SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File No. 333-19201
THE COMMERCIAL BANCORP, INC.
(Name of small business issuer in its charter)
A Florida Corporation (IRS Employer Identification No. 59-3396236)
258 N. Nova Road
Ormond Beach, Florida 32174
(904) 672-3003
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
----
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
NONE
----
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
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the fiscal year ended December 31, 1998: $ 1,041,053
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (338,176 shares) on February 28, 1998 was
approximately $3,381,760. As of such date, no organized trading market existed
for the common stock of the Registrant. The aggregate market value was computed
by reference to recent trading activity of the common stock of the registrant at
$10.00 per share. For the purposes of this response, directors, officers and
holders of 5% or more of the Registrant's common stock are considered the
affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's Common Stock, as of
February 28, 1999: 464,791 shares of $0.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the Company's 1998 Annual Report. (Part II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Shareholders. (Part III)
1
<PAGE>
TABLE OF CONTENTS
Consolidated--The Commercial Bancorp, Inc. and Affiliates
NOTE: Certain information required by Form 10-KSB is incorporated by
reference from the 1998 Annual Report and 1999 Annual Meeting Proxy Statement as
indicated below. Only that information expressly incorporated by reference is
deemed filed with the Commission.
<TABLE>
<CAPTION>
PART I Page Number
-----------
<S> <C> <C>
Item 1 Business..................................................................... 3
Item 2 Properties................................................................... 8
Item 3 Legal Proceedings............................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders.......................... 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters..................... 9
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 9(1)
Item 7 Financial Statements and Supplementary Data.................................. 9(1)
Item 8 Changes in and Dsagreements with Accountants on
Accounting and Financial Disclosure.......................................... 9
PART III
Item 9 Directors and Executive Officers of the Registrant........................... 10(2)
Item 10 Executive Compensation....................................................... 10(2)
Item 11 Security Ownership of Certain Beneficial Owners and Management............... 10(2)
Item 12 Certain Relationships and Related Transactions............................... 10(2)
Item 13 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 11
</TABLE>
- - --------------------------------------------------------------
(1) These items are incorporated by reference from the Company's
1998 Annual Report pursuant to instruction E 2. of Form
10-KSB.
(2) The material required by Items 9 through 11 is hereby
incorporated by reference from the Company's definitive proxy
statement pursuant to Instruction E 3. of Form 10-KSB.
2
<PAGE>
PART I
ITEM 1. - BUSINESS
Description
General
The Commercial Bancorp, Inc. ("TCB") is a bank holding company which owns 100%
of the issued and outstanding common stock of The Commercial Bank of Volusia
County, Ormond Beach, Florida (the "TCB-Volusia"). TCB was incorporated under
the laws of the State of Florida on August 15, 1996 to acquire 100 percent of
the shares to be issued by TCB-Volusia during its organizational stage and to
enhance the Bank's ability to serve its future customers' requirements for
financial services. TCB provides flexibility for expansion of the Company's
banking business through acquisition of other financial institutions and
provision of additional banking-related services which the traditional
commercial bank may not provide under present laws.
TCB-Volusia is a state-chartered commercial bank, which opened for business on
October 14, 1997. TCB-Volusia offers a wide range of interest-bearing and
noninterest-bearing accounts, including commercial and retail checking accounts,
negotiable order of withdrawal ("NOW") accounts, money market accounts,
individual retirement accounts, regular interest-bearing statement savings
accounts, certificates of deposit, commercial loans, real estate loans, home
equity loans and consumer/installment loans. In addition, TCB-Volusia provides
such consumer services as U.S. Savings Bonds, travelers checks, safe deposit
boxes, bank by mail services and direct deposit services.
Market Area
The primary service area for TCB-Volusia includes the city of Ormond Beach and
Ormond by the Sea, along with portion of the city of Holly Hill. There is a lot
of competition among financial institutions in this area. There are 20
commercial banking offices and 3 savings and loan offices within the primary
service area of TCB-Volusia. Most of these offices are branches of or are,
affiliated with major bank holding companies.
TCB-Volusia is in competition with existing area financial institutions other
than commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and other
business entities which have over the years, engaged more and more in providing
services which have historically been traditional banking services. Due to the
growth of the Volusia County area in general and the Bank's primary service area
in particular, it is anticipated that competition will increase because of new
entrants to the market.
Investments
As of December 31, 1998, federal funds sold comprised approximately 19.6% and
securities available for sale comprised approximately 15.2% of TCB's assets. Net
loans comprised approximately 53.3% of TCB's assets at December 31, 1998. TCB
enters into Federal Funds transactions with its principal correspondent banks,
and acts as a seller of such funds.
Loan Portfolio
TCB-Volusia engages in a wide range of lending activities, including the
originating and purchasing of commercial, consumer/installment and real estate
loans.
Commercial lending is directed principally toward businesses whose demands for
funds fall within TCB-Volusia's legal lending limits and which are potential
deposit customers of TCB-Volusia. This category of loans includes loans made to
individual, partnership or corporate borrowers, and obtained for a variety of
business purposes. Particular emphasis is placed on loans to small and
medium-sized businesses. TCB-Volusia's real estate loans consist of residential
and commercial first and second mortgage loans.
3
<PAGE>
TCB-Volusia's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including automobile
loans to individuals and pre-approved lines of credit. This category of loans
also includes term loans secured by second mortgages on the residences of
borrowers for a variety of purposes including home improvements, education and
other personal expenditures.
TCB-Volusia's general policy is not to accrue interest on loans delinquent over
ninety days unless fully secured and in the process of collection. The policy is
that the accrued and unpaid interest is reversed against current income and
thereafter interest is recognized only to the extent payments are received. The
policy is that non-accrual loans are restored to accrual basis when interest and
principal payments are current and prospects for recovery are no longer in
doubt.
As of December 31, 1998, TCB-Volusia had two loans totaling approximately $1.2
million where known information about possible credit problems of borrowers
causes management to have serious doubts as to the ability of such borrowers to
comply with the present loan repayment terms. These loans have been classified
by management as doubtful and a specific reserve allowance in the amount of
$600,000 has been established to offset possible future losses. See Item 6
"Management's Discussion And Analysis & Financial Condition And Results Of
Operations".
The majority of TCB-Volusia's loans are secured by real estate in Volusia
County, Florida, where TCB-Volusia is located. Accordingly, the ultimate
collectibility of a substantial portion of the loan portfolio is susceptible to
changes in market conditions in this County.
Loan Loss Reserves
In determining the adequacy of TCB-Volusia's allowance for loan losses,
management has considered that as of December 31, 1998, 75.1% of outstanding
loans are in the commercial loan category, including loans secured by commercial
real estate. Commercial loans are generally considered by management as having
greater risk than other categories of loans in TCB-Volusia's loan portfolio.
However, the majority of these commercial loans at December 31, 1998 were made
on a secured basis, with collateral consisting primarily of real estate,
accounts receivable, inventory, assignment of mortgages and equipment.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio reduces any risk of loss inherently present in
commercial loans.
TCB-Volusia's consumer loan portfolio at December 31, 1998 consisted primarily
of lines of credit and installment loans secured by automobiles, boats and other
consumer goods. Management believes that the risk associated with these types of
loans has been adequately provided for in the loan loss reserve.
Residential real estate mortgage loans constitute 11.8% of outstanding loans at
December 31, 1998. Management considers these loans to have minimal risk due to
the fact that these loans represent conventional residential real estate
mortgages where the amount of the original loan does not exceed 80% of the
appraisal value of the collateral.
TCB-Volusia's Board of Directors monitors the loan portfolio monthly in order to
enable it to evaluate the adequacy of the allowance for loan losses. In addition
to reviews by regulatory agencies and TCB's certified public accountants, the
services of outside consultants have been engaged to assist in the evaluation of
credit quality and loan administration. These professionals compliment the
system implemented by TCB-Volusia which identifies potential problem credits as
early as possible, categorizes the credits as to risk and includes a reporting
process to monitor the progress of the credits.
The allowance for loan losses represents the cumulative total of monthly
provisions for loan losses and specific provisions for impaired loans. The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged off against the allowance when management
believes the collectibility of principal is unlikely. The monthly provision for
loan losses is based on management's judgment, after considering known and
inherent risks in the portfolio, past loss experience of TCB-Volusia, adverse
situations that may affect the borrower's ability to repay, assumed values of
the underlying collateral securing the loans, the current and prospective
financial condition of the borrower, and the prevailing and anticipated economic
condition of the local market.
4
<PAGE>
TCB-Volusia maintains the allowance for loan losses at a level which management
believes is sufficient to absorb all estimated losses in the loan portfolio. The
allowance for loan losses is made up of two primary components: (i) amounts
allocated to loans based on collateral type and (ii) amounts allocated for loans
reviewed on an individual basis in accordance with a credit risk grading system.
Deposits
TCB-Volusia offers a wide range of interest-bearing and noninterest-bearing
accounts, including commercial and retail checking accounts, negotiable order of
withdrawal ("NOW") accounts, money market accounts, individual retirement
accounts, regular interest-bearing statement savings accounts and certificates
of deposit with fixed rates and a range of maturity date options. The sources of
deposits are residents, businesses and employees of businesses within the Bank's
market area, obtained through the personal solicitation of the Bank's officers
and directors, direct mail solicitation and advertisements published in the
local media. TCB-Volusia pays competitive interest rates on time and savings
deposits up to the maximum permitted by law or regulation. In addition,
TCB-Volusia has implemented a service charge fee schedule competitive with other
financial institutions in the Bank's market area, covering such matters as
maintenance fees on checking accounts, per item processing fees, returned check
charges and the like.
Correspondent Banking
TCB-Volusia purchases correspondent services offered by larger banks, including
check collections, purchase or sale of Federal Funds, security safekeeping,
investment services, coin and currency supplies, overline and liquidity loan
participations and sales of loans to or participations with correspondent banks.
TCB-Volusia sells loan participations to correspondent banks with respect to
loans which exceed the Bank's lending limit of approximately $800,000. For the
fiscal year ended December 31, 1998, TCB-Volusia had not sold any loan
participations.
Data Processing
TCB-Volusia has a data processing servicing agreement with Citrus & Chemical
Bank, Bartow, Florida. This servicing agreement provides for TCB-Volusia to
receive a full range of data processing services including an automated general
ledger, deposit accounting, commercial, real estate and installment lending data
processing, central information file ("CIF") and ATM processing. The data
processing servicing agreement provides for TCB-Volusia to pay a monthly fee
based on the type, kind and volume of data processing services provided, priced
at a stipulated rate schedule.
Employees
TCB-Volusia currently employs 10 full time persons, including 6 officers, and no
part time persons. TCB-Volusia will hire additional persons as needed.
Monetary Policies
The results of operations of TCB and TCB-Volusia are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
deposits. In view of changing conditions in the national economy and in the
money market, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand, or
the business and earnings of TCB- Volusia.
5
<PAGE>
Supervision and Regulation
TCB and TCB-Volusia operate in a highly regulated environment, and their
business activities are governed by statute, regulation and administrative
policies. The business activities of TCB and TCB-Volusia are supervised by a
number of federal regulatory agencies, including the Federal Reserve Board, the
Florida Department of Banking and Finance ("Department") and the Federal Deposit
Insurance Corporation ("FDIC").
TCB is regulated by the Federal Reserve Board under the federal Bank Holding
Company Act, which requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring more than 5% of the
voting shares of any bank or all or substantially all of the assets of a bank,
and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
Policy, TCB may be required to provide financial support for a subsidiary bank
at a time when, absent such Federal Reserve Board policy, TCB may not deem it
advisable to provide such assistance.
A bank holding company is generally prohibited from acquiring control of any
company which is not a bank and from engaging in any business other than the
business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies.
As a state bank, TCB-Volusia is subject to the supervision of the Department,
the FDIC and the Federal Reserve Board. With respect to expansion, TCB-Volusia
may establish branch offices anywhere within the State of Florida. TCB- Volusia
is also subject to the Florida banking and usury laws restricting the amount of
interest which it may charge in making loans or other extensions of credit. In
addition, TCB-Volusia, as a subsidiary of the TCB, is subject to restrictions
under federal law in dealing with TCB and other affiliates, if any. These
restrictions apply to extensions of credit to an affiliate, investments in the
securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by state banks are subject to legal lending
limitations. Under state law, a state bank may grant unsecured loans and
extensions of credit in an amount up to 15% of its unimpaired capital and
surplus to any person. In addition, a state bank may grant additional loans and
extensions of credit to the same person up to 10% of its unimpaired capital and
surplus, provided that the transactions are fully secured. This 10% limitation
is separate from, and in addition to, the 15% limitation for unsecured loans.
Loans and extensions of credit may exceed the general lending limit if they
qualify under one of several exceptions.
Both TCB and TCB-Volusia are subject to regulatory capital requirements imposed
by the Federal Reserve Board, the FDIC and the Department. Both the Federal
Reserve Board and the FDIC have established risk-based capital guidelines for
bank holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The FDIC's risk capital guidelines apply directly to state
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar) provide that
banking organizations must have capital equivalent to 8% of weighted risk
assets. The risk weights assigned to assets are based primarily on credit risks.
Depending upon the riskiness of a particular asset, it is assigned to a risk
category. For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category. A risk weight of 50%
is assigned to loans secured by owner-occupied one to four family residential
mortgages. The aggregate amount of assets assigned to each risk category is
multiplied by the risk weight assigned to that category to determine the
weighted values, which are added together to determine total risk-weighted
assets. At December 31, 1998, TCB's total risk-based capital and Tier 1 ratio
were 23.2% and 18.3%, respectively. Both the Federal Reserve Board and the FDIC
have also implemented new minimum capital leverage ratios to be used in tandem
with the risk-based guidelines in assessing the overall capital adequacy of bank
and bank holding companies. Under these rules, banking institutions are required
to maintain a ratio of 3% "Tier 1" capital to total assets (net of goodwill).
Tier 1 capital includes common stockholders equity, noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries.
6
<PAGE>
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements, applicable only to top-rated banking institutions. Institutions
operating at or near these levels are expected to have well-diversified risk,
excellent asset quality, high liquidity, good earnings and in general, have to
be considered strong banking organizations, rated composite 1 under the CAMELS
rating system for banks or the BOPEC rating system for bank holding companies.
Institutions with lower ratings and institutions with high levels of risk or
experiencing or anticipating significant growth would be expected to maintain
ratios 100 to 200 basis points above the stated minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (or FDICIA),
created five "capital categories" ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") which are defined in the Act and which are used to determine
the severity of corrective action the appropriate regulator may take in the
event an institution reaches a given level of undercapitalization. For example,
an institution which becomes "undercapitalized" must submit a capital
restoration plan to the appropriate regulator outlining the steps it will take
to become adequately capitalized. Upon approving the plan, the regulator will
monitor the institution's compliance. Before a capital restoration plan will be
approved, any entity controlling a bank (i.e., holding companies) must guarantee
compliance with the plan until the institution has been adequately capitalized
for four consecutive calendar quarters. The liability of the holding company is
limited to the lesser of five percent of the institution's total assets or the
amount which is necessary to bring the institution into compliance with all
capital standards. In addition, "undercapitalized" institutions will be
restricted from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business. As an institution drops to lower
capital levels, the extent of action to be taken by the appropriate regulator
increases, restricting the types of transactions in which the institution may
engage and ultimately providing for the appointment of a receiver for certain
institutions deemed to be critically undercapitalized.
The FDICIA required each federal banking agency to prescribe for all insured
depository institutions and their holding companies standards relating to
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, and
compensation, fees and benefits and such other operational and managerial
standards as the agency deems appropriate. In addition, the federal banking
regulatory agencies were required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions or the depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency deems appropriate. Finally, each federal banking agency
was required to prescribe standards for employment contracts and other
compensation arrangements of executive officers, employees, directors and
principal stockholders of insured depository institutions that would prohibit
compensation and benefits and other arrangements that are excessive or that
could lead to a material financial loss for the institution. If an insured
depository institution or its holding company fails to meet any of its standards
described above, it will be required to submit to the appropriate federal
banking agency a plan specifying the steps that will be taken to cure the
deficiency. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company, to correct the deficiency and until corrected,
may impose restrictions on the institution or the holding company including any
of the restrictions applicable under the prompt corrective action provisions of
the FDICIA.
In response to the directive issued under the Act, the regulators have adopted
regulations which, among other things, prescribe the capital thresholds for each
of the five capital categories established by the Act. The following table
reflects the capital thresholds:
<TABLE>
<CAPTION>
Total Risk - Tier 1 Risk - Tier 1
Based Capital Based Capital Leverage
Ratio Ratio Ratio
------------- ------------- --------
<S> <C> <C> <C>
Well capitalized (1) 10% 6% 5%
Adequately capitalized (1) 8% 4% 4%(2)
Undercapitalized (3) less than 8% less than 4% less than 4%
Significantly Undercapitalized (3) less than 6% less than 3% less than 3%
Critically Undercapitalized - - less than 2%
</TABLE>
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
7
<PAGE>
The Act also provided that banks must have to meet new safety and soundness
standards. In order to comply with the Act, the Federal Reserve Board, and the
FDIC, adopted a final Rule which institutes guidelines defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, director and officer
compensation, asset quality, earnings and stock valuation. Both the capital
standards and the safety and soundness standards which the Act to implement were
designed to bolster and protect the deposit insurance fund.
As a state bank, TCB-Volusia is subject to examination and review by the
Department. TCB-Volusia submits to the Department quarterly reports of
condition, as well as such additional reports as may be required by the state
banking laws.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
existing restrictions on interstate acquisitions of banks by bank holding
companies were repealed on September 29, 1995, such that TCB and any other bank
holding company located in Florida would be able to acquire any Florida-based
bank, subject to certain deposit percentage and other restrictions. The
legislation also provides that, unless an individual state elects beforehand
either (i) to accelerate the effective date or (ii) to prohibit out-of-state
banks from operating interstate branches within its territory, on or after June
1, 1997, adequately capitalized and managed bank holding companies will be able
to consolidate. De novo branching by an out-of-state bank would be permitted
only if it is expressly permitted by the laws of the host state. The authority
of a bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. During its 1996 Legislative Session
the Florida Legislature adopted Legislation which permits interstate branching
by acquisition but not by de novo branching.
As a bank holding company, TCB is required to file with the Federal Reserve
Board an annual report of its operations at the end of each fiscal year and such
additional information as the Federal Reserve Board may require pursuant to the
Act. The Federal Reserve Board may also make examinations of TCB and each of its
subsidiaries.
The scope of regulation and permissible activities of TCB and TCB-Volusia is
subject to change by future federal and state legislation.
ITEM 2. - DESCRIPTION OF PROPERTY
TCB-Volusia commenced business operations on October 14, 1997 in a leased
shopping center unit located in the Trails Shopping Center in Ormond Beach,
Florida. The facility is a 3,380 square foot unit consisting of a customer
lobby, with 3 teller stations, customer lounge, 3 executive officers,
operation area, and an employee lounge. TCB's headquarters are also located
in this facility.
ITEM 3. - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which TCB or TCB-Volusia
is a party or of which any of their properties are subject; nor are there
material proceedings known to TCB to be contemplated by any governmental
authority; nor are there material proceedings known to TCB, pending or
contemplated, in which any director, officer, affiliate or any principal
security holder of TCB, or any associate of any of the foregoing is a
party.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
8
<PAGE>
PART II
ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
During the period covered by this report and to date, there has been no
established public trading market for TCB's Common Stock.
As of March 15, 1999, the approximate number of holders of record of TCB's
Common Stock was 350.
To date, TCB has not paid any dividends on its Common Stock. It is the
present policy of the Board of Directors of TCB to reinvest earnings for
such period of time as is necessary to ensure the success of the operations
of TCB and of TCB-Volusia. There are no current plans to initiate payment
of cash dividends, and future dividend policy will depend on the Bank's
earnings, capital requirements, financial condition and other factors
considered relevant by the Board of Directors of TCB.
TCB-Volusia is restricted in its ability to pay dividends under Florida
banking laws and by regulations of the Federal Deposit Insurance
Corporation. Pursuant to Section 658.37, Florida Statutes, a state bank may
not pay dividends from its capital. All dividends must be paid out of net
profits then on hand, after charging off bad debts, depreciation, and other
worthless assets. Payment of dividends out of net profits is further
limited by Federal regulation which prohibits the payment of dividends if
such payment would bring the Bank's capital below required levels.
TCB commenced its initial public offering of common stock on April 28, 1997
which was the effective date of the Securities Act registration statement,
File No. 333-19201. The offering is a continuous offering made under Rule
415 whereby TCB offered up to 750,000 shares of common stock for an
aggregate of $7,500,000. The minimum offering of 450,000 shares was
completed on September 19, 1997 and a closing was held at that time which
resulted in TCB obtaining $4,500,000 in total offering proceeds from the
Escrow Agent. The offering was still open as of December 31, 1997 and an
additional 14,791 shares were sold between September 20 and December 31,
1997 resulting in TCB obtaining $147,910 in additional offering proceeds
from the Escrow Agent. As of December 31, 1997, TCB had sold a total of
464,791 shares of common stock at $10.00 per share for a total of
$4,647,910 in offering proceeds.
From the Effective Date of Registration to and including December 31, 1997
TCB had incurred $14,720 in expenses associated with the offering, issuance
and distribution of the common stock sold through December 31, 1997. No
such expenses were paid to directors, officers or 10% shareholders of TCB,
or their affiliates. All such payments were made to others. After deducting
the above expenses, TCB received $4,633,190 in net proceeds. Of this
amount, TCB purchased 100% of the issued and outstanding shares of The
Commercial Bank of Volusia County for $4,250,000 and retained $383,190 for
working capital. As of December 31, 1998, TCB had not issued any shares in
exchange for outstanding warrants.
ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS & FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TCB hereby incorporates by reference the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
on pages 7 through 20 of the 1998 Annual Report to Shareholders for the
year ended December 31, 1998 filed as an Exhibit under Item 13 herein.
ITEM 7. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TCB hereby incorporates by reference the Independent Auditors' Report and
the Consolidated Financial Statements contained in the 1998 Annual Report
filed as an Exhibit under Item 13 herein.
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS - None
9
<PAGE>
PART III
ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
TCB hereby incorporates by reference the sections entitled "Election of
Directors" and "Board of Directors Meeting" contained at pages 2 through 5
of the Proxy Statement filed as an Exhibit under Item 13 herein.
ITEM 10. - EXECUTIVE COMPENSATION
TCB hereby incorporates by reference the section entitled "Executive
Compensation" contained at page 5 of the Proxy Statement filed as an
Exhibit under Item 13 herein.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
TCB hereby incorporates by reference the sections entitled "Election of
Directors" and "Certain Shareholders" contained at page 2 of the Proxy Statement
filed as an Exhibit under Item 13 herein.
(b) Security Ownership of Management
TCB hereby incorporates by reference the section entitled "Election of
Directors" contained at pages 2 through 3 of the Proxy Statement filed as an
Exhibit under Item 13 herein.
(c) Changes in Control
TCB is not aware of any arrangements, including any pledge by any person of
securities of TCB, the operation of which may at a subsequent date result in a
change of control of TCB.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TCB hereby incorporates by reference the section titled "Certain
Relationships and Related Transactions" contained at page 5 through 6 of
the Proxy Statement filed as an exhibit under Item 13 herein.
10
<PAGE>
ITEM 13. - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are denominated by an
asterisk (*) were previously filed as a part of, and are hereby
incorporated by reference from TCB's Registration Statement on Form SB-2
under the Securities Act of 1933 for TCB, as effective with the Securities
and Exchange Commission on April 28, 1997, Registration No. 333-19201
(referred to as "Registration Statement"). The exhibit numbers correspond
to the exhibit numbers in the referenced documents.
Exhibit No. Description of Exhibit
- - ----------- ----------------------
*3.1 Amended and Restated Articles of Incorporation of TCB (Registration
Statement)
*3.2 By-laws of TCB (Registration Statement)
*4.1 Specimen Common Stock Certificate (Registration Statement)
*4.2 Specimen Warrant Certificate (Registration Statement)
*4.4 Company's Warrant Plan (Registration Statement)
22.1 TCB's 1999 Annual Meeting Proxy Statement.
22.2 TCB's 1998 Annual Report
(b) Reports on Form 8-K. TCB did not file any reports on Form 8-K
-------------------- during the last quarter of 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
The Commercial Bancorp, Inc.
Dated: March 30, 1999 By: /s/Gary G. Campbell
-------------- -----------------------
Gary G. Campbell
President & CEO
Dated: March 30, 1999 By: /s/Harvey E. Buckmaster
-------------- ---------------------------
Harvey E. Buckmaster
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/GARY G. CAMPBELL March 30, 1999
- - ------------------- --------------
GARY G. CAMPBELL, President & CEO
/s/JAMES R. PEACOCK March 28, 1999
- - ------------------- --------------
JAMES R. PEACOCK, Director, Vice Chairman
/s/LARRY A. KENT March 30, 1999
- - ---------------- --------------
LARRY A. KENT, Director, Chairman
/s/RICHARD R. DWYER March 30, 1999
- - ------------------- --------------
RICHARD R. DWYER, Director
/s/NORBERT A. WALZ March 30, 1999
- - ------------------ --------------
NORBERT A. WALZ, Director
/s/JAMES F. MCCOLLUM March 30, 1999
- - -------------------- --------------
JAMES F. MCCOLLUM, Director
/s/H. FREDERICK KIEBER March 30, 1999
- - ---------------------- --------------
H. FREDERICK KIEBER, MD, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
TCB's Proxy Statement and 1998 Annual Report are included as Exhibits 22.1 and
22.2 of this filing.
12
<PAGE>
EXHIBIT 22.1
--------------------------------------------------------------
The Commercial Bancorp Inc.'s
1999 Annual Meeting
Proxy Statement
<PAGE>
THE COMMERCIAL BANCORP, INC.
258 N. Nova Road
Ormond Beach, Florida 32174
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 20, 1999
Solicitation and Voting of Proxies
This Proxy Statement and the accompanying Proxy are being furnished to
shareholders of The Commercial Bancorp, Inc. ("TCB" or the "Company") in
connection with the solicitation of proxies by the Board of Directors to be used
at the Company's Annual Meeting of Shareholders ("Annual Meeting") or any
adjournment thereof, which will be held on Tuesday April 20, 1999 at 2:00 p.m.,
Local Time at The Trails Homeowners Association Community Center, 201 Main
Trail, Ormond Beach, Florida.
Regardless of the number of shares of common stock owned, it is
important that shareholders be represented by Proxy or in person at the Annual
Meeting. Shareholders are requested to vote by completing the enclosed Proxy and
returning it signed and dated in the enclosed postage prepaid envelope.
Shareholders are urged to indicate the way they wish to vote in the space
provided on the Proxy. Proxies solicited by the Board of Directors of the
Company will be voted in accordance with the directions given therein. Where no
instructions are indicated, proxies will be voted "FOR" the management director
nominees set forth below; and "FOR" ratification of the appointment of Hacker,
Johnson, Cohen & Grieb, PA as the independent auditors of TCB for the fiscal
year ending December 31, 1999.
Revocation of Proxy
A shareholder's presence at this Annual Meeting will not automatically
revoke his or her Proxy. Shareholders may revoke a Proxy at any time prior to
its exercise by filing with the Secretary of the Company a written notice of
revocation, by delivering to the Company a duly executed Proxy bearing a later
date, or by attending this Annual Meeting and voting in person.
Voting Securities
The securities which may be voted at this Annual Meeting consist of
shares of common stock of TCB ("Common Stock") with each share entitling its
owner to one vote for the election of directors and any other matters that may
come before the Annual Meeting. The close of business on March 23, 1999 has been
fixed by the Board of Directors as the record date ("Record Date") for the
determination of shareholders entitled to notice of and to vote at this Annual
Meeting and any adjournment thereof. The total number of shares of the Company's
Common Stock outstanding on the record date was 464,791 shares which are held by
approximately 350 shareholders.
1
<PAGE>
The presence, in person or by Proxy, of at least a majority of the
total number of outstanding shares of Common Stock is necessary to constitute a
quorum at the Annual Meeting. In the event there are not sufficient votes for a
quorum to approve any Proposal at the time of the Annual Meeting, this Annual
Meeting may be adjourned in order to permit further solicitation of proxies.
Certain Shareholders
As of March 23, 1999, no persons or apparent groups of persons, other
than Officers or Directors of the Company, are known by management to own
beneficially five percent or more of the outstanding shares of TCB's Common
Stock.
PROPOSAL I - ELECTION OF DIRECTORS
The Board of Directors of TCB is composed of seven members. The Board
of Directors are divided into three classes and the terms of each class are
staggered so that approximately one-third of the directors are elected each
year. There are three Class I directors to be elected to a three-year term.
Management's nominees to fill the terms are Gary G. Campbell, Richard
R. Dwyer, and Clarence W. Singletary each of whom, except for Mr. Singletary are
presently directors of TCB. Mr. Singletary has served as a member of The
Commercial Bank of Volusia County's Board of Directors since October, 1997.
It is intended that the proxies solicited by the Board of Directors
will be voted "FOR" the election of said nominees. If any nominee is unable to
serve, the shares represented by all valid proxies will be voted for the
election of such substitute as the Board may recommend. At this time the Board
of Directors knows of no reason why any nominee might not be able to serve.
- - --------------------------------------------------------------------------------
The Board of Directors recommends that shareholders vote "FOR" election
of the nominees.
- - --------------------------------------------------------------------------------
The following table describes the period that each nominee has served
as a director of TCB, his position and offices held, with the Company, his
principal occupation or employment, and further contains information as of March
19, 1999, with respect to the beneficial ownership (as such term is defined
under the Rules and Regulations of the Securities Exchange Commission) of the
Company's Common Stock held by each nominee, each director and all directors as
a group.
2
<PAGE>
<TABLE>
<CAPTION>
Name, age, principal Amount and nature
occupation, director- Current of beneficial
ships and business Director term ownership of Percent
experience since expires Common Stock of class(1)
- - ---------- ----- ------- ------------ -----------
Management's nominees for Three-Year Terms:
Class I Directors
- - -----------------
<S> <C> <C> <C> <C>
Gary G. Campbell, Age 45 1996 1999 5,500(2) 0.95%
Executive Vice President and Senior
Loan Officer, First State Bank of
Florida, 1992-1996; President of The
Commercial Bank, 1996 - current;
Director, President and Chief Executive
Officer of the Bank 1997 - current.
Richard R. Dwyer, Age 44 1998 1999 20,000(3) 3.47%
Specialty stock trader and partner of
M. J. Meehan & Company, a New
York Stock Exchange Trading Company,
1986 - 1996. Financial Advisor, Raymond
James Financial Services, 1998 - current.
Member of the Board of Directors of the
Bank, 1997 - current.
Clarence W. Singletary, Age 63 - - 10,000(4) 1.73%
Real estate developer since 1987.
Owner/Operator Bono's Bar-B-Q,
Holly Hill. Member of the Board
of Directors of the Bank, 1997 - current.
Continuing directors:
Class II Directors
- - ------------------
James R. Peacock, Age 52 1996 2000 105,268(5) 18.25%
Owner/Operator Jim Peacock Dodge
1981 - 1993; Director and Management
Consultant of Profitable Management
Services, Inc. 1988 - current.
James F. McCollum, Age 53 1998 2000 500(6) 0.09%
Attorney, 1972 - current; Shareholder
and partner McCollum, Oberhausen &
Tuck, LLP, 1997 - current.
Class III Directors
- - -------------------
Larry A. Kent, Age 46 1996 2001 69,282(7) 12.01%
President and Owner Larry Kent Homes,
Inc. 1974 - 1993; Owner operator of
Burger King franchise restaurants 1993 -
current; Member of Board of Directors
First State Bank of Florida, 1987 - 1996;
Chairman of The Commercial Bank 1996
current; member of the Board of Directors
of the Bank.
3
<PAGE>
H. Frederick Keiber, MD, Age 53 1998 2001 2,000(8) 0.35%
Ophthalmologist and Owner Keiber Eye
Center 1975 - current; majority owner
Keiber Optical Company 1983 - current;
Majority owner Surgical Center of Central
Florida 1989 - current.
</TABLE>
- - ----------------------------------------
(1) Percentage computed on 464,791 shares issued and outstanding, plus
100,150 shares subject to presently exercisable stock purchase warrants
issued in connection with the Company's stock offering and 2,500
presently exercisable stock options for a total of 576,941 beneficial
shares.
(2) Includes 1,500 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock
offering, 2,500 presently exercisable stock options and 1,500 shares
owned individually.
(3) Includes 10,000 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 10,000 shares owned individually.
(4) Includes 500 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 5,000 shares owned individually.
(5) Includes 52,509 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 52,509 shares owned individually. Includes 250 shares owned by Mr.
Peacock's wife, Myrtice Peacock.
(6) Includes 250 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 250 shares owned individually.
(7) Includes 34,641 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 34,641 shares owned individually.
(8) Includes 1,000 shares subject to presently exercisable stock purchase
warrants issued in connection with the Company's initial stock offering
and 1,000 shares owned individually.
Board of Directors Meetings
During the year ended December 31, 1998, the Board of Directors held 9
meetings. All but two directors of the Company, attended fewer than 75% of the
total meetings of the Board of Directors.
Committees of the Board of Directors
The Board of Directors of the Company may conduct business through its
Executive Committee.
Directors' Compensation
TCB did not pay any fees or other compensation to its Directors for the
period ending December 31, 1998 and neither TCB nor the Bank currently pays
Directors any fees or other compensation.
4
<PAGE>
Executive Compensation
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term
Annual Compensation compensation
------------------- ------------
Name and Other annual Stock All other
principal position Year Salary(1) Bonus compensation options compensation
------------------ ---- --------- ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Campbell 1998 $ 93,681 N/A - 10,000 0
President & CEO 1997 $ 75,000 $ 5,000 - 0 0
- - --------------------------------
</TABLE>
(1) Mr. Campbell's base salary for 1999 is $105,000 per year.
Robert M. Montgomery, President and Chief Executive Officer of the Bank
will receive a base salary of $100,000 per year beginning January, 1999.
Benefits
Insurance: TCB's full-time officers and employees are provided
hospitalization, major medical, short and long-term disability, dental insurance
and term life insurance under group plans on generally the same basis to all
full-time employees. The Bank pays all of the costs of this insurance.
Bonuses: Neither the Company nor the Bank has an established bonus
policy for employees. The payment of any future bonus is at the sole discretion
of the Board of Directors.
Certain Relationships and Related Transactions
Set forth below is certain information as of December 31, 1998
concerning loans made by the Bank to each of its directors, executive officers
and their immediate families whose aggregate indebtedness to the Bank exceeded
$60,000 at anytime since January 1, 1998.
[TABLE SHOWN ON NEXT PAGE]
5
<PAGE>
<TABLE>
<CAPTION>
Largest
Amount Balance
Maturity Outstanding as of
Date of Date of from January December Interest
Name Loan Loan 1, 1998 31, 1998 Rate Type
---------- -------- -------- --------------- ------------ -------- -----
<S> <C> <C> <C> <C> <C>
Stanley S. Bronski 07/01/98 04/01/99 68,350 68,350 8.75% CLCU
J S Associates 01/14/98 11/28/03 628,911 628,911 8.75% CLR
------- -------
Total 697,261 697,261
======= =======
Gary G. Campbell 12/22/97 01/01/28 144,976 143,737 7.50% ML
12/18/98 12/15/00 4,100 4,100 11.00% CL
--------- ---------
Total 149,076 147,837
======= =======
Richard R. Dwyer 01/09/98 03/09/99 320,000 320,000 8.75% CLR
05/18/98 03/31/99 100,000 68,637 8.75% CLCU
------- --------
Total 420,000 388,637
======= =======
Lawrence A. Kent 11/25/97 03/31/99 150,000 150,000 8.75% CLCU
James R. Peacock 10/17/97 03/31/99 300,000 300,000 8.75% CLCU
06/10/98 05/01/99 175,000 175,000 8.75% CLCU
Peacock Chrysler
Plymouth Dodge Jeep 10/06/98 04/06/99 150,000 150,000 8.75% CLCU
------- -------
Total 625,000 625,000
======= =======
Clarence W. Singletary 11/25/97 03/31/99 114,121 114,121 8.75% CLCU
Singletary-Merrell
Partnership 11/21/97 03/31/99 128,541 128,541 8.75% CLCU
Merrecull, Inc. 08/28/98 08/28/99 202,031 202,031 8.75% CLCS
------- -------
Total 444,693 444,693
======= =======
</TABLE>
Note: "CL" (Fixed Rate Consumer Loan); "ML" (Adjustable Mortgage Loan
made at the market interest rate); "CLCU" (Commercial Line of Credit -
unsecured); "CLCS" (Commercial Line of Credit - secured) Interest rates
on all loans above are adjustable; "CLR" (Commercial Real Estate).
Banks and other financial institutions are governed by the provisions
of Section 22(h) of the Federal Reserve Act. Any credit extended by the Bank to
its directors, executive officers and, to the extent otherwise permitted,
principal shareholder(s), or any affiliates thereof, must be: (i) on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions by the Bank with
non-affiliated parties and (ii) not involve more than the normal risk of
repayment or present other unfavorable features.
The above loans were made to the directors and officers on
substantially the same terms as they are made to other customers of the Bank.
All loans are current in their contractual payments for both principal and
interest and, in management's opinion, do not involve more than the normal risk
of collectibility.
6
<PAGE>
PROPOSAL II - RATIFICATION OF APPOINTMENT OF
AUDITORS FOR FISCAL YEAR ENDING DECEMBER, 31 1999
TCB's independent auditors for the fiscal year ended December 31, 1998,
were Hacker, Johnson, Cohen & Grieb, PA. The Board of Directors has appointed
Hacker, Johnson, Cohen & Grieb to be its independent auditors for the fiscal
year ending December 31, 1999, subject to shareholder ratification.
- - --------------------------------------------------------------------------------
The Board of Directors recommends that shareholders vote "FOR" the
ratification of the appointment of Hacker, Johnson, Cohen & Grieb, PA
as independent auditors for the fiscal year ending December 31, 1999.
- - --------------------------------------------------------------------------------
Solicitation
The cost of soliciting proxies on behalf of the Board of Directors for
the Annual Meeting will be borne by TCB. Proxies may be solicited by directors,
officers or regular employees of the Company or the Bank in person or by
telephone, telegraph or mail. TCB will request persons, firms and corporations
holding shares in their names, or in the names of their nominees, which are
beneficially owned by others, to send Proxy materials to and obtain proxies from
such beneficial owners, and will reimburse such holders for their reasonable
out-of-pocket expenses in doing so.
Shareholder Proposals
In order to be eligible for inclusion in TCB's Proxy material for next
year's Annual Meeting of Shareholders, any shareholder proposal to take action
at such Annual Meeting must be received at the Corporate Office of the Company,
258 N. Nova Road, Ormond Beach, Florida 32174, on or before December 22, 1999.
Proposals must comply with the provisions of 17 C.F.R. Section 240.14a-8 ("Rule
14a") of the rules and regulations of the Securities and Exchange Commission in
order to be included in the Company's Proxy materials.
New business may be taken up at the Annual Meeting, provided the
proposal is stated in writing and filed with the Secretary of the Company at
least ten (10) days before the Annual Meeting. Any shareholder may make any
other proposal at the Annual Meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Company's Secretary
by the above date, such proposal shall be laid over for action at an adjourned
Annual Meeting or at a Special Meeting taking place 30 or more days thereafter.
This provision does not prevent the consideration and approval or disapproval at
the Annual Meeting of reports of officers, directors and committees; but in
connection with such reports, no new business shall be acted upon at such Annual
Meeting unless stated and filed as provided herein.
Annual Report
A copy of the Company's 1998 Annual Report accompanies this Proxy
Statement.
7
<PAGE>
Other Matters
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, if other matters should come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of Proxy
to vote the Proxy in accordance with their judgment of what is in the best
interest of the Company.
The Commercial Bancorp, Inc.
Ormond Beach, Florida
March 31, 1999
8
<PAGE>
EXHIBIT 22.2
--------------------------------------------------------------
The Commercial Bancorp Inc.'s
1998 Annual Report
<PAGE>
THE COMMERCIAL BANCORP, INC.
1998 ANNUAL REPORT
<PAGE>
ABOUT THE COMMERCIAL BANCORP, INC.
The Commercial Bancorp, Inc. (the "Holding Company") was incorporated on August
15, 1996. The Holding Company owns 100% of the outstanding common stock of The
Commercial Bank of Volusia County ("TCB-Volusia") (collectively "TCB"). The
Holding Company was organized simultaneously with TCB-Volusia and its only
business is the ownership and operation of TCB-Volusia. TCB-Volusia is a Florida
state-chartered commercial bank and its deposits are insured by the Federal
Deposit Insurance Corporation. TCB-Volusia opened for business on October 14,
1997, and provides community banking services to businesses and individuals in
Volusia County, Florida. At December 31, 1998, TCB operated one retail banking
office in Ormond Beach, Florida and had total assets of $21.7 million and total
stockholders' equity of $3.3 million.
COMMON STOCK PRICES AND DIVIDENDS
TCB's common stock is not actively traded. The common stock was sold in a public
offering in which TCB sold "units" including one common share and a warrant
entitling the holder to purchase an additional common share. The units were sold
for $10 each. TCB has never paid cash dividends. Future dividends, if any, will
be determined by the Board of Directors.
As of March 15, 1999, the Company had 350 holders of record of common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements which represent the
issuer's expectations or beliefs, including, but not limited to, statements
concerning the banking industry and the issuer's operations, performance,
financial condition, and growth. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "should," "can," "estimate," or "continue" or the negative of other
variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the issuer's control, and
actual results may differ materially depending on a variety of important
factors, including competition, general economic conditions, potential changes
in interest rates, and changes in the value of real estate securing loans made
by The Commercial Bancorp, Inc. among other things.
CONTENTS
Page
Consolidated Financial Highlights...........................................1
Message from the President................................................2-3
Officers and Directors....................................................4-5
Selected Financial Data.....................................................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7-21
Consolidated Financial Statements.......................................22-39
Independent Auditors' Report...............................................40
Corporate Information......................................................41
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
At December 31, 1998 and 1997 or For the Years Then Ended
(Dollars in thousands, except per share figures)
1998 1997
---- ----
At Year End:
<S> <C> <C>
Total assets....................................................................... $ 21,676 7,078
Securities......................................................................... $ 3,302 -
Loans, net......................................................................... $ 11,563 3,746
Deposits........................................................................... $ 16,785 2,678
Borrowings......................................................................... $ 1,365 -
Stockholders' equity............................................................... $ 3,257 4,334
Book value per share............................................................... $ 7.01 9.32
Shares outstanding................................................................. 464,791 464,791
Warrants to purchase one share of common stock outstanding......................... 450,000 450,000
Equity-to-assets ratio............................................................. 15.03% 61.23%
Nonperforming assets-to-total assets ratio......................................... 5.53% -
For The Year:
Net interest income................................................................ 357 69
Provision for loan losses.......................................................... 725 35
Cumulative effect of accounting change for organization costs (100) -
Net loss........................................................................... (1,071) (262)
Return on average assets........................................................... (6.35)% (9.18)%
Return on average equity........................................................... (28.23)% (11.91)%
Average equity-to-average assets ratio............................................. 22.51% 77.02%
Noninterest expenses to average assets............................................. 7.32% 16.85%
Average Yield
or Rate
During the
Years Ended
December 31,
------------
1998 1997
---- ----
Yields and Rates:
Loans............................................................................... 8.14% 8.88%
Securities.......................................................................... 4.07% - %
Other interest-earnings assets (1).................................................. 5.41% 4.88%
Total interest-earnings assets...................................................... 6.71% 5.38%
Deposits............................................................................ 5.17% 3.95%
Borrowings.......................................................................... 6.86% 9.47%
Total interest-bearing liabilities.................................................. 5.22% 7.19%
Net interest margin (2)............................................................. 2.42% 3.28%
</TABLE>
- - -----------------
(1) Includes federal funds sold, interest bearing deposits and Federal
Home Loan Bank stock.
(2) Net interest income divided by average interest-earning assets.
1
<PAGE>
MESSAGE FROM THE PRESIDENT
Dear Stockholders:
We present the 1998 Annual Report to you with mixed emotions. At the end of our
first full year of operations we have many accomplishments to view with a great
deal of pride. And yet, the year has not been without its challenges and the
impact of those challenges moderates our accomplishments and forces us to
reflect soberly on the issues at hand and their resolution.
Our Bank's performance can be highlighted for its success in meeting anticipated
growth rates. The total deposits of the Bank met original growth goals when they
reached almost $16.8 million at year end. Loan growth met originally budgeted
growth rates as well and totaled $12.3 million on December 31st. However, it was
in our loan portfolio that our first disappointment occurred. Management
downgraded two separate loan relationships in August of 1998. In both cases
these borrowers had suffered problems not related to our loans. The continued
performance of the loans became questionable soon after the problems were
identified and management recommended the provision for loan losses be increased
in accordance with our loan policy. The provision is believed to be a
conservative position for the potential losses on these relationships,
nevertheless, the impact on our earnings for 1998 was significant.
In July of 1998 our Bank had one of the proudest moments in its brief history.
As a result of the wildfires that plagued our area for so many weeks, it was
necessary for us to enact our disaster plans and evacuate our building. While we
were able to return to operation the next morning, the fires in Flagler County
forced the evacuation of the entire county. During the evacuations, we were
aware that the banks in Flagler could be days in opening while their employees
returned from the evacuation, and that automated teller machines would be empty
of cash or may not be online with the loss of power and/or telephone lines.
Recognizing the difficulties this would create on the residents and having just
executed our own disaster and recovery programs, we felt our Bank could help
provide relief services to the residents of Flagler County upon their return.
Our Bank decided to offer an emergency check cashing service. In an outstanding
display of the cooperation by professionals, agencies, and individuals that is
characteristic of the human reaction to disaster, we applied for and received
regulatory approval to operate the check cashing service in under 8 hours.
Coordinating with the Emergency Relief Team effort in Flagler County was next
and on July 6, 1998 our Bank opened a check cashing facility. We received
national recognition for this effort and are proud to relate it to you today.
In a less positive development, our Company's plans to assist an organizing
group in Highlands County with the charter of a new bank which would have joined
our Holding Company as its second bank were not able to proceed. The efforts of
management, our time and attention, and the financial impact of the expenses
related to the applications and stock registration were substantially expensed
in 1998, also creating a significant impact on our first full year's earnings.
On the positive side, our focus proceeding forward will return to the Volusia
County Bank and we are certain its performance can be improved to provide
desirable returns for our shareholders.
2
<PAGE>
During our proposed expansion, the Bank expanded its Board of Directors and
Management Team. Most notably, after the Annual Meeting last year, our Bank
Board was expanded with addition of Michael D. Crotty and William L. Olivari as
Directors. Michael Crotty is an attorney with the firm of Black, Crotty, Sims,
Hubka, Burnett, Birch and Samuels in Daytona Beach, Florida. He is a lifelong
resident of Volusia County and extends our contacts with businessmen and
professionals in the area with his experience. Bill Olivari is a prominent CPA
in the Ormond Beach area practicing at his own firm, Olivari and Associates. He
has been living and working in the area since 1973, has a most impressive list
of professional and service organization achievements, and brings a lot of
experience to our Board. We are extremely proud to welcome both of these new
Directors to our Bank Board.
In addition, the Bank hired a new President and Chief Executive Officer, Robert
M. Montgomery. Bob Montgomery brings 25 years of service with Compass Bancshares
in Birmingham, Alabama and a great deal of banking expertise to our Volusia
County Bank. His professional and civic activities have included Chairman,
Junior Achievement of Greater Birmingham, Inc.; Chairman, Commercial Credit
Committee, Alabama Bankers' Association; and President's Advisory Council,
Birmingham Southern College. We are very happy to have Bob associated with our
Bank.
Our growth and earnings potential are firm and our marketplace in Volusia County
continues to grow and prosper. The capital base of the Bank will support the
growth anticipated for the future and with that growth will come profitability
on a monthly basis. The problem loans appear to be near their resolution and the
rest of our portfolio has exhibited satisfactory performance and credit
strengths. Management is confident the Volusia County Bank is sound and will
continue to develop.
While we are disappointed with our plans for the development of the second bank,
we are proud and confident that our initial plans for our Company can still be
met. There is no doubt that the challenges of the first full year of operations
have tested our Company but those challenges have not diminished our potential
for the future in any manner. We look to that future to provide you a
competitive return on your investment while we provide our community with an
outstanding Bank.
Sincerely,
Gary G. Campbell
President
3
<PAGE>
DIRECTORS AND OFFICERS OF
THE COMMERCIAL BANCORP, INC.
OFFICERS
Gary G. Campbell
President and Chief Executive Officer
Harvey E. Buckmaster
Chief Financial Officer
DIRECTORS
Larry Kent
Chairman of the Board - Burger King Franchiser
James R. Peacock
Vice Chairman of the Board - Real Estate Developer
Gary G. Campbell
President and Chief Executive Officer
Richard R. Dwyer
Stockbroker
Frederick Keiber
Opthamologist/Surgeon
James McCollum
Attorney at Law
Norbert Walz
Real Estate Developer
4
<PAGE>
DIRECTORS AND OFFICERS OF
THE COMMERCIAL BANK OF VOLUSIA COUNTY
OFFICERS
Bob Montgomery
President and Chief Financial Officer
Harvey E. Buckmaster
Senior Vice President - Chief Financial Officer and Cashier
Charles E. Merz
Vice President - Commercial Loans
Barbara A. Cloyd
Assistant Vice President - Operations
Sandy Bowe
Assistant Vice President - Loan Administration
Ginny Goodin
Assistant Vice President
DIRECTORS
James R. Peacock
Chairman of the Board - Real Estate Developer
Larry Kent
Vice Chairman of the Board - Burger King Franchiser
Gary G. Campbell
The Commercial Bancorp, Inc.
Stanley S. Bronski
Retired
Richard R. Dwyer
Stockbroker
Thomas R. Horton
Trustee/Stetson University
Susan A. Nicholson
Interior Designer
Clarence Singletary
Real Estate Developer
Michael D. Crotty
Attorney at Law
William L. Oliveri
Certified Public Accountant
Kirk Bauer
Attorney at Law
5
<PAGE>
SELECTED FINANCIAL DATA
At December 31, 1998 and 1997 or For the Years Then Ended
(Dollars in thousands, except per share figures)
<TABLE>
1998 1997
---- ----
<S> <C> <C>
At Year End:
Cash and cash equivalents............................................................... $ 4,949 2,466
Securities.............................................................................. 3,302 -
Loans, net.............................................................................. 11,563 3,746
All other assets........................................................................ 1,862 866
-------- --------
Total assets....................................................................... $ 21,676 7,078
======= =======
Deposits................................................................................ 16,785 2,678
Borrowings.............................................................................. 1,365 -
All other liabilities................................................................... 269 66
Stockholders' equity.................................................................... 3,257 4,334
-------- -------
Total liabilities and stockholders' equity......................................... $ 21,676 7,078
======= =======
For the Year:
Total interest income................................................................... 989 113
Total interest expense.................................................................. 632 44
--------- ---------
Net interest income..................................................................... 357 69
Provision for loan losses............................................................... 725 35
--------- ---------
Net interest (loss) income after provision for loan losses.............................. (368) 34
--------- ---------
Noninterest income...................................................................... 52 2
Noninterest expenses.................................................................... 1,233 481
-------- --------
Loss before income tax benefit and cumulative effect of change in
accounting principle............................................................... (1,549) (445)
Income tax benefit...................................................................... (578) (183)
-------- --------
Net loss before cumulative effect of change in accounting principle (971) (262)
Cumulative effect of accounting change for organization costs (100) -
-------- -------
Net loss................................................................................ $ (1,071) (262)
======= ========
Basic and diluted loss per share:
Loss before cumulative effect of change in accounting principle (2.09) (2.00)
Cumulative effect of accounting change for organization costs (.22) -
--------- -------
Net loss........................................................................... $ (2.31) (2.00)
======== ========
Weighted-average number of shares outstanding for basic and diluted..................... 464,791 130,682
======= =======
Ratios and Other Data:
Return on average assets................................................................ (6.35%) (9.18%)
Return on average equity................................................................ (28.23%) (11.91%)
Average equity to average assets........................................................ 22.51% 77.02%
Net interest margin..................................................................... 2.42% 3.28%
Noninterest expenses to average assets.................................................. 7.32% 16.85%
Ratio of average interest-earning assets to average interest-bearing liabilities........ 1.22 3.43
Nonperforming loans as a percentage of total assets at end of year...................... 5.53% -
Allowance for loan losses as a percentage of total loans at end of year................. 6.17% .93%
Allowance for loan loses as a percentage of nonperforming loans 127.24% N/A
Number of banking offices............................................................... 1 1
Total shares outstanding at end of year................................................. 464,791 464,791
Book value per share at end of year..................................................... $ 7.01 9.32
Dividend pay-out ratio.................................................................. - -
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
General
The Commercial Bancorp, Inc. ("TCB") was incorporated on August 15, 1996. TCB
owns 100% of the outstanding common stock of The Commercial Bank of Volusia
County ("TCB-Volusia") (collectively also "TCB"). TCB was organized
simultaneously with TCB-Volusia and its only business is the ownership and
operation of TCB-Volusia. TCB-Volusia is a Florida state-chartered commercial
bank and is insured by the Federal Deposit Insurance Corporation. TCB-Volusia
opened for business on October 14, 1997, and provides community banking services
to businesses and individuals in Volusia County, Florida.
At December 31, 1998, TCB had total consolidated assets of $21.7 million, an
increase of 206.24% over total assets of $7.1 million at December 31, 1997.
During the year ended December 31, 1998, net loans receivable increased to $7.8
million from $11.6 million at December 31, 1997. TCB's portfolio of securities
increased to $3.3 million at December 31, 1998. TCB's deposits increased to
$16.8 million at December 31, 1998 from $2.7 million as of December 31, 1997.
TCB's borrowings increased to $1.4 million as of December 31, 1998. TCB had a
consolidated net loss of $1,071,000 or $2.31 basic and diluted loss per share
for the year ended December 31, 1998 compared to consolidated net loss of
$262,000 or $2.00 basic and diluted loss per share for 1997.
New Bank Charter
TCB along with a group of local organizers made application to the state of
Florida for a bank charter in Highlands County, Florida. Management planned to
raise the capital for the new bank from a public offering of TCB's common stock.
In early 1999, TCB withdrew their application and the local organizers from
Highlands County elected to continue without TCB. Because of this, management
has terminated its planned public offering and has charged-off $88,986 in
prepaid offering expenses as of December 31, 1998.
Regulation and Legislation
As a state-chartered commercial bank, TCB-Volusia is subject to extensive
regulation by the Florida Department of Banking and Finance ("Florida DBF") and
the Federal Deposit Insurance Corporation ("FDIC"). TCB-Volusia files reports
with the Florida DBF and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with or acquisitions of other financial
institutions. Periodic examinations are performed by the Florida DBF and the
FDIC to monitor TCB-Volusia's compliance with the various regulatory
requirements. TCB and TCB-Volusia are also subject to regulation and examination
by the Federal Reserve Board of Governors.
Year 2000 Compliance
TCB is acutely aware of the many areas affected by the Year 2000 computer issue,
including those addressed by the Federal Financial Institutions Examination
Council in its interagency statement which provided an outline for institutions
to effectively manage the Year 2000 challenges. A Year 2000 plan has been
approved by the Board of Directors which includes multiple phases, tasks to be
completed, and target dates for completion. Issues addressed in the plan include
awareness, assessment, renovation, validation, implementation, testing, and
contingency planning.
TCB has formed a Year 2000 committee that is charged with the oversight of
completing the Year 2000 project on a timely basis. TCB has completed its
awareness, assessment and renovation phases and is actively involved in
validating and implementing its plan. At the present time, TCB has substantially
completed its testing phase. Since it routinely upgrades and purchases
technologically advanced software and hardware on a continual basis, TCB has
determined that the cost of making modifications to correct any Year 2000 issues
will not materially affect reported operating results.
7
<PAGE>
TCB's vendors and suppliers have been contacted for written confirmation of
their product readiness for Year 2000 compliance. Negative or deficient
responses are analyzed and periodically reviewed to prescribe timely actions
within TCB's contingency planning. TCB's main service provider has completed
testing of its mission critical application software and item processing
software; the test results, which have been documented and validated, are deemed
to be Year 2000 compliant. FFIEC guidance on testing Year 2000 compliance of
service providers states that proxy tests are acceptable compliance tests. In
proxy testing, the service provider tests with a representative sample of
financial institutions that use a particular service, with the results of such
testing shared with all similarly situated clients of the service provider. TCB
has authorized the acceptance of proxy testing since the proxy tests have been
conducted with financial institutions that are similar in type and complexity to
its own, using the same version of the Year 2000 ready software and the same
hardware and operating systems.
TCB also recognizes the importance of determining that its borrowers are
addressing the Year 2000 problem in a timely manner to avoid deterioration of
TCB's loan portfolio solely due to this issue. All material relationships have
been identified and questionnaires have been completed to assess the inherent
risks. Deposit customers have received statement stuffers and informational
material in this regard. TCB plans to work on a one-on-one basis with any
borrower who has been identified as having high Year 2000 risk exposure.
Accordingly, management does not believe that TCB has incurred or will incur
material costs associated with the Year 2000 issue. Yet, there can be no
assurances that all hardware and software that TCB will use will be Year 2000
compliant. Management cannot predict the amount of financial difficulties it may
incur due to customers and vendors inability to perform according to their
agreements with TCB or the effects that other third parties may cause as a
result of this issue. Therefore, there can be no assurance that the failure or
delay of others to address the issue or that the costs involved in such process
will not have a material adverse effect on TCB's business, financial condition,
and results of operations.
TCB's contingency plans relative to Year 2000 issues have not been finalized -
these plans are evolving as the testing of systems proceeds. During the
completion of the testing phase management will determine if it is necessary to
develop a "worst case scenario" contingency plan. Based on testing results to
date (as noted above), TCB's mission critical systems have been deemed to be
Year 2000 compliant and, therefore a contingency plan has not been developed
with respect to those systems. With regards to non-mission critical internal
systems, TCB's contingency plans are to replace those systems that test as being
noncompliant. Alternatively, some systems could be handled manually on an
interim basis. Should outside service providers not be able to provide compliant
systems, TCB will terminate those relationships and transfer to other vendors.
It is anticipated that TCB's deposit customers will have increased demands for
cash in the latter part of 1999 and correspondingly TCB will maintain higher
liquidity levels.
Liquidity and Capital Resources
A state-chartered commercial bank is required under Florida law and FDIC
regulations to maintain a liquidity reserve of at least 15% of its total
transaction accounts and 8% of its total nontransaction accounts subject to
certain restrictions. The reserve may consist of cash-on-hand, demand deposits
due from correspondent banks, and other investments and short-term marketable
securities. At December 31, 1998 and December 31, 1997, TCB-Volusia exceeded its
regulatory liquidity requirements.
TCB's primary source of cash and cash equivalents during the year ended December
31, 1998 was net deposit inflows of $14.1 million and repayments on securities
available for sale of $2.9 million. During this same period, cash and cash
equivalents were used to originate loans, net of repayments, of $8.6 million and
purchase securities available for sale of $6.3 million resulting in a net
increase in cash and cash equivalents of approximately $2.5 million. TCB's
primary source of cash during the year ended December 31, 1997 was the proceeds
from the sale of common stock of $4.6 million and net deposit inflows of $2.7
million. Cash was used primarily to originate loans and to purchase premises and
equipment.
8
<PAGE>
Credit Risk
TCB's primary business is making commercial, business, consumer, and real estate
loans. That activity entails potential loan losses, the magnitude of which
depend on a variety of economic factors affecting borrowers which are beyond the
control of TCB. While TCB has instituted underwriting guidelines and credit
review procedures to protect TCB from avoidable credit losses, some losses will
inevitably occur. The provision for loan losses for the year ended December 31,
1998 was $725,000 and the allowance for loan losses was $760,000 at December 31,
1998. The provision and the allowance increased primarily due to the
classification of commercial loans to two borrowers during the third quarter of
1998. Management has identified certain weaknesses in these borrowers. These two
relationships include $597,000 (4.84% of total loans) in commercial loans to one
borrower which were more than 180 days past due at December 31, 1998 and another
commercial relationship of $602,000 (4.89% of total loans) which was more than
ninety days past due at December 31, 1998. Management believes the allowance at
December 31, 1998 is adequate. Both loans are on nonaccrual status at December
31, 1998. TCB had no nonaccrual loans at December 31, 1997, and has no
charge-off experience.
The following table sets forth information with respect to activity in TCB's
allowance for loan losses during the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Average loans outstanding....................................................... $ 8,466 259
====== =======
Allowance at beginning of year.................................................. 35 -
Provision for loan losses....................................................... 725 35
------- -------
Allowance at end of year........................................................ $ 760 35
======= =======
Allowance as a percent of total loans........................................... 6.17% .93%
======= ======
Total gross loans at end of year................................................ $ 12,319 3,770
====== =====
</TABLE>
The following table presents information regarding TCB's total allowance for
losses as well as the allocation of such amounts to the various categories of
loans (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1998 1997
---- ----
Loans Loans
to to
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial................................................. $ 733 75.1% $ 27 75.1%
Residential real estate.................................... 13 11.8 4 11.4
Commercial real estate..................................... 6 5.8 2 6.4
Consumer and home equity................................... 8 7.3 2 7.1
----- ------ --- ------
Total allowance for loan losses............................ $ 760 100.0% $ 35 100.0%
=== ===== == =====
</TABLE>
9
<PAGE>
Loan Portfolio Composition
Commercial loans and residential real estate loans comprise the largest groups
of loans in TCB's portfolio. As of December 31, 1998 and December 31, 1997,
commercial loans amounted to $9.3 million or 75.1% and $2.8 million or 75.1% of
the total loan portfolio. Residential real estate loans amounted to $1.4 million
or 11.8% and $429,000 or 11.4% as of December 31, 1998 and December 31, 1997, of
which approximately 89.5% and 86.9% are first mortgage loans.
Consumer and home equity loans comprise the next largest group of loans in TCB's
loan portfolio, amounting to $897,000 or 7.3% and $268,000 or 7.1% of the total
loan portfolio as of December 31, 1998 and December 31, 1997. As of December 31,
1998 and December 31, 1997, commercial real estate loans, amounted to $717,000
or 5.8% and $241,000 or 6.4%, of the total loan portfolio.
The following table sets forth the composition of TCB's loan portfolio at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Commercial................................................ $ 9,255 75.1% $ 2,832 75.1%
Residential real estate................................... 1,450 11.8 429 11.4
Commercial real estate.................................... 717 5.8 241 6.4
Consumer and home-equity.................................. 897 7.3 268 7.1
-------- ------ ------ ------
12,319 100.0% 3,770 100.0%
===== =====
(Subtract) add:
Allowance for loan losses............................... (760) (35)
Net deferred costs...................................... 4 11
------- -------
Loans, net................................................ $ 11,563 $ 3,746
====== =====
</TABLE>
Securities
The securities portfolio is comprised of mortgage-backed securities. According
to Financial Accounting Standards No. 115, the securities portfolio must be
categorized as either "held to maturity", "available for sale" or "trading".
Securities held to maturity represent those securities which TCB has the
positive intent and ability to hold to maturity. Securities available for sale
represent those investments which may be sold for various reasons, including
changes in interest rates and liquidity considerations. These securities are
reported at fair market value with unrealized gains and losses being reported as
a separate component of stockholders equity, net of income taxes. Trading
securities are held primarily for resale and are recorded at their fair values.
Unrealized gains or losses on trading securities are included immediately in
earnings. At December 31, 1998, TCB had no securities categorized as held to
maturity or trading. At December 31, 1997, TCB did not have any securities.
The following table sets forth the carrying value of TCB's securities portfolio,
maturities of which all exceed ten years (dollars in thousands):
<TABLE>
<CAPTION>
At December 31, Average
1998 Yield
---- -----
Securities available for sale:
<S> <C> <C>
Mortgage-backed securities.............................................. $ 3,302 4.07%
===== ====
</TABLE>
10
<PAGE>
Regulatory Capital Requirements
TCB and TCB-Volusia are subject to various regulatory capital requirements
administered by various regulatory banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the TCB's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
TCB-Volusia must meet specific capital guidelines that involve quantitative
measures of TCB-Volusia's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. TCB-Volusia's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require TCB-Volusia to maintain minimum amounts and percents (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that
TCB-Volusia meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions
------ ------------------ -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to Risk-
Weighted Assets)......... $ 3,168 23.2% $ 1,081 8.0% $ 1,352 10.0%
Tier I Capital (to Risk-
Weighted Assets)......... 2,504 18.3 541 4.0 811 6.0
Tier I Capital
(to Average Assets)...... 2,504 12.6 798 4.0 1,596 5.0
As of December 31, 1997:
Total capital (to Risk-
Weighted Assets)......... $ 3,950 92.7% $ 341 8.0% $ 426 10.0%
Tier I Capital (to Risk-
Weighted Assets)......... 3,767 88.4 171 4.0 256 6.0
Tier I Capital
(to Average Assets)...... 3,767 69.2 218 4.0 272 5.0
</TABLE>
11
<PAGE>
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
TCB's market risk arises primarily from interest-rate risk inherent in its
lending and deposit taking activities. To that end, management actively monitors
and manages its interest-rate risk exposure. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 8 of Notes to Consolidated Financial Statements.
TCB's primary objective in managing interest-rate risk is to minimize the
adverse impact of changes in interest rates on TCB's net interest income and
capital, while adjusting TCB's asset-liability structure to obtain the maximum
yield-cost spread on that structure. TCB relies primarily on its asset-liability
structure to control interest-rate risk. However, a sudden and substantial
increase in interest rates may adversely impact TCB's earnings, to the extent
that the interest rates borne by assets and liabilities do not change at the
same speed, to the same extent, or on the same basis. TCB does not engage in
trading activities.
Asset - Liability Structure
As part of its asset and liability management, TCB has emphasized establishing
and implementing internal asset-liability decision processes, as well as
communications and control procedures to aid in managing TCB's earnings.
Management believes that these processes and procedures provide TCB with better
capital planning, asset mix and volume controls, loan-pricing guidelines, and
deposit interest-rate guidelines which should result in tighter controls and
less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest-rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
The gap ratio is computed as rate sensitive assets/rate sensitive liabilities. A
gap ratio of 1.0% represents perfect matching. A gap is considered positive when
the amount of interest-rate sensitive assets exceeds interest-rate sensitive
liabilities. A gap is considered negative when the amount of interest-rate
sensitive liabilities exceeds interest-rate sensitive assets. During a period of
rising interest rates, a negative gap would adversely affect net interest
income, while a positive gap would result in an increase in net interest income.
During a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would adversely affect net
interest income.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the results of operations, TCB's management
continues to monitor asset and liability management policies to better match the
maturities and repricing terms of its interest-earning assets and
interest-bearing liabilities. Such policies have consisted primarily of: (i)
emphasizing the origination of adjustable-rate loans; (ii) maintaining a stable
core deposit base; and (iii) maintaining a significant portion of liquid assets
(cash and short-term securities).
12
<PAGE>
The following table sets forth certain information relating to TCB's
interest-earning assets and interest-bearing liabilities at December 31, 1998
that are estimated to mature or are scheduled to reprice within the period shown
(dollars in thousands):
<TABLE>
<CAPTION>
More More
Than Than
Three Six More More
Months Months than One than
Three to Six to One Year to Five
Months Months Year Five Years Years Total
------ ------ ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Loans (1):
Commercial............................ $ 8,910 - 2 289 54 9,255
Residential real estate............... 40 - - 61 1,349 1,450
Commercial real estate................ 684 - - 33 - 717
Consumer and home equity.............. 186 4 9 698 - 897
------ -------- ------- ------ ------- -------
Total loans...................... 9,820 4 11 1,081 1,403 12,319
Securities................................ 1,414 1,888 - - - 3,302
Federal funds sold........................ 4,259 - - - - 4,259
------ ------- ------- -------- -------- -------
Total rate-sensitive assets...... 15,493 1,892 11 1,081 1,403 19,880
------ ----- ------ ----- ----- ------
Deposit accounts (2):
Money-market deposits................. 329 - - - - 329
Savings and NOW deposits.............. 5,069 - - - - 5,069
Time deposits......................... 3,156 1,119 833 5,375 - 10,483
----- ----- ------ ----- -------- ------
Total deposits................... 8,554 1,119 833 5,375 - 15,881
Borrowings............................ 365 - - - 1,000 1,365
------- -------- -------- -------- ----- -------
Total rate-sensitive liabilities. 8,919 1,119 833 5,375 1,000 17,246
------- -------- -------- -------- ----- -------
GAP (repricing differences)............... $ 6,574 773 (822) (4,294) 403 2,634
====== ====== ====== ===== ====== ======
Cumulative GAP............................ $ 6,574 7,347 6,525 2,231 2,634
====== ===== ===== ===== =====
Cumulative GAP/total assets............... 30.27% 33.83% 30.04% 10.27% 12.13%
===== ===== ===== ===== =====
</TABLE>
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed-rate loans are
scheduled, including repayment, according to their maturities.
(2) Money-market, NOW, and savings deposits are regarded as readily
accessible withdrawable accounts. Time deposits are scheduled according
to their respective maturity dates.
13
<PAGE>
The following table reflects the contractual principal repayments by period of
TCB's loan portfolio at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Residential Commercial Consumer
Years Ending Real Real and Home
December 31, Commercial Estate Estate Equity Total
------------ ---------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
1999............................. $ 4,886 - 629 77 5,592
2000............................. 315 - - 175 490
2001-2002........................ 1,910 16 59 379 2,364
2003-2004........................ 1,651 71 29 210 1,961
2005 & beyond.................... 493 1,363 - 56 1,912
------ ----- ----- ---- ------
Total............................ $ 9,255 1,450 717 897 12,319
===== ===== === === ======
</TABLE>
Of the $6.7 million of loans at December 31, 1998 due after one year, 36.9% of
such loans have fixed interest rates and 63.1% have adjustable interest rates.
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than their
average contractual terms due to prepayments. In addition, due-on-sale clauses
on loans generally give TCB the right to declare a conventional loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
Origination and Repayment of Loans. The primary focus of TCB's new loan
originations are to commercial borrowers. These loans are attributable to TCB's
relationship with their depositors and other existing customers as well as its
local advertising. TCB generally originates loans on real estate located in its
primary geographical lending area in Volusia County, Florida.
The following table sets forth total loan originations and principal repayments:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Originations:
Commercial............................................................... $ 6,948 3,290
Residential real estate.................................................. 1,237 430
Commercial real estate................................................... 1,019 -
Consumer and home equity................................................. 743 271
------- ------
Total loans originated................................................ 9,947 3,991
Principal reductions..................................................... (1,398) (221)
----- ------
Increase in total loans.................................................. $ 8,549 3,770
===== =====
</TABLE>
14
<PAGE>
Deposits and Other Sources of Funds
General. In addition to deposits, the sources of funds available for lending and
other business purposes include loan repayments and principal repayments on
securities. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are influenced significantly by general interest
rates and money-market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in other sources, such as deposits at less than
projected levels.
Deposits. Deposits are attracted principally from TCB's primary geographic
market areas in Volusia County, Florida. TCB offers a broad selection of deposit
instruments including demand deposit accounts, NOW accounts, money- market
accounts, regular savings accounts, term certificate accounts, and retirement
savings plans (such as IRA accounts). Certificate of deposit rates are set to
encourage longer maturities as cost and market conditions will allow. Deposit
account terms vary, with the primary differences being the minimum balance
required, the time period the funds must remain on deposit, and the interest
rate. TCB has emphasized commercial banking relationships in an effort to
increase demand deposits as a percentage of total deposits.
Management sets the deposit interest rates weekly based on a review of deposit
flows for the previous week and a survey of rates among competitors and other
financial institutions in Florida.
The following table shows the distribution of, and certain other information
relating to, TCB's deposit accounts by type (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
% of % of
Amount Deposits Amount Deposits
------ -------- ------ --------
<S> <C> <C> <C> <C>
Demand deposits................................................ $ 905 5.4% $ 832 31.0%
NOW deposits................................................... 4,859 28.9 948 35.4
Money-market deposits.......................................... 329 2.0 66 2.5
Savings deposits............................................... 209 1.2 93 3.5
--- ----- ------ ------
Subtotal ............................................. 6,302 37.5 1,939 72.4
Certificates of deposit:
3.00% - 3.99%............................................. 164 1.0 - -
4.00% - 4.99%............................................. 1,310 7.8 - -
5.00% - 5.99%............................................. 5,262 31.4 514 19.2
6.00% - 6.99%............................................. 3,747 22.3 225 8.4
------- ----- ------ ------
Total certificates of deposit.................................. 10,483 62.5 739 27.6
------ ----- ------ -----
Total deposits................................................. $ 16,785 100.0% $ 2,678 100.0%
====== ===== ===== =====
</TABLE>
The following table presents by various interest rate categories the amounts of
certificates of deposit at December 31, 1998 which mature during the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
1999 2000 2001 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
3.00% - 3.99%................................................... $ 164 - - 164
4.00% - 4.99%................................................... 1,258 23 29 1,310
5.00% - 5.99%................................................... 3,387 1,747 128 5,262
6.00% - 6.99%................................................... 298 3,449 - 3,747
------ ----- ----- -----
Total certificates of deposit................................... $ 5,107 5,219 157 10,483
===== ===== === ======
</TABLE>
15
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Due three months or less................................................................ $ 402 -
Due over three months to six months..................................................... 100 100
Due over six months to one year......................................................... 201 -
Due over one year....................................................................... 827 200
------ ---
$ 1,530 300
===== ===
</TABLE>
The following table sets forth the net deposit flows of TCB during the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net increase before interest credited.............................................. $ 13,494 2,668
Net credited....................................................................... 613 10
-------- ------
Net deposit increase.......................................................... $ 14,107 2,678
====== =====
</TABLE>
The following table shows the average amount of and the average rate paid on
each of the following interest-bearing deposit account categories during the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
Average Average Average Average
Balance Yield Balance Yield
------- ----- ------- -----
<S> <C> <C> <C> <C>
Savings and NOW deposits...................................... $ 3,282 3.90% $ 112 3.57%
Money-market deposits......................................... 184 2.72 67 2.99
Time deposits................................................. 8,289 5.73 74 5.41
------ ---
Total interest-bearing deposits.......................... $ 11,755 5.17% $ 253 3.95%
====== ==== === ====
</TABLE>
16
<PAGE>
Results of Operations
The operating results of TCB depend primarily on its net interest income, which
is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, consisting primarily of
deposits. Net interest income is determined by the difference between yields
earned on interest-earning assets and rates paid on interest-bearing liabilities
("interest-rate spread") and the relative amounts of interest-earning assets and
interest-bearing liabilities. TCB's interest-rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. In addition, TCB's net loss is also affected by
the level of nonperforming loans, as well as the level of its noninterest
income, and its noninterest expenses, such as salaries and employee benefits,
occupancy and equipment costs and income taxes.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of TCB from
interest-earning assets and the resultant average yield; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest/dividend income; (iv) interest-rate spread;
(v) net interest margin. Average balances are based on average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans................................................. $ 8,466 690 8.14% $ 259 23 8.88%
Securities............................................ 2,973 121 4.07 - - -
Other interest-earning assets (1)..................... 3,292 178 5.41 1,842 90 4.88
------- --- ----- ---
Total interest-earning assets..................... 14,731 989 6.71 2,101 113 5.38
--- ---
Noninterest-earning assets................................. 2,128 754
------ ------
Total assets...................................... $ 16,859 $ 2,855
====== =====
Interest-bearing liabilities:
Savings and NOW deposits.............................. 3,282 128 3.90 112 4 3.57
Money-market deposits................................. 184 5 2.72 67 2 2.99
Time deposits......................................... 8,289 475 5.73 74 4 5.41
Borrowings............................................ 350 24 6.86 359 34 9.47
------- ---- ------ ---
Total interest-bearing liabilities................ 12,105 632 5.22 612 44 7.19
--- ---
Noninterest-bearing deposits............................... 430 23
Noninterest-bearing liabilities............................ 529 21
Stockholders' equity....................................... 3,795 2,199
------ -----
Total liabilities and stockholders'
equity....................................... $ 16,859 $ 2,855
====== =====
Net interest/dividend income............................... $ 357 $ 69
=== ===
Interest-rate spread (2)................................... 1.49% (1.81%)
==== ====
Net interest margin (3).................................... 2.42% 3.28%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities.................. 1.22 3.43
==== ====
</TABLE>
(1) Other interest-earning assets include federal funds sold,
interest-earning deposits and Federal Home Loan Bank stock.
(2) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(3) Net interest margin is net interest/dividend income divided by average
interest-earning assets.
17
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense of TCB for the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in rate (change in rate
multiplied by prior volume), (2) changes in volume (change in volume multiplied
by prior rate) and (3) changes in rate-volume (change in rate multiplied by
change in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
1998 vs. 1997
-------------
Increase (Decrease) Due to
--------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans.................................................................... $ (2) 723 (54) 667
Securities............................................................... - - 121 121
Other interest-earning assets............................................ (45) 93 40 88
-- ---- --- ----
Total.................................................................. (47) 816 107 876
-- --- --- ---
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits............................................... - 106 18 124
Money-market deposits.................................................. (1) 9 (5) 3
Time deposits.......................................................... - 473 (2) 471
Borrowings............................................................. (10) (13) 13 (10)
-- --- --- ---
Total.................................................................. (11) 575 24 588
-- --- --- ---
Net change in net interest income............................................ $(36) 241 83 288
== === === ===
</TABLE>
18
<PAGE>
Comparison of the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997
General. Net loss for the year ended December 31, 1998 was $(1,071,398) or
$(2.31) per basic and diluted share compared to a loss of $(261,698) or
$(2.00) per basic and diluted share for the year ended December 31, 1997.
The increased losses in 1998 resulted from an increased loan loss provision
and allowance related to two loans.
Interest Income and Expense. Interest income totaled $988,527 for the year ended
December 31, 1998 compared to $112,458 for 1997. Interest income earned on
loans was $689,347 compared to $22,789 for 1997. The increase resulted from
an increase in the average loan balance in 1998. The average loan balance
for the year ended December 31, 1998 was $8.5 million and the weighted
average yield was 8.14% compared to a $259,000 average balance and a
average yield of 8.88% in 1997.
Interest on other interest earning assets totaled $178,071 in 1998 compared
to $89,669 for 1997. The average balance of these assets increased to $3.3
million 1998 from $1.8 million in 1997 and the weighted average yield
increased to 5.41% in 1998 from 4.88% in 1997.
Interest expense increased to $631,798 for the year ended December 31, 1998
from $43,522 for the year ended December 31, 1997. Interest expense on
deposit accounts amounted to $607,970 for the year ended December 31, 1998
compared to $10,007 for the year ended December 31, 1997. Interest
increased because of growth in deposits from an average of $253,000 during
1997 to an average of $11,755,000 during 1998. The weighted-average cost of
deposits was 5.17% during 1998 compared to approximately 3.95% in 1997.
Interest expense on borrowed funds amounted to $23,828 for the year ended
December 31, 1998 compared to $33,515 for 1997.
Provision for Loan Losses. The provision for loan losses is charged to earnings
to bring the total allowance to a level deemed appropriate by management
and is based upon the volume and type of lending conducted by TCB, industry
standards, the amount of nonperforming loans and general economic
conditions, particularly as they relate to TCB's market areas, and other
factors related to the collectibility of TCB's loan portfolio. The
provision for the year ended December 31, 1998 was $725,000. The provision
and the allowance increased primarily due to the classification of
commercial loans to two borrowers which management has identified as
impaired during the 1998 period. Management has identified certain
weaknesses in these borrowers. Management believes that the allowance for
loan losses of $760,000 is adequate at December 31, 1998.
Noninterest Expense. Noninterest expense totaled $1,233,963 for the year ended
December 31, 1998 compared to $480,681 for 1997. Salaries and employee
benefits was the largest, amounting to $514,629 during 1998 compared to
$245,302 during 1997. TCB-Volusia began operations in October 1997,
therefore 1998 was the first full year of banking operations resulting in a
substantial increase in all noninterest expenses in 1998 compared to 1997.
Income Taxes. TCB recognized a credit for income taxes as well as a deferred tax
asset because management believes its likely TCB will be able to generate
taxable income in the future to offset these amounts.
19
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of TCB are
monetary in nature. As a result, interest rates have a more significant impact
on TCB-Volusia's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services, since such prices are affected by
inflation to a larger extent than interest rates.
Future Accounting Requirements
Financial Accounting Standards 133 - Accounting for Derivative Investments and
Hedging Activities requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
TCB will be required to adopt this Statement effective January 1, 2000.
Management does not anticipate that this Statement will have a material impact
on TCB.
20
<PAGE>
Selected Quarterly Results
The following table presents summarized quarterly data (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 169 257 288 275 989
Interest expense.................................. 81 156 188 207 632
--- --- --- --- -----
Net interest income.......................... 88 101 100 68 357
Provision for loan losses......................... 29 26 190 480 725
--- --- --- --- ------
Net interest income (loss) after provision
for loan losses.......................... 59 75 (90) (412) (368)
--- --- --- --- ------
Noninterest income................................ 10 9 17 16 52
Noninterest expense............................... 229 249 320 435 1,233
--- --- --- --- -----
Loss before income tax benefit and cumulative
effect of change in accounting principle (160) (165) (393) (831) (1,549)
Income tax benefit ............................... (50) (53) (135) (340) (578)
--- --- --- --- ------
Net loss before cumulative effect of change in
accounting principle......................... (110) (112) (258) (491) (971)
Cumulative effect of accounting change for
organization costs........................... - - - (100) (100)
----- ----- ----- --- ------
Net loss.......................................... $(110) (112) (258) (591) (1,071)
=== === === === =====
Basic and diluted loss per common share (.24) (.24) (.55) (1.28) (2.31)
=== === === ==== =====
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Interest income................................... $ - - 37 75 112
Interest expense.................................. 5 9 19 10 43
-- ---- ---- --- ----
Net interest income.......................... (5) (9) 18 65 69
Provision for loan losses......................... - - - 35 35
--- ---- ----- --- ----
Net interest (loss) income after provision
for loan losses.......................... (5) (9) 18 30 34
-- ---- ---- --- ----
Noninterest income................................ - - - 2 2
Noninterest expense............................... 42 101 176 162 481
-- --- --- --- ---
Loss before income tax benefit.................... (47) (110) (158) (130) (445)
Income tax benefit ............................... (18) (42) (60) (63) (183)
-- --- --- --- ---
Net loss.......................................... $(29) (68) (98) (67) (262)
== === === === ===
Basic and diluted loss per common share * * * * (2.00)
=== === === === ====
</TABLE>
* Numbers are not presented due to bank opening in fourth quarter.
21
<PAGE>
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
Assets
<S> <C> <C>
Cash and due from banks........................................................... $ 689,903 1,065,817
Federal funds sold................................................................ 4,258,602 1,400,000
---------- ---------
Total cash and cash equivalents..................................... 4,948,505 2,465,817
Securities available for sale..................................................... 3,302,486 -
Loans, net of allowance for loan losses of $760,000
in 1998 and $35,000 in 1997................................................... 11,563,373 3,745,577
Premises and equipment, net....................................................... 838,931 462,784
Accrued interest receivable....................................................... 89,527 15,671
Restricted security, Federal Home Loan Bank stock, at cost 50,000 -
Deferred tax asset................................................................ 824,981 183,161
Other assets...................................................................... 58,003 204,917
------------ ----------
Total assets........................................................ $ 21,675,806 7,077,927
========== =========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................... 904,585 832,396
Savings and NOW deposits...................................................... 5,068,758 1,040,454
Money-market deposits......................................................... 329,293 65,777
Time deposits................................................................. 10,482,545 739,433
---------- ----------
Total deposits...................................................... 16,785,181 2,678,060
Advance from Federal Home Loan Bank........................................... 1,000,000 -
Other borrowings.............................................................. 364,749 -
Official checks............................................................... 127,342 54,138
Accrued interest payable and other liabilities................................ 141,642 11,944
----------- ----------
Total liabilities................................................... 18,418,914 2,744,142
---------- ---------
Commitments and contingencies (Notes 4, 8 and 16)
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized,
464,791 shares issued and outstanding.................................... 4,648 4,648
Additional paid-in capital.................................................... 4,628,542 4,628,542
Accumulated deficit........................................................... (1,370,803) (299,405)
Accumulated other comprehensive income........................................ (5,495) -
------------ ---------
Total stockholders' equity.......................................... 3,256,892 4,333,785
---------- ---------
Total liabilities and stockholders' equity.......................... $ 21,675,806 7,077,927
========== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable................................................................ $ 689,347 22,789
Securities available for sale................................................... 121,109 -
Other interest-earning assets................................................... 178,071 89,669
--------- --------
Total interest income........................................................ 988,527 112,458
--------- -------
Interest expense:
Deposits........................................................................ 607,970 10,007
Borrowings...................................................................... 23,828 33,515
---------- --------
Total interest expense....................................................... 631,798 43,522
--------- --------
Net interest income.......................................................... 356,729 68,936
Provision for loan losses........................................................... 725,000 35,000
--------- --------
Net interest (loss) income after provision for loan losses................... (368,271) 33,936
--------- --------
Noninterest income-
Service charges and fees........................................................ 52,526 1,886
---------- --------
Noninterest expense:
Salaries and employee benefits.................................................. 514,629 245,302
Occupancy expense............................................................... 242,093 91,720
Offering costs.................................................................. 88,986 -
Advertising..................................................................... 74,563 15,842
Professional fees............................................................... 48,638 11,269
Telephone....................................................................... 33,365 20,557
Data processing................................................................. 30,657 2,631
Printing and office supplies.................................................... 24,435 40,610
Amortization of organization costs.............................................. 30,000 7,500
Insurance expense............................................................... 23,948 7,474
Other .......................................................................... 122,649 37,776
--------- -------
Total noninterest expense.................................................... 1,233,963 480,681
--------- -------
Loss before income tax benefit and cumulative effect of change in
accounting principle............................................................ (1,549,708) (444,859)
Income tax benefit........................................................... (577,850) (183,161)
--------- -------
Net loss before cumulative effect of change in accounting principle (971,858) (261,698)
Cumulative effect of change in accounting principle, net of income
tax benefit of $60,600 ................................................... (99,540) -
---------- --------
Net loss............................................................................ $(1,071,398) (261,698)
========= =======
Basic and diluted loss per share:
Before cumulative effect of change in accounting principle (2.09) (2.00)
Cumulative effect of change in accounting principle............................. (.22) -
------------- --------
Net loss........................................................................ $ (2.31) (2.00)
=========== =========
Weighted-average shares outstanding for basic and diluted 464,791 130,682
========= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Accumulated Comprehensive Stockholders'
Stock Capital Deficit Income Equity
----- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......... $ 65 64,935 (37,707) -- 27,293
Retire 6,500 shares of common stock ... (65) (64,935) -- -- (65,000)
Issuance of 464,791 shares of common
stock, net of $14,720 of offering
costs ............................ 4,648 4,628,542 -- -- 4,633,190
Net loss and comprehensive income
(loss) ....................... -- -- (261,698) -- (261,698)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .......... 4,648 4,628,542 (299,405) -- 4,333,785
---------- ----------
Comprehensive income:
Net loss ......................... -- -- (1,071,398) -- (1,071,398)
Net change in unrealized loss on
securities available for sale,
net of tax of $3,370 ......... -- -- -- (5,495) (5,495)
---------- ---------- ----------
Comprehensive income (loss) ........... -- -- (1,071,398) (5,495) (1,076,893)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 .......... $ 4,648 4,628,542 (1,370,803) (5,495) 3,256,892
========== ========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss ........................................................................ $ (1,071,398) (261,698)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ............................................................... 81,557 16,579
Provision for loan losses .................................................. 725,000 35,000
Credit for deferred income taxes ........................................... (638,450) (183,161)
Net amortization of fees, costs, premiums and discounts .................... 72,085 342
Increase in accrued interest receivable .................................... (73,856) (15,671)
Decrease (increase) in other assets ........................................ 146,914 (55,379)
Increase in accrued interest payable and other liabilities ................. 129,698 11,944
------------
Net cash used in operating activities ................................. (628,450) (452,044)
------------ ------------
Cash flows from investing activities:
Purchases of securities available for sale ...................................... (6,297,091) --
Principal repayments on securities available for sale ........................... 2,924,447 --
Net increase in loans ........................................................... (8,553,588) (3,780,919)
Purchase of Federal Home Loan Bank stock ........................................ (50,000) --
Purchases of premises and equipment ............................................. (457,704) (479,363)
------------ ------------
Net cash used in investing activities ................................. (12,433,936) (4,260,282)
------------ ------------
Cash flows from financing activities:
Net increase in demand, savings, NOW and money-market deposits .................. 4,364,009 1,938,627
Net increase in time deposits ................................................... 9,743,112 739,433
Net increase in advances from Federal Home Loan Bank ............................ 1,000,000 --
Net increase (decrease) in other borrowings ..................................... 364,749 (134,204)
Net increase in official checks ................................................. 73,204 54,138
Retire common stock ............................................................. -- (65,000)
Sale of common stock ............................................................ -- 4,633,190
------------ ------------
Net cash provided by financing activities ............................. 15,545,074 7,166,184
------------ ------------
Net increase in cash and cash equivalents ........................................... 2,482,688 2,453,858
Cash and cash equivalents at beginning of year ...................................... 2,465,817 11,959
------------ ------------
Cash and cash equivalents at end of year ............................................ $ 4,948,505 2,465,817
============ ============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest................................................................... $ 669,266 43,229
============ ============
Income taxes............................................................... $ -- --
============ ============
Noncash transactions-
Accumulated other comprehensive income, change in unrealized
loss on securities available for sale, net............................$ 5,495 --
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997 and For the Years Then Ended
(1) Summary of Significant Accounting Policies
Organization. The Commercial Bancorp, Inc. ("TCB") was incorporated on
August 15, 1996. TCB owns 100% of the outstanding common stock of The
Commercial Bank of Volusia County ("TCB-Volusia"). TCB was organized
simultaneously with TCB-Volusia and its only business is the ownership
and operation of TCB-Volusia. TCB- Volusia is a Florida state-chartered
commercial bank and is insured by the Federal Deposit Insurance
Corporation. TCB-Volusia opened for business on October 14, 1997 and
provides community banking services, from its office in Ormond Beach,
to businesses and individuals in Volusia County, Florida.
Basisof Presentation. The accompanying consolidated financial statements
include the accounts of TCB and TCB- Volusia. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The accounting and reporting practices of TCB conform to
generally accepted accounting principles and to general practices
within the banking industry.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Securities. TCB must classify its securities as either trading, held to
maturity or available for sale. Trading securities are held principally
for resale and recorded at their fair values. Unrealized gains and
losses on trading securities are included immediately in earnings.
Held-to-maturity securities are those which TCB has the positive intent
and ability to hold to maturity and are reported at amortized cost.
Available-for-sale securities consist of securities not classified as
trading securities nor as held-to-maturity securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities
are reported as a net amount in a separate component of stockholders'
equity until realized. Gains and losses on the sale of
available-for-sale securities are determined using the
specific-identification method. Premiums and discounts on securities
available for sale and held to maturity are recognized in interest
income using the interest method over the period to maturity.
LoansReceivable. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
The allowance for loan losses is increased by charges to earnings and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on TCB's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.
(continued)
26
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Premises and Equipment. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed on the
straight-line basis over the estimated useful life of each type of asset.
Income Taxes. Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of nontaxable income
such as interest on state and municipal securities) and deferred taxes
on temporary differences between the amount of taxable income and
pretax financial income and between the tax bases of assets and
liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to
be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision
for income taxes.
Advances from Organizers. Certain of TCB's organizers made interest-bearing
advances totaling $738,882 during 1997 to TCB. These amounts were used
to fund organization and other costs incurred by TCB and TCB-Volusia.
The advances were repaid to the organizers on September 15, 1997 from
the proceeds of TCB's common stock offering.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). TCB has elected to follow Opinion 25 and
related interpretations in accounting for its employee stock options.
Statement 123 requires the disclosure of proforma net earnings and
earnings per share determined as if TCB accounted for its employee
stock options under the fair value method of that Statement.
Per Share Amounts. Per share amounts have been computed on the basis of the
weighted-average number of shares of common stock outstanding. TCB's
common stock equivalents are not dilutive due to the net losses
incurred during the years presented in the consolidated statements of
operations.
Accounting Change. Effective December 1, 1998, TCB adopted AICPA Statement
of Position 98-5 "Reporting on the Costs of Start-Up Activities and
Organization Expenses." The effect of this accounting change was to
expense all unamortized organizational costs in the current period
which resulted in an after tax charge against earnings of $99,540.
Off-Balance-Sheet Instruments. In the ordinary course of business TCB has
entered into off-balance-sheet financial instruments consisting of
commitments to extend credit. Such financial instruments are recorded
in the financial statements when they are funded.
Advertising. TCB expenses all media advertising as incurred.
Fair Values of Financial Instruments. The following methods and assumptions
were used by TCB in estimating fair values of financial instruments
disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Securities. Fair values for securities are based on quoted market
prices. If quoted market prices are not available, fair value is based
on quoted market prices for similar securities.
(continued)
27
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Values of Financial Instruments, Continued.
Loans. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for certain fixed-rate mortgage (e.g. one-to-four
family residential), commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
Deposits. The fair values disclosed for demand, NOW, money-market and
savings deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Borrowed Funds. The carrying amounts of other borrowings approximate
their fair values. Fair values of advances from Federal Home Loan Bank
are estimated using discounted cash flow analysis based on TCB's
current incremental borrowing rates for similar types of borrowing
arrangements.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Reclassifications. Certain amounts in the 1997 financial statements have
been reclassified to conform to the 1998 presentation.
Future Accounting Requirements. Financial Accounting Standards 133 -
Accounting for Derivative Investments and Hedging Activities requires
companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether they qualify for
hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. TCB will be required to adopt this
Statement effective January 1, 2000. Management does not anticipate
that this Statement will have a material impact on TCB.
(continued)
28
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale
The carrying amounts of securities and their approximate fair values were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1998-
Mortgage-backed securities................ $ 3,311,351 1,264 (10,129) 3,302,486
========= ===== ====== =========
</TABLE>
There were no sales of securities during the years ended December 31, 1998
or 1997.
(3) Loans
The components of loans were as follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Commercial.............................................................. $ 9,254,806 2,832,020
Residential real estate................................................. 1,449,602 429,364
Commercial real estate.................................................. 716,633 240,643
Consumer and home equity................................................ 897,475 268,297
----------- ----------
12,318,516 3,770,324
(Subtract) add:
Allowance for loan losses............................................. (760,000) (35,000)
Net deferred costs.................................................... 4,857 10,253
------------ -----------
Loans, net.............................................................. $ 11,563,373 3,745,577
========== =========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Balance at January 1............................................................. $ 35,000 -
Provision for loan losses........................................................ 725,000 35,000
------- ------
Balance at December 31........................................................... $ 760,000 35,000
======= ======
</TABLE>
(continued)
29
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued
The following summarizes the collateral dependent amounts of impaired loans:
<TABLE>
<CAPTION>
At
December 31,
------------
1998
----
Loans identified as impaired:
<S> <C>
Gross loans with no related allowance for loan losses $ -
Gross loans with related allowance for loan losses recorded 1,199,025
Less: Allowances on these loans........................................ 599,512
----------
Net investment in impaired loans........................................... $ 599,513
==========
</TABLE>
The average net investment in impaired loans and interest income recognized
and received on impaired loans were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998
----
<S> <C>
Average net investment in impaired loans.................................. $ 338,572
=======
Interest income recognized on impaired loans.............................. 75,589
=======
Interest income received on impaired loans................................ 75,589
=======
</TABLE>
There were no loans identified as impaired at or during the year ended
December 31, 1997.
(4) Premises and Equipment
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Land..................................................................... $ 261,246 -
Building and leasehold improvements...................................... 138,437 96,080
Furniture, fixtures and equipment........................................ 537,384 383,283
------- -------
Total, at cost....................................................... 937,067 479,363
Less accumulated depreciation............................................ (98,136) (16,579)
------- -------
Premises and equipment, net.......................................... $ 838,931 462,784
======= =======
</TABLE>
(continued)
30
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
TCB leases its office facilities under operating leases. These leases
contain escalation clauses and provide for annual adjustments for TCB's
prorata share of operating expenses. Rent expense under operating
leases during the years ended December 31, 1998 and 1997 was $55,210
and $38,858, respectively. Estimated future rentals over the remaining
noncancellable lease terms follow:
<TABLE>
<CAPTION>
Operating
Year Ending Lease
December 31, Amount
------------ ------
<S> <C> <C>
1999........................................................... $ 77,581
2000........................................................... 70,295
2001........................................................... 72,450
2002........................................................... 29,493
2003........................................................... 17,722
-------
Total minimum lease payments...................................... $ 267,541
=======
</TABLE>
(5) Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $1.5 million and $.3 million at December
31, 1998 and 1997, respectively.
A schedule of maturities of certificates of deposit at December 31, 1998
follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C> <C>
1999....................................................... $ 5,107,456
2000....................................................... 5,217,403
2001....................................................... 157,686
-----------
$10,482,545
</TABLE>
(6) Advance from Federal Home Loan Bank
The maturity and interest rate on the advance from the Federal Home Loan
Bank ("FHLB") was as follows:
<TABLE>
<CAPTION>
Year Ending Interest At December 31,
December 31, Rate 1998
------------ ---- ----
<S> <C> <C> <C>
2008................................... 4.80% $ 1,000,000
=========
</TABLE>
At December 31, 1998, pursuant to the collateral agreement with the FHLB,
advances are collateralized by $1.0 million of TCB's federal funds
sold.
(7) Other Borrowings
At December 31, 1998, TCB had two variable-rate lines of credit at 7.75%
from other financial institutions, totaling $700,000. At December 31,
1998, borrowings against these lines totaled $364,749. These borrowings
are collateralized by TCB-Volusia's stock.
(continued)
31
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Financial Instruments
TCB is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.
These financial instruments are unused lines of credit and undisbursed
loans in process and may involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
balance sheet. The contract amounts of these instruments reflect the
extent of involvement TCB has in these financial instruments.
TCB's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for unused lines of credit and
undisbursed loans in process is represented by the contractual amount
of those instruments. TCB uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The estimated fair values of TCB's financial instruments were as follows
(in thousands):
<TABLE>
<CAPTION>
At
--------------------------------------------------
December 31, 1998 December 31, 1997
--------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 4,949 4,949 2,466 2,466
Securities....................................... 3,302 3,302 - -
Loans receivable................................. 11,563 11,643 3,746 3,703
Accrued interest receivable...................... 90 90 16 16
Financial liabilities:
Deposits......................................... 16,785 17,352 2,678 2,692
Advances from Federal Home Loan Bank 1,000 958 - -
Other borrowings................................. 365 365 - -
======= ======= ======== =====
A summary of the notional amounts of TCB's financial instruments which
approximate fair value, with off-balance sheet-risk at December 31,
1998 was as follows (in thousands):
Unused lines of credit.................................................. $ 1,242
=====
Undisbursed loans in process............................................ $ 358
=====
</TABLE>
(continued)
32
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Related Party Transactions
In the ordinary course of business, TCB has made loans at terms and rates
prevailing at the time to officers and directors of TCB and their
affiliates. The aggregate dollar amount of these loans totaled
approximately $2.2 million and $.7 million December 31, 1998 and 1997,
respectively. As of the same dates, these individuals and entities had
approximately $1.0 million and $71,773 of funds on deposit in TCB.
(10) Credit Risk
TCB grants the majority of its loans to borrowers throughout Volusia
County, Florida. Although TCB has a diversified loan portfolio, a
significant portion of its borrowers' ability to honor their contracts
is dependent upon the economy in Volusia County, Florida.
(11) Income Taxes
Income taxes are included in the consolidated statements of operation as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Income tax benefit on loss before cumulative effect of change
in accounting principal............................................. $(577,850) (183,161)
Cumulative effect on change in accounting principal (60,600) -
------- --------
$ (638,450) (183,161)
======= =======
</TABLE>
The income tax benefit before cumulative effect of change in accounting
principal consisted of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred:
Federal............................................................ $(493,400) (156,000)
State.............................................................. (84,450) (27,161)
------- -------
Total deferred benefit.......................................... $(577,850) (183,161)
======= =======
</TABLE>
The income tax benefit before cumulative effect of change in accounting
principal is different than that computed by applying the Federal
statutory rate of 34%, as indicated in the following analysis:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997
------------------- -------------------
% of % of
Pretax Pretax
Amount Loss Amount Loss
------ ---- ------ ----
<S> <C> <C> <C> <C>
Income tax benefit at statutory Federal
income tax rate.......................................... $(526,901) (34.0)% $(151,000) (34.0)%
(Increases) decreases resulting from
State taxes, net of federal tax benefit (55,737) (3.6) (18,000) (4.0)
Other.................................................... 4,788 0.3 (14,161) (3.2)
-------- ---- ------- ----
$(577,850) (37.3)% $(183,161) (41.2)%
======= ==== ======= ====
</TABLE>
(continued)
33
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities available for sale $ 3,370 -
Allowance for loan losses.......................................... 250,000 -
Organization and startup costs..................................... 120,000 114,000
Net operating loss carryforwards................................... 484,000 88,000
Other.............................................................. 1,611 161
-------- ---------
Gross deferred tax assets........................................ 858,981 202,161
------- -------
Deferred tax liabilities:
Accrued income net of accrued expenses............................. 14,000 16,000
Premises and equipment............................................. 20,000 3,000
------- --------
Gross deferred tax liabilities................................... 34,000 19,000
------- -------
Net deferred tax asset........................................... $ 824,981 183,161
======= =======
</TABLE>
TCB had net operating loss carryforwards for federal and state income tax
purposes as follows:
<TABLE>
<CAPTION>
At December 31,
---------------
Year Expires 1998
------------ ----
<S> <C>
2011............................................................ $ 4,000
2012............................................................ 231,000
2018............................................................ 1,050,000
---------
$ 1,285,000
</TABLE>
(continued)
34
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Stock Option Plan
TCB adopted an employee stock option plan which was approved by the
stockholders on April 21, 1998. During 1998, the Plan was amended to
adjust the number of options which may be granted to 10% of the
original stock issuance or 46,479 shares. At December 31, 1998, 27,979
remain available for grant. A summary of stock option transactions
follows:
<TABLE>
<CAPTION>
Weighted-
Number Range of Average Aggregate
of Per Share Per Share Option
Shares Option Price Price Price
------ ------------ ----- -----
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997 - $ - - -
Options granted................................ 18,500 10.00 10.00 185,000
------ ----- -------
Outstanding at December 31, 1998 18,500 $ 10.00 10.00 185,000
====== ======= ===== =======
</TABLE>
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 1998 was 110 months.
These options are exercisable as follows:
<TABLE>
<CAPTION>
Number Weighted-Average
Year Ending of Shares Exercise Price
----------- --------- --------------
<S> <C> <C>
1999............................................... 6,550 $ 10.00
2000............................................... 3,700 10.00
2001............................................... 3,700 10.00
2002............................................... 3,700 10.00
2003............................................... 850 10.00
-------
18,500 $ 10.00
====== =====
</TABLE>
FASB Statement 123 requires proforma information regarding net loss and loss
per share. This proforma information has been determined as if TCB had
accounted for its stock options under the fair value method of that
Statement and was as follows:
Year Ended
December 31,
------------
1998
----
Net loss:
As reported.................................... (1,071,398)
=========
Proforma....................................... (1,082,071)
=========
Loss per share:
As reported.................................... (2.31)
=====
Proforma....................................... (2.33)
=====
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing method with the following assumptions:
Risk-free interest rate 5.0% and an expected life-in years 10.
(continued)
35
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Regulatory Matters
TCB-Volusia is subject to various regulatory capital requirements
administered by various regulatory banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on TCB-Volusia's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, TCB-Volusia must
meet specific capital guidelines that involve quantitative measures of
TCB-Volusia's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. TCB-Volusia's
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require TCB-Volusia to maintain minimum amounts and percents (set forth
in the table below) of Total and Tier I capital (as defined in the
regulations) to risk- weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). As of December 31,
1998, that TCB-Volusia exceeded all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the regulatory
authorities categorized TCB-Volusia as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized TCB-Volusia must maintain minimum total Risk-based,
Tier I risk-based, and Tier I leverage percents as set forth in the
table. There are no conditions or events since that notification that
management believes have changed TCB- Volusia's category. TCB-Volusia's
actual capital amounts and percentage are also presented in the table
(dollars in thousands).
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provision:
------ ------------------ -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
Total capital (to Risk-
Weighted Assets).......... $ 3,168 23.2% $ 1,081 8.0% $ 1,352 10.0%
Tier I Capital (to Risk-
Weighted Assets).......... 2,504 18.3 541 4.0 811 6.0
Tier I Capital
(to Average Assets)....... 2,504 12.6 798 4.0 1,596 5.0
At December 31, 1997:
Total capital (to Risk-
Weighted Assets).......... $ 3,950 92.7% $ 341 8.0% $ 426 10.0%
Tier I Capital (to Risk-
Weighted Assets).......... 3,767 88.4 171 4.0 256 6.0
Tier I Capital
(to Average Assets)....... 3,767 69.2 218 4.0 272 5.0
</TABLE>
(14) Stockholders' Equity
TCB-Volusia is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1998, TCB-Volusia had no amounts available for dividends.
During 1997, TCB sold 464,791 shares of common stock for an aggregate of
$4,647,910. TCB incurred $14,720 in offering expenses relating to their
public offering of TCB's common stock and warrants. Offering expenses
were deducted from the proceeds received from the sale of common stock
and warrants.
(continued)
36
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Stockholders' Equity, Continued
During the initial offering period shares were offered in units with a unit
consisting of one share of common stock and one warrant. Each warrant
entitles the holder thereof to purchase one additional share of common
stock for $10 per share during the 36 month period ending April 27,
2000. There were 450,000 warrants issued and as of December 31, 1998
and 1997 they were all outstanding.
(15) Parent Company Only Financial Information
Unconsolidated financial information for The Commercial Bancorp, Inc., is as
follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Assets
Cash...................................................................... $ 37,432 371,769
Investment in subsidiary.................................................. 3,162,731 3,950,016
Deferred tax asset........................................................ 161,650 -
Premises and equipment, net............................................... 342,122 -
Other assets.............................................................. 5,555 12,000
---------- ----------
Total assets.......................................................... $ 3,709,490 4,333,785
========= =========
Liabilities and Stockholders' Equity
Borrowings................................................................ 364,749 -
Other liabilities......................................................... 87,849 -
Stockholders' equity...................................................... 3,256,892 4,333,785
--------- ---------
Total liabilities and stockholders' equity............................ $ 3,709,490 4,333,785
========= =========
Condensed Statements of Operations
Year Ended
December 31,
------------
1998 1997
---- ----
Revenues.................................................................. $ 5,529 43,702
Expenses.................................................................. 295,137 5,416
---------- -------
(Loss) earnings before loss of subsidiary............................. (289,608) 38,286
Loss of subsidiary.................................................... (781,790) (299,984)
---------- -------
Net loss.............................................................. $(1,071,398) (261,698)
========= =======
</TABLE>
(continued)
37
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Parent Company Only Financial Information, Continued
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss....................................................................... $(1,071,398) (261,698)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Equity in undistributed loss of subsidiary................................. 781,790 299,984
Credit for deferred income taxes........................................... (161,650) -
Net decrease in other assets............................................... 6,445 137,538
Increase in other liabilities.............................................. 87,849 -
--------------------
Net cash (used in) provided by operating
activities.............................................................. (356,964) 175,824
---------- ---------
Cash flows from investing activities-
Purchases of premises and equipment............................................ (342,122) -
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock..................................... - 4,633,190
Retire common shares........................................................... - (65,000)
Net increase (decrease) in borrowings.......................................... 364,749 (134,204)
Investment in subsidiary....................................................... - (4,250,000)
------------- ---------
Net cash provided by financing activities.................................. 364,749 183,986
--------- ---------
Net (decrease) increase in cash and cash equivalents................................ (334,337) 359,810
Cash at beginning of the year....................................................... 371,769 11,959
--------- ----------
Cash at end of year................................................................. $ 37,432 371,769
========= =========
</TABLE>
(16) Year 2000 Issues
TCB is acutely aware of the many areas affected by the Year 2000 computer
issue, as addressed by the Federal Financial Institutions Examination
Council ("FFIEC") in its interagency statement which provided an
outline for institutions to effectively manage the Year 2000
challenges. A Year 2000 plan has been approved by the Board of
Directors which includes multiple phases, tasks to be completed, and
target dates for completion. Issues addressed therein include
awareness, assessment, renovation, validation, implementation, testing,
and contingency planning.
(continued)
38
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Year 2000 Issues, Continued
TCB has formed a Year 2000 committee that is charged with the oversight of
completing the Year 2000 project on a timely basis. TCB has completed
its awareness, assessment and renovation phases and is actively
involved in validating and implementing its plan. At the present time,
TCB has substantially completed its testing phase. Since it routinely
upgrades and purchases technologically advanced software and hardware
on a continual basis, TCB has determined that the cost of making
modifications to correct any Year 2000 issues will not materially
affect reported operating results.
TCB'svendors and suppliers have been contacted for written confirmation of
their product readiness for Year 2000 compliance. Negative or deficient
responses are analyzed and periodically reviewed to prescribe timely
actions within TCB's contingency planning. TCB's main service provider
has completed testing of its mission critical application software and
item processing software; the test results, which have been documented
and validated, are deemed to be Year 2000 compliant. FFIEC guidance on
testing Year 2000 compliance of service providers states that proxy
tests are acceptable compliance tests. In proxy testing, the service
provider tests with a representative sample of financial institutions
that use a particular service, with the results of such testing shared
with all similarly situated clients of the service provider. TCB has
authorized the acceptance of proxy testing since the proxy tests have
been conducted with financial institutions that are similar in type and
complexity to its own, using the same version of the Year 2000 ready
software and the same hardware and operating systems.
TCB also recognizes the importance of determining that its borrowers are
facing the Year 2000 problem in a timely manner to avoid deterioration
of the loan portfolio solely due to this issue. All material
relationships have been identified and questionnaires have been
completed to assess the inherent risks. Deposit customers have received
statement stuffers and informational material in this regard. TCB plans
to work on a one-on-one basis with any borrower who has been identified
as having high Year 2000 risk exposure.
Accordingly, management does not believe that TCB has incurred or will incur
material costs associated with the Year 2000 issue. Yet, there can be
no assurances that all hardware and software that TCB will use will be
Year 2000 compliant. Management cannot predict the amount of financial
difficulties it may incur due to customers and vendors inability to
perform according to their agreements with TCB or the effects that
other third parties may cause as a result of this issue. Therefore,
there can be no assurance that the failure or delay of others to
address the issue or that the costs involved in such process will not
have a material adverse effect on TCB's business, financial condition,
and results of operations.
TCB'scontingency plans relative to Year 2000 issues have not been
finalized. These plans are evolving as the testing of systems proceeds.
During the completion of the testing phase management will determine if
it is necessary to develop a "worst case scenario" contingency plan.
Based on testing results to date (as noted above), TCB's mission
critical systems have been deemed to be Year 2000 compliant and,
therefore a contingency plan has not been developed with respect to
those systems. With regards to nonmission critical internal systems,
TCB's contingency plans are to replace those systems that test as being
noncompliant. Alternatively, some systems could be handled manually on
an interim basis. Should outside service providers not be able to
provide compliant systems, TCB will terminate those relationships and
transfer to other vendors. It is anticipated that TCB's deposit
customers will have increased demands for cash in the latter part of
1999 and correspondingly TCB will maintain higher liquidity levels.
(17) New Bank Charter and Planned Public Offering
TCB along with a group of local organizers made application to the state of
Florida for a bank charter in Highlands County, Florida. Management
planned to raise the capital for the new bank from a public offering of
TCB's common stock. In early 1999, TCB withdrew their application and
the local organizers from Highlands County elected to continue without
TCB. Because of this, management has terminated its planned public
offering and has charged-off $88,986 in prepaid offering expenses as of
December 31, 1998.
39
<PAGE>
Independent Auditors' Report
Board of Directors
The Commercial Bancorp, Inc.
Ormond Beach, Florida:
We have audited the accompanying consolidated balance sheets of The Commercial
Bancorp, Inc. and Subsidiary ("TCB") at December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of TCB's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCB at December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, TCB changed its
method of accounting for organizational costs. During 1998, TCB adopted AICPA
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities."
HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
January 29, 1999
40
<PAGE>
CORPORATE INFORMATION
Corporate
Headquarters 258 North Nova Road
Ormond Beach, Florida 32174
(904) 672-3003
Annual
Meeting The Annual Meeting of the Stockholders
will be held at the Trails Homeowners
Association Community Center, 201 Main
Trail, Ormond Beach, Florida at 2:00
P.M., April 20, 1999.
Transfer Agent and
Registrar Continental Stock Transfer & Trust
Company 2 Broadway New York, New York
10004
Form 10-KSB A copy of the Form 10-KSB, as filed
with the Securities and Exchange
Commission, may be obtained by
stockholders without charge upon
written request to Mr. Harvey E.
Buckmaster, Chief Financial Officer,
The Commercial Bancorp, Inc., 258
North Nova Road, Ormond Beach,
Florida 32174.
Corporate Counsel Igler & Dougherty, P.A. 1501 Park
Avenue East Tallahassee, Florida
32301
Independent
Auditors Hacker, Johnson, Cohen & Grieb PA
Certified Public Accountants 500
North Westshore Boulevard Tampa,
Florida 33609
41
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 690
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,259
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,302
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,323
<ALLOWANCE> 760
<TOTAL-ASSETS> 21,676
<DEPOSITS> 16,785
<SHORT-TERM> 365
<LIABILITIES-OTHER> 269
<LONG-TERM> 1,000
0
0
<COMMON> 5
<OTHER-SE> 3,252
<TOTAL-LIABILITIES-AND-EQUITY> 21,676
<INTEREST-LOAN> 690
<INTEREST-INVEST> 121
<INTEREST-OTHER> 178
<INTEREST-TOTAL> 989
<INTEREST-DEPOSIT> 608
<INTEREST-EXPENSE> 632
<INTEREST-INCOME-NET> 357
<LOAN-LOSSES> 725
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,234
<INCOME-PRETAX> (1,550)
<INCOME-PRE-EXTRAORDINARY> (971)
<EXTRAORDINARY> 0
<CHANGES> (100)
<NET-INCOME> (1,071)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (2.31)
<YIELD-ACTUAL> 2.42
<LOANS-NON> 1,199
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,345
<ALLOWANCE-OPEN> 35
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 760
<ALLOWANCE-DOMESTIC> 760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
