U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 333-19201
THE COMMERCIAL BANCORP, INC.
----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 59-3396236
------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
258 North Nova Road
Ormond Beach, Florida 32174
---------------------------
(Address of Principal Executive Offices)
(904) 672-3003
--------------
(Issuer's Telephone Number, Including Area Code)
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date;
Common stock, par value $.01 per share
--------------------------------------
(class)
474,941 shares outstanding at June 30, 1999
-------------------------------------------
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets At June 30, 1999 (unaudited) and
At December 31, 1998.................................................2
Condensed Consolidated Statements of Operations Three and Six Months
ended June 30, 1999 and 1998 (unaudited).............................3
Condensed Consolidated Statement of Stockholders' Equity - Six Months
ended June 30, 1999 (unaudited)......................................4
Condensed Consolidated Statements of Cash Flows Six Months ended June
30, 1999 and 1998 (unaudited)........................................5
Notes to Condensed Consolidated Financial Statements (unaudited).........6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................14
Item 2. Changes in Securities and Use of Proceeds........................14
Item 4. Submission of Matters to a Vote of Security Holders...........14-15
Item 6. Exhibits and Reports on Form 8-K ................................15
SIGNATURES................................................................16
1
<PAGE>
<TABLE>
<CAPTION>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At
----------------------------
June 30, December 31,
-------- ------------
Assets 1999 1998
------ ---- ----
(unaudited)
<S> <C> <C>
Cash and due from banks ................................... $ 519,974 689,903
Federal funds sold ........................................ 1,495,663 4,258,602
------------ ----------
Total cash and cash equivalents ........................... 2,015,637 4,948,505
Securities available for sale ............................. 3,714,490 3,302,486
Loans, net of allowance for loan losses of $556,458
in 1999 and $760,000 in 1998 .............................. 12,806,814 11,563,373
Premises and equipment, net ............................... 524,823 838,931
Accrued interest receivable ............................... 106,335 89,527
Restricted security, Federal Home Loan Bank stock, at cost 64,500 50,000
Deferred tax asset ........................................ 857,211 824,981
Other assets .............................................. 51,382 58,003
------------ ----------
Total assets .............................................. $ 20,141,192 21,675,806
============ ==========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits ........................................... 801,244 904,585
Savings and NOW deposits .................................. 4,013,551 5,068,758
Money-market deposits ..................................... 364,076 329,293
Time deposits ............................................. 10,406,787 10,482,545
------------ ----------
Total deposits ............................................ 15,585,658 16,785,181
Advance from Federal Home Loan Bank ....................... 1,000,000 1,000,000
Other borrowings .......................................... -- 364,749
Official checks ........................................... 169,474 127,342
Other liabilities ......................................... 81,135 141,642
------------ ----------
Total liabilities ......................................... 16,836,267 18,418,914
------------ ----------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized,
474,941 and 464,791 shares issued and outstanding ......... 4,749 4,648
Additional paid-in capital ................................ 4,729,941 4,628,542
Accumulated deficit ....................................... (1,415,195) (1,370,803)
Accumulated other comprehensive income .................... (14,570) (5,495)
------------ ----------
Total stockholders' equity ................................ 3,304,925 3,256,892
------------ ----------
Total liabilities and stockholders' equity ................ $ 20,141,192 21,675,806
============ ==========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
<S> <C> <C> <C> <C>
Loans ....................................... $ 260,934 164,782 503,152 287,439
Securities available for sale ............... 36,385 31,480 67,805 31,480
Other interest-earning assets ............... 30,114 60,705 73,291 106,999
--------- ------- ------- -------
Total interest income ....................... 327,433 256,967 644,248 425,918
--------- ------- ------- -------
Interest expense:
Deposits .................................... 171,385 154,288 350,311 235,130
Other ....................................... 18,772 1,792 37,826 1,792
--------- ------- ------- -------
Total interest expense ...................... 190,157 156,080 388,137 236,922
--------- ------- ------- -------
Net interest income ......................... 137,276 100,887 256,111 188,996
(Credit) provision for loan losses .......... (158,000) 26,000 (131,000) 55,000
--------- ------- ------- -------
Net interest income after
(credit) provision for loan losses ........ 295,276 74,887 387,111 133,996
--------- ------- ------- -------
Noninterest income:
Service charges and fees .................... 12,005 9,257 23,346 18,771
Recovery of organizational expenses ......... 109,609 -- 109,609 --
--------- ------- ------- -------
Total noninterest income .................... 121,614 9,257 132,955 18,771
--------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits .............. 144,336 115,724 310,052 213,046
Occupancy expense ........................... 58,177 46,759 113,372 88,431
Professional fees ........................... 25,320 16,196 54,501 28,005
Advertising ................................. 6,867 20,761 8,378 49,200
Other ....................................... 50,835 49,218 104,855 98,217
--------- ------- ------- -------
Total noninterest expense ................... 285,535 248,658 591,158 476,899
--------- ------- ------- -------
Earnings (loss) before income taxes
(benefit) ................................... 131,355 (164,514) (71,092) (324,132)
Income taxes (benefit) ...................... 49,500 (53,500) (26,700) (103,200)
--------- ------- ------- -------
Net earnings (loss) ......................... $ 81,855 (111,014) (44,392) (220,932)
========= ======= ======= =======
Earnings (loss) per share, basic and diluted $ .17 (.24) (.09) (.48)
========= ======= ======= =======
Weighted-average number of shares outstanding
for basic and diluted ....................... 471,822 464,791 468,369 464,791
========= ======= ======= =======
Dividends per share ......................... $ -- -- -- --
========= ======= ======= =======
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1999
Accumulated
Other
Additional Compre- Total
Common Paid-In Accumulated hensive Stockholders'
Stock Capital Deficit Income Equity
----- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ....... $ 4,648 4,628,542 (1,370,803) (5,495) 3,256,892
Comprehensive income:
Net loss (unaudited) ............... -- -- (44,392) -- (44,392)
Net change in unrealized loss on
securities available for sale,
net of tax of $5,530
(unaudited) ........................ -- -- -- (9,075) (9,075)
---------- ------ ---------
Comprehensive income (unaudited) ... -- -- (44,392) (9,075) (53,467)
Issuance of 10,150 shares of common
stock upon exercise of 10,150
warrants (unaudited) ............... 101 101,399 -- -- 101,500
---------- --------- ---------- ------ ---------
Balance at June 30, 1999 (unaudited) $ 4,749 4,729,941 (1,415,195) (14,570) 3,304,925
========== ========= ========== ======= =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
4
<TABLE>
<CAPTION>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six Months Ended
June 30,
----------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (44,392) (220,932)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................................. 44,229 38,418
(Credit) provision for loan losses ........................... (131,000) 55,000
Credit for deferred income taxes ............................. (26,700) (103,200)
Net amortization of fees, costs, premiums and discounts ...... 35,686 15,932
Increase in accrued interest receivable and other assets ..... (10,187) (115,138)
(Decrease) increase in other liabilities ..................... (60,507) 158,758
---------- ----------
Net cash used in operating activities ........................ (192,871) (171,162)
---------- ----------
Cash flows from investing activities:
Purchases of securities available for sale ................... (1,518,438) (5,162,377)
Principal repayments on securities available for sale ........ 1,066,638 193,942
Net increase in loans ........................................ (1,122,936) (5,063,869)
Purchases of premises and equipment .......................... (23,505) (345,065)
Purchase of Federal Home Loan Bank stock ..................... (14,500) --
Proceeds from sale of premises and equipment ................. 293,384 --
---------- ----------
Net cash used in investing activities ........................ (1,319,357) (10,377,369)
---------- ----------
Cash flows from financing activities:
Net (decrease) increase in demand, savings, NOW and
money-market deposits ........................................ (1,123,765) 1,970,637
Net (decrease) increase in time deposits ..................... (75,758) 8,884,655
Net decrease in other borrowings ............................. (364,749) --
Net increase in official checks .............................. 42,132 9,337
Proceeds from issuance of common stock upon exercise
of warrants .................................................. 101,500 --
---------- ----------
Net cash (used in) provided by financing activities .......... (1,420,640) 10,864,629
---------- ----------
Net (decrease) increase in cash and cash equivalents ......... (2,932,868) 316,098
Cash and cash equivalents at beginning of period ............. 4,948,505 2,465,817
---------- ----------
Cash and cash equivalents at end of period ................... $ 2,015,637 2,781,915
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ..................................................... $ 392,445 212,571
=========== =========
Income taxes ................................................. $ -- --
=========== =========
Noncash transactions-
Accumulated other comprehensive income, net change in
unrealized loss on securities available for sale, net of tax $ (9,075) (7,277)
=========== =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) General Description and Basis of Presentation. 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 (the "Bank") (together, "TCB"). The
Holding Company was organized simultaneously with the Bank and its only
business is the ownership and operation of the Bank. The Bank is a
Florida state-chartered commercial bank and is insured by the Federal
Deposit Insurance Corporation. The Bank opened for business on October
14, 1997, and provides community banking services to businesses and
individuals in Volusia County, Florida.
In the opinion of the management of TCB, the accompanying condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
position at June 30, 1999 and the results of operations for the three
and six months ended June 30, 1999 and 1998 and cash flows for the six
months ended June 30, 1999 and 1998. The results of operations and
other data for the three and six months ended June 30, 1999, are not
necessarily indicative of results that may be expected for the year
ending December 31, 1999.
The condensed consolidated financial statements include the accounts of
the Holding Company and the Bank. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(2) Loan Impairment and Loan Losses. The following summarizes the collateral
dependent amounts of impaired loans:
<TABLE>
<CAPTION>
At
-------------------------
June 30, December 31,
-------- ------------
1999 1998
---- ----
<S> <C> <C>
Loans identified as impaired:
Gross loans with no related allowance for loan losses .......................... $ -- --
Gross loans with related allowance for loan losses recorded .................... 597,275 1,199,025
Less: Allowances on these loans ................................................ (298,637) (599,512)
----------- ----------
Net investment in impaired loans ............................................... $ 298,638 599,513
========== =========
The average net investment in impaired loans and interest income recognized and
received on impaired loans is as follows:
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Average net investment in impaired loans ....................................... $ 549,367 --
========== =========
Interest income recognized on impaired loans ................................... $ -- --
========== =========
Interest income received on impaired loans ..................................... $ -- --
========== =========
</TABLE>
(continued)
6
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(2) Loan Impairment and Loan Losses, Continued. The activity in the allowance
for loan losses was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period ... $ 787,000 64,000 760,000 35,000
(Credit) provision for loan losses (158,000) 26,000 (131,000) 55,000
Loan charge-offs ................. (72,542) -- (72,542) --
--------- ------ ------- ------
Balance at end of period ......... $ 556,458 90,000 556,458 90,000
========= ====== ======= ======
</TABLE>
(3) Earnings Per Share ("EPS"). Basic EPS has been computed on the basis of the
weighted-average number of shares of common stock outstanding. TCB's
common stock equivalents are not dilutive.
(4) Regulatory Matters. The Holding Company and the Bank 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 TCB's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank'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 the Bank to maintain minimum amounts and ratios (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, at June 30, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
(continued)
7
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(4) Regulatory Matters, Continued. As of June 30, 1999, the most recent
notification from the regulatory authorities categorized the Bank as
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands).
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------- ----------------- -------------------
Amount % Amount % Amount %
------ - ------ - ------ -
At June 30, 1999:
Total capital (to Risk-
Weighted Assets) ..... $2,626 19.3% $1,091 8.0% $1,364 10.0%
Tier I Capital (to Risk-
Weighted Assets) ..... 2,451 18.0 546 4.0 818 6.0
Tier I Capital
(to Average Assets) .. 2,451 12.9 761 4.0 951 5.0
8
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Comparison of June 30, 1999 (Unaudited) and December 31, 1998
General
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 (the "Bank")
(together, "TCB"). The Holding Company was organized simultaneously
with the Bank and its only business is the ownership and operation of
the Bank. The Bank is a Florida state-chartered commercial bank and is
insured by the Federal Deposit Insurance Corporation. The Bank opened
for business on October 14, 1997, and provides community banking
services to businesses and individuals in Volusia County, Florida.
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 and the organizers
withdrew their application and management terminated its planned public
offering. The application was assumed by the local organizers and
others, as a result TCB was able to recover some of the organizational
expenses which had been previously expensed. In addition, TCB sold
property and equipment which had been purchased for the proposed
Highlands County Bank, to the local organizers.
Liquidity and Capital Resources
TCB's primary source of cash during the six months ended June 30, 1999
was from principal repayments on securities available for sale. Cash
was used primarily to fund loan originations and net deposit outflows
and to purchase securities available for sale. At June 30, 1999, TCB
had unfunded lines of credit of approximately $1.0 million and
approximately $7.5 million in time deposits maturing in one year or
less. At June 30, 1999, the Bank exceeded its regulatory liquidity
requirements.
The following table shows selected ratios for the periods ended or at
the dates indicated:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Year Ended Ended
June 30, December 31, June 30,
1999 1998 1998
---- ---- ----
Average equity as a percentage
<S> <C> <C> <C>
of average assets ........................... 15.70% 22.51% 30.05%
Total equity to total assets at end of period 16.41% 15.03% 22.97%
Return on average assets (1) ................ (.43)% (6.35)% (3.15)%
Return on average equity (1) ................ (2.75)% (28.23)% (10.49)%
Noninterest expense to average assets (1) ... 5.75% 7.32% 6.81%
Nonperforming loans and foreclosed
real estate as a percentage of total assets
at end of period ............................ 3.32% 5.53% NIL
Allowance for loan losses as a percentage of
total loans at end of period ................ 4.16% 6.17% 1.03%
</TABLE>
- --------------------------
(1) Annualized for the six months ended June 30, 1999 and 1998.
9
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Changes in Financial Condition
Total assets decreased $1.6 million from $21.7 million at December 31,
1998 to $20.1 million at June 30, 1999, primarily as a result of
decreases in cash and cash equivalents of $2.9 million, partially
offset by an increase in loans of $1.2 million. Deposits decreased $1.2
million from $16.8 million at December 31, 1998 to $15.6 million at
June 30, 1999. Management expects the growth of the Bank and the
Company to resume during the balance of 1999.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 1999 and 1998
General. Net earnings for the three months ended June 30, 1999 was $81,855, or
$.17 per basic and diluted share compared to a net loss for the three
months ended June 30, 1998 of ($111,014), or $(.24) per basic and diluted
share. Net earnings for the 1999 period included a $109,609 recovery of
previously expensed organizational costs related to the Highlands County
Bank charter application and a $158,000 credit for loan losses due to the
settlement of two impaired loans to a single borrower. Without these
recoveries the Company would have reported a loss for the period. At June
30, 1999 or 1998, the Bank had not achieved the asset size to operate
profitably from operations.
Interest Income. Interest income increased $70,466 or 27.4% to $327,433 for the
three months ended June 30, 1999 from $256,967 for the three months ended
June 30, 1998. Interest income earned on loans increased $96,152 or 58.4%
from $164,782 for the three months ended June 30, 1998 to $260,934 during
the three months ended June 30, 1999. The increase was due to an increase
in the average loan portfolio of $6.2 million or 80.9% for the three months
ended June 30, 1999 compared to the same period in 1998, partially offset
by a decrease in the average yield earned from 8.66% in 1998 to 7.57% in
1999.
Interest Expense. Interest expense increased $34,077 or 21.8% to $190,157 for
the three months ended June 30, 1999 from $156,080 for the three months
ended June 30, 1998. This increase was due to an increase in average
interest-bearing liabilities outstanding of $3.8 million or 31.3% during
the three months ended June 30, 1999 when compared to the same period in
1998, partially offset by a decrease in the average rate paid from 5.10% in
1998 to 4.80% in 1999.
(Credit) Provision for Loan Losses. The (credit) provision for loan losses is
(credited) charged to earnings to (decrease) increase 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 credit for loan losses for the
three months ended June 30, 1999 was $158,000 and the allowance for loan
losses was $556,458 at June 30, 1999. The credit for loan losses resulted
from a settlement of two impaired loans, for less than the full amount,
from a single borrower. This resulted in the partial recapture of the
specific allowance against these loans and a charge-off of the remaining
uncollected loan balance. Management believes the allowance is adequate at
June 30, 1999.
10
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
Noninterest Income. Noninterest income increased $112,357 during the three
months ended June 30, 1999 compared to the same period in 1998. This
increase was primarily due to a recovery of previously expensed
organizational costs related to the Highlands County Bank charter
application of $109,609. TCB and the organizers withdrew their application
for the new bank in early 1999 but recovered certain previously expensed
organizational costs from local organizers who assumed the application.
Service charges and fees increased to $12,005 in 1999 from $9,257 or 30%
due primarily to increased deposits during the 1999 period.
Noninterest Expense. Noninterest expense increased $36,877 or 14.8% to $285,535
for the three months ended June 30, 1999 from $248,658 for the three months
ended June 30, 1998. Salaries and occupancy expenses increased in 1999 as a
result of additional personnel and additional office facilities.
Income Tax Provision (Benefit). The income tax provision for the three months
ended June 30, 1999 was $49,500 (an effective rate of 37.7%) compared to an
income tax benefit of $53,500 (an effective rate of 32.5%) for the three
months ended June 30, 1998.
Comparison of the Six-Month Periods Ended June 30, 1999 and 1998
General. Net loss for the six months ended June 30, 1999 was $44,392, or $.09
per basic and diluted share compared to a net loss for the six months ended
June 30, 1998 of $220,932 or $.48 per basic and diluted share. Net loss for
the 1999 period included a $109,609 recovery of previously expensed
organizational costs and a $131,000 credit for loan losses due to the
settlement of two impaired loans to a single borrower. At June 30, 1999 or
1998, the Bank had not achieved the asset size to operate profitably from
operations.
Interest Income. Interest income increased $218,330 or 51.3% to $644,248 for the
six months ended June 30, 1999 from $425,918 for the six months ended June
30, 1998. Interest income earned on loans increased $215,713 or 75.0% from
$287,439 for the six months ended June 30, 1998 to $503,152 during the six
months ended June 30, 1999. The increase was due to an increase in the
average loan portfolio of $6.3 million or 94.0% for the six months ended
June 30, 1999 compared to the same period in 1998, partially offset by a
decrease in the average yield earned from 8.60% in 1998 to 7.77% in 1999.
Interest Expense. Interest expense increased $151,215 or 63.8% to $388,137 for
the six months ended June 30, 1999 from $236,922 for the six months ended
June 30, 1998. This increase was due to an increase in average
interest-bearing liabilities outstanding of $7.0 million or 75.2% during
the six months ended June 30, 1999 when compared to the same period in
1998, partially offset by a decrease in the average rate paid from 5.10% in
1998 to 4.77% in 1999.
11
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
Results of Operations, Continued
(Credit) Provision for Loan Losses. The (credit) provision for loan losses is
(credited) charged to earnings to (decrease) increase 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 credit for loan losses for the
six months ended June 30, 1999 was $131,000 and the allowance for loan
losses was $556,458 at June 30, 1999. The credit for loan losses resulted
from a settlement of two impaired loans for less than the full amount. This
resulted in the partial recapture of the allowance against these loans and
a charge-off of the remaining loan balance. Management believes the
allowance is adequate at June 30, 1999.
Noninterest Income. Noninterest income increased $114,184 during the six months
ended June 30, 1999 compared to the same period in 1998. This increase was
primarily due to a recovery of previously expensed organizational costs
related to the Highlands County Bank charter application of $109,609. TCB
and the organizers withdrew their application for the new bank in early
1999 but recovered certain previously expensed organizational costs from
local organizers who assumed the application. Service charges and fees
increased to $23,346 from $18,771 in the 1998 period. The increase was due
primarily to increased deposits during the 1999 period compared to the 1998
period.
Noninterest Expense. Noninterest expense increased $114,259 or 24.0% to $591,158
for the six months ended June 30, 1999 from $476,899 for the six months
ended June 30, 1998. Salaries and occupancy expenses increased in 1999 as a
result of additional personnel and additional office facilities.
Income Tax Benefit. The income tax benefit for the six months ended June 30,
1999 was $26,700 (an effective rate of 37.6%) compared to $103,200 (an
effective rate of 31.8%) for the six months ended June 30, 1998.
12
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Year 2000
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 ("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.
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, renovation, validation and implemention phases. 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 bases, TCB has determined that the costs of making modifications
to correct any Year 2000 issues will not materially affect reported results from
operations.
TCB's vendors and suppliers have been contacted for written confirmation of
their product's readiness for the Year 2000 compliance. All significant vendors
of TCB have provided confirmation that they are Year 2000 compliant. TCB's main
service provider has completed testing of its mission critical application
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 Year 2000 ready software and the same
hardware and operating systems. TCB personnel have also performed Year 2000
testing on their computer databases and software applications and have found
them to be Year 2000 ready.
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 information 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 been finalized. 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. A Business Resumption Contingency
Plan (the "BRCP") has been developed and approved by the Board of Directors. The
BRCP assumes power outages and telephone disruptions. TCB is currently in the
process of testing and validating the BRCP. 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.
13
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 3. Quantitative and Qualitative Disclosures About 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. TCB has little or no risk related to
trading accounts, commodities or foreign exchange.
Management actively monitors and manages its interest rate risk exposure. The
primary objective in managing interest-rate risk is to limit, within established
guidelines, 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. Management relies
primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates could 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. There have been no significant changes in TCB's market risk exposure
since December 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which The Commercial Bancorp,
Inc. or its subsidiary is a party or to which any of their property is subject.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 1999, 7,900 shares were issued to holders of
warrants at a purchase price of $10.00 per share.
Proceeds were used for general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders (the "Annual Meeting") of The Commercial
Bancorp, Inc. was held on April 20, 1999, to consider the election of three
directors each for a term of three years and the ratification of the appointment
of TCB's independent auditors for the year ending December 31, 1999. At the
Annual Meeting, incumbent Directors Gary G. Campbell and Richard R. Dwyer were
reelected along with new Director Clarence W. Singletary. Mr. Singletary has
been a director of the Bank since 1997. The terms of Directors James R. Peacock,
James F. McCollum, Larry A. Kent and H. Fredrick Keiber continued after the
Annual Meeting.
14
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Item 4. Submission of Matters to a Vote of Security Holders, Continued
At the Annual Meeting, 278,878 shares were present in person or by proxy. The
following is a summary and tabulation of the matters that were voted upon at the
Annual Meeting:
Proposal I.
The election of three directors, each for a term of three years:
For Withheld Against
--- -------- -------
Gary G. Campbell 269,708 - 9,170
======= ======== =====
Richard R. Dwyer 276,528 - 2,350
======= ======== =====
Clarence W. Singletary 273,278 - 5,600
======= ======== =====
Proposal II:
To ratify the appointment of TCB's independent auditors for the year ending
December 31, 1999.
For Withheld Against
--- -------- -------
273,227 4,301 1,350
======= ======== =====
Item 6. 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 exhibits which are denominated by a
double asterisk (**) where filed with TCB's 1998 Form 10-KSB. The exhibit
numbers correspond to the exhibit numbers in the referenced documents.
Exhibit Number Description of Exhibit
*3.1 Amended and Restated Articles of Incorporation of TCB
*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
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed for the three
months ended June 30, 1999.
15
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE COMMERCIAL BANCORP, INC.
(Registrant)
Date: , 1999 By: /s/Gary G. Campbell
- --------------------- -------------------------------
Gary G. Campbell, President
and
Chief Executive Officer
Date: , 1999 By: /s/Harvey E. Buckmaster
- --------------------- -------------------------------
Harvey E. Buckmaster,
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form 10-QSB
for the period ended March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 520
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,496
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,714
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 13,363
<ALLOWANCE> 556
<TOTAL-ASSETS> 20,141
<DEPOSITS> 15,586
<SHORT-TERM> 0
<LIABILITIES-OTHER> 251
<LONG-TERM> 1,000
0
0
<COMMON> 5
<OTHER-SE> 3,300
<TOTAL-LIABILITIES-AND-EQUITY> 20,141
<INTEREST-LOAN> 503
<INTEREST-INVEST> 68
<INTEREST-OTHER> 73
<INTEREST-TOTAL> 644
<INTEREST-DEPOSIT> 350
<INTEREST-EXPENSE> 388
<INTEREST-INCOME-NET> 256
<LOAN-LOSSES> (131)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 591<F1>
<INCOME-PRETAX> (71)
<INCOME-PRE-EXTRAORDINARY> (71)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
<YIELD-ACTUAL> 0
<LOANS-NON> 0<F2>
<LOANS-PAST> 0<F2>
<LOANS-TROUBLED> 0<F2>
<LOANS-PROBLEM> 0<F2>
<ALLOWANCE-OPEN> 760
<CHARGE-OFFS> 73
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 556
<ALLOWANCE-DOMESTIC> 556
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Other expense includes: salaries and employee benefits of $310, occupancy
expense of $113, professional fees of $54 and other expenses which totaled
$114.
<F2>Items are only disclosed on an annual basis in the Company's Form 10-KSB, and
are, therefore, not included in this Financial Data Schedule.
</FN>
</TABLE>
