest and fees on loans $7,303 $6,456
Interest on investment securities 3,960 3,734
Interest on federal funds sold
and due from banks 306 134
______ ______
Total interest income 11,569 10,324
______ ______
Interest expense:
Interest on deposits 3,228 2,713
Interest on securities sold under
agreements to repurchase 251 164
______ ______
Total interest expense 3,479 2,877
______ ______
Net interest income 8,090 7,447
Provision(credit) for loan losses 20 (42)
______ ______
Net interest income
after provision 8,070 7,489
______ ______
Non-interest income:
Service charges on deposit accounts 520 584
Other fees and service charges 155 130
Securities gains - -
______ ______
Total non-interest income 675 714
______ ______
Non-interest expense:
Salaries and employee benefits 2,763 2,648
Occupancy 313 312
Data processing 300 299
Furniture and equipment 230 197
Professional fees 157 161
Insurance 83 102
Administrative service charges 73 61
Stationery and supplies 69 68
Telephone and fax 50 10
Other 301 326
______ ______
Total non-interest expense 4,339 4,184
______ ______
Income before income taxes 4,406 4,019
Provision for income taxes 1,493 1,314
______ ______
Net income $2,913 $2,705
====== ======
Earnings per common and common equivalent share:
Basic $.49 $.46
Diluted $.46 $.44
Weighted average number of shares
and common equivalent shares:
Basic 5,950,728 5,876,224
Diluted 6,333,006 6,182,523
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
COMMERCIAL BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2005 and 2004
(In thousands)
(Unaudited)
Three months ended
March 31,
___________________
2005 2004
____ ____
Net income $2,913 $2,705
Other comprehensive income(loss), net of tax:
Unrealized holding gain(loss) arising
during the period (net of tax expense(benefit)
of ($830) in 2005 and $503 in 2004) (1,321) 856
______ ______
Other comprehensive income(loss) (1,321) 856
______ ______
Comprehensive income $1,592 $3,561
====== ======
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
COMMERCIAL BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004
(In thousands)
(Unaudited)
2005 2004
____ ____
Cash flows from operating activities:
Net income $ 2,913 $ 2,705
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision(credit) for loan losses 20 (42)
Income tax benefit from stock option exercises 136 315
Depreciation, amortization and accretion, net 185 183
Change in accrued interest receivable 1,296 1,683
Change in other assets 400 29
Change in accounts payable and accrued liabilities 940 1,506
Change in accrued interest payable 56 (12)
________ ________
Net cash provided by operating activities 5,946 6,367
________ ________
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity - 17,105
Proceeds from maturities of investment securities
available for sale 3,500 18,000
Proceeds from prepayments of mortgage backed
securities held to maturity 171 340
Proceeds from prepayments of mortgage backed
securities available for sale 1,164 1,535
Purchases of investment securities
available for sale (20,491) (32,097)
Net change in loans (5,088) (14,803)
Purchases of premises and equipment (213) (235)
________ ________
Net cash used in investing activities (20,957) (10,155)
________ ________
Cash flows from financing activities:
Net change in demand, savings, interest-bearing
checking and money market accounts 38,451 24,909
Net change in time deposit accounts 4,417 12,732
Net change in securities sold under
agreements to repurchase 1,505 16,351
Dividends paid (1,014) (1,229)
Proceeds from exercise of stock options 252 904
________ ________
Net cash provided by financing activities 43,611 53,667
________ ________
Increase in cash and cash equivalents 28,600 49,879
Cash and cash equivalents at beginning of period 78,126 59,951
________ ________
Cash and cash equivalents at end of period $106,726 $109,830
======== ========
Supplemental disclosures:
Interest paid $ 588 $ 866
======== ========
Income taxes paid $ 118 $ -
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
COMMERCIAL BANKSHARES, INC.
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, 2004 for
Commercial Bankshares, Inc. (the "Company").
All material intercompany balances and transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary for
a fair presentation of the financial statements. Those adjustments are
of a normal recurring nature. The results of operations for the three
month period ended March 31, 2005, 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 month period ended March 31, 2005 compared to the
same period in the prior year:
Three Months Ended
March 31,
____________________
2005 2004
____ ____
(Dollars in thousands)
Net income as reported $2,913 $2,705
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (81) (46)
______ ______
Pro forma net income $2,832 $2,659
====== ======
5
Earnings per share, basic
as reported $ .49 $ .46
Earnings per share, basic
pro forma $ .48 $ .45
Earnings per share, diluted
as reported $ .46 $ .44
Earnings per share, diluted
pro forma $ .45 $ .43
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.
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
March 31, 2005 March 31, 2004
________________________________ ________________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS $2,913 5,951 $.49 $2,705 5,876 $.46
Effect of
Dilutive
Options - 382 (.03) - 307 (.02)
______ _____ ____ ______ _____ ____
Diluted EPS $2,913 6,333 $.46 $2,705 6,183 $.44
====== ===== ==== ====== ===== ====
All outstanding options were included in the computation of diluted earnings
per share because the average market price of the common shares was greater
than the options' exercise price.
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 $4.7 million as of March 31, 2005 as compared to $5.9 million as
of December 31, 2004. Approximately $398,000 of the standby letters of
credit outstanding at March 31, 2005 were issued subsequent to December 31,
2004 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.
6
Since certain letters of credit are expected to expire without being drawn
upon, they do not necessarily represent future cash requirements.
5. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of
Nonmonetary Assets, an Amendment of APB Opinion No. 20". Under APB No. 20
there was an exception from fair value measurement for nonmonetary exchanges
of similar productive assets. SFAS No. 153 replaces this exception with a
general exception from fair value measurement for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005, and shall be applied prospectively. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods after
December 2004. The provisions of this statement are not expected to have a
material effect on the financial statements of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), entitled
"Share-Based Payment" that will require compensation costs related to share-
based payment transactions to be recognized in the Company's financial
statements. With limited exceptions, the amount of compensation cost will
be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award. SFAS No. 123(R)
is a revision of SFAS No. 123, "Accounting for Stock Issued to Employees,"
and its related implementation guidance. The Company currently applies APB
No. 25 and related interpretations in the accounting for stock options under
the intrinsic value method of APB No. 25 and provides pro forma disclosure
of the Company's stock-based compensation expense as currently required by
SFAS No. 123. See Note 2 of Notes to Consolidated Financial Statement for
this pro forma disclosure. Management of the Company intends to adopt SFAS
No. 123(R) as required on January 1, 2006, using the modified prospective
application method. The provisions of this statement are not expected to
have a material effect on the financial statements of the Company.
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, 2004 appearing in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
CORPORATE OVERVIEW
Commercial Bankshares, Inc. (the "Company"), a Florida corporation organized
in 1988, is a bank holding company whose wholly-owned subsidiary and principal
asset is the Commercial Bank of Florida (the "Bank"). The Company, through
its ownership of the Bank, is engaged in a commercial banking business. Its
primary source of earnings is derived from income generated by its ownership
and operation of the Bank. The Bank is a Florida chartered banking
corporation with fourteen branch locations throughout Miami-Dade and Broward
counties in South Florida. The Bank primarily focuses on providing
personalized banking services to businesses and individuals within the
market areas where its banking offices are located.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 and 2004
The Company's net income for the three months ended March 31, 2005, was $2.91
million, an 8% increase over net income for the same three month period ended
March 31, 2004 of $2.70 million. Basic and diluted earnings per share were
$.49 and $.46, respectively, for the three months ended March 31, 2005, as
compared to $.46 and $.44, respectively, for the three months ended March 31,
2004.
The Company's first quarter tax-equivalent net interest income increased 9%
to $8.37 million, from $7.71 million in the first quarter in 2004. The
increase is the result of growth in average earning assets, which have
increased 12% to $849 million for the first quarter of 2005, as compared to
$758 million for the first quarter of 2004. The tax-equivalent net interest
yield for the three months ended March 31, 2005 was 4.00%, as compared to
4.09% for the same period in 2004. The decrease in net interest yield is
the result of increased cost of funds. The net interest margin has been
calculated on a tax-equivalent basis, which includes an adjustment for
interest on tax-exempt securities.
Non-interest income decreased by $39,000, or 5%, for the first quarter of
2005, as compared to the corresponding period in 2004. The decrease is due
to a reduction in service charges on deposit accounts of $64,000, partially
offset by an increase in other fees and service charges of $25,000, which is
primarily related to real estate tax refunds and insurance refunds.
Non-interest expense for the first quarter of 2005 increased $155,000, or 4%
from the same quarter in 2004, due primarily to increases in salaries and
employee benefits, furniture and equipment expense and telephone and fax
expense, partially offset by decreases in insurance expense. Salaries and
employee benefits increased $115,000, or 4%, due to the addition of two staff
positions and normal salary adjustments. Furniture and equipment expense
increased $33,000, or 17%, due to an increase in the maintenance of the
Company's fourteen branch locations. Telephone and fax expense increased
$40,000 due to credits which reduced the first quarter, 2004 telephone
expense. Insurance expense decreased by $19,000, or 19%, after the renewal
of certain policies which resulted in premium reductions.
8
Company management continually reviews and evaluates the allowance for loan
losses. In evaluating the adequacy of the allowance for loan losses,
management considers the results of its methodology, along with other factors
such as the amount of non-performing loans and the economic conditions
affecting the Company's markets and customers. The allowance for loan losses
was $4.77 million at March 31, 2005, as compared with $4.75 million at
December 31, 2004. For the three months ended March 31, 2005, the allowance
for loan losses was increased with a provision for loan losses of $20,000
and increased by approximately $2,000 in net recoveries. For the three
months ended March 31, 2004, the allowance was decreased with a credit for
loan losses of $42,000 and increased by approximately $130,000 in net
recoveries. The allowance as a percentage of total loans has decreased to
1.03% at March 31, 2005, from 1.04% at December 31, 2004. 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 $297 million, or 64%, of total loans was secured by non-
residential real estate, and $109 million, or 24%, of total loans was
secured by residential real estate as of March 31, 2005. Virtually all
loans are within the Company's markets in Miami-Dade and Broward counties.
The Company had two non-accrual loans at March 31, 2005, totaling $331,000.
If these loans were not on non-accrual an additional $5,000 in interest
would have been earned for the first quarter of 2005. There were no non-
accrual loans at March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash flow requirements
to meet immediate and ongoing future needs for loan demand, deposit
withdrawals, maturing liabilities, and expenses. In evaluating actual and
anticipated needs, management seeks to obtain funds at the most economical
cost. Management believes that the level of liquidity is sufficient to meet
future funding requirements.
For banks, liquidity represents the ability to meet both loan commitments and
withdrawals of deposited funds. Funds to meet these needs can be obtained
by converting liquid assets to cash or by attracting new deposits or other
sources of funding. Many factors affect a bank's ability to meet liquidity
needs. The Bank's principal sources of funds are deposits, repurchase
agreements, payments on loans, maturities and sales of investments. As an
additional source of funds, the Bank has credit availability with the
Federal Home Loan Bank amounting to $139 million, and Federal Funds
purchased lines available at correspondent banks amounting to $23 million
as of March 31, 2005.
The Bank's primary use of funds is to originate loans and purchase investment
securities. The Bank purchased $20 million of investment securities during
the first three months of 2005, and loans increased by $6 million. Funding
for the above came from increases in deposits of $43 million, an increase in
securities sold under agreements to repurchase of $2 million and increases
from proceeds of maturities and prepayments of investment securities of
$5 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
9
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 12.90%, 14.17%, and 7.73%, respectively, as of
March 31, 2005.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are disclosed on page 16 of its
2004 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, 2004. 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 2004 Annual Report, there have been no material changes to the
Company's critical accounting policies.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
(within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended), representing the Company's expectations and beliefs concerning
future events. The actual results of the Company could differ materially
from those indicated by the forward-looking statement because of various
risks and uncertainties, including, without limitation, the Company's
effective and timely initiation and development of new client relationships,
the maintenance of existing client relationships and programs, the
recruitment and retention of qualified personnel, possible or proposed
products, branch offices, or strategic plans, the ability to increase sales
of Company products and to increase deposits, the adequacy of cash flows
from operations and available financing to fund capital needs and future
growth, changes in management's estimate of the adequacy of the allowance
for loan losses, changes in the overall mix of the Company's loan and
deposit products, the impact of repricing and competitors' pricing
initiatives on loan and deposit products as well as other changes in
competition, the extent of defaults, the extent of losses given such
defaults, the amount of lost interest income that may result in the event
of a severe recession, the status of the national economy and the South
Florida economy in particular, the impact that changing interest rates have
on the Company's net interest margin, changes in governmental rules and
regulations applicable to the Company and other risks in the Company's
filings with the Securities and Exchange commission. The Company cautions
that its discussion of these matters is further qualified, as these risks
and uncertainties are beyond the ability of the Company to control. In
many cases, the Company cannot predict the risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements.
The Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances after the date of this
filing.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK
Changes in interest rates can substantially impact the Company's long-term
profitability and current income. An important part of management's efforts
to maintain long-term profitability is the management of interest rate risk.
The goal is to maximize net interest income within acceptable levels of
interest rate risk and liquidity. Interest rate exposure is managed by
monitoring the relationship between interest-earning assets and interest-
bearing liabilities, focusing on the size, maturity or repricing date, rate
of return and degree of risk. The Asset/Liability Management Committee of
the Bank oversees the interest rate risk management and reviews the Bank's
asset/liability structure on a quarterly basis.
The Bank uses interest rate sensitivity or GAP analysis to monitor the amount
and timing of balances exposed to changes in interest rates. The GAP
analysis is not relied upon solely to determine future reactions to interest
rate changes because it is presented at one point in time and could change
significantly from day-to-day. Other methods such as simulation analysis
are utilized in evaluating the Bank's interest rate risk position. The
table presented below shows the Bank's GAP analysis at March 31, 2005.
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:
Interest-bearing
due from banks $ 30,382 $ - $ - $ - $ 30,382
Federal funds sold 43,448 - - - 43,448
Investment securities (1) 5,092 6,084 17,805 311,921 340,902
Gross loans
(excluding non-accrual) 110,194 46,653 102,554 205,683 465,084
________ ________ ________ ________ ________
Total interest-
earning assets $189,116 $ 52,737 $120,359 $517,604 $879,816
======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing checking $ - $ - $ - $104,249 $104,249
Money market - 22,624 22,624 45,246 90,494
Savings - - - 36,117 36,117
Time deposits 63,934 59,913 109,801 149,308 382,956
Borrowed funds 75,924 - - - 75,924
________ ________ ________ ________ ________
Total interest-bearing
liabilities $139,858 $ 82,537 $132,425 $334,920 $689,740
======== ======== ======== ======== ========
Interest sensitivity gap $ 49,258 $(29,800) $(12,066) $182,684 $190,076
======== ======== ======== ======== ========
Cumulative gap $ 49,258 $ 19,458 $ 7,392 $190,076
======== ======== ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 135% 109% 102% 128%
Cumulative gap as a percentage
of total interest-
earning assets 5.6% 2.2% 0.8% 21.6%
11
(1) Investment securities include equity investment in the Federal Reserve
Board and Federal Home Loan Bank.
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. If non-
maturing deposits had been shown at their contractual term (90 days or less
column), the cumulative gap as a percentage of total earning assets would
have been -20.6%, -21.5%, -20.3% and 21.6% for 90 days or less, 91-181 days,
182-365 days and over 1 year, respectively.
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, 2005, the Bank's simulation analysis projects a
decrease to net interest income of 7.5%, 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 4.4%. These projected levels are within the Bank's policy limits.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of March 31, 2005, the Company's management carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures (as defied in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation
of these disclosure controls and procedures were effective as of the end of
the period covered by this report.
The work undertaken by the Company to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 involved the identification, documentation,
assessment and testing of the Company's internal control over financial
reporting in order to evaluate the effectiveness of such controls.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company's internal control
over financial reporting during the quarter ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
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
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
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
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
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
____________________
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
May 9, 2005
By:/s/ Barbara E. Reed
___________________
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
May 9, 2005
13
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)) and internal
control over financing reporting (as defined in Exchange Act Rules
13a-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this 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 such
evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) 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 control over financial reporting.
Dated: May 9, 2005 COMMERCIAL BANKSHARES, INC.
/s/ Joseph W. Armaly
____________________
Chief Executive Officer
14
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)) and internal
control over financing reporting (as defined in Exchange Act Rules
13a-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this 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 such
evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) 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 control over financial reporting.
Dated: May 9, 2005 COMMERCIAL BANKSHARES, INC.
/s/ Barbara E. Reed
___________________
Chief Financial Officer
15
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc.
(the "Company") on Form 10-Q for the quarter ended, March 31, 2005 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
_____________________
Chief Executive Officer
May 9, 2005
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc.
(the "Company") on Form 10-Q for the quarter ended, March 31, 2005 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
____________________
Chief Financial Officer
May 9, 2005
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.
16