U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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 .
CLASS OUTSTANDING AT July 16, 1998
COMMON STOCK, $.08 PAR VALUE 3,540,183 SHARES
<PAGE>
T A B L E O F C O N T E N T S
PART I Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998, and December 31, 1997
(Dollars in thousands except share data)
(Unaudited)
<CAPTION>
June 30, December 31,
<S> <C> <C>
1998 1997
Assets:
Cash and due from banks $ 16,583 $ 17,222
Federal funds sold 18,445 10,339
Total cash and cash equivalents 35,028 27,561
Investment securities available for sale, at
fair value (cost of $109,912 in 1998
and $91,381 in 1997) 118,121 95,054
Investment securities held to maturity
(aggregate fair value of $73,776
in 1998 and $85,174 in 1997) 67,839 83,012
Loans, net 178,483 170,401
Premises and equipment, net 14,145 13,230
Accrued interest receivable 3,109 2,755
Goodwill, net 882 972
Other assets 3,281 3,214
Total assets $420,888 $396,199
Liabilities and stockholders' equity:
Deposits:
Demand $ 75,338 $ 65,646
Savings 21,600 21,416
Interest-bearing checking 52,797 52,303
Money market accounts 42,387 44,014
Time 145,734 136,465
Total deposits 337,856 319,844
Securities sold under agreements to repurchase 35,690 31,285
Accounts payable and accrued liabilities 2,755 2,493
Accrued interest payable 623 648
Total liabilities 376,924 354,270
Stockholders' equity:
Common stock, $.08 par value, 6,250,000
authorized shares, 3,540,183 issued and
outstanding (3,523,095 in 1997) 282 282
Additional paid-in capital 35,214 35,013
Retained earnings 5,872 4,148
Accumulated other comprehensive income 2,663 2,553
Treasury stock, 5,512 shares, at cost (67) (67)
Total stockholders' equity 43,964 41,929
Total liabilities and stockholders' equity $420,888 $396,199
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements
</TABLE>
<TABLE>
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
<CAPTION>
1998 1997
<S> <C> <C>
Interest income:
Interest and fees on loans $3,978 $3,240
Interest on investment securities 2,925 2,987
Interest on federal funds sold 112 122
Total interest income 7,015 6,349
Interest expense:
Interest on deposits 2,458 2,114
Interest on securities sold under
agreements to repurchase 420 388
Total interest expense 2,878 2,502
Net interest income 4,137 3,847
Provision for loan losses 30 110
Net interest income after provision
for loan losses 4,107 3,737
Non-interest income:
Service charges on deposit accounts 479 475
Other fees and service charges 121 114
Gain on sales of premises and equipment - 95
Gain on sales of investment securities 1 0
Total non-interest income 601 684
Non-interest expense:
Salaries and employee benefits 1,727 1,580
Occupancy expense 296 323
Furniture and equipment expense 239 220
Data Processing 192 181
Professional fees 80 96
Stationery and supplies 64 64
Insurance 48 50
Other 353 327
Total non-interest expense 2,999 2,841
Income before income taxes 1,709 1,580
Provision for income taxes 502 475
Net income $1,207 $1,105
Earnings per common and common equivalent share
Basic $.34 $.31
Diluted $.33 $.31
Weighted average number of shares and common
equivalent shares:
Basic 3,531,503 3,517,099
Diluted 3,656,651 3,575,890
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements
</TABLE>
<TABLE>
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
<CAPTION>
1998 1997
<S> <C> <C>
Interest income:
Interest and fees on loans $7,812 $6,239
Interest on investment securities 5,736 5,987
Interest on federal funds sold 303 261
Total interest income 13,851 12,487
Interest expense:
Interest on deposits 4,823 4,205
Interest on securities sold under
agreements to repurchase 799 719
Total interest expense 5,622 4,924
Net interest income 8,229 7,563
Provision for loan losses 65 130
Net interest income after provision
for loan losses 8,164 7,433
Non-interest income:
Service charges on deposit accounts 961 964
Other fees and service charges 244 207
Gain on sales of premises and equipment - 95
Gain on sales of investment securities 1 -
Total non-interest income 1,206 1,266
Non-interest expense:
Salaries and employee benefits 3,414 3,146
Occupancy 579 577
Furniture and equipment 465 437
Data processing 383 363
Professional 141 167
Stationery and supplies 124 124
Insurance 96 99
Other 694 649
Total non-interest expense 5,896 5,562
Income before income taxes 3,474 3,137
Provision for income taxes 1,044 940
Net income $2,430 $2,197
Earnings per common and common equivalent share:
Basic $.69 $.63
Diluted $.67 $.62
Weighted average number of shares and common
equivalent shares:
Basic 3,525,221 3,516,345
Diluted 3,648,473 3,568,363
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements
</TABLE>
<TABLE>
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months and six months ended June 30, 1998
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
June 30,
1998 1997
<S> <C> <C>
Net Income $1,207 $1,105
Unrealized holding gains arising
during the period 190 305
Comprehensive income $1,397 $1,410
Six Months Ended
June 30,
1998 1997
Net Income $2,430 $2,197
Unrealized holding gains arising
during the period 69 107
Comprehensive income $2,499 $2,304
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements
</TABLE>
<TABLE>
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(In thousands)
(Unaudited)
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,430 $ 2,197
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 65 130
Depreciation, amortization, and accretion, net 583 461
Gain on sale of investment securities (1) -
Gain on sale of premises and equipment - (105)
Change in accrued interest receivable (762) 95
Change in other assets 405 (2,642)
Change in net income tax liability (1) (86)
Change in accounts payable and accrued liabilities 167 2,931
Change in accrued interest payable (25) (68)
Net cash provided by operating activities 2,861 2,913
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 16,035 5,116
Proceeds from maturities of investment securities
available for sale 51,593 3
Proceeds from sales of investment securities
held to maturity - 1,890
Proceeds from sales of investment securities
available for sale - 20,000
Purchases of investment securities held to maturity - (726)
Purchases of investment securities available for sale (75,432) (20,952)
Net change in loans (8,180) (15,709)
Purchases of premises and equipment (1,322) (2,396)
Sales of premises and equipment - 916
Net cash used in investing activities (17,306) (11,858)
Cash flows from financing activities:
Net change in demand, savings, interest-bearing
checking, money market, and time deposit accounts 18,012 2,589
Net change in securities sold under agreements
to repurchase 4,405 934
Dividends paid (706) (536)
Proceeds from issuance of stock 201 20
Net cash provided by financing activities 21,912 3,007
Increase (decrease) in cash and cash equivalents 7,467 (5,938)
Cash and cash equivalents at beginning of period 27,561 29,896
Cash and cash equivalents at end of period $ 35,028 $ 23,958
Supplemental disclosures:
Interest paid $ 932 $ 787
Income taxes paid $ 991 $ 1,026
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements<PAGE>
</TABLE>
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 years ended December 31, 1997, 1996, and 1995,
for Commercial Bankshares, Inc. (the "Company").
All material intercompany balances and transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary for a fair presentation
of the financial statements. Those adjustments are of a normal recurring
nature. The results of operations for the six-month period ended June 30,
1998, are not necessarily indicative of the results to be expected for the full
year.
2. PER SHARE DATA
Earnings per share have been computed in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings per Share" (SFAS 128) by dividing net
income by the weighted average number of common shares (basic earnings per
share) and by the weighted average number of common shares plus dilutive common
share equivalents outstanding (diluted earnings per share). Common stock
equivalents include the effect of all outstanding stock options, using the
treasury stock method. The weighted average numbers of shares and equivalent
shares for 1998 and 1997 include the effects of the one-for-twenty (five per
cent) stock dividends effective on January 2, 1998 and January 3, 1997.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income.
Total comprehensive income amounted to approximately $1.40 million and $1.41
million, respectively, for the second quarters of 1998 and 1997, and $2.50
million and $2.30 million, respectively, for the six months ended June 30, 1998
and 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's net income reported for the quarter ended June 30, 1998, was
approximately $1.21 million, a 9% increase over the quarter ended June 30,
1997, of $1.11 million. Basic and diluted earnings per share were $.34 and
$.33 respectively, for the second quarter of 1998, as compared to $.31 and $.31
respectively, for the second quarter of 1997.
For the six months ended June 30, 1997 the Company's net income was $2.43
million, an 11% increase over the six months ended June 30, 1997, of $2.20
million. Basic and diluted earnings per share were $.69 and $.67 respectively,
for the six months ended June 30, 1998, as compared to $.63 and $.62
respectively, for the six months ended June 30, 1997.
The Company's second quarter 1998 net interest income increased by $290,000, or
7.5%, from the corresponding quarter in 1997. Net interest income for the six
months ended June 30, 1998 also increased by $666,000, or 8.8%, from the
corresponding period in 1997. The increase in net interest income is
attributable to an increase in average earning assets of $41 million, or 12%,
for the quarter and $31.2 million, or 9%, for the six months ended June 30,
1998.
The annualized net interest margins for the quarter and six months ended June
30, 1998 were 4.61% and 4.70%, respectively. This compares to 4.75% and 4.73%,
respectively, for the quarter and six months ended June 30, 1997. The decrease
of 14 basis points for the quarter and three basis points for six months is the
result of a higher percentage of newly acquired deposits invested in securities
rather than in loans which provide higher yield. 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 for the second quarter of 1998 decreased by $83,000, or
12.1%, and decreased by $60,000 or 4.7%, for the first six months of 1998, from
the corresponding periods of 1997. The decrease is primarily due to the sale
of property in May 1997 that resulted in a gain of $95,000.
Salaries and employee benefits expense increased by $147,000, or 9.3%, for the
second quarter of 1998 and by $268,000, or 8.5%, for the first six months of
1998, from the corresponding periods of 1997. The increase includes normal
payroll increases and the cost of increasing the Company's staff from 169 to
174 full-time equivalent employees from June 30, 1997, to June 30, 1998. The
staff increase is primarily due to the opening of two new branches in 1998.
Company management continually reviews and evaluates the allowance for loan
losses. Based on the nature of the loan portfolio and prevailing economic
factors, the Company believes that the allowance for loan losses at June 30,
1998, was sufficient to absorb potential losses in the loan portfolio. 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 approximately $2,327,000 (or 1.29% of total
loans) at June 30, 1998, as compared with $2,233,000 (or 1.53% of total loans)
at June 30, 1997. For the six months ended June 30, 1998, the allowance for
loan losses was increased by the provision for loan losses of $65,000, as well
as by approximately $15,000 in net recoveries of previous loss charge-offs.
For the corresponding period of 1997, the allowance was increased by the
provision for loan losses of $130,000, as well as approximately $54,000 in net
recoveries of previous loss charge-offs. The Company actively pursues
collection of the past due loans.
Approximately $104.9 million (or 58.0% of total loans) were secured by non-
residential real estate and $34.3 million (or 19.0% of total loans) were
secured by residential real estate as of June 30, 1998. Virtually all loans
are within the Company's markets in Miami-Dade and Broward counties.
The Company had one non-accrual loan of approximately $84,000 at June 30, 1998.
Interest income of $3,000 and $4,000, respectively, was recognized on this non-
accrual loan to date in 1998 and 1997. If the non-accrual loan was on full
accrual, additional interest income of approximately $300 and $0, respectively,
would have been recorded during 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The source of the Company's liquidity is funds generated by the operations of
Commercial Bank of Florida ("Bank"), its wholly owned subsidiary. For banks,
liquidity represents the ability to meet loan commitments, withdrawals of
deposited funds, and operating expenses. 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, paydowns and maturities on investment
securities, and capital contributions by the Company.
The Company's liquidity at June 30, 1998, consisted of $35.0 million in cash
and cash equivalents and $118.1 million in available-for-sale investments, for
a total of $153.1 million, compared with a total of $122.6 million at year-end
1997, an increase of approximately $30.5 million. The federal funds sold
component of liquidity was increased by approximately $8.1 million during that
period. The total of deposits and securities sold under agreements to
repurchase, $373.5 million at June 30, 1998, increased by $22.4 million or 6.4%
over the year-end 1997 level, $351.1 million. The funds provided by the
changes in those accounts were invested in securities or used to fund loans.
Purchases of securities categorized as "available for sale" exceeded sales and
maturities in the same category by $23.1 million since year-end, partially
offset by maturities of securities categorized as "held to maturity" which
exceeded purchases in the same category by $15.2 million since year-end. Gross
loans at June 30, 1998, of $180.1 million increased by $8.2 million, or 4.7%
over the year-end 1997 level.
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 weighted risk 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 CAMEL 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, Total Capital, and Leverage Ratios of the Company were 17.91%, 18.94%,
and 9.60%, respectively, as of June 30, 1998.
YEAR 2000 COMPLIANCE
Management's evaluation of Year 2000 issues is ongoing and involves continual
evaluation and monitoring. The Company has established a Year 2000 committee
and a Board of Directors' Year 2000 committee to address the necessary
enhancements to computer, communication, and other systems which may be
affected by Year 2000 issues.
The Company has developed a Year 2000 plan which complies with the Federal
Reserve's Year 2000 Supervision Program and its published guidelines, which
include requirements regarding project plans, testing plans and contingency
plans. The Year 2000 plan has identified individual projects, assigned a
priority, and tracks the progress of each. Emphasis has been placed on those
projects considered to be critical to the functioning of the company, or
"mission critical". To date all mission critical projects are expected to be
Year 2000 compliant by December 31, 1998. A project is considered compliant
when the software/hardware has been verified to be Year 2000 compliant by the
vendor, and testing has been completed.
The Company has identified costs of $375,000 related to the Year 2000 issue,
including hardware, software, installation and human resources. Approximately
$65,000 and $40,000 were utilized in the first six months of 1998 and the year
1997, respectively.
The above reflects management's best estimates, which include numerous
assumptions of future events. The actual results could differ materially from
those shown due to these estimates, assumptions and forward looking statements.
Factors which may be beyond the Company's control include, but are not limited
to, vendor representations, third party modification plans, technological
advances and economic factors.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Statement re computation of earnings per share.
All other exhibits are omitted because they are not applicable.
(b) Reports on Form 8-K. No report on Form 8-K was filed during the quarter
ended June 30, 1998.
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.
(Registrant)
/s/ Barbara E. Reed
Senior Vice President &
Treasurer
Date: August 7, 1998
<TABLE>
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
The computation of earnings per common and common equivalent share is
as follows:
<CAPTION>
Three Months Ended
June 30,
<S> <C> <C>
1998 1997
Net income (in thousands) $1,207 $1,105
Weighted average number of shares and
equivalent shares:
Weighted average shares outstanding (basic) 3,531,503 3,517,099
Common stock equivalents from potential
dilutive exercise of stock options 125,148 58,791
Total shares included in computation of
earnings per share 3,656,651 3,575,890
Earnings per common and common equivalent share:
Basic $.34 $.31
Diluted $.33 $.31
Six Months Ended
June 30,
1998 1997
Net income (in thousands) $2,430 $2,197
Weighted average number of shares and
equivalent shares:
Weighted average shares outstanding (basic) 3,525,221 3,516,345
Common stock equivalents from potential
dilutive exercise of stock options 123,252 52,018
Total shares included in computation of
earnings per share 3,648,473 3,568,363
Earnings per common and common equivalent share:
Basic $.69 $.63
Diluted $.67 $.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 16583
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18445
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 118121
<INVESTMENTS-CARRYING> 67839
<INVESTMENTS-MARKET> 73776
<LOANS> 180810
<ALLOWANCE> 2327
<TOTAL-ASSETS> 420888
<DEPOSITS> 337856
<SHORT-TERM> 35690
<LIABILITIES-OTHER> 3378
<LONG-TERM> 0
0
0
<COMMON> 282
<OTHER-SE> 43682
<TOTAL-LIABILITIES-AND-EQUITY> 420888
<INTEREST-LOAN> 7812
<INTEREST-INVEST> 5736
<INTEREST-OTHER> 303
<INTEREST-TOTAL> 13851
<INTEREST-DEPOSIT> 4823
<INTEREST-EXPENSE> 5622
<INTEREST-INCOME-NET> 8229
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 5896
<INCOME-PRETAX> 3474
<INCOME-PRE-EXTRAORDINARY> 3474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2430
<EPS-PRIMARY> .69
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.32
<LOANS-NON> 84
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2247
<CHARGE-OFFS> 7
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 2327
<ALLOWANCE-DOMESTIC> 2327
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
