04729
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number 00-22246
COMMERCIAL BANKSHARES, INC.
_________________________________________________________________
(Exact name of Registrant as specified in its charter)
FLORIDA 65-0050176
_________________________________ ____________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1550 S.W. 57th Avenue, Miami, Florida 33144
___________________________________________ ______________
(Address of principal executive offices) (Zip Code)
(305) 267-1200
____________________________________________________
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
____ ____
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No .
____ ____
CLASS OUTSTANDING AT NOVEMBER 13, 2003
_____ ________________________________
COMMON STOCK, PAR VALUE $.08 PER SHARE 4,644,670 SHARES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements 1
Condensed Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Income
for the Three and Nine Months Ended
September 30, 2003 and 2002 2
Condensed Consolidated Statements of Comprehensive
Income for the Three and Nine Months Ended
September 30, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003
and 2002 4
Notes To Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
(Dollars in thousands, except share data)
9/30/2003 12/31/2002
_________ __________
(Unaudited)
Assets:
Cash and due from banks $ 24,896 $ 31,108
Federal funds sold 23,965 29,425
________ ________
Total cash and cash equivalents 48,861 60,533
Investment securities available for sale,
at fair value (cost of $119,432 in 2003
and $175,597 in 2002) 126,129 182,831
Investment securities held to maturity,
at cost (fair value of $184,215 in 2003
and $90,019 in 2002) 189,289 88,307
Loans, net 393,031 345,766
Premises and equipment, net 12,523 12,591
Accrued interest receivable 4,508 4,328
Goodwill, net 253 253
Other assets 3,905 3,915
________ ________
Total assets $778,499 $698,524
======== ========
Liabilities and stockholders' equity:
Deposits:
Demand $122,554 $ 99,018
Interest-bearing checking 83,117 81,978
Money market accounts 85,902 62,096
Savings 32,049 28,633
Time 330,277 309,501
________ ________
Total deposits 653,899 581,226
________ ________
Securities sold under agreements
to repurchase 55,411 53,705
Accrued interest payable 590 624
Accounts payable and accrued liabilities 4,443 4,364
________ ________
Total liabilities 714,343 639,919
________ ________
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.08 par value, 15,000,000 authorized
shares, 5,084,691 issued (5,006,670 in 2002) 407 401
Additional paid-in capital 45,576 44,653
Retained earnings 20,564 15,603
Accumulated other comprehensive income 4,377 4,716
Treasury stock, 443,820 shares, at cost (6,768) (6,768)
________ ________
Total stockholders' equity 64,156 58,605
________ ________
Total liabilities and stockholders' equity $778,499 $698,524
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
__________________ __________________
2003 2002 2003 2002
____ ____ ____ ____
Interest income:
Interest and fees on loans $6,032 $6,294 $17,866 $19,065
Interest on investment
securities 3,840 2,538 10,607 7,254
Interest on federal funds sold 156 251 437 518
______ ______ _______ _______
Total interest income 10,028 9,083 28,910 26,837
______ ______ _______ _______
Interest expense:
Interest on deposits 2,710 2,663 8,254 7,873
Interest on securities sold
under agreements to
repurchase 168 273 558 762
______ ______ _______ _______
Total interest expense 2,878 2,936 8,812 8,635
______ ______ _______ _______
Net interest income 7,150 6,147 20,098 18,202
Provision for loan losses - 20 135 170
______ ______ _______ _______
Net interest income
after provision 7,150 6,127 19,963 18,032
______ ______ _______ _______
Non-interest income:
Service charges on deposit
accounts 636 655 1,902 1,969
Other fees and service charges 136 133 439 425
Securities gains - - 139 33
______ ______ _______ _______
Total non-interest income 772 788 2,480 2,427
______ ______ _______ _______
Non-interest expense:
Salaries and employee benefits 2,593 2,239 7,290 6,914
Occupancy 336 320 942 939
Data processing 286 265 821 850
Furniture and equipment 202 176 573 542
Insurance 104 86 305 252
Stationery and supplies 59 65 188 196
Administrative service charges 66 61 167 175
Telephone and fax 50 61 137 173
Other 369 221 974 874
______ ______ _______ _______
Total non-interest expense 4,065 3,494 11,397 10,915
______ ______ _______ _______
Income before income taxes 3,857 3,421 11,046 9,544
Provision for income taxes 1,243 1,058 3,460 2,885
______ ______ _______ _______
Net income $2,614 $2,363 $ 7,586 $ 6,659
====== ====== ======= =======
Earnings per common and common equivalent share:
Basic $.57 $.52 $1.65 $1.47
Diluted $.53 $.49 $1.56 $1.40
Weighted average number of shares
and common equivalent shares:
Basic 4,623,986 4,548,989 4,597,527 4,536,623
Diluted 4,898,079 4,774,555 4,872,797 4,747,188
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, 2003 and 2002
(In thousands)
(Unaudited)
Three months ended
September 30,
__________________
2003 2002
____ ____
Net income $2,614 $2,363
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period (net of tax
(benefit)expense of ($543,000) in 2003
and $694,000 in 2002) (924) 1,182
______ ______
Other comprehensive income (924) 1,182
______ ______
Comprehensive income $1,690 $3,545
====== ======
Nine months ended
September 30,
_________________
2003 2002
____ ____
Net income $7,586 $6,659
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period (net of tax
(benefit)expense of ($147,000) in 2003
and $1,437,000 in 2002) (251) 2,447
Reclassification adjustment for gains
realized in net income (net of tax (benefit)
of ($51,000) in 2003 and ($12,000) in 2002) (88) (21)
______ ______
Other comprehensive income (339) 2,426
______ ______
Comprehensive income $7,247 $9,085
====== ======
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, 2003 and 2002
(In thousands)
(Unaudited)
2003 2002
____ ____
Cash flows from operating activities:
Net income $ 7,586 $ 6,659
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 135 170
Depreciation, amortization and accretion, net 841 420
Gain on sale of investment securities (139) (33)
Gain on sale of premises and equipment (1) (1)
Change in accrued interest receivable (180) (536)
Change in other assets 10 (986)
Change in accounts payable and accrued liabilities 266 2,762
Change in accrued interest payable (34) (69)
_______ ______
Net cash provided by operating activities 8,484 8,386
_______ ______
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 99,873 23,554
Proceeds from maturities and sales of investment
Securities available for sale 163,235 57,113
Purchases of investment securities
held to maturity (156,007) (71,286)
Purchases of investment securities
available for sale (152,158) (109,765)
Net change in loans (47,400) 7,757
Purchases of premises and equipment (394) (466)
Sales of premises and equipment 1 1
_______ _______
Net cash used in investing activities (92,850) (93,092)
_______ _______
Cash flows from financing activities:
Net change in deposits 72,673 107,158
Net change in securities sold under
agreements to repurchase 1,706 446
Dividends paid (2,614) (2,353)
Proceeds from issuance of stock 929 440
Purchase of treasury stock - (64)
_______ _______
Net cash provided by financing activities 72,694 105,627
_______ _______
Increase in cash and cash equivalents (11,672) 20,921
Cash and cash equivalents at beginning of period 60,533 68,200
_______ _______
Cash and cash equivalents at end of period $48,861 $89,121
======= =======
Supplemental disclosures:
Interest paid (net of amounts credited
to deposit accounts) $ 1,471 $ 1,330
======= =======
Income taxes paid $ 3,371 $ 3,058
======= =======
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, 2002 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, 2003, are not necessarily indicative
of the results to be expected for the full year.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the statements of financial
condition and revenues and expenses for the periods covered. Actual
results could differ from those estimates and assumptions.
2. STOCK OPTIONS
The new disclosure requirements under Statement of Financial Accounting
Standard (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure an amendment of FASB Statement No. 123" SFAS
No. 148 for interim financial statements are effective and were adopted
by the Company on January 1, 2003. The following table provides the
newly required disclosures for the three and nine-month periods ended
September 30, 2003 compared to the same periods in the prior year:
Three Months Ended Nine Months Ended
September 30, September 30,
___________________ _________________
2003 2002 2003 2002
____ ____ ____ ____
(Dollars in thousands)
Net income as reported $2,614 $2,363 $7,586 $6,659
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (1) (34) (30) (191) (192)
______ ______ ______ ______
Pro forma net income $2,580 $2,333 $7,395 $6,467
====== ====== ====== ======
Earnings per share, basic
as reported $ .57 $ .52 $ 1.65 $ 1.47
Earnings per share, basic
pro forma $ .56 $ .51 $ 1.61 $ 1.43
Earnings per share, diluted
as reported $ .53 $ .49 $ 1.56 $ 1.40
Earnings per share, diluted
pro forma $ .53 $ .49 $ 1.52 $ 1.36
(1) The fair value of each option has been estimated on the date of the grant
using the Black Scholes option pricing model.
5
3. PER SHARE DATA
Earnings per share have been computed by dividing net income by the
weighted average number of 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 (in thousands, except
per share amounts):
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
_______________________________ _______________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS
$2,614 4,624 $.57 $2,363 4,549 $.52
Effect of
Dilutive
Options
- 274 (.04) - 226 (.03)
______ _____ ____ ______ _____ ____
Diluted EPS
$2,614 4,898 $.53 $2,363 4,775 $.49
====== ===== ==== ====== ===== ====
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
_______________________________ _______________________________
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
_________ ___________ ______ _________ ___________ ______
Basic EPS
$7,586 4,598 $1.65 $6,659 4,537 $1.47
Effect of
Dilutive
Options
- 275 (.09) - 210 (.07)
______ _____ _____ ______ _____ _____
Diluted EPS
$7,586 4,873 $1.56 $6,659 4,747 $1.40
====== ===== ===== ====== ===== =====
Options to purchase 64,500 and 79,375 shares of common stock at $33.32
and $22.80 per share were outstanding at September 30, 2003 and September
30, 2002, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
6
4. COMMITMENTS AND CONTINGENCIES
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The Bank
had outstanding standby letters of credit in the amount of $4.5 million
as of September 30, 2003 as compared to $4.1 million as of December 31,
2002. Approximately $1.55 million of the standby letters of credit
outstanding at September 30, 2003 were issued subsequent to December
31, 2002 and are being carried at fair value. The Bank's exposure to
credit loss in the event of non-performance by the other party to the
financial instrument for standby letters of credit is represented by the
contractual amounts of those instruments. The Bank uses the same credit
policies in establishing conditional obligations as those for on-balance
sheet instruments. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. Collateral held varies but may include cash,
or the goods acquired by the customer for which the standby letter of
credit was issued. Since certain letters of credit are expected to
expire without being drawn upon, they do not necessarily represent
future cash requirements.
5. SUBSEQUENT EVENT
On November 11, 2003 the Company's Board of Directors approved a five-for-
four stock split of the Company's common stock. One additional share of
common stock will be issued on January 2, 2004 for each four shares held
by shareholders of record as of December 11, 2003.
The Company's pro forma earnings per common share, giving retroactive
effect to the stock split, are as follows:
Three months ended Nine Months Ended
September 30, September 30,
____________________ _____________________
2003 2002 2003 2002
____ ____ ____ ____
Pro forma earnings per
Common and common
Equivalent share:
Basic $.45 $.41 $1.32 $1.17
Diluted $.43 $.39 $1.24 $1.12
Pro forma weighted average
Number of shares and
Common equivalent shares:
Basic 5,784,203 5,709,206 5,757,744 5,696,840
Diluted 6,126,818 5,991,164 6,101,830 5,960,046
7
6. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, Financial Accounting Standard Board (FASB) issued SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity". This statement establishes standards for
how an issuer classifies and measures in its statement of financial
position certain financial instruments with characteristics of both
liabilities and equity. It requires than an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation
of the issuer. This statement is effective for financial instruments
entered into or modified after May 31, 2003. The provisions of this
statement did not have a material effect on the financial statements of
the Company.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The provisions of this
statement amend and clarify financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement is
effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The provisions
of this statement did not have a material effect on the financial
statements of the Company.
In December of 2002, FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation -- Transition and Disclosure an amendment of FASB
Statement No. 123". Under SFAS No. 148, alternative methods of transition
are provided for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of FASB No. 123, "Accounting
for Stock Based Compensation" to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. As permitted by SFAS No. 123, the Bank continues
to follow the intrinsic value method of accounting for stock-based
compensation under the provision of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees". Accordingly,
the alternative methods of transition for the fair value based method
of accounting for stock-based employee compensation provided by SFAS No.
148 do not apply to the Bank. The Bank is required under the provisions
of SFAS No. 148 amending SFAS No. 123 and APB No. 28, "Interim Financial
Reporting", to provide additional disclosure in both annual and interim
financial statements. The new disclosure requirements are included in
Note 2.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 addresses the treatment of goodwill
related to branch acquisitions. It requires that goodwill meeting
certain criteria be accounted for under SFAS No. 142, "Goodwill and
Other Intangible Assets." The Company adopted SFAS No. 142 in January
2002 and adopted SFAS No. 147 in the fourth quarter of 2002. The
implementation of this statement did not have a material effect on the
Company's financial position, results of operations or cash flows.
8
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB 51" ("FIN 46").
The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity which either (1) the equity investors
(if any) do not have a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other
parties. In addition, FIN 46 requires that both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE
make additional disclosures. The provisions of this interpretation are
effective for reporting periods ending after December 15, 2003 and are
not expected to have a material effect on the financial statements of
the Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated results
of operations and financial condition should be read in conjunction with
the unaudited interim consolidated financial statements and the related
notes included herein and the consolidated financial statements for the
year ended December 31, 2002 appearing in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
CORPORATE OVERVIEW
Commercial Bankshares, Inc. (the "Company"), a Florida corporation
organized in 1988, is a bank holding company whose wholly-owned subsidiary
and principal asset is the Commercial Bank of Florida (the "Bank"). The
Company, through its ownership of the Bank, is engaged in a commercial
banking business. Its primary source of earnings is derived from income
generated by its ownership and operation of the Bank. The Bank is a
Florida chartered banking corporation with fourteen branch locations
throughout Miami-Dade and Broward counties in South Florida. The Bank
primarily focuses on providing personalized banking services to
businesses and individuals within the market areas where its banking
offices are located.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2003 and 2002
The Company's net income reported for the quarter ended September 30,
2003, was $2.61 million, an 11% increase over the quarter ended September
30, 2002 of $2.36 million. Basic and diluted earnings per share were $.57
and $.53, respectively, for the third quarter of 2003, as compared to $.52
and $.49, respectively, for the third quarter of 2002.
Results for the nine months ended September 30, 2003, showed net income
of $7.59 million, a 14% increase over net income for the nine months ended
September 30, 2002 of $6.66 million. Basic and diluted earnings per share
were $1.65 and $1.56, respectively, for the nine months ended September 30,
2003 as compared to $1.47 and $1.40, respectively, for the nine months
ended September 30, 2002.
The Company's third quarter tax-equivalent net interest income increased 16%
to $7.4 million, from $6.4 million for the corresponding quarter in 2002.
The increase is the result of growth in average earning assets, which have
increased 20% to $715 million for the third quarter of 2003, as compared to
$597 million for the third quarter of 2002. The tax-equivalent net interest
yield for the quarter ended September 30, 2003 was 4.10%, as compared to
4.26% for the quarter ended September 30, 2002. The decrease in the net
interest yield is due to the increase in interest-earning deposits, which
were partially invested in short term, low yielding instruments during the
quarter. Tax equivalent net interest income for the nine months ended
September 30, 2003 increased 9% to $20.8 million, from the same nine month
period one year ago. The net interest yield for the nine months ended
September 30, 2003 was 4.01%, as compared to 4.49% for the same period
in 2002. The net interest margin has been calculated on a tax-equivalent
basis, which includes an adjustment for interest on tax-exempt securities.
10
Non-interest income decreased by $16,000, or 2%, for the third quarter
of 2003 and increased by $53,000, or 2%, for the first nine months of 2003,
as compared to the corresponding periods of 2002. The decrease in the
third quarter is due to a decrease in service charges on deposit accounts.
The increase in the nine months ended September 30, 2003 is due primarily
to an increase in net gain on sale of investments of $106,000, partially
offset by a decrease in service charges on deposit accounts of $67,000.
Non-interest expenses for the third quarter of 2003 increased $571,000,
or 16%, from the same quarter in 2002, due to an increase in staff expenses
of $354,000, legal and professional fees of $30,000, data processing expense
of $21,000, advertising expense of $21,000, donation expense of $20,000 and
miscellaneous charge-offs of $63,000 for charge-offs in 2002 of $46,000 and
net recoveris in 2003 of $17,000. Expenses for the nine months ended
September 30, 2003 increased $482,000, or 4%, from the nine months ended
September 30, 2002, due to an increase in staff expense of $376,000,
miscellaneous expense of $64,000, insurance expense of $53,000, and
furniture and fixture expense of $31,000, partially offset by a decrease
in telephone and fax expense of $36,000, data processing expense of
$29,000, and legal and professional fees of $22,000.
Company management continually reviews and evaluates the allowance for
loan losses. In evaluating the adequacy of the allowance for loan
losses, management considers the results of its methodology, along with
other factors such as the amount of non-performing loans and the economic
conditions affecting the Company's markets and customers. The allowance
for loan losses was $4.80 million at September 30, 2003, as compared with
$4.75 million at December 31, 2002. For the nine months ended September
30, 2003, the allowance for loan losses was increased with a provision
for loan losses of $135,000 and decreased by approximately $90,000 in net
charge-offs. For the nine months ended September 30, 2002, the allowance
was increased with a provision for loan losses of $170,000 and decreased
by approximately $62,000 in net charge-offs. The allowance as a percentage
of total loans has decreased to 1.20% at September 30, 2003, from 1.35%
at December 31, 2002. Based on the nature of the loan portfolio and
prevailing economic factors, management believes that the current level
of the allowance for loan losses is sufficient to absorb probable losses
in the loan portfolio.
Approximately $265.6 million, or 67%, of total loans was secured by non-
residential real estate, and $79.5 million, or 20%, of total loans was
secured by residential real estate as of September 30, 2003. Virtually
all loans are within the Company's markets in Miami-Dade and Broward
counties.
The Company had no non-accrual loans at September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash flow requirements
to meet immediate and ongoing future needs for loan demand, deposit
withdrawals, maturing liabilities, and expenses. In evaluating actual
and anticipated needs, management seeks to obtain funds at the most
economical cost. Management believes that the level of liquidity is
sufficient to meet future funding requirements.
For banks, liquidity represents the ability to meet both loan commitments
and withdrawals of deposited funds. Funds to meet these needs can be
obtained by converting liquid assets to cash or by attracting new deposits
or other sources of funding. Many factors affect a bank's ability to
meet liquidity needs. The Bank's principal sources of funds are deposits,
repurchase agreements, payments on loans, maturities and sales of
investments. As an additional source of funds, the Bank has credit
availability with the Federal Home Loan Bank amounting to $116 million,
and Federal Funds purchased lines available at correspondent banks
amounting to $23 million as of September 30, 2003.
11
The Bank's primary use of funds is to originate loans and purchase
investment securities. The Bank purchased $308 million of investment
securities during the first nine months of 2003, and loans increased by
$47.4 million. Funding for the above came primarily from increases in
deposits of $72.7 million and increases from proceeds from maturities
and sales of investment securities of $263 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 12.46%, 13.78%, and 7.63%, respectively, as of September
30, 2003.
FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q
may include "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including in particular
the statements about the Company's plans, strategies and prospects.
These statements are based on the Company's current plans and expectations
and involve risks and uncertainties that could cause actual future
activities and results to be materially different from those set forth
in these forward-looking statements. Important factors that could cause
actual results to differ materially from the Company's forward-looking
statements are set forth below and elsewhere in this Quarterly Report
on Form 10-Q. Such factors include, among others:
- the general state of the economy and, together with all aspects
of the Company's business that are affected by changes in the
economy, the impact that changing rates have on the Company's
net interest margin;
- the Company's ability to increase the loan portfolio, and in
particular its secured loan portfolio;
- the Company's ability to access cost-effective funding to fund
marginal loan growth;
- changes in management's estimate of the adequacy of the allowance
for loan losses;
- changes in the overall mix of the Company's loan and deposit
products;
- the impact of repricing and competitors' pricing initiatives on loan
and deposit products; and
- the extent of defaults, the extent of losses given default, and the
amount of lost interest income that may result in the event of a
severe recession.
The Company undertakes no obligation to revise or update these forward-
looking statements to reflect events or circumstances after the date of
this filing.
12
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, 2003.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
Term to Repricing
______________________________________________
Over 1 Year
90 Days 91-181 182-365 & Non-rate
or Less Days Days Sensitive Total
________ ________ ________ ________ ________
Interest-earning assets:
Federal funds sold $ 23,965 $ - $ - $ - $ 23,965
Investment securities 122,665 46,807 67,501 75,065 312,038
Gross loans
(excluding non-accrual) 91,377 45,450 _ 36,640 225,147 398,614
________ ________ ________ ________ ________
Total interest-
earning assets $238,007 $ 92,257 $104,141 $300,212 $734,617
======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing
checking $ - $ 20,779 $ 20,779 $ 41,559 $ 83,117
Money market - 21,476 21,476 42,950 85,902
Savings - 8,012 8,012 16,025 32,049
Time deposits 67,674 66,441 89,010 107,152 330,277
Borrowed funds 59,200 - - - 59,200
________ ________ ________ ________ ________
Total interest-bearing
liabilities $126,874 $116,708 $139,277 $207,686 $590,545
======== ======== ======== ======== ========
Interest sensitivity gap $111,133($ 24,451)($ 35,136) $ 92,526 $144,072
======== ======== ======== ======== ========
Cumulative gap $111,133 $ 86,682 $ 51,546 $144,072
======== ======== ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 188% 136% 113% 124%
Cumulative gap as a percentage
of total interest-
earning assets 15.1% 11.8% 7.0% 19.6%
13
Management's assumptions reflect the Bank's estimate of the anticipated
repricing sensitivity of non-maturity deposit products. Interest
checking, savings and 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.
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, 2003, the Bank's
simulation analysis projects an increase to net interest income of .07%,
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 .41%. 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, 2003 that
has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
14
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 13, 2003 Commercial Bankshares, Inc. announced that its Board of
Directors had approved a 5-for-4 stock split of the Company's common shares,
as further discussed in the attached Exhibit 99.1 and in Footnote 5 to the
Condensed Consolidated Financial Statements.
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 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Press Release of Commercial Bankshares, Inc. dated November
13, 2003.
(b) Reports on Form 8-K
A Form 8-K was filed on July 17, 2003 to announce second quarter
2003 earnings for Commercial Bankshares, Inc.
A Form 8-K was filed on July 18, 2003 to issue a second quarter
2003 financial statement brochure 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)
November 14, 2003
15
By:/s/ Barbara E. Reed
______________________
Barbara E. Reed
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
November 14, 2003
16
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) [Intentionally omitted];
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this report based on our evaluation; and
d) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Dated: November 14, 2003 COMMERCIAL BANKSHARES, INC.
/s/ Joseph W. Armaly
_______________________
Joseph W. Armaly
Chief Executive Officer
17
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. [Intentionally omitted];
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report, based on our evaluation; and
d. Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
e. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
f. 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 14, 2003 COMMERCIAL BANKSHARES, INC.
/s/ Barbara E. Reed
___________________
Barbara E. Reed
Chief Financial Officer
18
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc. (the
"Company") on Form 10-Q for the quarter ended, September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Joseph W. Armaly, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d),
as applicable, of the Securities Exchange Act of 1934, as amended; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
as of the dates and for the periods expressed in the Report.
/s/ Joseph W. Armaly
_______________________
Joseph W. Armaly
Chief Executive Officer
November 14, 2003
The foregoing certification is being furnished solely pursuant to 18
U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Commercial Bankshares, Inc. (the
"Company") on Form 10-Q for the quarter ended, September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Barbara E. Reed, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d),
as applicable, of the Securities Exchange Act of 1934, as amended; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
as of the dates and for the periods expressed in the Report.
/s/ Barbara E. Reed
_______________________
Barbara E. Reed
Chief Financial Officer
November 14, 2003
The foregoing certification is being furnished solely pursuant to 18
U.S.C. Section 1350 and is not being filed as part of the Report or as
a separate disclosure document.
19
EXHIBIT 99.1
PRESS RELEASE OF COMMERCIAL BANKSHARES, INC. DATED NOVEMBER 13, 2003
COMMERCIAL BANKSHARES, INC.
DECLARES 5-FOR-4 STOCK SPLIT,
FOURTH QUARTER REGULAR CASH DIVIDEND
AND SPECIAL CASH DIVIDEND
MIAMI, FL - Miami-based Commercial Bankshares, Inc. (NASDAQ: CLBK), parent
company of Commercial Bank of Florida, today announced that its Board of
Directors has approved a 5-for-4 stock split of the Company's common shares.
One additional share of common stock will be issued on January 2, 2004 for
each four shares held by shareholders of record as of December 11, 2003.
Additionally, the Company's Board of Directors announced a regular cash
dividend in the amount of $.16 per common share and a special cash dividend
in the amount of $.05 per share. The cash dividends are payable on January
2, 2004 to shareholders of record as of December 12, 2003. The cash dividends
will be paid on newly issued shares from the stock split.
Commercial Bankshares, Inc. is the parent company of Commercial Bank of
Florida, a $780 million, state chartered, FDIC insured commercial bank and
a member of the Federal Reserve. The Bank operates 14 branches in Miami-Dade
and Broward Counties, Florida. The Company's stock is traded on Nasdaq under
the symbol CLBK.
20