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, 1999
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, 1999: $1,635,000
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (362,191 shares) on March 1, 2000 was
approximately $3,621,910. 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 March
1, 2000: 475,491 shares of $0.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Company's 2000 Annual Report. (Part II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of Shareholders.
(Part III)
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TABLE OF CONTENTS
Consolidated--The Commercial Bancorp, Inc. and Affiliates
NOTE: Certain information required by Form 10-KSB is incorporated by
reference from the 1999 Annual Report and 2000 Annual Meeting Proxy Statement as
indicated below. Only that information expressly incorporated by reference is
deemed filed with the Commission.
PART I Page Number
-----------
Item 1 Business........................................................ 3
Item 2 Description of Property......................................... 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........ 8
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 Disagreements with Accountants on
Accounting and Financial Disclosure............................. 9
PART III
Item 9 Directors and Executive Officers of the Registrant.............. 9(2)
Item 10 Executive Compensation.......................................... 9(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...................................................... 10
- --------------------------------------------------------------
(1) These items are incorporated by reference from Registrant's 1999 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 Registrant's definitive proxy statement pursuant to
Instruction E 3. of Form 10-KSB.
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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 all of Volusia County,
Florida. There is a lot of competition among financial institutions in this
area. There are 127 commercial banking offices and 5 savings and loan offices
within our primary service area. 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 that have historically been traditional banking services. Due to the
growth of the Volusia County area in general, it is anticipated that competition
will increase because of new entrants to the market.
Investments
As of December 31, 1999, federal funds sold comprised approximately 4.1% and
securities available for sale comprised approximately 30.1% of TCB's assets. Net
loans comprised approximately 55.9% of TCB's assets at December 31, 1999. 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 our legal lending limits and which are potential deposit
customers of the bank. 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. Our real estate loans consist of residential and commercial first
and second mortgage loans.
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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.
Our general policy is not to accrue interest on loans delinquent over ninety
days unless fully secured and in the process of collection. It is our policy
that the accrued and unpaid interest is reversed against current income and
thereafter interest is recognized only to the extent payments are received,
while non-accrual loans are restored to accrual basis when interest and
principal payments are current and prospects for recovery are no longer in
doubt.
The majority of our loans are secured by real estate in Volusia County, Florida,
where our main office is located. Accordingly, the ultimate collectibility of a
substantial portion of the loan portfolio is susceptible to changes in market
conditions in Volusia County.
Loan Loss Reserves
In determining the adequacy of our allowance for loan losses, management has
considered that as of December 31, 1999, 75.3% 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 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 the risk of
loss inherently present in commercial loans.
At December 31, 1999, our consumer loan portfolio consisted primarily of lines
of credit and installment loans secured by automobiles, boats and other consumer
goods. We believe 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 17.9% of outstanding loans at
December 31, 1999. These loans are considered by management 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.
Our 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 our
internal system, 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, our past loss experience, 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.
Our allowance for loan losses is maintained at a level which we believe is
sufficient to absorb all estimated losses in the loan portfolio. The allowance
for loan losses is made up of two primary components: (a) amounts allocated to
loans based on collateral type and (b) amounts allocated for loans reviewed on
an individual basis in accordance with a credit risk grading system.
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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 our market
area, obtained through the personal solicitation of our officers and directors,
direct mail solicitation and advertisements published in the local media. We pay
competitive interest rates on time and savings deposits up to the maximum
permitted by law or regulation. In addition, we have implemented a service
charge fee schedule which is competitive with other financial institutions in
our market area, covering such matters as maintenance fees on checking accounts,
per item processing fees, returned check charges and the like.
Data Processing
TCB-Volusia has a data processing servicing agreement with Citrus & Chemical
Bank, Bartow, Florida. This servicing agreement provides for us with 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. For this
service, we pay a monthly fee based on the type, kind and volume of data
processing services provided, priced at a stipulated rate schedule.
Employees
We currently employ 11 full-time persons, including 6 officers, and no part time
persons. Employees are hired as needed to meet company-wide needs.
Monetary Policies
The results of our operations 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.
Supervision and Regulation
TCB and TCB-Volusia operate in a highly regulated environment. Our business
activities, which are governed by statute, regulation and administrative
policies, 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.
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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, 1999, our total risk-based capital and Tier I ratio were
10.6% and 18.3%, respectively. Both the Federal Reserve Board and the FDIC have
also implemented 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 4% "Tier I" capital to total assets (net of goodwill). Tier
I capital includes common stockholders equity, noncumulative perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries.
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 5% 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.
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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:
o maximum classified assets to capital ratios;
o minimum earnings sufficient to absorb losses without impairing capital;
o 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
o 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>
Total Risk - Tier I Risk - Tier I
Based Capital Based Capital Leverage
Ratio Ratio Ratio
------------- --------------- --------
<S> <C> <C> <C> <C>
Well capitalized (1) 10% 6% 5%
Adequately capitalized (1) 8% 4% 4% (2)
Undercapitalized (3) < 8% < 4% < 4%
Significantly Undercapitalized (3) < 6% < 3% < 3%
Critically Undercapitalized - - < 2%
- -----------------------------------------
<FN>
(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.
</FN>
</TABLE>
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,
restrictions on interstate acquisitions of banks by bank holding companies were
repealed, such that TCB and any other bank holding company located in Florida is
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:
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o to accelerate the effective date; or
o 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
is 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. 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 offices, 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 our properties are subject; nor are there material
proceedings known to us to be contemplated by any governmental authority; nor
are there material proceedings known to us, 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.
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 1, 2000, the approximate number of holders of record of TCB's common
stock was 334.
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 our overall operations. There are
no current plans to initiate payment of cash dividends, and future dividend
policy will depend on our earnings, capital requirements, financial condition
and other factors considered relevant by our Board of Directors.
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TCB-Volusia is restricted in its ability to pay dividends to TCB 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, 1999 and an additional 25,491 shares were sold between September
20, 1997, and December 31, 1999, including 10,700 shares issued pursuant to
warrants exercised, resulting in TCB obtaining $254,910 in additional offering
proceeds. As of December 31, 1999, TCB had sold a total of 475,491 shares of
common stock at $10.00 per share for a total of $4,754,910 in offering proceeds.
From the Effective Date of Registration to and including December 31, 1999, TCB
had incurred $14,720 expenses associated with the offering, issuance and
distribution of the common stock sold through December 31, 1999. 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 $4,740,190 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 $490,190 for working capital. Included in the
above proceeds was $107,000 received as a result of the exercise of 10,700
shares in exchange for outstanding warrants.
ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 19 of the 1999 Annual Report to Shareholders for the year ended
December 31, 1999, 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 1999 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.
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 3 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 the Proxy Statement filed as an Exhibit under
Item 13 herein.
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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 pages 5 through 6 of the Proxy Statement
filed as an exhibit under Item 13 herein.
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 Bylaws 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 2000 Annual Meeting Proxy Statement.
22.2 TCB's 1999 Annual Report
27.1 Financial Data Schedule
(b) Reports on Form 8-K. TCB did not file any reports on Form 8-K during the
last quarter of 1999.
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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 22, 2000 By: /s/Gary G. Campbell
-------------------------------------
Gary G. Campbell
President and Chief Executive Officer
Dated: March 22, 2000 By:/s/Harvey E. Buckmaster
-------------------------------------
Harvey E. Buckmaster
Chief Financial Officer and Secretary
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 22, 2000
- ---------------------------------------------
GARY G. CAMPBELL, Director, President & CEO
/s/Richard R. Dwyer March 22, 2000
- ---------------------------------------------
RICHARD R. DWYER, Director
/s/Larry A. Kent March 22, 2000
- ---------------------------------------------
LARRY A. KENT, Director, Chairman
_____________________________________________ _______________, 2000
JAMES R. PEACOCK, Director
/s/Clarence W. Singletary March 22, 2000
- ---------------------------------------------
CLARENCE W. SINGLETARY, 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 2000 Proxy Statement and 1999 Annual Report are included as Exhibits 22.1
and 22.2 of this filing.
EXHIBIT 22.1
--------------------------------------------------------------
The Commercial Bancorp, Inc.'s
2000 Annual Meeting
Proxy Statement
<PAGE>
THE COMMERCIAL BANCORP, INC.
258 N. Nova Road
Ormond Beach, Florida 32174
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 18, 2000
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 or any adjournment thereof. The
Annual Meeting will be held on April 18, 2000 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
nominee set forth below; "FOR" ratification of the appointment of Hacker,
Johnson, Cohen & Grieb, PA as the independent auditors of TCB for the fiscal
year ending December 31, 2000; and "FOR" the adjournment of the Annual Meeting
to solicit more proxies, if necessary.
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 15, 2000 has been
fixed by the Board of Directors as the 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 475,491 shares which are held by
approximately 334 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 15, 2000, 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 five 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 is one Class II director nominated to be elected to a three-year
term.
Management's nominee to fill the term is James R. Peacock who is
presently a director of TCB.
If the 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 the
nominee might not be able to serve.
The Board of Directors recommends that shareholders vote "FOR"
the election of the nominee.
The following table describes the period that the nominee has served as
a director of TCB, his position and offices held, with the Company, his
principal occupation or employment. In addition, the table contains information,
as of March 15, 2000, 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 the nominee and each other director.
2
<PAGE>
<TABLE>
Name, age, principal occupation, Current Number Percent of
directorships and business Director Term of Shares Right to Beneficial
experience Since Expires Owned(1) Acquire(2) Ownership(3)
- --------------------------------------- ------------ ----------- ----------- ----------- --------------
Management's nominee for Three-Year Term:
Class II Director
<S> <C> <C> <C> <C> <C> <C>
James R. Peacock, Age 54, Owner 1996 2000 52,759 52,509 18.20%
and Operator Jim Peacock Dodge,
1981 - 1993; Director and
Management Consultant of
Profitable Management Services,
Inc. 1988 - current.
Continuing directors:
Class I Directors
Gary G. Campbell, Age 47, 1996 2002 1,500 5,500 1.21%
Executive Vice President and Senior
Loan Officer, First State Bank of
Florida, 1992 - 1996; President of
TCB, 1996 - current; Director,
President and Chief Executive
Officer of the Bank
1997 - current.
Richard R. Dwyer, Age 46, 1998 2002 11,000 9,000 3.46%
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 65, 1999 2002 5,000 5,000 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.
Class III Director
Larry A. Kent, Age 48, President 1996 2001 42,541 30,741 12.67%
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, 1997-current.
[Footnotes follow this page]
3
<PAGE>
<FN>
(1) Includes shares for which the named person:
o has sole voting and investment power
o has shared voting and investment power with a spouse, or
o holds in an IRA or other retirement plan program, unless otherwise
indicated in these footnotes.
Does not include shares that may be acquired:
o by exercising stock options, or
o under stock purchase warrants.
(2) Includes shares that may be acquired within the next 60 days:
o by exercising vested stock options, or
o under presently exercisable stock purchase warrants granted in
connection with TCB's initial stock offering.
(3) Percentage computed on 475,491 shares issued and outstanding, plus 98,750
shares subject to presently exercisable stock purchase warrants issued
in connection with the Company's stock offering and 4,300 presently
exercisable stock options for a total of 578,541 beneficial shares.
</FN>
</TABLE>
Board of Directors Meetings
During the year ended December 31, 1999, the Board of Directors held
five meetings. None of the directors 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, 1999; however, The Commercial Bank of Volusia County
("Bank"), currently pays non-officer Directors $200 per Board of Directors
meeting attended.
Employee Stock Options Outstanding
The following stock options have been granted by the Board of Directors
pursuant to TCB's 1997 Employee Stock Option and Limited Rights Plan:
<TABLE>
Employee Year Granted Number of Shares Vested Term
-------- ------------ ---------------- ------ ----
<S> <C> <C> <C> <C>
Gary G. Campbell 1998 10,000 4,000 10 years
President and Chief
Executive Officer
Harvey E. Buckmaster 1999 5,000 0 10 years
Chief Financial
Officer
All other employees 1999 8,300 300 10 years
(7 persons total)
TOTAL OUTSTANDING 23,300 4,300
====== =====
</TABLE>
4
<PAGE>
<TABLE>
Executive Compensation
Summary Compensation Table
Annual Compensation Long-term compensation
------------------------------------------- --------------------------------
Name and Other annual Stock All other
principal position Year Salary Bonus compensation options compensation
------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Gary G. Campbell 1999 $ 105,000 $ 870 - 0 0
President & CEO 1998 $ 93,681 N/A - 10,000 0
1997 $ 75,000 $ 5,000 - 0 0
</TABLE>
Benefits
Insurance: TCB's full-time officers are provided hospitalization, major
medical, short and long-term disability, dental insurance and term life
insurance under group plans on generally the same basis as 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, 1999 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, 1999.
<TABLE>
Largest
Amount Balance
Maturity Outstanding as of
Date of Date of from January December Interest
Name Loan Loan 1, 1999 31, 1999 Rate Type
---------- -------- -------- --------------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Kirk Bauer 10/29/98 12/31/00 9,000 0 9.5% CLCU
Flight Level LC 07/06/99 07/06/03 100,452 99,104 9.0% CLCS
------- -------
Total 109,452 99,104
======= =======
Stanley S. Bronski 07/01/98 12/31/00 68,350 68,350 9.5% CLCU
J S Associates 01/14/98 11/28/03 644,043 601,116 9.5% CLR
J S Associates 10/21/99 10/21/00 22,128 18,461 9.0% CLCU
------- -------
Total 734,521 687,927
======= =======
Gary G. Campbell 12/22/97 01/01/28 143,609 142,293 7.50% ML
12/18/98 12/15/00 3,943 2,157 11.00% CL
------- -------
Total 147,552 144,450
======= =======
Richard R. Dwyer 01/09/98 05/01/04 320,000 310,667 9.5% CLR
05/18/98 12/31/00 86,853 84,000 9.5% CLCU
Deland Museum of Art,
Inc. 10/07/99 10/07/00 6,070 6,070 9.5% CLCS
------- -------
Total 412,923 400,737
======= =======
</TABLE>
5
<PAGE>
<TABLE>
Largest
Amount Balance
Maturity Outstanding as of
Date of Date of from January December Interest
Name Loan Loan 1, 1999 31, 1999 Rate Type
---------- -------- -------- --------------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence A. Kent 11/25/97 05/01/00 150,000 92,964 9.5% CLCU
Merrecull, Inc. 08/28/98 07/01/07 202,031 196,087 9.5% CLCS
------- -------
Total 352,031 289,051
======= =======
James R. Peacock 06/10/98 12/31/00 294,000 294,000 9.5% CLCU
Dispenser Systems.com, 10/28/99 11/01/07 351,294 351,294 9.5% CLCS
------- -------
Inc. 645,294 645,294
======= =======
Total
Clarence W. Singletary 11/25/97 12/31/00 145,872 50,820 9.5% CLCU
Singletary-Merrell
Partnership 11/21/97 12/31/00 180,000 174,623 9.5% CLCU
Merrecull, Inc. 08/28/98 07/01/07 202,031 196,087 9.5% CLCS
------- -------
Total 527,903 421,530
======= =======
</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:
o 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
o 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.
PROPOSAL II - RATIFICATION OF APPOINTMENT OF
AUDITORS FOR FISCAL YEAR ENDING DECEMBER 31, 2000
TCB's independent auditors for the fiscal year ended December 31, 1999,
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, 2000, 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, 2000.
6
<PAGE>
PROPOSAL III - ADJOURNMENT OF ANNUAL MEETING
TCB seeks approval to adjourn the Annual Meeting in the event that the
number of proxies sufficient to approve Proposals I or II are not received by
April 18, 2000. In order to permit proxies that have been received by TCB at the
time of the Annual Meeting to be voted, if necessary, for the adjournment, TCB
is submitting the question of adjournment to the shareholders as a separate
proposal. If it becomes necessary to adjourn the Annual Meeting, and the
adjournment is for a period less than 30 days, no notice of the time and place
of the adjourned meeting will be given to the shareholders, other than an
announcement made at the Annual Meeting.
The Board of Directors recommends that shareholders vote "FOR"
the approval of the adjournment of the Annual Meeting.
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, facsimile 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 19, 2000.
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.
7
<PAGE>
Annual Report
A copy of the Company's 1999 Annual Report accompanies this Proxy
Statement.
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 17, 2000
8
EXHIBIT 22.2
--------------------------------------------------------------
The Commercial Bancorp, Inc.'s
1999 Annual Report
<PAGE>
THE COMMERCIAL BANCORP, INC.
1999 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, 1999, TCB operated one retail banking
office in Ormond Beach, Florida and had total assets of $25.7 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 1, 2000, the Company had 334 holders of record of common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements which represent the
issuers expectations or beliefs, including, but not limited to, statements
concerning the banking industry and the issuers 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 issuers control, and actual results may differ
materially depending on a variety of important factors, including competition,
general economic conditions, changes in interest rates, and changes in the value
of real estate and other collateral 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.....................................................7-19
Selected Quarterly Results....................................................20
Consolidated Financial Statements..........................................21-39
Independent Auditors' Report..................................................40
Corporate Information..........................................Inside Back Cover
<PAGE>
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
At December 31, 1999 and 1998 or For the Years Then Ended
(Dollars in thousands, except per share figures)
1999 1998
---- ----
At Year End:
<S> <C> <C>
Total assets....................................................................... $ 25,732 21,676
Securities......................................................................... $ 7,897 3,302
Loans, net......................................................................... $ 14,373 11,563
Deposits........................................................................... $ 21,220 16,785
Borrowings......................................................................... $ 1,000 1,365
Stockholders' equity............................................................... $ 3,296 3,257
Book value per share............................................................... $ 6.93 7.01
Shares outstanding................................................................. 475,491 464,791
Warrants outstanding to purchase one share of common stock......................... 439,300 450,000
Equity-to-assets ratio............................................................. 12.81% 15.03%
Nonperforming assets-to-total assets ratio......................................... N/A 5.53%
For The Year:
Interest income.................................................................... 1,468 989
Interest expense................................................................... 852 632
Net interest income................................................................ 616 357
(Credit) provision for loan losses................................................. (309) 725
Cumulative effect of accounting change for organization costs...................... - (100)
Net earnings (loss)................................................................ 6 (1,071)
Return on average assets........................................................... .03% (6.35)%
Return on average equity........................................................... .18% (28.23)%
Average equity-to-average assets ratio............................................. 14.87% 22.51%
Noninterest expenses to average assets............................................. 4.91% 7.32%
Average Yield
or Rate
During the
Year Ended
December 31,
1999 1998
---- ----
Yields and Rates:
Loans (1)........................................................................... 8.16% 8.14%
Securities.......................................................................... 5.67% 4.07%
Other interest-earnings assets (2).................................................. 5.03% 5.41%
Total interest-earnings assets...................................................... 7.28% 6.71%
Deposits............................................................................ 4.80% 5.17%
Borrowings.......................................................................... 5.38% 6.86%
Total interest-bearing liabilities.................................................. 4.84% 5.22%
Net interest spread (3)............................................................. 2.44% 1.49%
Net interest margin (4)............................................................. 3.06% 2.42%
- ----------------
<FN>
(1) Includes nonaccrual loan
(2) Includes federal funds sold, interest bearing deposits and Federal Home
Loan Bank stock.
(3) Yield on average interest-earning assets less rate on average interest-
bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
1
<PAGE>
MESSAGE FROM THE PRESIDENT
Letter to our Shareholders
The Commercial Bancorp, Inc.
Dear Shareholder:
While most of the nation's media concerned itself with the dreaded Y2K
Millennium change and the possible ill-effect it might have on automation all
over the world, our Company was excited about ending it's second full year of
operations with positive news in almost every area of the bank. As many of you
know, our confidence in the Bank's automation and our ability to handle the
change from 1999 to 2000 was supreme. In fact, our Bank hosted an Open House
event at our Main Office in The Trails Shopping Center and we were proud to meet
and share the January 1st Holiday with more than 200 guests over the course of
the day. For those of you who missed that event, we'll plan another celebration
for January 1, 3000 and will look forward to seeing you then. In the meantime,
we'd like to use the opportunity of this Annual Report to bring you up-to-date
with the positive performance of our Bank and Company for the year ended
December 31, 1999.
First, note the growth of the Bank in Total Assets. The year ended with the Bank
at a record high of $25.7 Million. We were pleased with this ending balance for
several reasons. First, a great deal of the growth had come in the final quarter
and we set records for opening new accounts for the months of August through
November. We were also very pleased to note that the Total Assets ended with our
Bank within $1.5 Million of our originally projected budget. We are extremely
pleased to be so close to our targeted growth for the second year, particularly
because we could not have anticipated being in competition with so many other
new banks when we originally applied for our charter.
Second, and maybe of more importance to our Shareholders, note the Bank and the
Company both reported an operating profit for the year's operations. While some
of the profits were the result of our recovering reserves, the Bank's growth
also allowed us to turn a profit from operations. This is an extremely
significant event and our Management and Board of Directors are extremely
pleased to report the result to you.
Some concerns had been expressed regarding problem loans from the year ended in
1998. Management is pleased to report that substantially all of our problem
loans were resolved with only minimal losses during this year. In addition sound
underwriting and prudent administration of our current loan portfolio have led
to a great deal of confidence in our existing portfolio. While economic
conditions are always unpredictable and may lead to unforeseen and unpredictable
loan losses, the existing loans and customer base through today are not
demonstrating any significant performance problems.
Our Management and Personnel within the Bank have stabilized this year and we
are pleased to report that our staff may be the strongest performing team in our
history. We believe this asset cannot be underestimated and that it contributes
as much as our competitive pricing in attracting new customers to our Bank.
And so, our Bank excels in the three areas we consider most important to our
future. We have Quality, Profitability, and Growth. We find Quality in our
management, our personnel, our equipment, and the assets of the Bank.
Profitability has been achieved through successful operations and should only
improve as the Bank continues to increase in size. And, we have proven Growth in
a market that has become extremely competitive in the short period of time that
we have been open. We are extremely proud of these factors. We hope you will be
also.
Finally, we are considering the future of our organization and its' continued
success. As our growth continues we face the challenge of needing a second
location. Our Board of Directors has spent a great deal of time considering a
Strategic Plan that will allow us to offer a competitive return to our
Shareholders over the next 36 months. A key component in that strategy will
include additional branches in our immediate future. We of our plans and
progress in this area.
As you know, the stock originally purchased by our Shareholders came with
Warrants which will expire in April this year. We want to encourage all of our
Shareholders to take advantage of those Warrants. There are no immediate plans
for additional stock in the future and exercising the Warrants will be the most
effective method for you to maximize your equity in our Company. If you have any
questions regarding the Warrants, please feel free to call me or Harvey
Buckmaster.
2
<PAGE>
As always, we thank you for your support and look forward to meeting with you
when convenient to discuss your banking needs as well as your investment in the
Company.
Sincerely,
/s/ Gary G. Campbell
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 and Secretary
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
Clarence Singletary
Real Estate Developer
4
<PAGE>
DIRECTORS AND OFFICERS OF
THE COMMERCIAL BANK OF VOLUSIA COUNTY
OFFICERS
Gary G. Campbell
President and Chief Executive Officer
Harvey E. Buckmaster
Senior Vice President - Chief Financial Officer and Cashier
Charles E. Merz
Vice President - Commercial Loans
Barbara A. Cloyd
Vice President - Operations
Sandy Bowe
Assistant Vice President - Loan Administration
Ginny Goodin
Assistant Vice President
DIRECTORS
Larry Kent
Chairman of the Board - Burger King Franchiser
Kirk Bauer
Attorney at Law
Stanley S. Bronski
Retired
Gary G. Campbell
The Commercial Bancorp, Inc.
Michael D. Crotty
Attorney at Law
Richard R. Dwyer
Stockbroker
Thomas R. Horton
Trustee/Stetson University
William L. Oliveri
Certified Public Accountant
James R. Peacock
Real Estate Developer
Clarence Singletary
Real Estate Developer
5
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
At December 31, 1999 and 1998 or For the Years Then Ended
(Dollars in thousands, except per share figures)
1999 1998
---- ----
At Year End:
<S> <C> <C>
Cash and cash equivalents............................................................... $ 1,819 4,949
Securities.............................................................................. 7,897 3,302
Loans, net.............................................................................. 14,373 11,563
All other assets........................................................................ 1,643 1,862
------- -------
Total assets....................................................................... $ 25,732 21,676
======= =======
Deposits................................................................................ 21,220 16,785
Borrowings.............................................................................. 1,000 1,365
All other liabilities................................................................... 216 269
Stockholders' equity.................................................................... 3,296 3,257
------- -------
Total liabilities and stockholders' equity......................................... $ 25,732 21,676
======= =======
For the Year:
Total interest income................................................................... 1,468 989
Total interest expense.................................................................. 852 632
------- -------
Net interest income..................................................................... 616 357
(Credit) provision for loan losses...................................................... (309) 725
------- -------
Net interest income (loss) after provision (credit) for loan losses..................... 925 (368)
------- -------
Noninterest income...................................................................... 167 52
Noninterest expenses.................................................................... 1,083 1,233
------- -------
Earnings (loss) before income tax provision (benefit) and cumulative
effect of change in accounting principle........................................... 9 (1,549)
Income tax provision (benefit).......................................................... 3 (578)
------- -------
Net earnings (loss) before cumulative effect of change in accounting principle 6 (971)
Cumulative effect of accounting change for organization costs........................... -- (100)
------- -------
Net earnings (loss).....................................................................$ 6 (1,071)
======= =======
Basic and diluted earnings (loss) per share:
Earnings (loss) before cumulative effect of change in accounting principle......... .01 (2.09)
Cumulative effect of accounting change for organization costs...................... -- (.22)
------- -------
Net earnings (loss)................................................................$ .01 (2.31)
======= =======
Weighted-average number of shares outstanding for basic and diluted..................... 471,822 464,791
======= =======
Ratios and Other Data:
Return on average assets................................................................ .03% (6.35%)
Return on average equity................................................................ .18% (28.23%)
Average equity to average assets........................................................ 14.87% 22.51%
Net interest margin..................................................................... 3.06% 2.42%
Noninterest expenses to average assets.................................................. 4.91% 7.32%
Ratio of average interest-earning assets to average interest-bearing liabilities 1.14% 1.22%
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 1.98% 6.17%
Allowance for loan loses as a percentage of nonperforming loans......................... - % 127.24%
Number of banking offices............................................................... 1 1
Total shares outstanding at end of year................................................. 475,491 464,791
Book value per share at end of year..................................................... $ 6.93 7.01
Dividend pay-out ratio.................................................................. - -
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
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 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, 1999, TCB had total consolidated assets of $25.7 million, an
increase of 18.7% over total assets of $21.7 million at December 31, 1998.
During the year ended December 31, 1999, net loans receivable increased to $14.4
million from $11.6 million at December 31, 1998. TCB's portfolio of securities
increased to $7.9 million at December 31, 1999. TCB's deposits increased to
$21.2 million at December 31, 1999 from $16.8 million as of December 31, 1998.
TCBs borrowings decreased to $1.0 million as of December 31, 1999. TCB had
consolidated net earnings of $5,867 or $.01 basic and diluted earnings per share
for the year ended December 31, 1999 compared to consolidated net loss of
$1,071,000 or $2.31 basic and diluted loss per share for 1998.
New Bank Charter
During 1998, 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 TCBs
common stock. In early 1999, TCB withdrew their application and the local
organizers from Highlands County ("Organizers") elected to continue without TCB.
Because of this, management terminated its planned public offering and
charged-off $88,986 in prepaid offering expenses during 1998. During 1999, TCB
and the Organizers entered into a settlement agreement in which the Organizers
paid TCB $402,993 in proceeds, including repayment of debt and for certain
premises and equipment and as partial reimbursement of organization expenses.
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's operating and financial systems have been found to be compliant; the "Y2K
Problem" has not adversely affected TCB's operations nor does management expect
that it will.
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, 1999 and 1998, TCB-Volusia exceeded its regulatory
liquidity requirements.
7
<PAGE>
TCBs primary source of cash and cash equivalents during the year ended December
31, 1999 was net deposit inflows of $4.4 million and repayments on securities
available for sale of $1.4 million. During this same period, cash and cash
equivalents were used to originate loans, net of repayments, of $2.5 million and
purchase securities available for sale of $6.2 million resulting in a net
decrease in cash and cash equivalents of approximately $3.1 million.
Credit Risk
TCB's primary business is making commercial, consumer, and real estate loans.
That activity entails potential loan losses, the magnitude of which depends 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 credit for loan losses for the year ended December 31,
1999 was $308,571 and the allowance for loan losses was $290,000 at December 31,
1999. The credit resulted from the settlement of four commercial loans to two
borrowers during 1999 which were placed on nonaccrual status in 1998. This
settlement resulted in a partial recapture of the specific allowance related to
these loans and charge-offs of the remaining balances. Management believes the
allowance at December 31, 1999 is adequate. These four loans were on nonaccrual
status at December 31, 1998. TCB had no nonaccrual loans at December 31, 1999.
The following table sets forth information with respect to activity in TCBs
allowance for loan losses during the periods indicated (dollars in thousands):
Year Ended December 31,
1999 1998
---- ----
Average loans outstanding................... $ 13,678 8,466
====== ======
Allowance at beginning of year.............. 760 35
(Credit) provision for loan losses.......... (309) 725
Charge-offs, net of recoveries.............. (161) --
------ ------
Allowance at end of year.................... $ 290 760
====== ======
Allowance as a percent of total loans....... 1.98% 6.17%
====== ======
Total gross loans at end of year............ $ 14,660 12,319
====== ======
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):
At December 31,
1999 1998
------------------ -----------------
Loans Loans
to to
Total Total
Amount Loans Amount Loans
Commercial................................ $ 160 44.5% $ 733 75.1%
Commercial real estate.................... 72 30.8 6 5.8
Residential real estate................... 42 17.9 13 11.8
Consumer and home equity.................. 16 6.8 8 7.3
---- ----- ----- ------
Total allowance for loan losses........... $ 290 100.0% $ 760 100.0%
==== ===== ===== ======
8
<PAGE>
Loan Portfolio Composition
Commercial loans and commercial real estate loans comprise the largest groups of
loans in TCBs portfolio. As of December 31, 1999 and December 31, 1998,
commercial loans amounted to $6.5 million or 44.5% and $9.3 million or 75.1% of
the total loan portfolio. Commercial real estate loans amounted to $4.5 million
or 30.8% and $717,000 or 5.8% as of December 31, 1999 and December 31, 1998, of
which approximately 91.7% and 89.5% are first mortgage loans.
As of December 31, 1999 and December 31, 1998, residential real estate loans,
amounted to $2.6 million or 7.9% and $1.5 million or 11.8%, of the total loan
portfolio. Consumer and home equity loans amounted to $989,000 or 6.8% and
$897,000 or 7.3% of the total loan portfolio as of December 31, 1999 and
December 31, 1998.
The following table sets forth the composition of TCB's loan portfolio at
December 31, 1999 and 1998:
<TABLE>
1999 1998
---------------------- -------------------
% of % of
Amount Total Amount Total
(In thousands)
<S> <C> <C> <C> <C>
Commercial................................................ $ 6,527 44.5% $ 9,255 75.1%
Commercial real estate.................................... 4,519 30.8 717 5.8
Residential real estate................................... 2,625 17.9 1,450 11.8
Consumer and home-equity.................................. 989 6.8 897 7.3
-------- ----- ------ -----
14,660 100.0% 12,319 100.0%
===== =====
(Subtract) add:
Allowance for loan losses............................... (290) (760)
Net deferred costs...................................... 3 4
-------- ------
Loans, net................................................ $ 14,373 $ 11,563
======== ======
</TABLE>
Securities
The securities portfolio is comprised of mortgage-backed securities and U.S.
agency 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 net amount in other comprehensive income (loss), net of tax.
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, 1999 and 1998, TCB had no securities
categorized as held to maturity or trading.
The following table sets forth the carrying value and average yields of TCB's
securities portfolio (dollars in thousands):
<TABLE>
At December 31, Average At December 31, Average
1999 Yield 1998 Yield
---- -------- ---- -------
Securities available for sale:
<S> <C> <C> <C> <C>
Mortgage-backed securities................. $ 6,429 6.94% $ 3,303 4.07%
U.S. agency securities..................... 1,468 6.01 - -
----- -------
$ 7,897 6.67% $ 3,303 4.07%
===== ==== ======= ====
</TABLE>
9
<PAGE>
The scheduled maturities of securities available for sale were as follows:
At December 31,
1999 1998
---- ----
Due from five to ten years................... $ 1,468 -
Mortgage-backed securities................... 6,429 3,303
----- -----
$ 7,897 3,303
===== =====
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, 1999, that
TCB-Volusia meets all capital adequacy requirements to which it is subject.
<TABLE>
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions
--------------------------- ---------------------- ---------------------
Amount % Amount % Amount %
------ ------ ------ ------ ------ ----
(dollars in thousands)
As of December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to Risk-
Weighted Assets)......... $ 2,751 18.3% $ 1,206 8.0% $ 1,507 10.0%
Tier I Capital (to Risk-
Weighted Assets)......... 2,561 17.0 603 4.0 904 6.0
Tier I Capital
(to Average Assets)...... 2,561 10.6 965 4.0 1,206 5.0
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 4.0 997 5.0
</TABLE>
10
<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 (ratio is greater than 1.0). A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets (ratio is less than 1.0). 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 federal funds sold).
11
<PAGE>
The following table sets forth certain information relating to TCB's
interest-earning assets and interest-bearing liabilities at December 31, 1999
that are estimated to mature or are scheduled to reprice within the period shown
(dollars in thousands):
<TABLE>
More More
Than Than
Three Six More More
Three Months Months than One than
Months to Six to One Year to Five
or Less Months Year Five Years Years Total
-------- ------ ------- ---------- ------- ------
Loans (1):
<S> <C> <C> <C> <C> <C> <C>
Commercial............................ $ 4,570 100 103 745 1,009 6,527
Commercial real estate................ 4,488 - - 31 - 4,519
Residential real estate............... - 802 812 101 910 2,625
Consumer and home equity.............. 131 20 22 816 - 989
------ ----- ------ ----- ----- ------
Total loans...................... 9,189 922 937 1,693 1,919 14,660
Securities................................ 506 506 2,354 - 4,531 7,897
Other interest-earning assets (2) 1,116 - - - - 1,116
------ ----- ------ ----- ----- ------
Total rate-sensitive assets 10,811 1,428 3,291 1,693 6,450 23,673
------ ----- ------ ----- ----- ------
Deposit accounts (3):
Money-market deposits................. 226 - - - - 226
Savings and NOW deposits.............. 4,975 - - - - 4,975
Time deposits......................... 2,748 3,697 7,559 917 - 14,921
------ ----- ------ ----- ----- ------
Total deposits................... 7,949 3,697 7,559 917 - 20,122
Borrowings............................ - - - - 1,000 1,000
------ ----- ------ ----- ----- ------
Total rate-sensitive liabilities 7,949 3,697 7,559 917 1,000 21,122
------ ----- ------ ----- ----- ------
GAP (repricing differences)............... $ 2,862 (2,269) (4,268) 776 5,450 2,551
====== ===== ====== ===== ===== ======
Cumulative GAP............................ $ 2,862 593 (3,675) (2,899) 2,551
====== ===== ====== ===== =====
Ratio of interest-earning assets to
interest-bearing liabilities.......... 1.36 .39 .44 1.85 6.45
====== ===== ====== ===== =====
Ratio of cumulative interest-bearing
assets to cumulative interest-
bearing liabilities................... 1.36 1.05 .81 .86 1.12
====== ====== ====== ===== =====
Cumulative GAP/total assets............... 11.1% 2.3% (14.3)% (11.3)% 9.9%
====== ====== ====== ===== =====
<FN>
(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) Includes federal funds sold and Federal Home Loan Bank stock.
(3) Money-market, NOW, and savings deposits are regarded as readily accessible
withdrawable accounts. Time deposits are scheduled according to their
respective maturity dates.
</FN>
</TABLE>
12
<PAGE>
The following table reflects the contractual principal repayments by period of
TCB's loan portfolio at December 31, 1999 (in thousands):
<TABLE>
Commercial Residential Consumer
Years Ending Real Real and Home
December 31, Commercial Estate Estate Equity Total
------------ ---------- ---------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
2000............................. $ 3,960 1,529 154 378 6,021
2001............................. 710 791 137 221 1,859
2002-2003........................ 1,122 1,273 263 303 2,961
2004-2005........................ 618 741 266 86 1,711
2006 & beyond.................... 117 185 1,805 1 2,108
----- ----- ----- ---- ------
Total............................ $ 6,527 4,519 2,625 989 14,660
===== ===== ===== ==== ======
</TABLE>
Of the $8.6 million of loans at December 31, 1999 due after one year, 34.4% of
such loans have fixed interest rates and 65.6% 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 TCBs new loan
originations are to commercial borrowers. These loans are attributable to TCBs
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:
Year Ended December 31,
1999 1998
---- ----
(In thousands)
Originations:
Commercial..................................... $ 3,465 6,948
Commercial real estate......................... 2,901 1,019
Residential real estate........................ 1,512 1,237
Consumer and home equity....................... 611 743
----- -----
Total loans originated...................... 8,489 9,947
Principal reductions........................... (6,148) (1,398)
----- -----
Increase in total loans........................ $ 2,341 8,549
===== =====
13
<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 TCBs 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>
At December 31,
1999 1998
------------------------- -------------------
% of % of
Amount Deposits Amount Deposits
<S> <C> <C> <C> <C>
Demand deposits................................................ $ 1,098 5.2% 905 5.4%
NOW deposits ............................................. 4,661 22.0 4,859 28.9
Money-market deposits.......................................... 226 1.1 329 2.0
Savings deposits............................................... 314 1.4 209 1.2
------ ----- ------ -----
Subtotal ............................................. 6,299 29.7 6,302 37.5
------ ----- ------ -----
Certificates of deposit:
3.00% - 3.99%............................................. 2 .1 164 1.0
4.00% - 4.99%............................................. 3,136 14.8 1,310 7.8
5.00% - 5.99%............................................. 8,434 39.6 5,262 31.4
6.00% - 6.99%............................................. 3,349 15.8 3,747 22.3
------ ----- ------ -----
Total certificates of deposit.................................. 14,921 70.3 10,483 62.5
------ ----- ------ -----
Total deposits................................................. $ 21,220 100.0% $ 16,785 100.0%
====== ===== ====== =====
</TABLE>
The following table presents by various interest rate categories the amounts of
certificates of deposit at December 31, 1999 which mature during the periods
indicated (in thousands):
Year Ending December 31,
-----------------------------
2000 2001 Total
---- ---- -----
3.00% - 3.99%.............................. $ 2 - 2
4.00% - 4.99%.............................. 2,703 433 3,136
5.00% - 5.99%.............................. 7,950 484 8,434
6.00% - 6.99%.............................. 3,349 - 3,349
------ ----- ------
Total certificates of deposit.............. $ 14,004 917 14,921
====== ===== ======
14
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows (in thousands):
December 31,
-------------------
1999 1998
---- ----
Due three months or less............................. $ 300 402
Due over three months to six months.................. 311 100
Due over six months to one year...................... 444 201
Due over one year.................................... - 827
----- -----
$ 1,055 1,530
===== =====
The following table sets forth the net deposit flows of TCB during the periods
indicated (in thousands):
Year Ended December 31,
-----------------------
1999 1998
---- ----
Net increase before interest credited................ $ 3,765 13,494
Net credited......................................... 670 613
----- ------
Net deposit increase............................ $ 4,435 14,107
===== ======
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>
1999 1998
-------------------- -----------------------
Average Average Average Average
Balance Yield Balance Yield
<S> <C> <C> <C> <C>
Savings and NOW deposits..................... $ 4,628 3.54% $ 3,282 3.90%
Money-market deposits........................ 325 2.77 184 2.72
Time deposits................................ 11,507 5.36 8,289 5.73
------ ------
Total interest-bearing deposits......... $ 16,460 4.80% $ 11,755 5.17%
====== ==== ====== ====
</TABLE>
15
<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>
Year Ended December 31,
------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
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> <C>
Loans (1).................................. $ 13,678 1,116 8.16% $ 8,466 690 8.14%
Securities................................. 3,961 225 5.67 2,973 121 4.07
Other interest-earning assets (2).......... 2,523 127 5.03 3,292 178 5.41
------- ----- ------ ---
Total interest-earning assets.......... 20,162 1,468 7.28 14,731 989 6.71
----- ---
Noninterest-earning assets...................... 1,875 2,128
------- ------
Total assets........................... $ 22,037 $ 16,859
======= ======
Interest-bearing liabilities:
Savings and NOW deposits................... 4,628 164 3.54 3,282 128 3.90
Money-market deposits...................... 325 9 2.77 184 5 2.72
Time deposits.............................. 11,507 617 5.36 8,289 475 5.73
Borrowings................................. 1,152 62 5.38 350 24 6.86
------- ------ ------ ---
Total interest-bearing liabilities 17,612 852 4.84 12,105 632 5.22
------ ---
Noninterest-bearing deposits.................... 925 430
Noninterest-bearing liabilities................. 223 529
Stockholders' equity............................ 3,277 3,795
------- ------
Total liabilities and stockholders'
equity............................ $ 22,037 $ 16,859
======= ======
Net interest/dividend income.................... $ 616 $ 357
====== ===
Interest-rate spread (3)........................ 2.44% 1.49%
==== ====
Net interest margin (4)......................... 3.06% 2.42%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.14 1.22
==== ====
- -------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Other interest-earning assets include federal funds sold, interest-earning
deposits and Federal Home Loan Bank stock.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest/dividend income divided by average
interest-earning assets.
</FN>
</TABLE>
16
<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).
Year Ended December 31,
1999 vs. 1998
-----------------------
Increase (Decrease) Due to
--------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
(In thousands)
Interest earning assets:
Loans................................ $ 2 424 - 426
Securities........................... 48 40 16 104
Other interest-earning assets........ (13) (42) 4 (51)
-- --- -- ---
Total.............................. 37 422 20 479
-- --- -- ---
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits........... (12) 52 (4) 36
Money-market deposits.............. - 4 - 4
Time deposits...................... (31) 184 (11) 142
Borrowings......................... (5) 55 (12) 38
-- --- -- ---
Total.............................. (48) 295 (27) 220
-- --- -- ---
Net change in net interest income........ $ 85 127 47 259
== === == ===
17
<PAGE>
The Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
General. Net earnings for the year ended December 31, 1999 was $5,867 or $.01
per basic and diluted share compared to a net loss of $(1,071,398) or
$(2.31) per basic and diluted share for the year ended December 31, 1998.
The increase in earnings resulted from an increase in net interest income
and a credit for loan losses in 1999.
Interest Income. Interest income totaled $1,467,714 for the year ended December
31, 1999 compared to $988,527 for 1998, an increase of 48.5%. Interest
income earned on loans increased $426,280, or 61.8% to $1,115,627 in 1999
compared to $689,347 for 1998. The increase resulted from increases in the
average loan balance from $8.5 million to $13.7 million and an increase in
the average yield from 8.14% to 8.16%.
Interest on securities totaled $224,516 in 1999 compared to $121,109 for
1998, an increase of 85.4%. This increase resulted from an increase in
average securities outstanding from $3.0 million in 1998 to $4.0 million in
1999, and an increase in the average yield earned from 4.07% in 1998 to
5.67% in 1999.
Interest on other interest earning assets totaled $127,571 in 1999 compared
to $178,071 for 1998. The average balance of these assets decreased to $2.5
million 1999 from $3.3 million in 1998 and the weighted-average yield
decreased to 5.03% in 1999 from 5.41% in 1998.
Interest Expense. Interest expense increased to $851,566 for the year ended
December 31, 1999 from $631,798 for the year ended December 31, 1998, an
increase of 34.8%. Interest expense on deposit accounts amounted to
$789,606 for the year ended December 31, 1999 compared to $607,970 for the
year ended December 31, 1998. Interest increased because of an increase in
the average balance of deposits of $11.8 million during 1998 to an average
of $16.5 during 1999, partially offset by a decrease in the
weighted-average cost of deposits to 4.80% during 1999 compared to 5.17% in
1998. Interest expense on borrowed funds amounted to $61,960 for the year
ended December 31, 1999 compared to $23,828 for 1998.
Provision (Credit) for Loan Losses. The provision (credit) fo 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 TCBs market
areas, and other factors related to the collectibility of TCB's loan
portfolio. The credit for the year ended December 31, 1999 was $308,571.
The credit resulted from the settlement of four commercial loans to two
borrowers during 1999 which were placed on nonaccrual status in 1998. This
settlement resulted in a partial recapture of the specific allowance
related to these loans and charge-offs of the remaining balances.
Management believes that the allowance for loan losses of $290,000 is
adequate at December 31, 1999.
Noninterest Income. Noninterest income totaled $167,280 for the year ended
December 31, 1999 compared to $52,526 for 1998. This increase was mainly
the result of a recovery organization expenses of $109,609 during 1999.
Noninterest Expense. Noninterest expense totaled $1,082,732 for the year ended
December 31, 1999 compared to $1,233,963 for 1998. Salaries and employee
benefits was the largest, amounting to $524,906 during 1999 compared to
$514,629 during 1998.
Income Taxes. TCB recognized a provision for income taxes of $3,400 in 1999
(effective tax rate of 36.7%) compared to a benefit of $577,850 (effective
tax rate of 37.3%) in 1998.
18
<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, 2001.
Management does not anticipate that this Statement will have a material impact
on TCB.
19
<PAGE>
<TABLE>
Selected Quarterly Results (Unaudited)
The following table presents summarized quarterly data (in thousands, except per
share amounts):
Year Ended December 31, 1999
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 317 327 359 465 1,468
Interest expense.................................. 198 190 210 254 852
--- --- --- --- ------
Net interest income.......................... 119 137 149 211 616
Provision (credit) for loan losses................ 27 (158) (150) (28) (309)
--- --- --- --- ------
Net interest income after provision (credit)
for loan losses.......................... 92 295 299 239 925
--- --- --- --- ------
Noninterest income................................ 11 122 17 17 167
Noninterest expense............................... 305 286 247 245 1,083
--- --- --- --- ------
(Loss) earnings before income tax (benefit)
provision.................................... (202) 131 69 11 9
Income tax (benefit) provision.................... (76) 49 26 4 3
--- ---- ---- ---- ------
Net (loss) earnings............................... $(126) 82 43 7 6
=== ==== ==== ==== ======
Basic and diluted (loss) earnings per
common share................................. (.27) .17 .09 .02 .01
=== === === === ======
Year Ended December 31, 1998
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
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)
=== === === ==== =====
</TABLE>
20
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Ormond Beach, Florida
Audited Consolidated Financial Statements
At December 31, 1999 and 1998 and For the Years Then Ended
(Together with Independent Auditors' Report)
<TABLE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
At December 31,
1999 1998
---- ----
Assets
<S> <C> <C>
Cash and due from banks........................................................... $ 766,972 689,903
Federal funds sold................................................................ 1,051,995 4,258,602
---------- ----------
Total cash and cash equivalents..................................... 1,818,967 4,948,505
Securities available for sale..................................................... 7,897,493 3,302,486
Loans receivable, net of allowance for loan losses of $290,000
in 1999 and $760,000 in 1998.................................................. 14,372,913 11,563,373
Accrued interest receivable....................................................... 146,202 89,527
Premises and equipment, net....................................................... 519,639 838,931
Federal Home Loan Bank stock, at cost............................................. 64,500 50,000
Deferred tax asset................................................................ 862,611 824,981
Other assets...................................................................... 49,819 58,003
---------- ----------
Total assets........................................................ $ 25,732,144 21,675,806
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits........................................... 1,098,188 904,585
Savings and NOW deposits...................................................... 4,974,284 5,068,758
Money-market deposits......................................................... 226,115 329,293
Time deposits................................................................. 14,921,394 10,482,545
---------- ----------
Total deposits...................................................... 21,219,981 16,785,181
Advance from Federal Home Loan Bank........................................... 1,000,000 1,000,000
Other borrowings.............................................................. - 364,749
Official checks............................................................... 112,738 127,342
Accrued interest payable and other liabilities................................ 103,098 141,642
---------- ----------
Total liabilities................................................... 22,435,817 18,418,914
---------- ----------
Commitments and contingencies (Notes 4, 8 and 16)
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized, 475,491
shares in 1999 and 464,791 shares in 1998 issued and outstanding......... 4,755 4,648
Additional paid-in capital.................................................... 4,735,435 4,628,542
Accumulated deficit........................................................... (1,364,936) (1,370,803)
Accumulated other comprehensive income (loss)................................. (78,927) (5,495)
---------- ----------
Total stockholders' equity.......................................... 3,296,327 3,256,892
---------- ----------
Total liabilities and stockholders' equity.......................... $ 25,732,144 21,675,806
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
21
<PAGE>
<TABLE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31,
1999 1998
---- ----
Interest income:
<S> <C> <C>
Loans receivable................................................................ $ 1,115,627 689,347
Securities...................................................................... 224,516 121,109
Other interest-earning assets................................................... 127,571 178,071
--------- ---------
Total interest income........................................................ 1,467,714 988,527
--------- ---------
Interest expense:
Deposits........................................................................ 789,606 607,970
Borrowings...................................................................... 61,960 23,828
--------- ---------
Total interest expense....................................................... 851,566 631,798
--------- ---------
Net interest income.......................................................... 616,148 356,729
(Credit) provision for loan losses.................................................. (308,571) 725,000
--------- ---------
Net interest income (loss) after (credit) provision for loan losses 924,719 (368,271)
--------- ---------
Noninterest income:
Service charges and fees........................................................ 57,671 52,526
Recovery of organizational expenses............................................. 109,609 -
--------- ---------
Total noninterest income..................................................... 167,280 52,526
--------- ---------
Noninterest expense:
Salaries and employee benefits.................................................. 524,906 514,629
Occupancy expense............................................................... 252,157 242,093
Offering costs.................................................................. - 88,986
Advertising..................................................................... 31,815 74,563
Professional fees............................................................... 66,696 48,638
Telephone....................................................................... 18,652 33,365
Data processing................................................................. 39,308 30,657
Printing and office supplies.................................................... 18,360 24,435
Amortization of organization costs.............................................. - 30,000
Other .......................................................................... 130,838 146,597
--------- ---------
Total noninterest expense.................................................... 1,082,732 1,233,963
--------- ---------
Earnings (loss) before income tax provision (benefit) and cumulative effect of
change in accounting principle.................................................. 9,267 (1,549,708)
Income tax provision (benefit)............................................... 3,400 (577,850)
--------- ---------
Net earnings (loss) before cumulative effect of change in accounting principle 5,867 (971,858)
Cumulative effect of change in accounting principle, net of income
tax benefit of $60,600 ................................................... - (99,540)
--------- ---------
Net earnings (loss)................................................................. $ 5,867 (1,071,398)
========= =========
Basic and diluted earnings (loss) per share:
Before cumulative effect of change in accounting principle...................... .01 (2.09)
Cumulative effect of change in accounting principle............................. - (.22)
--------- ----------
Net earnings (loss)............................................................. $ .01 (2.31)
========= =========
Weighted-average shares outstanding for basic and diluted........................... 471,822 464,791
========= =========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
22
<PAGE>
<TABLE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
Other
Compre-
Common Stock Additional hensive Total
--------------- Paid-In Accumulated Income Stockholders'
Shares Amount Capital Deficit (Loss) Equity
------- ------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997............. 464,791 $ 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)......... (1,076,893)
------- ------- --------- ---------- -------- ---------
Balance at December 31, 1998............. 464,791 4,648 4,628,542 (1,370,803) (5,495) 3,256,892
---------
Comprehensive income:
Net earnings........................ - - - 5,867 - 5,867
Net change in unrealized loss on
securities available for sale,
net of tax of $41,030........... - - - - (73,432) (73,432)
---------
Comprehensive income (loss)......... (67,565)
---------
Common stock issued upon exercise
of 10,700 warrants.................. 10,700 107 106,893 - - 107,000
------- ------- --------- ---------- -------- ---------
Balance at December 31, 1999............. 475,491 $ 4,755 4,735,435 (1,364,936) (78,927) 3,296,327
======= ======= ========= ========== ======== =========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
23
<PAGE>
<TABLE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended December 31,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss)............................................................. $ 5,867 (1,071,398)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Depreciation and amortization.............................................. 98,568 81,557
(Credit) provision for loan losses......................................... (308,571) 725,000
Provision (credit) for deferred income taxes............................... 3,400 (638,450)
Net amortization of fees, costs, premiums and discounts.................... 52,032 72,085
Increase in accrued interest receivable.................................... (56,675) (73,856)
Decrease in other assets................................................... 8,184 146,914
(Decrease) increase in official checks..................................... (14,604) 73,204
(Decrease) increase in accrued interest payable and other liabilities...... (38,544) 129,698
--------- ----------
Net cash used in operating activities................................. (250,343) (555,246)
--------- ----------
Cash flows from investing activities:
Purchases of securities available for sale...................................... (6,195,969) (6,297,091)
Principal repayments on securities available for sale........................... 1,436,583 2,924,447
Net increase in loans........................................................... (2,503,084) (8,553,588)
Purchase of Federal Home Loan Bank stock........................................ (14,500) (50,000)
Purchases of premises and equipment............................................. (72,660) (457,704)
Net proceeds from sale of premises and equipment................................ 293,384 -
--------- -----------
Net cash used in investing activities................................. (7,056,246) (12,433,936)
--------- ----------
Cash flows from financing activities:
Net increase in deposits........................................................ 4,434,800 14,107,121
Net increase in advance from Federal Home Loan Bank............................. - 1,000,000
Net (decrease) increase in other borrowings..................................... (364,749) 364,749
Proceeds from issuance of common stock upon exercise of warrants................ 107,000 -
--------- ----------
Net cash provided by financing activities............................. 4,177,051 15,471,870
--------- ----------
Net (decrease) increase in cash and cash equivalents................................ (3,129,538) 2,482,688
Cash and cash equivalents at beginning of year...................................... 4,948,505 2,465,817
--------- ----------
Cash and cash equivalents at end of year............................................ $ 1,818,967 4,948,505
========= ==========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest................................................................... $ 838,682 669,266
========= ==========
Income taxes............................................................... $ - -
========= ==========
Noncash transaction-
Accumulated other comprehensive income (loss), net change in
unrealized loss on securities available for sale, net of tax $ (73,432) 5,495
========= ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 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
it's deposits are 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.
Basis of 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.
Use of Estimates. In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and deferred tax assets.
Cash and Cash Equivalents. For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and balances due from banks
and federal funds sold.
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 other
comprehensive income (loss). Gains and losses on the sale of
available-for-sale securities are determined using the
specific-identification method. Premiums and discounts on securities are
recognized in interest income using the interest method over the period to
maturity.
Loans Receivable. Loans receivable that management has th 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 loans is discontinued at the time the loan is
ninety days delinquent unless the credit is well-secured and in process of
collection. In all cases, loans are placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered
doubtful.
(continued)
25
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Loans Receivable, Continued. All interest accrued but not collected for loans
that are placed on nonaccrual or charged- off is reversed against interest
income. The interest on these loans is accounted for on the cash-basis or
cost- recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that TCB will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial loans by either the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, TCB does not separately identify
individual consumer and residential loans for impairment disclosures.
Premises and Equipment. Leasehold improvements, fixtures and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation
and amortization expense is computed using the straight-line method over
the estimated useful life of each type of asset.
(continued)
26
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Transfer of Financial Assets. Transfers of financial assets are accounted for as
sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have
been isolated from TCB, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) TCB does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Income Taxes. Deferred income tax assets and liabilities are recorded to reflect
the tax consequences on future years of temporary differences between
revenues and expenses reported for financial statement and those reported
for income tax purposes. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be realized or
settled. Valuation allowances are provided against assets which are not
likely to be realized.
Stock-Based Compensation. Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock- Based Compensation, encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period. 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 Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, whereby
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options issued under TCB's
stock option plan have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. TCB has elected
to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided proforma disclosures of net earnings and earnings per
share and other disclosures, as if the fair value based method of
accounting had been applied.
Per Share Amounts. Per share amounts have been computed on the basis of the
weighted-average number of shares of common stock outstanding. TCBs common
stock equivalents are not dilutive during the years presented in the
consolidated statements of operations.
Accounting Change. Effective December 1, 1998, TCB adopte 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 operations 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.
(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. The fair value of a financial instrument
is the current amount that would be exchanged between willing parties,
other than in a forced liquidation. Fair value is best determined based
upon quoted market prices. However, in many instances, there are no quoted
market prices for TCB's various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value
of TCB. The following methods and assumptions were used by TCB in
estimating fair values of financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Securities. Fair values for available for sale are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The
carrying value of Federal Home Loan Bank stock approximates fair value.
Loans Receivable. 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 TCBs 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 1998 consolidated financial statements
have been reclassified to conform to the 1999 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,
2001. Management does not anticipate that this Statement will have a
material impact on TCB.
(continued)
28
<PAGE>
<TABLE>
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:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999:
<S> <C> <C> <C>
U.S. agency securities.................... $ 1,507,873 - (39,154) 1,468,719
Mortgage-backed securities................ 6,512,947 7,878 (92,051) 6,428,774
--------- ----- ------- ---------
$ 8,020,820 7,878 (131,205) 7,897,493
========= ===== ======= =========
December 31, 1998-
Mortgage-backed securities................ $ 3,311,351 1,264 (10,129) 3,302,486
========= ===== ======= =========
</TABLE>
The scheduled maturities of securities available for sale were as follows:
At December 31, 1999
------------------------
Amortized Fair
Cost Value
----------- ---------
Due from five to ten years $ 1,507,873 1,468,719
Mortgage-backed securities 6,512,947 6,428,774
----------- ---------
$ 8,020,820 7,897,493
There were no sales of securities during the years ended December 31, 1999 or
1998.
At December 31, 1999, securities with a carrying value of approximately
$1.9 million were pledged as collateral for the advance from the Federal Home
Loan Bank (see Note 6). There were no pledged securities at December 31, 1998.
(3) Loans
The components of loans were as follows:
At December 31,
-----------------------
1999 1998
---- ----
Commercial...................................... $ 6,527,174 9,254,806
Commercial real estate......................... 4,518,649 716,633
Residential real estate........................ 2,625,368 1,449,602
Consumer and home equity........................ 988,980 897,475
---------- ----------
Loans, gross.................................... 14,660,171 12,318,516
(Subtract) add:
Allowance for loan losses.................... (290,000) (760,000)
Net deferred costs........................... 2,742 4,857
---------- ---------
Loans, net...................................... $14,372,913 11,563,373
========== ==========
Loans serviced for others, which consist of participations sold, are not
included in the accompanying consolidated balance sheets and were $384,939
at December 31, 1999. There were no loans serviced for others at December
31, 1998.
(continued)
29
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans, Continued
An analysis of the change in the allowance for loan losses follows:
Year Ended
December 31,
---------------------
1999 1998
---- ----
Balance at January 1............................ $ 760,000 35,000
(Credit) provision for loan losses.............. (308,571) 725,000
Loans charged-off............................... (161,429) -
------- -------
Balance at December 31.......................... $ 290,000 760,000
======= =======
The following summarizes the collateral dependent amounts of impaired loans:
<TABLE>
At December 31,
----------------------
1999 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:
Year Ended
December 31,
---------------------
1999 1998
---- ----
Average net investment in impaired loans............ $ 329,804 338,572
======== =======
Interest income recognized on impaired loans........ $ - 75,589
======== =======
Interest income received on impaired loans.......... $ - 75,589
======== =======
(4) Premises and Equipment
A summary of premises and equipment follows:
At December 31,
---------------------
1999 1998
---- ----
Land.............................................. $ - 261,246
Building and leasehold improvements............... 137,808 138,437
Furniture, fixtures and equipment................. 578,535 537,384
------- -------
Total, at cost................................ 716,343 937,067
Less accumulated depreciation and amortization.... (196,704 (98,136)
------- --------
Premises and equipment, net................... $ 519,639 838,931
======= ========
(continued)
30
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
During 1999, TCB sold premises and equipment with a carrying value of $293,384
(see Note 17).
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 as well as renewal options. Rent expense under
operating leases during the years ended December 31, 1999 and 1998 was
$73,036 and $55,210, respectively. Estimated future rentals over the
remaining noncancellable lease terms follow (in thousands):
Year Ending
December 31, Amount
------------- ------
2000................................................ $ 73
2001................................................ 76
2002................................................ 33
2003................................................ 21
---
Total minimum lease payments........................... $ 203
===
(5) Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $1.1 million and $1.5 million at December 31, 1999 and
1998, respectively.
A schedule of maturities of time deposits at December 31, 1999 follows:
Year Ending
December 31, Amount
2000....................................................... $ 14,003,883
2001....................................................... 917,511
----------
$ 14,921,394
==========
(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:
At December 31,
Year Ending Interest ------------------
December 31, Rate 1999 1998
------------ --------- ---- ----
2008...................... 4.80% $ 1,000,000 1,000,000
========= =========
At December 31, 1999, this advance was collateralized by securities with a
carrying value of approximately $1.9 million.
At December 31, 1998, this advance was collateralized by $1.0 million of TCBs
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 were
collateralized by TCB-Volusias stock. These borrowings were repaid in 1999
using the proceeds from the settlement with Highlands County organizers
(see Note 17). There were no other borrowings at December 31, 1999.
(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.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration does or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. TCB evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if any, is based on management's credit evaluation of
the counterparty.
The estimated fair values of TCB's financial instruments were as follows (in
thousands):
<TABLE>
At
December 31, 1999 December 31, 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 1,819 1,819 4,949 4,949
Securities....................................... 7,897 7,897 3,302 3,302
Loans receivable................................. 14,373 14,347 11,563 11,643
Accrued interest receivable...................... 146 146 90 90
Financial liabilities:
Deposits......................................... 21,220 21,649 16,785 17,352
Advance from Federal Home Loan Bank.............. 1,000 967 1,000 958
Other borrowings................................. - - 365 365
======== ======== ======= =======
</TABLE>
A summary of the notional amounts of TCB's financial instruments which
approximate fair value, with off-balance sheet-risk at December 31, 1999
was as follows (in thousands):
Unused lines of credit.............................. $ 1,519
=====
Undisbursed loans in process........................ $ 427
=====
(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 $2,516,771
and $2,192,033 December 31, 1999 and 1998, respectively. During the year
ended December 31, 1999, new loans originated to these related parties
totaled $518,873 and principal repayments totaled $194,135.
(10) Commitments and Contingencies
In the ordinary course of business, TCB has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying
financial statements. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse
effect on the financial condition of TCB.
(11) 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.
(12) Income Taxes
Income taxes are included in the consolidated statements of operation as
follows:
<TABLE>
Year Ended
December 31,
----------------------------
1999 1998
---- ----
Income tax provision (benefit) on loss before cumulative effect
<S> <C> <C>
of change in accounting principal................................... $ 3,400 (577,850)
Cumulative effect of change in accounting principal..................... - (60,600)
----- -------
$ 3,400 (638,450)
===== =======
</TABLE>
The income tax benefit before cumulative effect of change in accounting
principal consisted of the following:
Year Ended
December 31,
------------------------
1999 1998
---- ----
Deferred:
Federal...................................... $ 2,900 (493,400)
State........................................ 500 (84,450)
----- -------
Total deferred provision (benefit)........ $ 3,400 (577,850)
===== =======
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>
Year Ended December 31,
1999 1998
----------------------------------------
% of % of
Pretax Pretax
Amount Loss Amount Loss
------ ------ ------ ------
Income tax provision (benefit) at statutory Federal
<S> <C> <C> <C> <C>
income tax rate.......................................... $ 3,151 34.0% $(526,901) (34.0)%
(Increases) decreases resulting from
State taxes, net of federal tax benefit.................. 328 3.5 (55,737) (3.6)
Other.................................................... (79) (.8) 4,788 0.3
------- ---- -------- ----
$ 3,400 36.7% $(577,850) (37.3)%
======= ==== ======= ====
</TABLE>
(continued)
33
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented
below.
At December 31,
--------------------
1999 1998
---- ----
Deferred tax assets:
Unrealized loss on securities available for sale.....$ 44,400 3,370
Allowance for loan losses............................ 56,000 250,000
Organization and startup costs....................... 117,000 120,000
Net operating loss carryforwards..................... 734,000 484,000
Other................................................ 4,211 1,611
------- -------
Gross deferred tax assets.......................... 955,611 858,981
------- -------
Deferred tax liabilities:
Accrued income net of accrued expenses............... 44,000 14,000
Premises and equipment............................... 49,000 20,000
------- -------
Gross deferred tax liabilities..................... 93,000 34,000
------- -------
Net deferred tax asset.............................$ 862,611 824,981
======= =======
TCB had net operating loss carryforwards for federal and state income tax
purposes as follows:
At December 31,
---------------
Year Expires 1999
----
2011........................................... $ 4,000
2012........................................... 231,000
2018.......................................... 839,000
2019.......................................... 876,000
----------
$ 1,950,000
==========
(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, 1999, 23,279 remain available
for grant. A summary of stock option transactions follows:
<TABLE>
Weighted-
Number Range of Average Aggregate
of Per Share Per Share Option
Shares Option Price Price Price
<S> <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
Options forfeited.............................. (8,500) 10.00 10.00 (85,000)
Options granted................................ 13,200 10.00 10.00 132,000
------ ----- -------
Outstanding at December 31, 1999............... 23,200 $ 10.00 10.00 232,000
====== ===== ===== =======
</TABLE>
The weighted-average remaining contractual life of the outstanding stock options
at December 31, 1999 and 1998 was 109 months and 110 months, respectively.
These options are exercisable as follows:
<TABLE>
Number Weighted-Average
Year Ending of Shares Exercise Price
----------- ------ --------------
<S> <C> <C>
Currently exercisable.............................. 4,330 $ 10.00
2000............................................... 4,640 10.00
2001............................................... 4,640 10.00
2002............................................... 4,640 10.00
2003............................................... 2,640 10.00
2004............................................... 2,310 10.00
------
23,200 $ 10.00
====== =====
</TABLE>
FASB Statement 123 requires proforma information regarding net loss and loss per
share. For purposes of proforma disclosures, the estimated fair value is
included in expense during the vesting period. 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:
<TABLE>
Year Ended December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Grant date fair value of stock options issued during year......... $ 57,077 55,363
====== =========
Net earnings (loss):
As reported................................................... $ 5,867 (1,071,398)
====== ==========
Proforma...................................................... $ (8,960) (1,082,071)
====== ==========
Earnings (loss) per share:
As reported................................................... .01 (2.31)
====== ===========
Proforma...................................................... (.02) (2.33)
======= ===========
</TABLE>
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 6.0% in 1999 and 5.0% in 1998, no dividends 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
Banking regulations place certain restrictions on dividend and loans or advances
made by TCB-Volusia to TCB.
TCB-Volusia is subject to various regulatory capital requirements administered
by the 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, TCB-Volusia must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The 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 percentages (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 1999 and 1998, TCB-Volusia met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, 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, an institution must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage percentages as set forth in the
following tables. 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 percentages as of December 31, 1999 and 1998 are
also presented in the table (dollars in thousands).
<TABLE>
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provision:
----------------------------- ---------------------- ----------------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ ---
At December 31, 1999:
Total capital (to Risk-
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets).......... $ 2,751 18.3% $ 1,206 8.0% $ 1,507 10.0%
Tier I Capital (to Risk-
Weighted Assets).......... 2,561 17.0 603 4.0 904 6.0
Tier I Capital
(to Average Assets)....... 2,561 10.6 965 4.0 1,206 5.0
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 4.0 997 5.0
(continued)
</TABLE>
36
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Stockholders' Equity
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 thirty-six month period ending April 27,
2000. During the year ended December 31, 1999, 10,700 warrants were
exercised. There were 439,300 and 450,000 warrants outstanding at December
31, 1999 and 1998, respectively.
(15) Parent Company Only Financial Information
Unconsolidated financial information for The Commercial Bancorp, Inc., is as
follows:
Condensed Balance Sheets
At December 31,
-------------------
1999 1998
---- ----
Assets
Cash............................................ $ 19,572 37,432
Investment in subsidiary........................ 3,122,380 3,162,731
Deferred tax asset.............................. 178,250 161,650
Premises and equipment, net..................... - 342,122
Other assets.................................... 3,270 5,555
----------- ---------
Total assets................................ $ 3,323,472 3,709,490
========= =========
Liabilities and Stockholders' Equity
Borrowings...................................... - 364,749
Other liabilities............................... 27,145 87,849
Stockholders' equity............................ 3,296,327 3,256,892
--------- ---------
Total liabilities and stockholders' equity.. $ 3,323,472 3,709,490
========= =========
<TABLE>
Condensed Statements of Operations
Year Ended
December 31,
1999 1998
---- ----
<S> <C> <C>
Revenues.................................................................. $ 109,624 5,529
Expenses.................................................................. (136,838) (295,137)
-------- ----------
Loss before earnings (loss) of subsidiary............................. (27,214) (289,608)
Earnings (loss) of subsidiary......................................... 33,081 (781,790)
-------- ----------
Net earnings (loss)................................................... $ 5,867 (1,071,398)
======== ==========
</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>
Year Ended
December 31,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss)............................................................ $ 5,867 (1,071,398)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Equity in undistributed (earnings) loss of subsidiary...................... (33,081) 781,790
Credit for deferred income taxes........................................... (16,600) (161,650)
Net proceeds from sale and transfer of premises and equipment.............. 342,122 -
Net decrease in other assets............................................... 2,285 6,445
(Decrease) increase in other liabilities................................... (60,704) 87,849
-------- --------
Net cash provided by (used in) operating activities........................ 239,889 (356,964)
-------- --------
Cash flows from investing activities-
Purchases of premises and equipment............................................ - (342,122)
-------- --------
Cash flows from financing activities:
Sale of common stock upon exercise of warrants................................. 107,000 -
Net (decrease) increase in borrowings.......................................... (364,749) 364,749
-------- --------
Net cash (used in) provided by financing activities........................ (257,749) 364,749
-------- --------
Net decrease in cash and cash equivalents........................................... (17,860) (334,337)
Cash and cash equivalents at beginning of the year.................................. 37,432 371,769
-------- --------
Cash and cash equivalents at end of year............................................ $ 19,572 37,432
======== ========
Noncash transaction -
Net change in investment in subsidiary due to net change in
accumulated other comprehensive income (loss), unrealized loss
on securities
available for sale, net of tax............................................. $ (73,432) (5,495)
======== ========
</TABLE>
(continued)
38
<PAGE>
THE COMMERCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Year 2000 Issues
TCB'soperating and financial systems have been found to b compliant; the "Y2K
Problem" has not adversely affected TCB's operations nor does management
expect that it will.
(17) New Bank Charter and Planned Public Offering
During 1998, 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 ("Organizers")
elected to continue without TCB. Because of this, management terminated its
planned public offering and charged-off $88,986 in prepaid offering
expenses during 1998. During 1999, TCB and the Organizers entered into a
settlement agreement in which the Organizers paid TCB $402,993 in proceeds,
including repayment of debt and for certain premises and equipment and as
partial reimbursement of organization expenses.
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, 1999 and 1998,
and the related consolidated statements of operations, changes in 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 audit 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, 1999 and 1998, 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
February 1, 2000
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 18, 2000.
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, Suite 1000
Tampa, Florida 33609
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form
10-KSB for the period ended December 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 767
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,052
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,897
<INVESTMENTS-CARRYING> 0
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<LOANS> 14,662
<ALLOWANCE> 290
<TOTAL-ASSETS> 25,732
<DEPOSITS> 21,220
<SHORT-TERM> 0
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<LONG-TERM> 1,000
0
0
<COMMON> 5
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<INTEREST-LOAN> 1,116
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<INTEREST-TOTAL> 1,468
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<LOAN-LOSSES> (309)
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<EPS-BASIC> .01
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</TABLE>
