UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission File Number 00-22246 COMMERCIAL BANKSHARES, INC. ______________________________________________________ (Exact name of Registrant as specified in its charter) FLORIDA 65-0050176 ________________________________ ____________________ (State or other jurisdiction of (IRS Employer 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 . ___ ___ On May 7, 2004 there were 5,920,417 shares of common stock (par value $.08 per share) outstanding. TABLE OF CONTENTS Description Page No. ___________ ________ PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 1 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 2 Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2004 and 2003 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 4 Notes To Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 14 Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Rule 15A-14(A) or 15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of the Chief Financial Officer pursuant to Rule 15A-14(A) or 15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2004 and December 31, 2003 (Dollars in thousands, except share data) 3/31/2004 12/31/2003 _________ __________ Assets: (Unaudited) Cash and due from banks $ 46,454 $ 30,569 Federal funds sold 63,376 29,382 ________ ________ Total cash and cash equivalents 109,830 59,951 Investment securities available for sale, at fair value (cost of $115,750 in 2004 and $103,206 in 2003) 124,002 110,096 Investment securities held to maturity, at cost (fair value of $167,613 in 2004 and $179,559 in 2003) 168,337 185,781 Loans, net 422,443 408,100 Premises and equipment, net 12,488 12,420 Accrued interest receivable 4,276 5,959 Goodwill, net 253 253 Other assets 3,590 3,619 ________ ________ Total assets $845,219 $786,179 ======== ======== Liabilities and stockholders' equity: Deposits: Demand $131,372 $117,893 Interest-bearing checking 92,404 87,918 Money market accounts 77,916 72,218 Savings 33,486 32,240 Time 357,252 344,520 ________ ________ Total deposits 692,430 654,789 Securities sold under agreements to repurchase 76,561 60,210 Accrued interest payable 606 618 Accounts payable and accrued liabilities 5,686 4,464 ________ ________ Total liabilities 775,283 720,081 Commitments and contingencies (Note 4) Stockholders' equity: Common stock, $.08 par value, 15,000,000 authorized shares, 6,461,981 issued (6,390,242 in 2003) 517 511 Additional paid-in capital 47,031 45,818 Retained earnings 23,800 22,037 Accumulated other comprehensive income 5,356 4,500 Treasury stock, 554,775 shares, at cost (6,768) (6,768) ________ ________ Total stockholders' equity 69,936 66,098 ________ ________ Total liabilities and stockholders' equity $845,219 $786,179 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements 1 COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 2004 and 2003 (Dollars in thousands, except share data) (Unaudited) Three months ended March 31, __________________ 2004 2003 ____ ____ Interest income: Interest and fees on loans $6,456 $5,836 Interest on investment securities 3,734 3,278 Interest on federal funds sold 134 127 ______ ______ Total interest income 10,324 9,241 Interest expense: Interest on deposits 2,713 2,762 Interest on securities sold under agreements to repurchase 164 190 ______ ______ Total interest expense 2,877 2,952 ______ ______ Net interest income 7,447 6,289 Provision for loan losses 15 - ______ ______ Net interest income after provision 7,432 6,289 ______ ______ Non-interest income: Service charges on deposit accounts 584 633 Other fees and service charges 130 146 Securities gains, net - - ______ ______ Total non-interest income 714 779 ______ ______ Non-interest expense: Salaries and employee benefits 2,648 2,332 Occupancy 312 294 Data processing 299 257 Furniture and equipment 197 185 Insurance 102 97 Professional fees 125 (3) Stationery and supplies 68 60 Administrative service charges 61 46 Telephone 10 41 Other 305 262 ______ ______ Total non-interest expense 4,127 3,571 ______ ______ Income before income taxes 4,019 3,497 Provision for income taxes 1,314 1,036 ______ ______ Net income $2,705 $2,461 ====== ====== Earnings per common and common equivalent share: Basic $.46 $.43 Diluted $.44 $.40 Weighted average number of shares and common equivalent shares: Basic 5,876,224 5,710,710 Diluted 6,182,523 6,089,826 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 months ended March 31, 2004 and 2003 (In thousands) (Unaudited) Three months ended March 31, __________________ 2004 2003 ____ ____ Net income $2,705 $2,461 ______ ______ Other comprehensive income, net of tax: Unrealized holding gains arising during the period (net of tax expense of $503,000 in 2004 and $106,000 in 2003 856 181 ______ ______ Other comprehensive income 856 181 ______ ______ Comprehensive income $3,561 $2,642 ====== ====== 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 three months ended March 31, 2004 and 2003 (In thousands) (Unaudited) 2004 2003 ____ ____ Cash flows from operating activities: Net income $ 2,705 $ 2,461 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 15 - Depreciation, amortization and accretion, net 183 244 Gain on sale of premises and equipment - (1) Change in accrued interest receivable 1,683 300 Change in other assets 29 12 Change in accounts payable and accrued liabilities 1,319 731 Change in accrued interest payable (12) (17) ________ _______ Net cash provided by operating activities 5,922 3,730 Cash flows from investing activities: Proceeds from maturities of investment securities held to maturity 17,445 26,451 Proceeds from maturities of investment Securities available for sale 19,535 69,478 Purchases of investment securities held to maturity - (43,562) Purchases of investment securities available for sale (32,097) (58,280) Net change in loans (14,358) (7,897) Purchases of premises and equipment (235) (125) Sales of premises and equipment - 1 Net cash used in investing activities (9,710) (13,934) Cash flows from financing activities: Net change in deposits 37,641 32,821 Net change in securities sold under agreements to repurchase 16,351 3,981 Dividends paid (1,229) (870) Proceeds from issuance of stock 904 154 ________ _______ Net cash provided by financing activities 53,667 36,086 ________ _______ Increase in cash and cash equivalents 49,879 25,882 Cash and cash equivalents at beginning of period 59,951 60,533 ________ _______ Cash and cash equivalents at end of period $109,830 $86,415 ======== ======= Supplemental disclosures: Interest paid (net of amounts credited to deposit accounts) $ 866 $ 514 ======== ======= Income taxes paid $ - $ 1,216 ======== ======= The accompanying notes are an integral part of these condensed consolidated financial statements 4 COMMERCIAL BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements, which are for interim periods, do not include all disclosures provided in the annual consolidated financial statements. These financial statements and the footnotes thereto should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2003 for Commercial Bankshares, Inc. (the "Company"). All material intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of the financial statements. Those adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the statements of financial condition and revenues and expenses for the periods covered. Actual results could differ from those estimates and assumptions. 2. STOCK OPTIONS The 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" for interim financial statements are effective and were adopted by the Company on January 1, 2003. See Note 5 for a discussion of SFAS No. 148, which requires disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method of accounting for stock-based awards. The following table provides the newly required disclosures for the three month period ended March 31, 2004 compared to the same period in the prior year: Three Months Ended March 31, ___________________ 2004 2003 ____ ____ (Dollars in thousands) Net income as reported $2,705 $2,461 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1) (46) (30) ______ ______ Pro forma net income $2,659 $2,431 ====== ====== 5 Earnings per share, basic as reported $ .46 $ .43 Earnings per share, basic pro forma $ .45 $ .43 Earnings per share, diluted as reported $ .44 $ .40 Earnings per share, diluted pro forma $ .43 $ .40 (1) The fair value of each option has been estimated on the date of the grant using the Black Scholes option pricing model. 3. PER SHARE DATA Earnings per share have been computed by dividing net income by the weighted average number of shares of common stock (basic earnings per share) and by the weighted average number of shares of common stock plus dilutive shares of common stock equivalents outstanding (diluted earnings per share). Common stock equivalents include the effect of all outstanding stock options, using the treasury stock method. Per share data and weighted average shares outstanding have been adjusted for the three months ended March 31, 2003 for the five-for-four stock split which was effective on January 2, 2004. The following tables reconcile the weighted average shares used to calculate basic and diluted earnings per share (in thousands, except per share amounts): Three Months Ended Three Months Ended March 31, 2004 March 31, 2003 ________________________________ ________________________________ Income Shares Per-Share Income Shares Per-Share (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount _________ ___________ ______ _________ ___________ ______ Basic EPS $2,705 5,876 $.46 $2,461 5,711 $.43 Effect of Dilutive Options - 307 (.02) - 379 (.03) ______ _____ ____ ______ _____ ____ Diluted EPS $2,705 6,183 $.44 $2,461 6,090 $.40 ====== ===== ==== ====== ===== ==== 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 $4.8 million as of March 31, 2004 as compared to $4.4 million as of December 31, 2003. Approximately $1.0 million of the standby letters of credit outstanding at March 31, 2004 were issued subsequent to December 31, 2003 and are being carried at fair value. The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in establishing conditional obligations as those for on-balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies but may include cash, or the goods acquired by the customer for which the standby letter of credit was issued. Since certain letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. 6 5. 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, the 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 November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. This interpretation also incorporates, without change, the 7 guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others", which is being superseded. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Although applicable to the Bank, FIN 45 has not had a significant impact on its consolidated financial condition or results of operations. 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. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's consolidated results of operations and financial condition should be read in conjunction with the unaudited interim consolidated financial statements and the related notes included herein and the consolidated financial statements for the year ended December 31, 2003 appearing in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. CORPORATE OVERVIEW Commercial Bankshares, Inc. (the "Company"), a Florida corporation organized in 1988, is a bank holding company whose wholly-owned subsidiary and principal asset is the Commercial Bank of Florida (the "Bank"). The Company, through its ownership of the Bank, is engaged in a commercial banking business. Its primary source of earnings is derived from income generated by its ownership and operation of the Bank. The Bank is a Florida chartered banking corporation with fourteen branch locations throughout Miami-Dade and Broward counties in South Florida. The Bank primarily focuses on providing personalized banking services to businesses and individuals within the market areas where its banking offices are located. RESULTS OF OPERATIONS Three Months Ended March 31, 2004 and 2003 The Company's net income reported for the three months ended March 31, 2004, was $2.70 million, a 10% increase over the three months ended March 31, 2003 of $2.46 million. Basic and diluted earnings per share were $.46 and $.44, respectively, for the three months ended March 31, 2004, as compared to $.43 and $.40, respectively, for the three months ended March 31, 2003. The Company's first quarter tax-equivalent net interest income increased 18% to $7.7 million, from $6.5 million for the corresponding quarter in 2003. The increase is the result of growth in average earning assets, which have increased 12% to $748 million for the first quarter of 2004, as compared to $669 million for the first quarter of 2003. It is also the result of a higher net interest yield. The tax-equivalent net interest yield for the three months ended March 31, 2004 was 4.14%, as compared to 3.97% for the same period in 2003. The increase in the net interest yield is the result of an increase in loans and a reduction in the cost of funds. The net interest margin has been calculated on a tax-equivalent basis, which includes an adjustment for interest on tax-exempt securities. Non-interest income decreased by $65,000, or 8%, for the first quarter of 2004, as compared to the corresponding period in 2003. The decrease in the first quarter is due to a decrease in service charges on deposit accounts of $49,000 and non-recurring income in 2003 of $19,000 for real estate tax reductions and other credits. Non-interest expenses for the first three months of 2004 increased $556,000, or 16%, from the first three months of 2003, due primarily to an increase in staff expenses, professional fees and data processing expense. Staff expenses increased by $316,000, or 14%, due to an increase in the number of officers, and increase in medical expense of $30,000 and normal salary increases. Professional fees increased by $129,000 in 2004 due to several SEC filings including the 2004 Employee and Outside Director Stock Option Plans and an S-8, and legal matters in the normal course of business. No legal expenses were 9 incurred in the first quarter of 2003 due to sufficient accruals in 2002 to cover all year-end related work and no special legal projects during the period. Data processing expense increased by $42,000, or 16%, due to increases from our service provider for new platforms, increased number of accounts processed and regular contractual increases. Company management continually reviews and evaluates the allowance for loan losses. In evaluating the adequacy of the allowance for loan losses, management considers the results of its methodology, along with other factors such as the amount of non-performing loans and the economic conditions affecting the Company's markets and customers. The allowance for loan losses was $5.02 million at March 31, 2004, as compared with $4.87 million at December 31, 2003. For the three months ended March 31, 2004, the allowance for loan losses was increased with a provision for loan losses of $15,000 and increased by approximately $130,000 in net recoveries. For the three months ended March 31, 2003, the allowance was decreased by approximately $90,000 in net charge-offs. The allowance as a percentage of total loans has decreased to 1.17% at March 31, 2004, from 1.18% at December 31, 2003. Based on the nature of the loan portfolio and prevailing economic factors, management believes that the current level of the allowance for loan losses is sufficient to absorb probable losses in the loan portfolio. Approximately $280.5 million, or 66%, of total loans was secured by non- residential real estate, and $91.3 million, or 21%, of total loans was secured by residential real estate as of March 31, 2004. Virtually all loans are within the Company's markets in Miami-Dade and Broward counties. The Company had no non-accrual loans at March 31, 2004. LIQUIDITY AND CAPITAL RESOURCES The objective of liquidity management is to maintain cash flow requirements to meet immediate and ongoing future needs for loan demand, deposit withdrawals, maturing liabilities, and expenses. In evaluating actual and anticipated needs, management seeks to obtain funds at the most economical cost. Management believes that the level of liquidity is sufficient to meet future funding requirements. For banks, liquidity represents the ability to meet both loan commitments and withdrawals of deposited funds. Funds to meet these needs can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect a bank's ability to meet liquidity needs. The Bank's principal sources of funds are deposits, repurchase agreements, payments on loans, maturities and sales of investments. As an additional source of funds, the Bank has credit availability with the Federal Home Loan Bank amounting to $126 million, and Federal Funds purchased lines available at correspondent banks amounting to $23 million as of March 31, 2004. The Bank's primary use of funds is to originate loans and purchase investment securities. The Bank purchased $32.1 million of investment securities during the first three months of 2004, and loans increased by $14.4 million. Funding for the above came from increases in deposits of $37.6 million, an increase in securities sold under agreements to repurchase of $16.4 million and increases from proceeds of maturities of investment securities of $37.0 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 risk weighted assets of 8%. Additionally, all bank holding companies and member banks must maintain "core" or "Tier 1" capital of at least 10 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 12.48%, 13.79%, and 7.59%, respectively, as of March 31, 2004. The Company's critical accounting policies are disclosed on page 16 of its 2003 Annual Report under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations, which report is filed with the Annual Report on Form 10-K for the year ended December 31, 2003. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to valuation of the loan portfolio. Since the date of the 2003 Annual Report, there have been no material changes to the Company's critical accounting policies. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), representing the Company's expectations and beliefs concerning future events. The actual results of the Company could differ materially from those indicated by the forward-looking statement because of various risks and uncertainties, including, without limitation, the Company's effective and timely initiation and development of new client relationships, the maintenance of existing client relationships and programs, the recruitment and retention of qualified personnel, possible or proposed products, branch offices, or strategic plans, the ability to increase sales of Company products and to increase deposits, the adequacy of cash flows from operations and available financing to fund capital needs and future growth, changes in management's estimate of the adequacy of the allowance for loan losses, changes in the overall mix of the Company's loan and deposit products, the impact of repricing and competitors' pricing initiatives on loan and deposit products as well as other changes in competition, the extent of defaults, the extent of losses given such defaults, the amount of lost interest income that may result in the event of a severe recession, the status of the national economy and the South Florida economy in particular, the impact that changing interest rates have on the Company's net interest margin, changes in governmental rules and regulations applicable to the Company and other risks in the Company's filings with the Securities and Exchange commission. The Company cautions that its discussion of these matters is further qualified, as these risks and uncertainties are beyond the ability of the Company to control. In many cases, the Company cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated in the forward- looking statements. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this filing. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK Changes in interest rates can substantially impact the Company's long-term profitability and current income. An important part of management's efforts to maintain long-term profitability is the management of interest rate risk. The goal is to maximize net interest income within acceptable levels of interest rate risk and liquidity. Interest rate exposure is managed by monitoring the relationship between interest-earning assets and interest-bearing liabilities, focusing on the size, maturity or repricing date, rate of return and degree of risk. The Asset/Liability Management Committee of the Bank oversees the interest rate risk management and reviews the Bank's asset/liability structure on a quarterly basis. The Bank uses interest rate sensitivity or GAP analysis to monitor the amount and timing of balances exposed to changes in interest rates. The GAP analysis is not relied upon solely to determine future reactions to interest rate changes because it is presented at one point in time and could change significantly from day-to-day. Other methods such as simulation analysis are utilized in evaluating the Bank's interest rate risk position. The table presented below shows the Bank's GAP analysis at March 31, 2004. INTEREST RATE SENSITIVITY ANALYSIS (Dollars in Thousands) Term to Repricing _________________ Over 1 Year 90 Days 91-181 182-365 & Non-rate or Less Days Days Sensitive Total ________ ________ ________ ________ ________ Interest-earning assets: Federal funds sold $ 63,376 $ - $ - $ - $ 63,376 Investment securities 9,846 3,585 6,722 268,367 288,520 Gross loans (excluding non-accrual) 39,127 24,338 _ 77,646 287,161 428,272 ________ ________ ________ ________ ________ Total interest- earning assets $112,349 $ 27,923 $ 84,368 $555,528 $780,168 ======== ======== ======== ======== ======== Interest-bearing liabilities: Interest-bearing checking $ - $ - $ - $ 92,404 $ 92,404 Money market - 19,479 19,479 38,958 77,916 Savings - - - 33,486 33,486 Time deposits 62,927 71,497 114,103 108,725 357,252 Borrowed funds 81,986 - - - 81,986 ________ ________ ________ ________ ________ Total interest-bearing liabilities $144,913 $ 90,976 $133,582 $273,573 $643,044 ======== ======== ======== ======== ======== Interest sensitivity gap ($ 32,564)($ 63,053)($ 49,214) $281,955 $137,124 ======== ======== ======== ======== ======== Cumulative gap ($ 32,564)($ 95,617)($144,831) $137,124 ======== ======== ======== ======== Cumulative ratio of interest- earning assets to interest- bearing liabilities 78% 59% 61% 121% Cumulative gap as a percentage of total interest- earning assets (4.2%) (12.3%) (18.6%) 17.6% 12 Management's assumptions reflect the Bank's estimate of the anticipated repricing sensitivity of non-maturity deposit products. Money market accounts have been allocated 25% to the "91-181 days" category, 25% to the "182-365 days" category, and 50% to the "over 1 year" category. Interest checking and savings are allocated to the "over 1 year" category. The Bank uses simulation analysis to quantify the effects of various immediate parallel shifts in interest rates on net interest income over the next 12 month period. Such a "rate shock" analysis requires key assumptions which are inherently uncertain, such as deposit sensitivity, cash flows from investments and loans, reinvestment options, management's capital plans, market conditions, and the timing, magnitude and frequency of interest rate changes. As a result, the simulation is only a best-estimate and cannot accurately predict the impact of the future interest rate changes on net income. As of March 31, 2004, the Bank's simulation analysis projects an increase to net interest income of 2.11%, 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 5.28%. 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 March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II - OTHER INFORMATION ITEM 6. EXHIBITS 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 Rule 13a- 14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to Rule 13a- 14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K A Form 8-K was filed on January 21, 2004 to announce fourth quarter and 2003 earnings 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) May 10, 2004 By:/s/ Barbara E. Reed ______________________ Barbara E. Reed Senior Vice President and Chief Financial Officer (Principal Financial Officer) May 10, 2004 14 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 15A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph W. Armaly, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commercial Bankshares, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Reserved.] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on our evaluation; and d) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: May 10, 2004 COMMERCIAL BANKSHARES, INC. /s/ Joseph W. Armaly ____________________ Joseph W. Armaly Chief Executive Officer 15 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 15A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Barbara E. Reed, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commercial Bankshares, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. [Reserved.] c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and d. Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: May 10, 2004 COMMERCIAL BANKSHARES, INC. /s/ Barbara E. Reed ___________________ Barbara E. Reed Chief Financial Officer 16 EXHIBIT 32.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Commercial Bankshares, Inc. (the "Company") on Form 10-Q for the quarter ended, March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph W. Armaly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. /s/ Joseph W. Armaly ______________________ Joseph W. Armaly Chief Executive Officer May 10, 2004 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EXHIBIT 32.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Commercial Bankshares, Inc. (the "Company") on Form 10-Q for the quarter ended, March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barbara E. Reed, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. /s/ Barbara E. Reed _____________________ Barbara E. Reed Chief Financial Officer May 10, 2004 The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. 17