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 March 31, 1999
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 May 14, 1999
COMMON STOCK, $.08 PAR VALUE 3,683,048 SHARES
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 5
PART II Item 6. Exhibits and Reports on Form 8-K 7
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(Dollars in thousands except share data)
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 20,231 $ 19,047
Federal funds sold 10,998 16,186
Total cash and cash equivalents 31,229 35,233
Investment securities available for sale, at
fair value (cost of $111,437 in 1999
and $115,113 in 1998) 114,426 119,072
Investment securities held to maturity
(aggregate fair value of $54,612
in 1999 and $59,267 in 1998) 52,906 57,430
Loans, net 213,703 199,533
Premises and equipment, net 13,981 13,990
Accrued interest receivable 3,304 3,148
Goodwill, net 748 793
Other assets 3,351 3,402
Total assets $433,648 $432,601
Liabilities and stockholders' equity:
Deposits:
Demand $ 75,691 $ 78,932
Interest-bearing checking 57,626 58,984
Money market accounts 44,409 41,923
Savings 23,073 22,807
Time 145,115 147,769
Total deposits 345,914 350,415
Securities sold under agreements to repurchase 39,157 33,978
Accounts payable and accrued liabilities 3,103 2,833
Accrued interest payable 582 638
Total liabilities 388,756 387,864
Stockholders' equity:
Common stock, $.08 par value, 6,250,000
authorized shares, 3,721,798 issued and
outstanding in 1999 and 1998 296 296
Additional paid-in capital 39,313 39,313
Retained earnings 3,903 3,136
Accumulated other comprehensive income 2,118 2,730
Treasury stock, 39,136 shares in 1999
and 1998, at cost (738) (738)
Total stockholders' equity 44,892 44,737
Total liabilities and stockholders'equity $433,648 $432,601
<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 March 31, 1999 and 1998
(Dollars in thousands except per share data)
(Unaudited)
<CAPTION>
1999 1998
<S> <C> <C>
Interest income:
Interest and fees on loans $4,326 $3,834
Interest on investment securities 2,594 2,811
Interest on federal funds sold 162 191
Total interest income 7,082 6,836
Interest expense:
Interest on deposits 2,349 2,365
Interest on securities sold under
agreements to repurchase 338 379
Total interest expense 2,687 2,744
Net interest income 4,395 4,092
Provision for loan losses 60 35
Net interest income after provision
for loan losses 4,335 4,057
Non-interest income:
Service charges on deposit accounts 569 482
Other fees and service charges 124 123
Securities gains - -
Total non-interest income 693 605
Non-interest expense:
Salaries and employee benefits 1,866 1,687
Occupancy expense 306 283
Furniture and equipment expense 248 226
Data processing 265 191
Professional fees 73 61
Amortization of goodwill 45 45
FDIC Insurance 32 30
Other 410 374
Total non-interest expense 3,245 2,897
Income before income taxes 1,783 1,765
Provision for income taxes 501 542
Net income $1,282 $1,223
Earnings per common and common equivalent share:
Basic $.35 $.33
Diluted $.34 $.32
Weighted average number of shares and common
equivalent shares:
Basic 3,682,662 3,695,209
Diluted 3,800,419 3,820,161
<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 ended March 31, 1999 and 1998
(Dollars in thousands)
(Unaudited)
<CAPTION>
1999 1998
<S> <C> <C>
Net income $ 1,282 $ 1,223
Other comprehensive income (loss), net
of tax:
Unrealized holding losses arising
during the period (612) (192)
Reclassification adjustment for gains
realized in net income - -
Other comprehensive income (612) (192)
Comprehensive income $ 670 $1,031
<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 three months ended March 31, 1999 and 1998
(In thousands)
(Unaudited)
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,282 $ 1,223
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 60 35
Depreciation, amortization, and accretion, net 392 234
Change in accrued interest receivable (156) (986)
Change in other assets (73) 356
Change in accounts payable and accrued liabilities 1,285 614
Change in accrued interest payable (575) (65)
Net cash provided by operating activities 2,215 1,411
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 4,516 5,651
Proceeds from maturities of investment securities
available for sale 11,589 41,065
Purchases of investment securities
held to maturity (35) -
Purchases of investment securities
available for sale (7,968) (61,874)
Net increase in loans (14,230) (2,446)
Purchases of premises and equipment (64) (869)
Sales of premises and equipment - -
Net cash used in investing activities (6,192) (18,473)
Cash flows from financing activities:
Net change in demand, savings, interest-bearing
checking, money market, and time dep accounts (4,501) 14,074
Net change in securities sold under agreements
to repurchase 5,179 8,720
Dividends paid (705) (353)
Proceeds from issuance of stock - 84
Net cash provided by financing activities (27) 22,525
Increase (decrease) in cash and cash equivalents (4,004) 5,463
Cash and cash equivalents at beginning of period 35,233 27,561
Cash and cash equivalents at end of period $31,229 $33,024
Supplemental disclosures:
Interest paid $ 521 $ 481
Income taxes paid $ - $ 285
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements
</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, 1998, 1997, and 1996,
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, 1999, 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 1999 and 1998 include the effect of the one-for-twenty
(five per cent) stock dividend effective on January 4, 1999 and January 2,
1998.
The following table reconciles the weighted average shares (Denominator) used
to calculate basic and diluted earnings per share (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
Income Shares Per-Share Income Shares Per-Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,282 3,683 $ .35 $1,223 3,695 $ .33
Effect of
Dilutive
Options - 117 (.01) - 125 (.01)
Diluted EPS $1,282 3,800 $ .34 $1,223 3,820 $ .32
</TABLE>
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 $670,000 and $1.03
million, for the first quarters of 1999 and 1998, respectively.
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 March 31, 1999, was
$1.28 million, a 5% increase over the quarter ended March 31, 1998, of $1.22
million. Basic and diluted earnings per share were $.35 and $.34, respectively,
for the first quarter of 1999, as compared to $.33 and $.32, respectively, for
the first quarter of 1998.
The Company's first quarter net interest income increased by $303,000, or 7.4%,
from the corresponding quarter in 1998. This is due primarily to an increase
in earning assets resulting from a rise in deposits during the quarter.
The annualized net interest margin for the quarters ended March 31, 1999 and
March 31, 1998 were 4.75% and 4.77%, respectively. The decrease of 2 basis
points for the quarter is the result of a declining interest rate environment
and a relatively flat yield curve. This type of interest rate environment has
had an unfavorable impact on the Company's interest rate spread because the
Company's rate sensitive assets reprice more quickly than its rate sensitive
liabilities. 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 first quarter of 1999 increased by $87,000, or
18.05%, from the corresponding period of 1998. The increase for the quarter
is primarily due to an increase in the number of transaction fees processed.
Salaries and employee benefits expense increased by $179,000, or 10.61%, for
the first quarter of 1999, from the corresponding quarter of 1998. The
increase includes normal payroll increases and the cost of increasing the
Company's staff from 168 to 180 full-time employees from March 31, 1998, to
March 31, 1999. The staff increase during that interval was primarily as a
result of the opening of new offices on February 17, 1998, and June 1,
1998.
Occupancy expense increased by $23,000, or 8.13%, for the first quarter in 1999
from the corresponding quarter in 1998. This increase is primarily due to an
increase in electricity expenses, coupled with depreciation on two new offices.
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 March 31,
1999, 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 $2.50 million (or 1.16% of
total loans) at March 31, 1999, as compared with $2.29 million (or 1.31% of
total loans) at March 31, 1998. For the three months ended March 31, 1999,
the allowance for loan losses was increased by the provision for loan losses
of $60,000, as well as by approximately $10,000 in recoveries of previous loss
charge-offs. For the three months ended March 31, 1998, the allowance was
credited with a provision for losses of $35,000 as well as by approximately
$9,000 in net recoveries. The Company actively pursues collection of past due
loans.
Approximately $129.4 million (or 59.8% of total loans) was secured by non-
residential real estate and $38.5 million (or 17.8% of total loans) was
secured by residential real estate as of March 31, 1999. 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, 1999, totalling $394,000
(or .18% of total loans). Interest income of $161 and $12,763, respectively,
was recognized on these non-accrual loans in 1999 and 1998. If the non-
accrual loans were on full accrual, additional interest income of
approximately $11,245 and $0, respectively, would have been recorded during
1999 and 1998.
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 March 31, 1999, consisted of $31.2 million in cash
and cash equivalents and $114.4 million in available-for-sale investments, for
a total of $145.6 million, compared with a total of $154.3 million at year-end
1998, a decrease of approximately $8.7 million. "Held to maturity"
investments of $52.9 million at March 31, 1999 decreased by $4.5 million from
$57.4 million at March 31, 1998. The funds provided by the changes in these
categories were used to fund loans. The total of deposits and securities sold
under agreements to repurchase, $385.1 million at March 31, 1999, compares to
the year-end 1998 level of $384.4 million. Proceeds from maturities of
investment securities categorized as "available for sale" exceeded purchases in
the same category by $3.6 million since year-end. Maturities of securities
categorized as "held to maturity" exceeded purchases in the same category by
$4.5 million since year-end. Gross loans at March 31, 1999, of $216.2 million
increased by $14.2 million, or 7.1% over the year-end 1998 level of $202.0
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 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 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, Total Capital, and Leverage Ratios of the Company
were 15.75%, 17.22%, and 9.67%, respectively, as of March 31, 1999.
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 Company's Asset/Liability Management Committee
oversees the interest rate risk management and reviews the Company's
asset/liability structure on a quarterly basis.
The Company 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 Company's interest rate risk position. The table
presented below shows the Company's GAP analysis at March 31, 1999.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 10,998 $ - $ - $ - $ 10,998
Investment securities 18,857 19,407 22,254 106,814 167,332
Gross loans (excluding non-accr)101,813 30,753 30,209 53,034 215,809
Total interest-earning assets $131,668 $50,160 $52,463 $159,848 $394,139
Interest-bearing liabilities:
Interest-bearing checking $ - $ - $ - $ - $ -
Money-market - 11,102 11,102 22,205 44,409
Savings - - - 23,073 23,073
Time deposits 47,401 35,286 45,636 16,792 145,115
Borrowed funds 39,157 - - - 39,157
Total interest-bearing liabs $ 86,558 $46,388 $56,738 $119,696 $309,380
Interest sensitivity gap $ 45,110 $ 3,772 $(4,275) $ 40,152 $ 84,759
Cumulative gap $ 45,110 $48,882 $44,607 $ 84,759
Cumulative ratio of interest-earning assets to
interest-bearing liabilities 152% 137% 124% 127%
Cumulative gap as a percentage of total
interest-earning assets 11.4% 12.4% 11.3% 21.5%
<FN>
Management assumptions reflect the Company's estimate of the anticipated
repricing sensitivity of non-maturity deposit products. Interest-bearing
checking and savings accounts have been allocated to the "over 1 year"
category, and money market accounts 25% to the "91-181 days" category, 25% to
the "182-365 days" category, and 50% to the "over 1 year" category.
</TABLE>
The Company 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, 1999, the Company's simulation analysis projects a
decrease to net interest income of 4.90%, 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
3.13%. These projected levels are within the company's policy limits.
YEAR 2000 COMPLIANCE
The company began addressing Year 2000 ("Y2K") risk factors in 1996, forming a
Y2K Management committee and a Y2K Board of Directors committee in 1997 to
oversee the progress on the Y2K project. The management committee began by
evaluating the necessary updates to computer, communication and other systems
which may be affected by the upcoming date change. The committee began to
monitor all vendors and to survey large corporate customers to gauge their Y2K
readiness and the potential affects to the Company should they not become year
2000 compliant. A Y2K plan was developed in which each individual project was
identified, assigned a priority, and monitored for final compliance. A
project is considered to be compliant when the vendor has verified that the
software/hardware is compliant, and internal testing has been completed. The
Company uses a vendor-provided system for its core bank processing and for all
other data processing applications. The Company does not develop in-house
software.
As of December 31, 1998, the Company has completed testing of all applications
considered to be critical to the functioning of the Company, or "mission
critical" applications. During the testing phase, tested applications have
successfully processed dates in the year 2000. The Company expects to
complete testing of any remaining applications during the second
quarter of 1999. The Company has developed a contingency plan that
identifies alternate systems or other methods of processing in the event that
the existing mission critical systems are not able to operate in part, or in
whole, after December 31, 1999. The contingency plan identifies numerous
scenarios, and includes the alternate process to be used, personnel needs,
equipment needs and cost estimates for each scenario.
As of March 31, 1999, the Company has identified costs of approximately
$400,000 related to the Y2K issue, including hardware and software upgrades,
installation and human resources. Approximately $247,000 of these costs
were incurred up to March 31, 1999.
The Company continues to bear some risk arising from Year 2000 issues and
could be adversely affected should significant customers fail to address the
issues appropriately, or should vendors of the Company fail to perform due to
unforeseen circumstances. The Company is conferring with its lending
customers to evaluate their Y2K readiness and to encourage the prompt
implementation of Y2K projects if none is currently underway. At this time,
management has no reason to believe that any customer with a significant
banking relationship is failing to take appropriate action to reach year 2000
compliance, or that its software vendors will be unable to perform.
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 March 31, 1999.
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 &
Chief Financial Officer
Date: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 20231
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10998
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114426
<INVESTMENTS-CARRYING> 52906
<INVESTMENTS-MARKET> 54612
<LOANS> 216203
<ALLOWANCE> 2500
<TOTAL-ASSETS> 433648
<DEPOSITS> 345914
<SHORT-TERM> 39157
<LIABILITIES-OTHER> 3685
<LONG-TERM> 0
0
0
<COMMON> 296
<OTHER-SE> 44596
<TOTAL-LIABILITIES-AND-EQUITY> 433648
<INTEREST-LOAN> 4326
<INTEREST-INVEST> 2594
<INTEREST-OTHER> 162
<INTEREST-TOTAL> 7082
<INTEREST-DEPOSIT> 2349
<INTEREST-EXPENSE> 2687
<INTEREST-INCOME-NET> 4395
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3245
<INCOME-PRETAX> 1783
<INCOME-PRE-EXTRAORDINARY> 1783
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1282
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
<YIELD-ACTUAL> 4.52
<LOANS-NON> 394
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2430
<CHARGE-OFFS> 0
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2500
<ALLOWANCE-DOMESTIC> 2500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
