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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X Annual Report under Section 13 or 15(d) of the Securities Exchange
---- Act of 1934 For the fiscal year ended December 31, 1998
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
---- Act of 1934
For the transition period from _____ to _____
Commission file no. 333-41545
SOUTHEAST COMMERCE HOLDING COMPANY
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(Name of Small Business Issuer in Its Charter)
Georgia 58-2349097
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2410 Paces Ferry Road
Atlanta, Georgia 30339
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(Address of Principal Executive Offices) (Zip Code)
(770) 863-9229
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will 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.[X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 26, 1999, was $11,760,227. This calculation is
based upon a value of $8.75 per share, which was the average bid and asked
price of the common stock on the over-the-counter market on such date.
There were 1,469,250 shares of the Company's common stock issued and
outstanding as of the record date, March 29, 1999.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Company's 1998 Annual Report and Proxy Statement for the 1999 Annual
Shareholders Meeting.
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ITEM 1. DESCRIPTION OF BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief
or current expectations of the Company, its directors or its officers with
respect to, among other things: (i) the Company's financing plans; (ii) trends
affecting the Company's financial condition or results of operations; (iii) the
Company's growth strategy and operating strategy; and (iv) the declaration and
payment of dividends. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors
discussed herein and those factors discussed in detail in the Company's filings
with the Securities and Exchange Commission.
GENERAL
Southeast Commerce Holding Company (the "Company") was incorporated as a
Georgia corporation on August 22, 1997 primarily to own and control all of the
capital stock of Commerce Bank (the "Bank"). On July 10, 1998 the Company
completed the initial public offering of its common stock at a price of $10.00
per share. The Company sold 1,469,250 shares for a total of $14,692,500 in the
offering. The net proceeds to the Company after deducting the total offering
expenses were $13,736,665.
The Bank obtained a thrift charter from the Office of Thrift Supervision
("OTS") and commenced operations on August 17, 1998. The Bank engages in a
commercial banking business from its main office located at 2410 Paces Ferry
Road in the city of Atlanta, Georgia bordering Cobb County, Georgia. Deposits
are insured by the FDIC. The Bank chose a thrift charter because this charter
will allow the Bank to operate in all fifty states and to branch into any
county in the state of Georgia. The thrift charter will also give the Company
more flexibility to pursue strategic opportunities to grow its customer base
and to create cross-selling opportunities to those same customers. The Company
intends eventually to build a multi-site financial services institution that
focuses its core business on community banking as it relates to real estate and
other related areas of commerce. These businesses may include, but will not be
limited to, a residential mortgage company, a wholesale mortgage company, a
small loan finance company, and a property/ casualty insurance company. The
Company has already invested in Commerce Mortgage Company, LLC, ("Commerce
Mortgage") which is described further below.
The Company intends to use state-of-the-art technology to offer
electronic banking services and products and provide better service to its
customers. The Bank's operating strategies will be based on its philosophy of
Better People, Better Service, Better Banking(sm).
MARKETING FOCUS
Most of the banks in the Cobb County area are now local branches of
large regional banks. Although size gives the larger banks certain advantages
in competing for business from large corporations, including higher lending
limits and the ability to offer services in other areas of Georgia and the Cobb
County area, the Company believes that there is a void in the community banking
market in the Cobb County area and believe that the Bank can successfully fill
this void. As a result, the Company generally will not attempt to compete for
the banking relationships of large corporations, but
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will concentrate its efforts on small- to medium-sized businesses and on
individuals. The Bank plans to advertise to emphasize the Company's local
ownership, community bank nature, and ability to provide more personalized
service than its competition. The Company believes that the area will react
favorably to the Bank's emphasis on service to small businesses, individuals,
and professional concerns. However, no assurances in this respect can be given.
The Bank also intends to offer Internet banking and, in March 1999,
appointed William W. Klenk to its newly created position of Director of
Internet Banking Services. As a community bank, the Bank's operating strategy
is to utilize state-of-the art technology and offer all of the traditional
banking services in an efficient and convenient manner in order to be
competitive in the markets it serves. The Bank intends to leverage the power of
the Internet to develop closer ties with its customers and more
cost-effectively reach new markets. In 1999 the Bank began developing its web
site and expects to begin offering Internet banking services in the second
quarter of 1999.
LOCATION AND SERVICE AREA
While not restricted by law, the Bank expects initially to draw 75% of
its non-Internet related business from Cobb County, Georgia, and the
surrounding areas. Cobb County, which will be the Bank's primary service area,
has been one of the fastest growing regions in Georgia over the last several
years. The county's population has grown from 447,745 in 1990 to 538,832 in
1996, and per capita income in the county was $30,000 as of 1996 making it the
second largest county in the state.
Cobb County is located on the Northwest side of Atlanta in the state of
Georgia. Cobb County has evolved from a bedroom community to a business and
residential center in its own right. According to government statistics, Cobb
County had an estimated population of 539,000 in 1998, with an annual growth
rate of approximately 3%. Cobb County enjoys a diversified employment base. The
larger employment sectors include retail trade, services, government and
manufacturing. Cobb County has approximately 9,000 hotel rooms to accommodate
conventions, trade shows, and business meetings, and over 13 million square
feet of developed office space. College-educated residents comprise 33% of the
population. Annual family income of approximately $46,000 is among the highest
in the metropolitan Atlanta area. Local museums, arts center, a symphony,
libraries and parks enable Cobb residents to enjoy arts and other cultural
events without having to drive into Atlanta. Outdoors activities include lakes,
13 golf courses, public and private facilities for baseball, softball, soccer,
and tennis, as well as amusement parks which attract metropolitan Atlanta
residents, as well as out of town guests. The Cobb County area has experienced
growth over the last ten years, and the Company expects that the area and
industry will continue to grow.
DEPOSITS
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, commercial accounts, savings accounts, and other time deposits of
various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates are
tailored to the Bank's principal market area at rates competitive to those
offered in the Cobb County area. In addition, the Bank offers certain
retirement account services, such as Individual Retirement Accounts (IRAs). The
Bank solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
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LENDING ACTIVITIES
General. The Bank emphasizes a range of lending services, including real
estate, commercial and consumer loans, to individuals and small-to medium-sized
businesses and professional concerns that are located in or conduct a
substantial portion of their business in the Bank's market area. The Bank will
initially emphasize retail banking, home mortgages, real estate development,
and consumer lending needs. The Bank will not be permitted to make non-real
estate commercial purpose loans that exceed 20% of its assets or non-real
estate consumer purpose loans that exceed 35% of its assets. Outside of the
inherent risk of the credit worthiness of the Bank's borrowers, other risks
associated with residential mortgage loans would be the inability to move
foreclosed real estate in a down market or economy, shifts in the demographics
of a given market from residential zonings to commercial, individual customers
who have been displaced due to corporate downsizing/loss of income, and an
overall economic downturn creating unemployment due to lack of product demand.
Real Estate Loans. One of the primary components of the Bank's loan
portfolio is loans secured by first or second mortgages on real estate. These
loans generally consist of commercial real estate loans, construction and
development loans, and residential real estate loans (home equity loans are
excluded as they are classified as consumer loans). Loan terms generally are
limited to five years or less, although payments may be structured on a longer
amortization basis. Interest rates may be fixed or adjustable, and will more
likely be fixed in the case of shorter term loans. The Bank will generally
charge an origination fee. Management will attempt to reduce credit risk in the
commercial real estate portfolio by emphasizing loans on owner-occupied office
and retail buildings where the loan-to-value ratio, established by independent
appraisals, does not exceed 80%. In addition, the Bank typically requires
personal guarantees of the principal owners of the collateral property,
combined with a review by the Bank of the personal financial statements of the
principal owners. The principal economic risk associated with each category of
anticipated loans, including real estate loans, is the creditworthiness of the
Bank's borrowers. The risks associated with real estate loans vary with many
economic factors, including employment levels and fluctuations in the value of
real estate.
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. Equipment loans are typically for a term of five
years or less at fixed or variable rates, with the loan fully amortized over
the term and secured by the financed equipment and with a loan-to-value ratio
of 80% or less. Working capital loans typically have terms not exceeding one
year and will usually be secured by accounts receivable, inventory, or personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal will typically be repaid as the assets
securing the loan are converted into cash, and in other cases principal will
typically be due at maturity. The principal economic risk associated with each
category of anticipated loans, including commercial loans, is the
creditworthiness of the Bank's borrowers. The risks associated with commercial
loans vary with many economic factors, including the economy in the Cobb County
area. The well-established banks in the Cobb County area will make
proportionately more loans to medium- to large-sized businesses than the Bank.
Many of the Bank's anticipated commercial loans will likely be made to small-
to medium-sized businesses which may be less able to withstand competitive,
economic, and financial conditions than larger borrowers.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment
and term loans, home equity loans and lines of credit, and revolving lines of
credit such as credit cards. These loans typically will carry balances of less
than $25,000 and, in the case of non-revolving loans, will be amortized over a
period not to exceed 48 months. Ninety-day term loans typically bear interest
at a fixed rate. The revolving loans typically
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bear interest at a fixed rate and require monthly payments of interest and a
portion of the principal balance. The underwriting criteria for home equity
loans and lines of credit will generally be the same as applied by the Bank
when making a first mortgage loan, as described above, and home equity lines of
credit will typically expire ten years or less after origination. As with the
other categories of loans, the principal economic risk associated with consumer
loans is the creditworthiness of the Bank's borrowers, and the principal
competitors for consumer loans will be the established banks in the Cobb County
area.
Loan Approval and Review. The Bank's loan approval policies will provide
for various levels of officer lending authority. When the amount of aggregate
loans to a single borrower exceeds that individual officer's lending authority,
the loan request will be considered and approved by an officer with a higher
lending limit or the officers' loan committee. The Bank has established an
officers' loan committee that has lending limits, and any loan in excess of
this lending limit will be approved by the directors' loan committee. The Bank
will not make any loans to any director, officer, or employee of the Bank
unless the loan is approved by the board of directors of the Bank and is made
on terms not more favorable to such person than would be available to a person
not affiliated with the Bank.
Lending Limits. The Bank's lending activities are subject to a variety
of lending limits imposed by federal law. While differing limits apply in
certain circumstances based on the type of loan or the nature of the borrower
(including the borrower's relationship to the Bank), in general the Bank is
subject to a loan-to-one-borrower limit. Since the enactment of FIRREA in 1989,
a savings association generally may not make loans to one borrower and related
entities in an amount which exceeds 15% of its unimpaired capital and surplus,
although loans in an amount equal to an additional 10% of unimpaired capital
and surplus may be made to a borrower if the loans are fully secured by readily
marketable securities. Unless the Bank is able to sell participations in its
loans to other financial institutions, the Bank will not be able to meet all of
the lending needs of loan customers requiring aggregate extensions of credit
above these limits.
OTHER BANKING SERVICES
Other services the Bank provides or expects to provide include cash
management services, safe deposit boxes, travelers checks, direct deposit of
payroll and social security checks, and automatic drafts for various accounts.
The Bank is associated with a shared network of automated teller machines that
may be used by Bank customers throughout Georgia and other regions. The Bank
also offers MasterCard and VISA credit card services through a correspondent
bank as an agent for the Bank.
The Company also operates a sub-prime mortgage lending business through
its affiliate Commerce Mortgage. The Company invested $250,000 for a 50%
interest in the mortgage company. Commerce Mortgage, which operates from an
office in Gainesville, Georgia, originates, packages, and sells sub-prime
mortgages on a service-released basis, but it is not a portfolio lender. The
sub-prime lending market focuses on those homeowners that are looking to use
the equity in their home for debt consolidation. Another area of business is
the potential home buyer who may have less than the A-1 credit that is required
for the traditional conforming loans.
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Cobb County area and elsewhere. In 1996, there were more than 160 branches
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of financial institutions operating in Cobb County, holding over $4.5 billion
in deposits. A number of these competitors are well established in the Cobb
County area. Most of them have substantially greater resources and lending
limits than the Bank and offer certain services, such as extensive and
established branch networks and trust services, that the Bank either does not
expect to provide or will not provide initially. As a result of these
competitive factors, the Bank may have to pay higher rates of interest to
attract deposits.
EMPLOYEES
As of March 15, 1999, the Company had 17 full-time employees and no
part-time employees. The Company does not have any employees other than its
officers.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of the Company. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following with FDICIA, which was enacted in 1991, numerous additional
regulatory requirements have been placed on the banking industry in the past
several years, and additional changes have been proposed. The banking industry
is also likely to change significantly as a result of the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") The operations of the Company and the Bank may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control, or new federal or state legislation may have in the future.
THE COMPANY
The Company is a registered holding company under both the Savings and
Loan Holding Company Act (the "SLHCA") set forth in Section 10 of the Home
Owners Loan Act ("HOLA") and the Financial Institutions Code of Georgia. The
Company is regulated under such acts by the OTS and by the Department of
Banking and Finance (the "DBF"), respectively. As a savings and loan holding
company, the Company is required to file with the OTS an annual report and such
additional information as the OTS may require pursuant to the SLHCA. The OTS
will also conduct examinations of the Company and each of its subsidiaries.
As a unitary savings and loan holding company owning only one savings
institution, the Company will generally be allowed to engage and invest in a
broad range of business activities not permitted to commercial bank holding
companies or multiple savings and loans holding companies, provided that the
Bank continues to qualify as a "qualified thrift lender." See "--The Bank -
Qualified Thrift Lender Requirements."
The SLHCA and the Financial Institutions Code of Georgia will prohibit
the Company from acquiring control of another savings association or another
savings and loan holding company without
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prior approval from the OTS and the DBF, respectively. However, savings and
loan holding companies are allowed to acquire or to retain as much as 5% of the
voting shares of a savings institution or savings and loan holding company
without regulatory approval.
The OTS may not approve an acquisition that would result in the
formation of certain types of interstate holding company networks. The OTS is
precluded from approving an acquisition that would result in the formation of a
multiple holding company controlling institutions in more than one state unless
the acquiring company or one of its savings institution subsidiaries is
authorized to acquire control of an institution or to operate an office in the
additional state pursuant to a supervisory acquisition authorized under Section
13(k) of the Federal Deposit Insurance Act or unless the statutes of the state
in which the institution to be acquired is located permits such an acquisition.
THE BANK
General. The Bank operates as a federal savings bank incorporated under
the laws of the United States and subject to examination by the OTS. The OTS
regulates or monitors virtually all areas of the Bank's operations, including
security devices and procedures, adequacy of capitalization and loss reserves,
loans, investments, borrowings, deposits, mergers, issuances of securities,
payment of dividends, interest rates payable on deposits, interest rates or
fees chargeable on loans, establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training to carry on
safe lending and deposit gathering practices. The OTS requires the Bank to
maintain certain capital ratios and will impose limitations on the Bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The Bank is required by the OTS to prepare quarterly reports on the Bank's
financial condition and to conduct an annual audit of its financial affairs in
compliance with minimum standards and procedures prescribed by the OTS. OTS
Regulations generally provide that federal savings banks must be examined no
less frequently than every 18 months. The Bank also is subject to assessments
by the OTS to cover the costs of such examinations.
As a federally chartered savings institution, the Bank generally is not
subject to those provisions of Georgia law governing state chartered financial
institutions or to the jurisdiction of the DBF. However, the DBF interprets the
Financial Institutions Code of Georgia to require the prior approval of the DBF
for any acquisition of control of any savings institution (whether chartered by
state or federal authority) located in Georgia. The DBF also interprets the
Financial Institutions Code of Georgia to include savings and loan holding
companies as "bank holding companies," thus giving the DBF the authority to
make examinations of the Company and any subsidiaries and to require periodic
and other reports. Existing DBF regulations do not restrict the business
activities or investments of the Company or the Bank.
State usury laws are applicable to federally insured institutions with
regard to loans made within Georgia. Generally speaking, Georgia law does not
establish ceilings on interest rates although certain specialized types of
lending, in which the Bank engages, such as making loans of $3,000 or less, are
subject to interest rate limitations.
Subsidiary institutions of a savings and loan holding company, such as
the Bank, are subject to certain restrictions imposed by the Federal Reserve
Act on any extension of credit to the holding company or any of its
subsidiaries, on investment in the stock or other securities thereof, and on
the taking of such stock or securities as collateral for loans to any borrower.
In addition, a holding company and its subsidiaries are prohibited from
engaging in certain tying arrangements in connection with any extension of
credit or provision of any property or services.
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Capital Requirements. OTS regulations require that federal savings banks
maintain (i) "tangible capital" in an amount of not less than 1.5% of total
assets, (ii) "core capital" in an amount not less than 3.0% of total assets,
and (iii) a level of risk-based capital equal to 8% of risk-weighted assets.
Under OTS regulations, the term "core capital" generally includes common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries less unidentifiable intangible assets (other than certain amounts
of supervisory goodwill) and certain investments in certain subsidiaries plus
90% of the fair market value of readily marketable purchased mortgage servicing
rights and purchased credit card relationships (subject to certain conditions).
"Tangible capital" generally is defined as core capital minus intangible assets
and investments in certain subsidiaries, except purchased mortgage servicing
rights.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and each on-balance sheet asset must be multiplied by a
risk factor ranging from 0% to 200% (again depending upon the nature of the
asset) and (iii) the resulting amounts are added together and constitute total
risk-weighted assets. "Total capital"- risk-based capital requirement equals
the sum of core capital plus supplementary capital (which, as defined, includes
the sum of, among other items, perpetual preferred stock not counted as core
capital, limited life preferred stock, subordinated debt, and general loan and
lease loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of 4%.
OTS regulations also include an interest-rate risk component in the
risk-based capital requirement. Under this regulation, an institution is
considered to have excess interest rate-risk if, based upon a 200-basis point
change in market interest rates, the market value of an institution's capital
changes by more than 2%. The OTS risk-based capital standards also provide for
concentration of credit risk, risk from nontraditional activities and actual
performance, and expected risk of loss on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Additionally, the DBF requires that savings
and loan holding companies, such as the Company, must maintain a 5% Tier 1
leverage ratio on a consolidated basis.
Deposit Insurance. Deposits at the Bank are insured to a maximum of
$100,000 for each insured depositor by the FDIC. The FDIC establishes rates for
the payment of premiums by federally insured commercial banks and savings
banks, or thrifts, for deposit insurance. A separate Bank Insurance Fund
("BIF") and Savings Association Insurance Fund ("SAIF") are maintained for
commercial banks and thrifts, respectively, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Since 1993, insured depository institutions like the Bank have paid for
deposit insurance under a risk-based premium system. Under this system, until
mid-1995 depositor institutions paid to BIF or SAIF from $0.23 to $0.31 per
$100 of insured deposits depending on its capital levels and risk profile, as
determined by its primary federal regulator on a semi-annual basis. Once the
BIF reached its legally mandated reserve ratio in mid-1995, the FDIC
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lowered premiums for well-capitalized banks, eventually to $.00 per $100, with
a minimum semiannual assessment of $1,000. However, in 1996 Congress enacted
the Deposit Insurance Funds Act of 1996, which eliminated this minimum
assessment. It also separated the Financial Corporation (FICO) assessment to
service the interest on its bond obligations. The amount assessed on individual
institutions, including the Bank, by FICO is in addition to the amount paid for
deposit insurance according to the risk-related assessment rate schedule.
Increases in deposit insurance premiums or changes in risk classification will
increase the Bank's cost of funds, and there can be no assurance that such cost
can be passed on the Bank's customers.
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured institutions. Any insured
institution which does not operate in accordance with or conform to FDIC
regulations, policies and directives may be sanctioned for non-compliance. The
FDIC has the authority to suspend or terminate insurance of deposits upon the
finding that the institution has engaged in unsafe or unsound practices, is
operating in an unsafe or unsound condition, or has violated any applicable
law, regulation, rule, order, or condition imposed by the FDIC. If insurance of
accounts is terminated by the FDIC, the deposits in the institution will
continue to be insured by the FDIC for a period of two years following the date
of termination. The FDIC requires an annual audit by independent accountants
and also periodically makes its own examinations of insured institutions.
In addition to deposit insurance premiums, savings institutions also
must bear a portion of the administrative costs of the OTS through an
assessment based on the level of total assets of each insured institution and
which differentiates between troubled and nontroubled savings institutions.
Additionally, the OTS assesses fees for the processing of various applications.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank's capital and surplus. Furthermore, within the foregoing limitations
as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to
avoid the taking of low quality assets.
The Bank is also subject to the provisions of Section 23B of the Federal
Reserve Act which, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must
be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. The Bank is subject to regulatory restrictions on the payment
of dividends, including a prohibition of payment of dividends from its capital.
All dividends must be paid out of the undivided profits then on hand, after
deducting expenses, including losses and bad debts. The Bank must also obtain
approval from the OTS prior to the payment of any dividends to the Company. In
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addition, under FDICIA, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be undercapitalized.
Branching. As a federal savings bank, there are no regulatory
restrictions on the Bank's ability to branch within or without the state of
Georgia.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, a financial institution's primary federal regulator
(this is the OTS for the Bank) shall evaluate the record of the financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or
facility.
Liquidity. Under applicable federal regulations, savings associations
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings association's net withdrawable
deposits plus short-term borrowings. Under HOLA, this liquidity requirement may
be changed from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and the deposit flows of member
institutions, and currently is 5%. Savings institutions also are required to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of the average daily balance of its net
withdrawable deposits and short-term borrowings.
Equity Investments. The OTS has revised its risk-based capital
regulation to modify the treatment of certain equity investments and to clarify
the treatment of other equity investments. Equity investments that are
permissible for both savings banks and national banks will no longer be
deducted from savings associations' calculations of total capital over a
five-year period. Instead, permissible equity investments will be placed in the
100% risk-weight category, mirroring the capital treatment prescribed for those
investments when made by national banks under the regulations of the OCC.
Equity investments held by savings associations that are not permissible for
national banks must still be deducted from assets and total capital.
Qualified Thrift Lender Requirement. A federal savings bank is deemed to
be a "qualified thrift lender" ("QTL") as long as its "qualified thrift
investments" equal or exceed 65% of its "portfolio assets" on a monthly average
basis in nine out of every 12 months. Qualified thrift investments generally
consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile
home loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FDIC, and (iii) shares of stock issued by any FHLB, the
FHLMC or the FNMA. Qualified thrift investments also include certain other
specified investments, subject to a percentage of portfolio assets limitation.
For purposes of the QTL test, the term "portfolio assets" means the savings
institution's total assets minus goodwill and other intangible assets, the
value of property used by the savings institution to conduct its business, and
liquid assets held by the savings institution in an amount up to 20% of its
total assets.
OTS regulations provide that any savings association that fails to meet
the definition of a QTL must either convert to a national bank charter or limit
its future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national
9
<PAGE> 11
banks. Further, within one year of the loss of QTL status, a holding company of
a savings association that does not convert to a bank charter must register as
a bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL.
Loans to One Borrower Limitations. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower in
amounts up to 15% of their unimpaired capital and surplus, plus an additional
10% of capital and surplus for loans secured by readily marketable collateral.
HOLA provides exceptions under which a savings association may make loans to
one borrower in excess of the generally applicable national bank limits. A
savings association may make loans to one borrower in excess of such limits
under one of the following circumstances: (i) for any purpose, in any amount
not to exceed $500,000; or (ii) to develop domestic residential housing units,
in an amount not to exceed the lesser of $30 million or 30% of the savings
association's unimpaired capital and unimpaired surplus, provided other
conditions are satisfied.
Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to an
amount not in excess of 400% of the savings association's capital.
ELIMINATION OF FEDERAL SAVINGS ASSOCIATION CHARTER
Legislation that would eliminate the federal savings association charter
is under discussion. If such legislation is enacted, the Bank would be required
to convert its federal savings bank charter to either a national bank charter
or to a state depository institution charter. Various legislative proposals
also may result in the restructuring of federal regulatory oversight,
including, for example, consolidation of the OTS into another agency, or
creation of a new Federal banking agency to replace the various such agencies
which presently exist. The Bank is unable to predict whether such legislation
will be enacted or, if enacted, what the effect of such legislation will be.
Federal Home Loan Bank System. The FHLB System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal Housing
Finance Board. The FHLBs provide a central credit facility for member savings
associations. The maximum amount that the FHLB of Atlanta will advance
fluctuates from time to time in accordance with changes in policies of the
Federal Home Finance Board and the FHLB of Atlanta, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings association may obtain will be
restricted in the event the institution fails to constitute a QTL.
Federal Reserve System. The Federal Reserve Board has adopted
regulations that require savings associations to maintain nonearning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). These reserves may be used to satisfy liquidity requirements imposed
by the OTS. Because required reserves must be maintained in the form of cash or
a non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the Bank's interest-earning
assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings associations to exhaust all FHLB sources before borrowing from a
Federal Reserve bank.
10
<PAGE> 12
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution will be fulfilling its obligation
to help meet the housing needs of the community it serves; the Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit; the Fair Credit Reporting Act of
1978, governing the use and provision of information to credit reporting
agencies; the Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of the Bank also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities arising
from the use of automated teller machines and other electronic banking
services.
ENFORCEMENT POWERS
FIRREA expanded and increased civil and criminal penalties available for
use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties" (primarily including management,
employees, and agents of a financial institution, and independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs). These practices can include the failure
of an institution to timely file required reports or the filing of false or
misleading information or the submission of inaccurate reports. Civil penalties
may be as high as $1,000,000 a day for such violations. Criminal penalties for
some financial institution crimes have been increased to twenty years. In
addition, regulators are provided with greater flexibility to commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, FIRREA expanded the appropriate banking agencies' power to issue
cease-and-desist orders that may, among other things, require affirmative
action to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. The Company cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
11
<PAGE> 13
EFFECT OF GOVERNMENTAL MONETARY POLICIES
The earnings of the Bank will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserve Board's monetary policies have had, and
will likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The
monetary policies of the Federal Reserve Board have major effects upon the
levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or
impact of future changes in monetary and fiscal policies.
ITEM 2. DESCRIPTION OF PROPERTY
The principal place of business of both the Company and the Bank and the
main office of the Bank is located at 2410 Paces Ferry Road in Atlanta,
Georgia. The Company leases the first floor of a six story office building
located approximately .2 miles from Interstate 285. The banking facility is
5,000 square feet with a monthly lease cost of approximately $10,400.
Furniture, fixtures, equipment, and leasehold improvements for the main office
cost approximately $920,000. The Company's management believes that the
facilities adequately serve the Bank's needs.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since its public offering on August 6, 1998, the Company's common stock
has been quoted on the OTC Bulletin Board under the symbol STCH. The Company's
articles of incorporation authorize it to issue up to 10,000,000 shares of
common stock, of which 1,469,250 shares, for a total of $14,692,500, were sold
in the initial public offering and are outstanding as of March 29, 1999. The
Company has 198 shareholders of record. To date, the Company has not paid cash
dividends on its common stock. The Company currently intends to retain earnings
to support operations and finance expansion and therefore does not anticipate
paying cash dividends in the foreseeable future.
The following table sets forth the high and low sales price information
as quoted on the OTC Bulletin Board during the period indicated since the
Company's common stock began trading publicly on August 6, 1998.
12
<PAGE> 14
<TABLE>
<CAPTION>
STOCK PRICE
-----------
HIGH LOW
1998
<S> <C> <C>
Third Quarter $12.375 $8.25
Fourth Quarter $9.75 $7.75
</TABLE>
All outstanding shares of common stock of the Company are entitled to
share equally in dividends from funds legally available therefor, when, as and
if declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future. See "Item 1. Description of Business --
Dividends."
(b) Pursuant to Commission Rule 463, the Company is obligated to
report on the use of proceeds from its initial public offering. The information
provided below is given as of December 31, 1998.
(1) The Company's registration statement on Form SB-2
(File No. 333-41545) was declared effective by the
Commission on April 21, 1998.
(2) The offering commenced on April 21, 1998.
(3) The offering did not terminate before any securities
were sold.
(4)
(i) The offering terminated on July 23, 1998,
before the sale of all securities that the
Company had registered.
(ii) Banc Stock Financial Services, Inc. served
as a sales agent for the offering. In
addition, the Company's officers and
directors sold shares in the offering, but
did not receive any commissions for their
efforts.
(iii) Common stock was the only class of
securities registered in the offering.
(iv) 1,500,000 shares ($15,000,000) of common
stock was registered, of which 1,469,250
shares ($14,692,500) were sold.
(v) The Company incurred approximately $955,835
in expenses (including sales commissions) in
connection with the issuance and
distribution of the common stock in the
offering. All of these expenses were paid
directly or indirectly to persons or
entities other than directors, officers,
persons owning 10% or more of the Company's
securities, or affiliates of the Company.
(vi) The net proceeds to the Company after
deducting the total expenses described above
were $13,736,665.
13
<PAGE> 15
(vii) Through December 31, 1998, $4,090,000 of the
net proceeds of the offering were invested
in cash, $8,500,000 was invested in the
Company's bank subsidiary; $250,000 was
invested in Commerce Mortgage; and $503,284
was used to pay organization costs. None of
the net proceeds have been paid directly or
indirectly to directors, officers, persons
owning 10% or more of the Company's
securities, and affiliates of the Company,
except for an aggregate of $272,549 paid as
salaries to officers of the Company.
(viii) The use of proceeds described above does not
represent a material change from the use of
proceeds disclosed in the prospectus for the
offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
In response to this Item, the information contained on pages 4 through
16 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 17 through
38 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
In response to this Item, the information contained on pages 3 through 5
and page 10 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 3, 1999 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on page 8 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 3, 1999 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on page 9 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 3, 1999 is incorporated herein by reference.
14
<PAGE> 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 10 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 3, 1999 is incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) The following documents are filed as part of this report:
3.1. Articles of Incorporation (incorporated by reference to Exhibit 3.1 of
the Registration Statement on Form SB-2, File No. 333-41545).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 of the Registration
Statement on Form SB-2, File No. 333-41545).
4.1. See Exhibits 3.1 and 3.2 for provisions in the Company's Articles of
Incorporation and Bylaws defining the rights of holders of the Common
Stock (incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form SB-2, File No. 333-41545).
4.2. Form of Certificate of Common Stock (incorporated by reference to
Exhibit 4.2 of the Registration Statement on Form SB-2, File No.
333-41545).
5.1. Opinion Regarding Legality (incorporated by reference to Exhibit 5.1 of
the Registration Statement on Form SB-2, File No. 333-41545).
10.1. Letter of Employment dated November 18, 1997, between the Company and
Louis J. Douglass, III (incorporated by reference to Exhibit 10.1 of the
Registration Statement on Form SB-2, File No. 333-41545).
10.2. Line of Credit Agreement dated August 27, 1997, between The Company and
The Bankers Bank (incorporated by reference to Exhibit 10.2 of the
Registration Statement on Form SB-2, File No. 333-41545).
10.3. Lease Agreement dated October 14, 1997, between the Company, as lessee,
and Regent Paces Ferry Office I, Inc., as lessor (incorporated by
reference to Exhibit 10.3 of the Registration Statement on Form SB-2,
File No. 333-41545).
10.4 Escrow Agreement among the Company, Banc Stock Financial Services, Inc.,
and The Bankers Bank (incorporated by reference to Exhibit 3.2 of the
Registration Statement on Form SB-2, File No. 333-41545)
10.5 Phoenix International Ltd., Inc. Software License Agreement
(incorporated by reference to Exhibit 10.5 of the Registration Statement
on Form SB-2, File No. 333-41545).
10.6 Letter of Intent dated February 20, 1998 between the Company and Banc
Stock Financial Services, Inc. (incorporated by reference to Exhibit
10.6 of the Registration Statement on Form SB-2, File No. 333-41545).
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
10.7 Form of Underwriting Agreement among the Company and Banc Stock
Financial Services, Inc. (incorporated by reference to Exhibit 10.7
of the Registration Statement on Form SB-2, File No. 333-41545).
13 The Company's 1998 Annual Report
21 Subsidiaries of the Company
27.1. Financial Data Schedule. (for SEC use only).
</TABLE>
- ---------------------
* Denotes executive compensation contract or arrangement.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1998.
16
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHEAST COMMERCE HOLDING COMPANY
Date: March 29, 1999 By: /s/ Richard A. Parlontieri
----------------------- ------------------------------------
Richard A. Parlontieri
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard A. Parlontieri, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-KSB, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gary M. Bremer
- -----------------------------
Gary M. Bremer Director March 29, 1999
/s/ Richard C. Carter
- -----------------------------
Richard C. Carter Director March 29, 1999
/s/ Louis J. Douglass, III
- -----------------------------
Louis J. Douglass, III Director March 29, 1999
/s/ Terry L. Ferrero
- -----------------------------
Terry L. Ferrero Director March 29, 1999
/s/ Stephen R. Gross
- -----------------------------
Stephen R. Gross Director March 29, 1999
/s/ G. Webb Howell
- -----------------------------
G. Webb Howell Director March 29, 1999
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard A. Parlontieri
- -----------------------------
Richard A. Parlontieri President; March 29, 1999
Chief Executive Officer
of the Company;
Principal Accounting
and Financial Officer;
Director
/s/ Frank E. Perisino
- -----------------------------
Frank E. Perisino Director March 29, 1999
</TABLE>
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----- -----------
<S> <C>
3.1. Articles of Incorporation (incorporated by reference to
Exhibit 3.1 of the Registration Statement on Form SB-2, File
No. 333-41545).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 of the
Registration Statement on Form SB-2, File No. 333-41545).
4.1. See Exhibits 3.1 and 3.2 for provisions in the Company's
Articles of Incorporation and Bylaws defining the rights of
holders of the Common Stock (incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form SB-2, File
No. 333-41545).
4.2. Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.2 of the Registration Statement on Form SB-2,
File No. 333-41545).
5.1. Opinion Regarding Legality (incorporated by reference to
Exhibit 5.1 of the Registration Statement on Form SB-2, File
No. 333-41545).
10.1. Letter of Employment dated November 18, 1997, between the
Company and Louis J. Douglass, III (incorporated by reference
to Exhibit 10.1 of the Registration Statement on Form SB-2,
File No. 333-41545).
10.2. Line of Credit Agreement dated August 27, 1997, between The
Company and The Bankers Bank (incorporated by reference to
Exhibit 10.2 of the Registration Statement on Form SB-2, File
No. 333-41545).
10.4. Lease Agreement dated October 14, 1997, between the Company,
as lessee, and Regent Paces Ferry Office I, Inc., as lessor
(incorporated by reference to Exhibit 10.3 of the
Registration Statement on Form SB-2, File No. 333-41545).
10.8 Escrow Agreement among the Company, Banc Stock Financial
Services, Inc., and The Bankers Bank (incorporated by
reference to Exhibit 3.2 of the Registration Statement on
Form SB-2, File No.
333-41545)
10.9 Phoenix International Ltd., Inc. Software License Agreement
(incorporated by reference to Exhibit 10.5 of the Registration
Statement on Form SB-2, File No. 333-41545).
10.10 Letter of Intent dated February 20, 1998 between the Company
and Banc Stock Financial Services, Inc. (incorporated by
reference to Exhibit 10.6 of the Registration Statement on
Form SB-2, File No.
333-41545).
10.11 Form of Underwriting Agreement among the Company and Banc
Stock Financial Services, Inc. (incorporated by reference to
Exhibit 10.7 of the Registration Statement on Form SB-2, File
No. 333-41545).
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
13 The Company's 1998 Annual Report
21 Subsidiaries of the Company
27.1. Financial Data Schedule. (for SEC use only).
</TABLE>
- -----------------------------
20
<PAGE> 1
EXHIBIT 13
SOUTHEAST COMMERCE
HOLDING COMPANY
1998 ANNUAL REPORT
<PAGE> 2
SOUTHEAST COMMERCE HOLDING COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Stockholders.......................................................................................... 2
Selected Financial Data......................................................................................... 3
Management's Discussion and Analysis............................................................................ 4-15
Report of Independent Certified Public Accountants.............................................................. 16
Consolidated Balance Sheets..................................................................................... 17
Consolidated Statements of Loss................................................................................. 18-19
Consolidated Statements of Changes in Stockholders' Equity...................................................... 20
Consolidated Statements of Cash Flows........................................................................... 21
Notes to Consolidated Financial Statements...................................................................... 22-38
Directors, Officers and Location................................................................................ 39
Corporate Data.................................................................................................. 40-41
</TABLE>
<PAGE> 3
Letter to Our Stockholders:
The past year was a very challenging, exciting and rewarding one for our
company. It began literally with the dream of forming a community bank that
would provide the service levels that only a community bank can offer, while
delivering service through state of the art technology. We made great strides
in 1998 towards building our dream.
The transition from dream to reality began with the formation of an organizing
group and board of directors that represented some of the most successful and
respected business people in our markets. This group of individuals was
dedicated to applying their success and discipline to our common belief that a
locally owned and managed community bank would be best suited to identify and
respond to the financial needs of the community.
Reality next took shape in our strategy to serve the major markets of Cobb
County and North Atlanta. This decision became the foundation of our successes
that followed, especially as we faced the next challenge of raising capital.
Approximately two months after we began a public offering, Southeast Commerce
Holding Company had raised $14,692,500 with over 700 stockholders, indicating
very strong support throughout the investment community.
Moving towards our goal also required the build-out of our corporate location;
identifying, hiring and training management and staff; selection of products
and operating systems; and acquiring approvals from all the regulatory
authorities. After accomplishing all of these tasks, the dream became a reality
on August 17, 1998, with the opening of the bank at 2410 Paces Ferry Road,
Suite 190, Atlanta, GA 30339.
Our wholly-owned subsidiary, Commerce Bank, was capitalized with $8,500,000 of
the capital raised. The remaining capital will be used to enhance stockholder
value by investing these proceeds in businesses that will compliment our
banking subsidiary. Great care will be exercised to make sure this capital is
invested in the most profitable way possible.
We are pleased with the operating results and the growth of the bank in our
first 136 days of operation. Loan demand was more than expected, and deposit
growth and our customer base met or exceeded our expectations. The support from
the market has been exceptional.
It is our intent to market both deposit products and loans very aggressively
during 1999. To that end, we have made two significant strategic moves. First,
we recently hired our Director of Internet Banking Services. We expect to
launch the Internet Banking Unit during the second quarter of 1999. This
business unit will greatly enhance our ability to serve existing customers
through the Internet, as well as to provide a vehicle for new deposits. Second,
we have added an SBA lender to develop the small business government-backed
loan program to the bank. This unit is expected to increase our fee income,
along with commercial relationship customers.
We want to thank our customers, stockholders, associates and Board of Directors
for making our first 136 days a success.
We invite your comments and suggestions.
Richard A. Parlontieri Louis J. Douglass, III
Chairman and Chief Executive Officer President and Chief Executive Officer
Southeast Commerce Holding Company Commerce Bank
2
<PAGE> 4
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning
Southeast Commerce Holding Company and subsidiary as of and for the year ended
December 31, 1998. The selected financial data has been derived from the
consolidated financial statements that have been audited by BDO Seidman, LLP,
independent certified public accountants. This information should be read in
conjunction with management's discussion and analysis of financial condition
and results of operation.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
BALANCE SHEET:
Federal funds sold $ 9,320,000
Securities available for sale 4,011,991
Net loans 10,240,557
Properties and equipment, net 865,587
Total assets 25,499,836
Noninterest-bearing deposits 1,025,162
Interest-bearing deposits 11,775,961
Total deposits 12,801,123
Total liabilities 12,879,088
Total stockholders' equity 12,620,748
For the year ended
December 31, 1998
------------------
RESULTS OF OPERATIONS:
Interest income $ 577,669
Interest expense 110,124
------------
Net interest income 467,545
Provision for loan losses (165,000)
------------
Net interest income after provision for loan losses 302,545
Noninterest income 662
Equity in undistributed loss from joint venture 87,909
Noninterest expenses 1,171,390
Cumulative effect on prior year of change in accounting
principle for deferred organizational costs 84,926
------------
Net loss $ (1,041,018)
============
PER SHARE DATA:
Weighted average common shares outstanding 704,435
Basic loss per share of common stock $ (1.48)
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets 73.37%
Risk-based capital:
Tier 1 92.34%
Total 93.55%
Leverage (4% required minimum) 49.49%
Total loans to total deposits 80.00%
</TABLE>
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of Southeast Commerce Holding
Company. This commentary should be read in conjunction with the financial
statements and the related notes and the other statistical information included
elsewhere in this report.
OVERVIEW
Southeast Commerce Holding Company (the Company) was incorporated in Georgia on
August 22, 1997 as a proposed bank holding company to own and control all of
the capital stock of Commerce Bank (the Bank). Organizing activities for the
Company began in September 1997, consisting primarily of preparation and filing
of a Registration Statement (the "Registration Statement") with the Securities
and Exchange Commission pursuant to which the Company registered the issuance
of 1,500,000 share of its Common Stock at an offering price of $10.00 per
share. Upon the Registration Statement's effectiveness, the
organizers/directors focused their efforts on the sale of such Common Stock
and, by July 1998, had completed all selling activities. Net of selling
expenses, the Company raised $13,736,665 in the offering. After completing the
offering, management engaged in activities resulting in the opening of the
Bank. On May 21, 1998, the Office of Thrift Supervision approved the
application of the Bank to become a federally-chartered savings bank, and on
August 14, 1998, the Federal Deposit Insurance Corporation approved the
Company's application for deposit insurance for the Bank. The Bank began
operations on August 17, 1998 at its main banking location in Atlanta, Georgia.
During the development stage, from August 22, 1997 ("Inception") to August 17,
1998 (the "Bank Opening"), the accumulated net loss amounted to $503,284. The
net loss from the bank opening (August 17, 1998) to December 31, 1998 amounted
to $537,734. Losses from Inception to December 31, 1998 amounted to $1,115,778.
During 1998, total assets of the Company grew from $160,501 at December 31,
1997 to $25.5 million at December 31, 1998. For the year ended December 31,
1998, net loss amounted to $1,041,018, or $1.48 per share.
RESULTS OF OPERATIONS
At December 31, 1998, the end of the first partial year of banking operations,
the Company had total assets of $25,499,836, which consisted of cash and due
from banks of $603,677, federal funds sold of $9,320,000, securities and
short-term investments of $4,011,991, net loans of $10,240,557, property and
equipment of $865,587, and other assets of $458,024. The Company's liabilities
at year-end were $12,801,123 in deposits and $77,965 in other liabilities.
Stockholders' equity at December 31, 1998 was $12,620,748.
The Company's net loss for the year ended December 31, 1998 was $1,041,018. The
net loss includes approximately $503,000 in pre-opening expenses incurred to
prepare the bank for opening. The pre-opening expenses also include $84,926 in
organizational costs expensed due to a change in accounting for organizational
costs. These costs had been deferred at December 31, 1997. Staffing at the Bank
was at a full-service level beginning the first part of August 1998 for
training in preparation of the Bank's opening on August 17, 1998, and other
noninterest expenses were incurred in operating the Bank.
Net interest income of $467,545 was earned for the period and partially offset
noninterest expense of $1,171,390. Interest income totaled $577,669 and
interest expense amounted to $110,124. Investment income of $370,201
represented the largest portion of interest income, since the Company had the
largest portion of earning assets in its investment portfolio and federal funds
sold during the period.
4
<PAGE> 6
The provision for loan losses was established at $165,000 at December 31, 1998,
reflecting management's estimate of the amount necessary to adequately reflect
possible loan losses. The Company's allowance for loan losses as a percentage
of its year-end loans was 1.59%. Management's judgment as to the adequacy of
the allowance is based upon a number of assumptions about future events which
it believes to be reasonable, but which may or may not prove to be accurate.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the loan
loss allowance will not be required. The Company had no charge-offs in 1998.
Noninterest income in 1998 was $662, representing service charges on deposit
accounts. The Company recognized a loss of $87,909 relating to the start-up of
the Commerce Mortgage joint venture in 1998. Noninterest expense included
$645,538 in salaries and employee benefits incurred during the initial start-up
phase of the Company and approximately $503,000 in pre-opening expenses.
NET INTEREST INCOME
Earnings are dependent on net interest income to be the primary source of
revenue. Net interest income is the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Interest
rate spread, or margin, is the difference between the yield on average earning
assets and the rate on average interest-bearing liabilities. Net yield on
earning assets is net interest income divided by average interest-earning
assets. Net interest income for the year ended December 31, 1998 was $467,545.
AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth, for the year ended December 31, 1998, the
weighted average yields earned, the weighted average rates paid, the interest
rate spread and the net yield on earning assets and interest-bearing
liabilities, on an annualized basis.
<TABLE>
<CAPTION>
Average Income/ Yield/
Balance Expense Rate
---------- -------- ------
<S> <C> <C> <C>
ASSETS:
Federal funds sold $6,139,606 $323,689 5.27%
Investment securities 923,469 46,512 5.04%
Loans 2,113,721 207,468 9.82%
---------- --------
Total earning assets 9,176,796 577,669 6.29%
--------
All other assets 624,192
----------
Total assets $9,800,988
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits $1,962,567 98,011 4.99%
Noninterest-bearing deposits 337,376
Short-term borrowings 139,704 12,113 8.67%
---------- --------
Deposits and short-term borrowings 2,439,647 110,124 4.51%
--------
Other liabilities 170,499
Stockholders' equity 7,190,842
----------
Total liabilities and stockholders' equity $9,800,988
==========
Net interest spread 1.78%
Net interest income/margin $467,545 5.09%
========
</TABLE>
5
<PAGE> 7
As shown in the previous table, the average yield on earning assets was 6.29%,
while the average cost of funds was 4.51% for a net interest spread of 1.78%.
The net interest margin as a percentage of interest-earning assets was 5.09%.
The average balances above were calculated on an annualized basis, even though
the Company and the Bank were not in operations for the entire year. Income on
loans includes loan fees that amounted to $38,585. Interest expense of $12,113
was incurred on short-term borrowings used to organize the Bank. See the
section in this discussion relating to short-term borrowings.
RATE/VOLUME ANALYSIS
Net interest income can be analyzed in terms of the impact of changing rates
and changing volume. As this was the first period of operations for the
Company, all interest income and expense is attributable to volume. Therefore,
the Company has omitted the table analyzing the changes in net interest income
as it would not be meaningful since there are no 1997 results.
LIQUIDITY AND RATE SENSITIVITY
Asset/liability management is the process by which the Company monitors and
controls the mix and maturities of its assets and liabilities. The essential
purposes of asset/liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities to minimize potentially adverse impacts on earnings from changes in
market interest rates.
Primary sources of liquidity for the Company are a stable base of deposits,
scheduled repayments on the Company's loans, and interest and maturities of its
investments. All securities of the Company have been classified as
available-for-sale. If necessary, the Company has the ability to sell a portion
of its investment securities to manage its interest sensitivity gap or
liquidity. The Company also may utilize its cash and due from banks and federal
funds sold to meet liquidity needs. Additionally, the Company has an unsecured
line of credit with a correspondent bank in the amount of $2,000,000. No
borrowings have been drawn on this line of credit.
The principal monitoring technique employed by the Company is the measurement
of the Company's interest sensitivity "gap," which is the positive or negative
dollar difference between assets and liabilities that are subject to interest
rate repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities
available-for-sale, replacing an asset or liability at maturity, or adjusting
the interest rate during the life of an asset or liability. Managing the amount
of assets and liabilities repricing in this same time interval helps to
minimize interest rate risk and manage net interest income in changing interest
rate environments. The Company's net interest income generally would benefit
from rising interest rates when it has an asset-sensitive gap position.
Conversely, the Company's net interest income generally would benefit from
decreasing interest rates of interest when it has a liability-sensitive gap
position.
Because the Bank has only been open since August 1998 and not yet generated a
substantial amount of loans, the Company is currently asset sensitive over all
time frames. However, the Company's gap analysis is not a precise indicator of
its interest sensitivity position. The analysis presents only a static view of
the timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those rates are viewed by management as significantly less interest-sensitive
than market-based rates such as those paid on non-core deposits. Net interest
income may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
6
<PAGE> 8
INTEREST RATE SENSITIVITY ANALYSIS
The asset mix of the balance sheet is continually evaluated in terms of several
variables: yield, credit quality, appropriate funding sources and liquidity. To
effectively manage the liability mix of the balance sheet, there should be a
focus on expanding the various funding sources. The interest rate sensitivity
position at December 31, 1998 is presented in the following table. The
difference between rate sensitive assets and rate sensitive liabilities, or the
interest rate sensitivity gap, is shown at the bottom of the table. Since all
interest rates and yields do not adjust at the same velocity, the gap is only a
general indicator of rate sensitivity. The table may not be indicative of the
Company's rate sensitivity position at other points in time.
<TABLE>
<CAPTION>
After three
Within but within After one
three twelve but within After five
months months five years years Total
------- ----------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 9,320 $ -- $ -- $ -- $ 9,320
Investment securities 3,986 -- -- 26 4,012
Loans 5,122 763 2,822 1,699 10,406
------- ------- ------- ------- -------
Total earning assets $18,428 $ 763 $ 2,822 $ 1,725 $23,738
======= ======= ======= ======= =======
Interest-bearing liabilities:
Money market and NOW $ 5,210 $ -- $ -- $ -- $ 5,210
Regular savings 19 -- -- -- 19
Time deposits 50 6,318 178 -- 6,546
------- ------- ------- ------- -------
Total interest-bearing liabilities $ 5,279 $ 6,318 $ 178 $ -- $11,775
======= ======= ======= ======= =======
Interest-sensitivity gap $13,149 $(5,555) $ 2,644 $ 1,725 $11,963
Cumulative interest-sensitivity gap $13,149 $ 7,594 $10,238 $11,963 $11,963
Ratio of interest-sensitivity gap to
total earning assets 55.39% (23.40)% 11.14% 7.27% 50.40%
Ratio of cumulative
interest-sensitivity gap to total
earning assets 55.39% 31.99% 43.13% 50.40% 50.40%
</TABLE>
As evidenced by the table above, the Company, is cumulatively asset-sensitive
at one year. In a rising interest rate environment, an asset-sensitive position
(a positive gap ratio) is generally more advantageous since assets reprice
sooner than liabilities. Conversely, in a declining interest rate environment,
a liability-sensitive position (a negative gap ratio) is generally more
advantageous as interest-bearing liabilities reprice sooner than earning
assets. With respect to the Company, an increase in interest rates would result
in increased earnings, while a decline in interest rates would decrease income.
This, however, assumes that all other factors affecting income remain constant.
7
<PAGE> 9
LOAN PORTFOLIO
Since loans typically provide higher interest yields than do other types of
earning assets, the Company's intent is to channel a substantial percentage of
its earning assets into the loans category. However, since the Bank only
commenced operations in August 1998, that category has not yet grown to a
percentage of total earning assets, comparable to other banks that are well
established. Average loans, on an annualized basis, were $2,113,721 for 1998.
Total gross loans outstanding at December 31, 1998 were $10,425,246.
The following table summarizes the composition of the loan portfolio at
December 31, 1998:
<TABLE>
<CAPTION>
Percent
Amount of total
------------ --------
<S> <C> <C>
Commercial $ 3,714,416 35.63%
Real estate - individual 2,159,834 20.72%
Real estate - commercial 3,794,652 36.40%
Installment loans to individuals 756,344 7.25%
------------ ------
Total loans 10,425,246 100.00%
======
Less: Net deferred loan fees (19,689)
Allowance for loan loss (165,000)
============
Total net loans $ 10,240,557
============
</TABLE>
The principal components of the Company's loan portfolio at year-end were
mortgage loans and commercial loans, which represented 92.75% of the portfolio.
Due to the short time the portfolio has existed, the current mix of loans may
not be indicative of the ongoing portfolio mix. Management will attempt to
maintain a relatively diversified loan portfolio to help reduce the risk
inherent in concentration of collateral.
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:
The information in the following table is based on the contractual maturities
of individual loans, including loans which may be subject to renewal at their
contractual maturity. Renewal of such loans is subject to review and credit
approval, as well as modification of terms upon their maturity. Actual
repayments of loans may differ from maturities reflected below because
borrowers have the right to prepay obligations with or without prepayment
penalties. The following table summarizes loan maturities, by type, and related
interest rate characteristics at December 31, 1998:
<TABLE>
<CAPTION>
After one After
One year but within five
or less five years years Total
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial $1,763,273 $1,143,568 $ 807,575 $ 3,714,416
Real estate - commercial 1,535,645 1,515,663 743,344 3,794,652
Real estate - mortgage 434,899 481,982 1,242,953 2,159,834
Installment loans to individuals 480,927 275,417 -- 756,344
---------- ---------- ---------- -----------
Total $4,214,744 $3,416,630 $2,793,872 $10,425,246
========== ========== ========== ===========
Loans maturing after one year with:
Fixed interest rates $3,420,074
Floating interest rates 2,790,428
</TABLE>
8
<PAGE> 10
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company has developed policies and procedures for evaluating the overall
quality of its credit portfolio and the timely identification of potential
credit problems. Additions to the allowance for loan losses are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio.
At December 31, 1998, the allowance for loan losses was $165,000, or 1.58% of
outstanding loans of $10,425,246. The Bank has not charged off any loans since
commencing operations. The provision for loan losses was made primarily as a
result of management's assessment of general loan loss risk as the Bank
recorded its first loans.
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following table
for the year ended December 31, 1998, as well as a breakdown of the allowance
for possible loan losses:
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
Balance at beginning of period $ --
Charge-offs --
Recoveries --
Net charge-offs --
Additions charged to operations 165,000
---------
Balance at end of period $ 165,000
=========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0%
=========
</TABLE>
At December 31, 1998, the allowance was allocated as follows:
<TABLE>
<CAPTION>
Percent of loans
Year ended in each category
December 31, 1998 to total loans
----------------- -----------------
<S> <C> <C>
Commercial $ 55,226 35.63%
Real estate - individual 32,116 20.72%
Real estate - commercial 56,420 36.40%
Installment loans to individuals 11,238 7.25%
Unallocated 10,000 0.00%
--------- ------
Total $ 165,000 100.00%
========= ======
</TABLE>
9
<PAGE> 11
INVESTMENT PORTFOLIO
At December 31, 1998, the investment securities portfolio represented
approximately 16.87% of the Company's earning assets at $4,011,991. The Company
had investments in U.S. Government agency securities with a fair value of
$3,986,491 and an amortized cost of $3,986,889, for an unrealized loss of $239,
net of income taxes. The Company also invested in stock of the Federal Home
Loan Bank in the amount of $25,500.
Contractual maturities and yields on the Company's investments (all available
for sale) at December 31, 1998 are shown in the following table. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
After one
Within but within
one year Yield five years Yield Total Yield
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $3,986,491 5.00% $ -- --% $3,986,491 5.00%
Other -- --% 25,500 7.5% 25,500 7.50%
---------- ---- ------- --- ---------- ----
Total $3,986,491 5.00% $25,500 7.5% $4,011,991 5.02%
========== ==== ======= === ========== ====
</TABLE>
At December 31, 1998, short-term investments comprised the largest portion of
total earning assets at $9,320,000. These funds were invested in Federal funds
sold on an overnight basis. As the Bank continues to grow, management expects a
shift from primarily overnight investments into the loan portfolio and, to a
lesser extent, into the investment securities portfolio.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
As of December 31, 1998, deposits were the only component of interest-bearing
liabilities. Average total deposits were $2,299,943 and average
interest-bearing deposits were $1,962,567 in 1998, on an annualized basis. The
following is a table of deposits by category at year-end.
<TABLE>
<CAPTION>
Percentage Percentage
Ending of total Average of total Effective
amount deposits amount deposits cost
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Demand deposit accounts $ 1,025,162 8.01% $ 337,583 14.68% --%
NOW accounts 652,704 5.10% 174,253 7.57% 2.84%
Money market accounts 4,557,614 35.60% 726,605 31.59% 4.38%
Savings accounts 19,295 .15% 974 .04% 2.05%
Time deposits less than $100,000 3,611,622 28.21% 639,343 27.80% 5.71%
Time deposits of $100,000 or
more 2,934,726 22.93% 421,392 18.32% 5.87%
----------- ------ ---------- ------
Total deposits $12,801,123 100.00% $2,300,150 100.00%
=========== ====== ========== ======
</TABLE>
10
<PAGE> 12
Core deposits, which exclude time deposits of $100,000 or more, provide a
relatively stable funding source for the Company's loan portfolio and other
earning assets. The Company's core deposits were $9,866,397 at December 31,
1998. The Company's loan-to-deposit ratio was 81.29% at year-end. The maturity
distribution of the Company's time deposits at December 31, 1998 is as follows:
<TABLE>
<S> <C>
Three months or less $ 50,430
Over three through six months --
Over six through twelve months 6,317,758
Over twelve months 178,160
-----------
Total $ 6,546,348
===========
</TABLE>
SHORT-TERM BORROWINGS
At December 31, 1998, the Company had no outstanding balances under short-term
borrowings. During 1997, the Company had a line of credit with a bank that was
used to finance the purchase of leasehold improvements and furniture, fixtures
and equipment and to pay operating expenses while in organization. The maximum
amount of borrowings outstanding at any month end was $377,000. The average
rate paid on the short-term borrowings was 8.50%.
The Company also has an unsecured line of credit available on a one to fourteen
day basis with a bank for $2,000,000. No borrowings have been made from this
line as of December 31, 1998.
RETURN ON EQUITY AND ASSETS
The following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), and equity to assets ratio (average equity divided by average total
assets) for 1998. Since its inception, the Company has not paid any cash
dividends.
<TABLE>
<S> <C>
Return on average assets (10.61)%
Return on average equity (14.48)%
Equity to assets ratio 73.31%
</TABLE>
CAPITAL ADEQUACY
There are now two primary measures of capital adequacy for banks and banking
holding companies: (i) risk-based capital guidelines and (ii) the leverage
ratio.
The risk-based capital guidelines measure the amount of a bank's required
capital in relation to the degree of risk perceived in its assets and its
off-balance sheet items. Under the risk-based capital guidelines, capital
guidelines, capital is divided into two "tiers." Tier 1 capital consists of
common stockholders' equity, non-cumulative and cumulative perpetual preferred
stock (bank holding companies only) and minority interest. Goodwill is
subtracted from the total. Tier 2 capital consists of the allowance for loan
losses, hybrid capital instruments, term subordinated debt and intermediate
term preferred stock. Banks are required to maintain a minimum risk-based
capital ratio of 8.0% at least 4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio. The
Office of Thrift Supervision has established a 3.0% minimum leverage ratio
requirement. Note that the leverage ratio is computed by dividing Tier 1
capital into average assets. For all except the highest rated banks, the
minimum leverage ratio should be 3.0% plus an additional cushion of at least 1
to 2 percent, depending upon risk profiles and other factors.
11
<PAGE> 13
A new rule was recently adopted by the Federal Reserve Board, the Office of
Thrift Supervision and the FDIC that adds a measure of interest rate risk to
the determination of supervisory capital adequacy. In connection with this new
rule, the agencies have also proposed a measurement process to measure interest
rate risk. Under this proposal, all items reported on the balance sheet, as
well as off-balance sheet items, would be reported according to maturity,
repricing dates and cash flow characteristics. A bank's reporting position
would be multiplied by duration-based risk factors and weighted according to
rate sensitivity. The net risk weighted position would be used in assessing
capital adequacy. The objective of this complex proposal is to determine the
sensitivity of bank to various rising and declining interest rate scenarios.
The table below illustrates the Bank's and Company's regulatory capital ratios
at December 31, 1998:
<TABLE>
<CAPTION>
Minimum
regulatory
December 31, 1998 requirement
----------------- -----------
<S> <C> <C>
Bank
- ----
Tier 1 capital 60.6% 4.0%
Tier 2 capital 1.3% --%
---- ---
Total risk-based capital ratio 61.9% 8.0%
==== ===
Leverage ratio 36.1% 4.0%
==== ===
Company - Consolidated
- ----------------------
Tier 1 capital 92.3% 4.0%
Tier 2 capital 1.3% --%
---- ---
Total risk-based capital ratio 93.6% 8.0%
==== ===
Leverage ratio 49.5% 4.0%
==== ===
</TABLE>
The above ratios indicate that the capital positions of the Company and the
Bank are sound and that the Company is well positioned for future growth.
A condition of the original offering was that a minimum of 600,000 shares of
common stock be sold. There were a total of 1,469,250 shares sold during the
offering period with net proceeds after offering expenses of $13,736,665. Of
the proceeds, $8,500,000 was used to capitalize the Bank. The Company believes
that this amount is sufficient to fund the activities of the Bank in its
initial stages of operations and that the Bank will generate sufficient income
from operations to fund its activities on an on-going basis. The remaining
offering proceeds were retained in the Company to fund activities which may
from time to time be considered appropriate investments of capital at some
point in the future.
As of December 31, 1998, there were no significant commitments outstanding for
capital expenditures.
12
<PAGE> 14
COMMERCE MORTGAGE COMPANY, LLC
The Company entered into a joint venture in August 1998 to form Commerce
Mortgage Company, LLC. Commerce Mortgage Company, LLC was established to serve
as a mortgage originator, focusing in the sub-prime mortgage market. Under the
terms of the joint venture agreement, the Company contributed $250,000 capital
to Commerce Mortgage Company, LLC. Due to start-up costs, as well as reduced
demand in the investor markets for this mortgage product, Commerce Mortgage
Company, LLC incurred losses in 1998. The Company's portion of the loss was
$87,909. Commerce Mortgage Company, LLC has significantly restructured its
operations in early 1999 in response to overall market conditions. It will
continue to serve the sub-prime market and try to achieve profitability in
1999.
IMPACT OF INFLATION AND CHANGING PRICES
The effect of relative purchasing power over time due to inflation has not been
taken into effect in the financial statements of the Company. Rather, the
statements have been prepared on an historical cost basis in accordance with
generally accepted accounting principles.
Since most of the assets and liabilities of a financial institution are
monetary in nature, the effect of changes in interest rates will have a more
significant impact on the Company's performance than will the effect of
changing prices and inflation in general. Interest rates may generally increase
as the rate of inflation increases, although not necessarily in the same
magnitude.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133). This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. Retroactive application to financial statements of prior periods
is not required. The Company does not currently have any derivative instruments
nor is it involved in hedging activities.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Cost of Start-Up Activities," ("SOP 98-5"),
which requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company elected to
early adopt SOP 98-5 for the year ended December 31, 1998, and as a result,
recognized a cumulative effect of change in accounting principle of
approximately $85,000 in its 1998 consolidated Statement of Loss.
INDUSTRY DEVELOPMENTS
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
13
<PAGE> 15
YEAR 2000
Like many financial institutions, we rely on computers to conduct our business
and information systems processing. Industry experts are concerned that on
January 1, 2000, some computers may not be able to interpret the new year
properly, causing computer malfunctions. As described in more detail below, we
have developed and are executing a plan to ensure that our computer and
telecommunication systems do not have these Year 2000 problems. We do not
anticipate that the Year 2000 issue will materially impact our business or
operations. We rely on third party vendors to supply our computer and
telecommunication systems and other office equipment; and we also rely on a
third party to process our data and account information. Because we just
recently commenced operations, we had the ability to choose only those vendors
which we believed are ready for the Year 2000, thereby relieving any additional
costs associated with the conversion of older computer systems. Although we
believe we have addressed the Year 2000 issue, we cannot be entirely sure that
the Year 2000 will not have any adverse effect on the Company.
We have prepared a comprehensive Year 2000 plan to monitor and ensure the Year
2000 compliance of our third party vendors of computer and telecommunication
systems, data processing services, and other office equipment. We have budgeted
for the execution of this plan, and the plan calls for us to have all systems
in place and be fully Year 2000 compliant by June 30, 1999. The plan also calls
for us to continue to monitor the situation through the end of the year and
beyond. We are executing this plan under the supervision of our chief financial
officer and vice president of operations, with oversight from our board of
directors. Under the plan, we will investigate the Year 2000 readiness of each
vendor, review Year 2000 testing completed by each vendor, test our own
systems, if necessary and reasonable, and require comprehensive Year 2000
warranties from each vendor. Our investigation of each vendor will primarily
consist of requesting and reviewing its Year 2000 test results.
Phoenix International Ltd., Inc. (Phoenix) provides our mission critical
computer software and data processing services. Phoenix is a well-established
company and provides computer systems and data processing services to many
financial institutions throughout the world. Phoenix is currently in the
process of testing its systems for Year 2000 issues and will test our database
for Year 2000 compliance in April 1999. The Phoenix system includes interfaces
to other systems provided by other vendors, such as our ATM hardware. Phoenix
is in the process of testing these interfaces and will provide the results of
these tests to us as soon as they are complete. We expect to have all of these
test results prior to June 30, 1999.
Our Year 2000 plan extends to our other less critical vendors as well,
including our vendors for ATM hardware, account origination software, telephone
systems, and suppliers of office equipment, such as copy and fax machines.
Under our plan, we are reviewing the test results, assurances and warranties of
all of these vendors, and we believe we will be satisfied that these systems
are Year 2000 compliant before the end of June 1999. Based on our review of our
vendor's systems and Year 2000 testing results to date, we do not believe that
any of them will have any significant Year 2000 problems. The Office of Thrift
Supervision and the FDIC are also monitoring the Year 2000 readiness of the
thrift industry.
14
<PAGE> 16
Our agreements with each of our vendors, including Phoenix, include contractual
assurances and warranties regarding Year 2000 compliance. Some of these
warranties are limited by disclaimers of liability, which specifically exclude
special, incidental, indirect, and consequential damages. These limitations
could limit our ability to obtain recourse against a vendor who is not Year
2000 compliant by excluding damages for things such as lost profits and
customer lawsuits. We are also in the process of evaluating our worst case
scenario and developing contingency plans in case Year 2000 issues do arise.
Based on the information currently available, we do not believe that we have
significant Year 2000 exposure and believe that we will be able to continue to
operate the business if one or more of our vendors experience unanticipated
Year 2000 problems, although we cannot be certain.
Our customers may also have Year 2000 issues. These issues could disrupt
certain businesses with high Year 2000 risk and affect their deposit balances
and their ability to repay their loans. We intend to review our customers'
exposure and assess Year 2000 readiness through Year 2000 surveys. For those
customers with high credit risk and high potential exposure, we may require
more substantial proof of Year 2000 compliance. Although these surveys will be
helpful, it would be very difficult for us to accurately assess the Year 2000
readiness of any particular borrower or depositor. Additionally, there may be a
higher than usual demand for liquidity immediately prior to the century change
due to deposit withdrawals by customers concerned about Year 2000 issues. To
address this possible demand, we plan to have a higher percentage of our
investment portfolio in readily accessible funds during this time frame.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company has made, and may continue to make, various written or verbal
forward-looking statements with respect to business and financial matters,
including statements contained in this report, filings with the Securities and
Exchange Commission, and reports to stockholders. All statements which address
operating performance, events or developments that we expect or anticipate will
occur in the future, including statements related to loan growth, deposit
growth, per share growth, and statements expressing general sentiment about
future operating results and non-historical information, are forward-looking
statements within the meaning of the Act. The forward-looking statements are
and will be based on management's then current views and assumptions regarding
future events and operating performance. Certain factors that could affect
financial performance or cause actual results to vary significantly from
estimates contained in or underlying forward-looking statements include:
- Interest rate fluctuations and other market conditions.
- Strength of the consumer and commercial credit sectors, as
well as real estate markets.
- Changes in laws and regulations, including changes in
accounting standards and taxation requirements (including tax
rate changes, new tax laws, and revised tax law
interpretations).
- Competitive pricing and other pressures on loans and deposits
and the Company's ability to maintain market shares in its
trade areas.
- The inherent uncertainties in achieving Year 2000 compliance
with respect to the Company and its vendors, suppliers, and
loan customers.
- The outcome of litigation which depends on judicial
interpretations of law and findings of juries.
- Other risks and uncertainties as detailed from time to time
in Company filings with the Securities and Exchange
Commission.
15
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Southeast Commerce Holding Company
and Subsidiary
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Southeast
Commerce Holding Company and subsidiary as of December 31, 1998, and the
related consolidated statements of loss, changes in stockholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The financial statements of Southeast Commerce Holding Company (a
Development Stage Corporation) for the period from inception (August 22, 1997)
to December 31, 1997, were audited by Bricker & Melton, P.A., whose practice
has been combined with our Firm and whose report dated February 28, 1998,
expressed an unqualified opinion on those statements; such report contained an
explanatory paragraph relating to the Company's ability to continue as a going
concern.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southeast Commerce Holding Company and subsidiary as of December 31, 1998,
and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, Southeast
Commerce Holding Company and subsidiary changed their method of accounting for
deferred organization costs in 1998.
Duluth, Georgia
March 17, 1999
16
<PAGE> 18
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2) $ 603,677 $ --
Federal funds sold 9,320,000 --
Investment securities available for sale (Note 3) 3,986,491 --
Other investments (Note 3) 25,500 --
Investment in Commerce Mortgage Joint Venture (Note 1) 162,091 --
Loans, net of allowance for loan losses of $165,000 in 1998 (Notes 4 and 9) 10,240,557 --
Premises and equipment, net (Note 5) 865,587 50,000
Accrued interest receivable 49,740 --
Other assets 246,193 110,501
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $25,499,836 $160,501
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits: (Notes 8 and 13)
Noninterest-bearing demand $ 1,025,162 $ --
Interest-bearing demand and money market 5,210,318 --
Savings 19,295 --
Time deposits of $100,000 or more 2,934,726 --
Other time deposits 3,611,622 --
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 12,801,123 --
Accrued interest payable 26,552 --
Other liabilities (Note 6) 51,413 235,161
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 12,879,088 235,161
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 5, 11 and 12)
STOCKHOLDERS' EQUITY (Note 10)
Common stock, par value $.01; 10,000,000 shares authorized, 1,469,250
shares issued and outstanding and $0 shares issued and outstanding in
1998 and 1997, respectively 14,693 --
Capital surplus 13,722,072 100
Accumulated deficit (1,115,778) (74,760)
Accumulated other comprehensive income - market valuation reserve on
investment securities available for sale (Note 3) (239) --
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,620,748 (74,660)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,499,836 $160,501
======================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
17
<PAGE> 19
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 207,468 $ --
Investment securities:
U.S. Government agencies and corporations 45,862 --
Other investments 650 --
Federal funds sold 323,689 --
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 577,669 --
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing demand and money market 36,736 --
Savings 20 --
Time deposits of $100,000 or more 24,733 --
Other time deposits 36,522 --
Other borrowings (Note 6) 12,113 2,909
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 110,124 2,909
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) 467,545 (2,909)
PROVISION FOR LOAN LOSSES (Note 4) 165,000 --
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after provision for loan losses 302,545 (2,909)
- --------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 662 --
- --------------------------------------------------------------------------------------------------------------------------
Total other income 662 --
- --------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and other compensation 556,038 51,780
Employee benefits 89,500 --
Net occupancy and equipment expense 156,415 8,351
Professional and other outside services 223,898 --
Equity in undistributed (loss) of Commerce Mortgage Joint
Venture 87,909 --
Other expense (Note 14) 145,539 11,720
- --------------------------------------------------------------------------------------------------------------------------
Total other expense 1,259,299 71,851
- --------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (956,092) (74,760)
INCOME TAX BENEFIT (Note 7) -- --
- --------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (956,092) (74,760)
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN ACCOUNTING
PRINCIPLE FOR DEFERRED ORGANIZATION COSTS, NET OF TAX (Note 16) (84,926) --
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS $(1,041,018) $(74,760)
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
(Continued)
18
<PAGE> 20
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF LOSS (Continued)
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
BASIC LOSS PER COMMON SHARE: (Note 1)
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (1.36) $ --
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN ACCOUNTING
PRINCIPLE FOR DEFERRED ORGANIZATION COSTS, NET OF TAX (Note 16) (.12) --
- ---------------------------------------------------------------------------------------------------------------------
BASIC LOSS PER COMMON SHARE $ (1.48) $ --
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
19
<PAGE> 21
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Comprehensive
Income Accumulated Income-Market Common
Total (Loss) Deficit Valuation Reserve Stock Surplus
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION $ -- $ -- $ -- $ -- $ --
(Parent Only)
Capital contribution 100 -- -- -- 100
Comprehensive income:
Net loss (74,760) $ (74,760) (74,760) -- -- --
-----------
Comprehensive income (loss) $ (74,760)
===========
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1997
(Parent Only) (74,660) (74,760) -- -- 100
Proceeds from sale of
capital stock, net of
expenses 13,736,665 -- -- 14,693 13,721,972
Comprehensive income:
Net loss (1,041,018) $(1,041,018) (1,041,018) -- -- --
Other comprehensive
income, net of tax:
Market valuation
adjustment on
securities
available for sale (239) (239) -- (239) -- --
-----------
Comprehensive income (loss) $(1,041,257)
===========
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1998 $ 12,620,748 $(1,115,778) $(239) $14,693 $13,722,072
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
20
<PAGE> 22
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,041,018) $ (74,760)
Adjustments to reconcile net loss to net cash used by operating
activities:
Net accretion of investment securities (45,862) --
Depreciation and amortization of premises and equipment 53,280 --
Provision for loan losses 165,000 --
Loss on Commerce Mortgage Joint Venture 87,909 --
Increase in deferred loan fees 19,688 --
Cumulative effect of change in accounting for organization
costs 84,926 --
Increase in other assets (70,459) (25,575)
Increase in accrued interest receivable (49,740) --
Increase in accrued interest payable 26,552 --
Increase (decrease) in other liabilities (13,748) 65,161
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (783,472) (35,174)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (13,941,027) --
Purchases of other investments and assets (175,500) --
Maturities of investment securities available for sale 10,000,000 --
Purchase of investment in Commerce Mortgage Joint Venture (250,000) --
Loans originated, net of principal repayments (10,425,245) --
Purchases of premises and equipment (868,867) (50,000)
Deferred organization costs -- (84,926)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (15,660,639) (134,926)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital stock, net of expenses 13,736,665 --
Net increase in demand, money market and savings deposits 6,254,775 --
Time deposits accepted, net of repayments 6,546,348 --
Proceeds from other borrowings 272,000 170,000
Repayment of other borrowings (442,000) --
Proceeds from initial capital contribution -- 100
Proceeds from loans by Organizers -- 8,000
Repayment of loans by Organizers -- (8,000)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,367,788 170,100
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,923,677 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -- --
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,923,677 $ --
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID
Interest $ 83,573 $ --
Income taxes -- --
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
21
<PAGE> 23
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Southeast Commerce Holding Company provides a full range of banking and
bank-related services to individual and corporate customers through its bank
subsidiary, located in north Atlanta, Georgia. Southeast Commerce Holding
Company and subsidiary are subject to intense competition from other financial
institutions and are also subject to the regulations of certain government
agencies and, therefore, undergo periodic examinations by those regulatory
authorities.
The accounting and reporting policies of Southeast Commerce Holding Company and
subsidiary conform to generally accepted accounting principles and to general
practices within the banking industry. The following is a summary of the more
significant of these policies.
BASIS OF PRESENTATION
Southeast Commerce Holding Company (the Parent Company) was incorporated, under
the laws of the State of Georgia on August 22, 1997, to operate as a bank
holding company pursuant to the Federal Bank Holding Company Act of 1956, as
amended, and the Georgia Bank Holding Company Act, to charter a federal savings
bank with the Office of Thrift Supervision and to organize and own 100 percent
of the issued and outstanding capital stock of that bank, Commerce Bank (the
Bank). The Bank is an association organized under the laws of the United
States, which began as a general banking business on August 17, 1998, as a
wholly-owned subsidiary of the Parent Company. The 1998 consolidated financial
statements include the accounts of the Parent Company and its wholly-owned
subsidiary, the Bank, collectively known as the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements for the period from inception (August 22, 1997) to
December 31, 1997, are for Southeast Commerce Holding Company (a Development
Stage Corporation), the Parent Company only.
In preparing the consolidated financial statements, 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 revenues and expenses for
the period. Actual results could differ significantly from those estimates. For
instance, material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses. Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the adequacy of the allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them at the
time of their examination.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
22
<PAGE> 24
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
PARENT COMPANY JOINT VENTURE
In 1998, the Parent Company acquired a 50 percent joint venture interest in
Commerce Mortgage Company, LLC (Commerce Mortgage), a limited liability
corporation, in exchange for a total cash consideration of $250,000. The
investment in Commerce Mortgage is being accounted for using the equity method.
Commerce Mortgage`s primary business is originating residential real estate
loans that are secured by first and second mortgages and sold into the
secondary mortgage market.
Commerce Mortgage maintains a $3,000,000 warehouse line of credit with a
regional bank, which had an outstanding balance of $859,471 at December 31,
1998.
INVESTMENT SECURITIES
Investment securities available for sale are reported at fair market value,
with unrealized gains and losses reported as a separate component of
stockholders' equity, net of the related tax effect. Other investments are
reported at cost and, accordingly, earnings are reported when interest is
accrued or when dividends are received.
Premium and discount on all investment securities are amortized (deducted) and
accreted (added), respectively, to interest income on the straight-line and
interest methods over the period to the maturity of the related securities.
Gains or losses on disposition are computed by the specific identification
method for all securities.
LOANS
Loans are reported at the gross amount outstanding, less a valuation allowance
for loan losses. Interest income on loans is recognized over the terms of the
loans based on the principal amount outstanding. If the collectibility of
interest appears doubtful, the accrual thereof is discontinued. Interest income
on nonaccrual loans is recognized on a cash basis, if there is no doubt of
future collection of principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans and takes into consideration such factors as the balance of impaired
loans, changes in the nature and volume of the loan portfolio, current economic
conditions that may affect the borrower's ability to pay, overall portfolio
quality and a review of specific problem loans. Periodic revisions are made to
the allowance when circumstances which necessitate such revisions become known.
Recognized losses are charged to the allowance for loan losses, while
subsequent recoveries are added to the allowance.
23
<PAGE> 25
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
A loan is impaired when it is probable the Company will be unable to collect
all principal and interest payments due in accordance with the terms of the
loan agreement. Individually identified impaired loans are measured based on
the present value of payments expected to be received, using the contractual
loan rate as the discount rate. Alternatively, measurement may be based on
observable market prices, or for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds the measure
of fair value, a valuation allowance is established as a component of the
allowance for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses, and may
require the Company to record additions to the allowance based on their
judgement about information available to them at the time of their
examinations.
SALE OF LOANS
The Bank and Commerce Mortgage originate and sell loans and participations in
certain loans. Gains or losses on the sale of loans are recorded in noninterest
income, based on the net proceeds received and the recorded investment in the
loan sold.
PREMISES AND EQUIPMENT
Bank premises, furniture and equipment, and leasehold improvements are reported
at cost less accumulated depreciation and amortization. For financial reporting
purposes, depreciation and amortization are computed using primarily
straight-line methods over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations as incurred,
while major renewals and betterments are capitalized. When property is disposed
of, the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is reflected in income. For federal tax reporting
purposes, depreciation and amortization are computed using primarily
accelerated methods.
INCOME TAXES
The tax effects of transactions are recorded at current tax rates in the
periods the transactions are reported for financial statement purposes.
Deferred income taxes are established for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled.
Recognition of deferred tax asset balance sheet amounts is based on
management's belief that it is more likely than not that the tax benefit
associated with certain temporary differences, tax operating loss carryforwards
and tax credits will be realized. A valuation allowance is recorded for those
deferred tax asset items for which it is more likely than not that realization
will not occur in the near term.
The Company and the Bank file a consolidated income tax return. Each entity
provides for income taxes based on its contribution to income taxes (benefits)
of the consolidated group.
24
<PAGE> 26
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
EARNINGS PER COMMON SHARE
Earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding during each
year, which totaled 704,435 shares for the year ended December 31, 1998. There
were no shares outstanding for the period from inception to December 31, 1997.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Company originates financial instruments
with off-balance-sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the consolidated balance sheet. Commitments to extend
credit represent legally binding agreements to lend to a customer with fixed
expiration dates or other termination clauses. Since many commitments expire
without being funded, total commitment amounts do not necessarily represent
future liquidity requirements. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable; inventory; and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating fair
values of financial instruments (see Note 15):
Cash and cash equivalents - The carrying amount of cash and cash equivalents
approximates fair value.
Investment securities - The fair value of investment securities available for
sale is estimated based on bid quotations received from independent pricing
services.
Other investments - For other investments, which consist of common stock in the
Federal Home Loan Bank of Atlanta and investment in Commerce Mortgage Joint
Venture, the carrying amount approximates fair value.
Loans - For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. For all other
loans, fair values are calculated by discounting the contractual cash flows
using estimated market discount rates which reflect the credit and interest
rate risk inherent in the loan, or by using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits - The fair value of deposits with no stated maturity, such as demand,
NOW and money market, and savings accounts, is equal to the amount payable on
demand at year-end. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using the rates currently offered
for deposits of similar remaining maturities.
Accrued interest - The carrying amount of accrued interest receivable and
payable approximates fair value.
25
<PAGE> 27
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
Off-balance-sheet instruments - The fair value for off-balance-sheet lending
commitments is equal to the amount of commitments outstanding at December 31,
1998. This is based on the fact that the Company generally does not offer
lending commitments or standby letters of credit to its customers for long
periods, and therefore, the underlying rates of the commitments approximate
market rates.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
Effective August 22, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 is
effective for such transactions entered into subsequent to December 31, 1996,
and for certain excess servicing rights recorded at December 31, 1996. Under
SFAS 125, a company recognizes the financial and servicing assets it controls
and the liabilities it has incurred and derecognizes financial assets when
control has been surrendered and liabilities when extinguished. The Financial
Accounting Standards Board has issued Statement of Financial Accounting
Standards No. 127 (SFAS 127), "Deferral of the Effective Date of FASB Statement
No. 125," which delayed the effective date of certain provisions of SFAS 125
until 1998. The adoption of SFAS 125 and SFAS 127 did not have a significant
impact on the consolidated financial condition or results of operations of the
Company.
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
Under SFAS 130, a company will begin showing changes in assets and liabilities
in a new comprehensive income statement or alternative presentation, as opposed
to showing some of the items as transactions only in stockholders' equity
accounts. All comparative annual and interim financial statements will present
a comprehensive income statement disclosure for all years presented.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
disclosure of segment information about services, geographic areas, and major
customers. The Company acts as an independent community financial services
provider and offers traditional banking services to individual, commercial, and
government customers. Because management of the Company views and operates the
Bank as one versus multiple segments for financial reporting purposes, no
segmentation of bank operations between services, types of customers and market
areas is provided. Parent Company only financial information is provided in
Note 17.
26
<PAGE> 28
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for fiscal years beginning after
June 15, 1999. Under SFAS 133, a company will recognize all free-standing
derivative instruments in the statement of financial position as either assets
or liabilities and will measure them at fair value. The difference between a
derivative's previous carrying amount and its fair value shall be reported as a
transition adjustment presented in net income or other comprehensive income, as
appropriate, in a manner similar to the cumulative effect of a change in
accounting principle. This statement also determines the accounting for the
changes in fair value of a derivative, depending on the intended use of the
derivative and resulting designation. The adoption of SFAS 133 is not expected
to have a significant impact on the consolidated financial condition or results
of operations of the Company.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134 (SFAS 134), "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS 134 is effective for the
first fiscal quarter after December 15, 1998, and amends Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities," which revises the accounting for retained securities and
beneficial interests. The adoption of SFAS 134 is not expected to have a
significant impact on the consolidated financial condition or results of
operations of the Company.
2. CASH AND DUE FROM BANKS
The Federal Reserve Board requires that banks maintain reserve balances with
the Federal Reserve Bank or in cash on hand, based on the institution's deposit
balances. At December 31, 1998, the Bank's reserve requirement had not been
required to be computed or reported to the Federal Reserve Bank.
3. INVESTMENT SECURITIES AND OTHER INVESTMENTS
The amortized cost and estimated market value of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies and
corporations $3,986,889 $ -- $398 $3,986,491
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, the unrealized gain on available-for-sale securities, net of related
deferred taxes of $159, is $239 and is included as a separate component of
stockholders' equity.
27
<PAGE> 29
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
The amortized cost and estimated market value of investment securities
available for sale, by contractual maturity, are shown as follows. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
AVAILABLE FOR SALE
-----------------------------
AMORTIZED MARKET
DECEMBER 31, 1998 COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $3,986,889 $3,986,491
Due after one year through three years -- --
- ----------------------------------------------------------------------------------------------------------------------
$3,986,889 $3,986,491
======================================================================================================================
</TABLE>
There were no sales or calls of investment securities in 1998.
Investment securities with amortized costs of $3,986,889 and market values of
$3,986,491 at December 31, 1998, were pledged to secure public funds and
certain other deposits.
At December 31, 1998, the Bank had no off-balance-sheet derivative financial
instruments, such as swaps, options, futures, or forward contracts.
Other investments, totaling $25,500 at December 31, 1998, consist of common
stock in the Federal Home Loan Bank of Atlanta.
4. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Commercial $ 3,714,416
Real estate--individual 2,159,834
Real estate--commercial 3,794,652
Installment loans to individuals 756,344
- -----------------------------------------------------------------------------------------------------------------------
Total loans 10,425,246
Less: Net deferred loan fees (19,689)
Allowance for loan losses (165,000)
- -----------------------------------------------------------------------------------------------------------------------
Loans, net $ 10,240,557
=======================================================================================================================
</TABLE>
Most of the Bank's business activity is with customers located in the Atlanta,
Georgia, metropolitan area, with market concentration in the Cobb County area.
As of December 31, 1998, the Bank had approximately $5,955,000 of its loan
portfolio secured by real estate.
At December 31, 1998, the Bank had no loans which are considered impaired.
28
<PAGE> 30
The following is a summary of transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance, beginning of year $ --
Provision charged to expense 165,000
Loans charged off --
Recoveries of loans previously charged off --
- ----------------------------------------------------------------------------------------------------------------------
Balance, end of year $165,000
======================================================================================================================
5. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following:
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
Leasehold improvements $ 29,850 $ --
Furniture, fixtures and equipment 889,017 50,000
- ----------------------------------------------------------------------------------------------------------------------
918,867 50,000
Less accumulated depreciation and amortization 53,280 --
- ----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 865,587 $50,000
======================================================================================================================
</TABLE>
Depreciation and amortization expense totaled $53,280 for 1998. No depreciation
was recorded in 1997.
The Company leases its banking facility and offices pursuant to an operating
lease. Rental expense incurred under the lease was $62,186 and $9,015 in 1998
and 1997, respectively.
Future minimum lease payments under the operating lease are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 125,028
2000 125,028
2001 125,028
2002 125,028
2003 125,028
2004 and thereafter 616,986
- ----------------------------------------------------------------------------------------------------------------------
$ 1,242,126
======================================================================================================================
</TABLE>
29
<PAGE> 31
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
6. SHORT-TERM AND OTHER BORROWINGS
On August 27, 1997, the organizers of the Bank obtained a $500,000 line of
credit from a bank at the adjustable prime rate. The line of credit was
unsecured and required interest-only payments on a quarterly basis with total
principal plus interest due at maturity on August 27, 1998. Personal guarantees
of the organizers, up to $83,333 each, were required by the lender bank. This
line of credit was used to repay (without interest) the organizers' $8,000
initial funding of the Company and to provide additional operating funds until
equity funding was obtained in 1998. Outstanding borrowings were $170,000 at
December 31, 1997. Approximately $442,000 was drawn against this line of credit
in 1998 and all borrowings outstanding were repaid on June 10, 1998. The line
of credit expired in 1998.
The Bank utilizes short-term borrowings as needed for liquidity purposes in the
form of federal funds purchased. The Bank has unsecured lines of credit for
federal funds purchased from other banks totaling $2,000,000 at December 31,
1998. There were no amounts outstanding under these lines at December 31, 1998.
7. INCOME TAXES
The following are the components of income tax expense as provided:
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
Current income tax provision $ -- $ --
Deferred income tax benefit -- --
- ------------------------------------------------------------------------------------------------------------
$ -- $ --
============================================================================================================
</TABLE>
A reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes is as follows:
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
Pretax income (loss) $(1,041,018) $(74,760)
- ----------------------------------------------------------------------------------------------------------------------
Income tax (benefit) computed at federal statutory tax rate $ (353,946) $(25,418)
Increase (decrease) resulting from:
Nondeductible meals and entertainment 2,368 850
State income tax benefit, net of federal tax benefit (41,224) (850)
Valuation allowance 392,802 25,418
- ----------------------------------------------------------------------------------------------------------------------
$ -- $ --
======================================================================================================================
</TABLE>
30
<PAGE> 32
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
The following summarizes the tax effects of temporary differences which
comprise net deferred tax assets:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(Parent Only)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $ 38,497 $ --
Net operating loss carryforward 258,285 25,418
Deferred organization costs 130,279 --
Unrealized loss on investment securities available for sale 159 --
Other, net 5,118 --
- ----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 432,338 25,418
- ----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Accumulated depreciation (13,959) --
- ----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities (13,959) --
- ----------------------------------------------------------------------------------------------------------------
Valuation allowance (418,220) (25,418)
- ----------------------------------------------------------------------------------------------------------------
Net deferred income tax (liability) asset $ 159 $ --
================================================================================================================
</TABLE>
As of December 31, 1998 and 1997, the Company had cumulative net operating loss
carryforwards of approximately $1,034,000 and $73,900, respectively, for
financial reporting purposes, and $678,400 and $71,400, respectively, for tax
purposes. The 1998 and 1997 net operating loss carryforwards of $607,000 and
$71,400 are subject to 20-year and 15-year carryforward limitations,
respectively.
8. TIME DEPOSITS
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $2,935,000 at December 31, 1998.
At December 31, 1998, the scheduled maturities of time deposits of $100,000 or
more and other time deposits are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $6,368,188
2000 178,160
Thereafter --
- -----------------------------------------------------------------------------------------------------------------------
$6,546,348
=======================================================================================================================
</TABLE>
31
<PAGE> 33
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Bank had direct and indirect loans which aggregated
$377,718, outstanding to or for the benefit of certain of the Bank's officers,
directors and their related interests. During 1998, $382,522 of such loans were
made and repayments totaled $4,804. These loans were made in the ordinary
course of business in conformity with normal credit terms, including interest
rates and collateral requirements prevailing at the time for comparable
transactions with borrowers unaffiliated with the Bank. These individuals and
their related interests also maintain customary demand and time deposit
accounts with the Bank.
10. STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal 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
Bank's financial statements. The regulations require the Bank to meet specific
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tier 1 capital (as defined in the regulations) to average
assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). To be considered well
capitalized and adequately capitalized (as defined) under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table. The Bank's and Company's consolidated actual capital amounts and ratios
are also presented in the table.
32
<PAGE> 34
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ADEQUATELY
WELL CAPITALIZED CAPITALIZED
DECEMBER 31, 1998 REQUIREMENT REQUIREMENT ACTUAL
- -----------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital (to Average
Assets)
Bank >$1,050,000 > 5.0% $ 840,000 4.0% $ 7,579,000 36.1%
- -
Consolidated Company >$1,275,000 > 5.0% $1,020,000 4.0% $12,621,000 49.5%
- -
Tier 1 Capital (to Risk
Weighted Assets)
Bank >$ 750,000 > 6.0% $ 500,000 4.0% $ 7,579,000 60.6%
- -
Consolidated Company >$ 820,000 > 6.0% $ 547,000 4.0% $12,621,000 92.3%
- -
Total Capital (to Risk
Weighted Assets)
Bank >$1,250,000 >10.0% $1,000,000 8.0% $ 7,744,000 61.9%
- -
Consolidated Company >$1,367,000 >10.0% $1,093,000 8.0% $12,786,000 93.6%
- -
</TABLE>
Management believes that, as of December 31, 1998, the Bank and Company meet
all capital requirements to which they are subject.
Dividends paid by the Bank are the primary source of funds available to the
Company. Banking regulations limit the amount of dividends which the Bank may
pay without obtaining prior regulatory approval. These restrictions are based
on the level of regulatory classified assets, the prior years' net earnings,
and the ratio of equity capital to total assets. At December 31, 1998, total
stockholders' equity of the Bank was $7,578,502 and was not available for
dividends.
11. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Bank 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 include commitments to extend credit. These instruments
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 the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amounts of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
33
<PAGE> 35
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
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 dates 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. At December 31, 1998, commitments to extend
credit totaled approximately $9,457,000. The Bank's experience has been that
approximately 70 percent of loan commitments are drawn upon by customers.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on management's credit evaluation of the other
party. Collateral held varies but may include accounts receivable; inventory;
property, plant and equipment; and income-producing commercial properties on
those commitments for which collateral is deemed necessary.
12. COMMITMENT
The Company entered into a letter of employment with the President and Chief
Executive Officer of the Bank. The letter of employment continues for two more
years and provides for an annual base salary, plus medical insurance premiums,
and such other benefits which are generally made available to other senior
executives of the Company and the Bank. The letter of employment also provides
for granting stock options to purchase 10,000 shares of Parent Company common
stock at a purchase price of $10.00 per share. These stock options are subject
to the stock option plan being approved by the Office of Thrift Supervision and
the Company's stockholders.
13. DEPOSIT CONCENTRATION
At December 31, 1998, the Bank had approximately $3,849,000 in deposits with
one corporate customer.
14. SUPPLEMENTAL FINANCIAL DATA
Components of other expense in excess of 1 percent of total income are as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Supplies and printed forms $43,011
Loan expenses 10,531
Telecommunications 17,874
Business licenses 10,000
Travel and entertainment 28,060
</TABLE>
34
<PAGE> 36
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998
--------------------------------
CARRYING ESTIMATED
December 31, VALUE FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,923,677 $ 9,923,677
Investment securities available
for sale 3,986,491 3,986,491
Other investments 187,591 187,591
Loans 10,240,557 10,159,287
Accrued interest receivable 49,740 49,740
Financial liabilities:
Noncontractual deposits $ 6,254,775 $ 6,254,775
Contractual deposits 6,546,348 6,537,428
Accrued interest payable 26,552 26,552
Off-balance-sheet instruments:
Undisbursed credit lines $ 9,456,635
</TABLE>
16. CHANGE IN ACCOUNTING PRINCIPLE--DEFERRED ORGANIZATION COSTS
Effective January 1, 1998, the Company changed its method of accounting for
organization costs in order to expense these costs in the period incurred.
Prior to 1998, the Company capitalized organization costs and amortized them to
expense over a five-year period. This change in accounting method was made in
order for the Company to be in compliance with AICPA Statement of Position 98-5
(SOP 98-5), which states that the costs of start-up activities, which include
organization costs, be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998; however the Company elected early
adoption, which is encouraged. The Company recorded a pretax charge of
approximately $85,000, or $.12 per share, in 1998 as the cumulative effect of
this accounting change. Of this amount, approximately $64,000 was related to
the Bank and $21,000 was related to the Parent Company. This change also
increased 1998 costs and expenses by approximately $343,000, or $.49 per share.
35
<PAGE> 37
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
17. CONDENSED FINANCIAL INFORMATION OF SOUTHEAST COMMERCE HOLDING COMPANY
CONDENSED BALANCE SHEETS
(PARENT ONLY)
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on hand or at other financial institutions $ 84,901 $ --
Federal funds sold 4,090,000 --
Interest-bearing deposit with bank subsidiary 540,111 --
Premises and equipment -- 50,000
Deferred organization costs -- 84,926
Investment in subsidiary 7,578,502 --
Investment in Commerce Mortgage Joint Venture 162,091 --
Other assets 165,143 25,575
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,620,748 $ 160,501
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Note payable $ -- $ 170,000
Other liabilities -- 65,161
- ------------------------------------------------------------------------------------------------------------------
Total liabilities -- 235,161
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 14,693 --
Capital surplus 13,722,072 100
Accumulated deficit (1,115,778) (74,760)
Accumulated other comprehensive income - market valuation
reserve on investment securities available for sale (239) --
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,620,748 (74,660)
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,620,748 $ 160,501
==================================================================================================================
</TABLE>
36
<PAGE> 38
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF LOSS
(PARENT ONLY)
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME
Interest income $ 213,733 $ --
- -----------------------------------------------------------------------------------------------------------
Total operating income 213,733 --
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Salaries and benefits 107,887 51,780
Occupancy expense 9,919 8,351
Interest expense on other borrowings 12,113 2,909
Professional fees and outside services 68,945 --
Equity in undistributed loss of Commerce Mortgage
Joint Venture 87,909 --
Other expense 25,534 11,720
- -----------------------------------------------------------------------------------------------------------
Total operating expense 312,307 74,760
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, INCOME TAX BENEFIT, AND EQUITY IN
UNDISTRIBUTED LOSS OF SUBSIDIARY (98,574) (74,760)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (21,185) --
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED LOSS OF SUBSIDIARY (119,759) (74,760)
INCOME TAX BENEFIT -- --
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (119,759) (74,760)
EQUITY IN UNDISTRIBUTED LOSS OF SUBSIDIARY (921,259) --
- -----------------------------------------------------------------------------------------------------------
NET LOSS $(1,041,018) $(74,760)
===========================================================================================================
</TABLE>
37
<PAGE> 39
SOUTHEAST COMMERCE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED AND PARENT-ONLY FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT ONLY)
<TABLE>
<CAPTION>
For the period
FOR THE YEAR ENDED from inception to
DECEMBER 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,041,018) $ (74,760)
Equity in undistributed loss of bank subsidiary 921,259 --
Cumulative effect of change in accounting for
organization costs 21,185 --
Loss on Commerce Mortgage Joint Venture 87,909 --
Increase in other assets (25,827) (25,575)
(Decrease) increase in other liabilities (65,161) 65,161
- --------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (189,562) (35,174)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Contribution of capital to bank subsidiary (8,500,000) --
Purchase of investment in Commerce Mortgage Joint
Venture (250,000) --
Purchase of interest-bearing deposits with bank
subsidiary (540,111) --
Deferred organization costs -- (84,926)
Purchase of fixed assets -- (50,000)
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (9,290,111) (134,926)
- --------------------------------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES
Proceeds from sales of capital stock, net of expenses 13,736,665 --
Initial capital contribution -- 100
Proceeds from loans by organizers -- 8,000
Repayment of loans by organizers -- (8,000)
Proceeds from other borrowings 272,000 170,000
Repayment of other borrowings (442,000) --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,566,665 170,100
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,174,901 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -- --
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,174,901 $ --
==============================================================================================================
</TABLE>
38
<PAGE> 40
BOARD OF DIRECTORS
Gary M. Bremer Stephen R. Gross
Richard C. Carter G. Webb Howell
Louis J. Douglass, III Frank E. Perisino
Terry L. Ferrero Richard A. Parlontieri
Chairman
EXECUTIVE OFFICERS
COMMERCE BANK
Louis J. Douglass, III, President & Chief Executive Officer
Mark D. Little, Senior Vice President, Chief Financial Officer
Lawrence S. Bourne, Senior Vice President
OFFICERS
Melissa Ricketts, Vice President, Operations
Sue Ann Wood, Assistant Vice President
LOCATION
2410 Paces Ferry Road
Suite 190
Atlanta, Georgia 30339
39
<PAGE> 41
CORPORATE DATA
ANNUAL MEETING:
The Annual Meeting of Shareholders of Southeast Commerce Holding Company will
be held at 4:00 p.m. on Monday, May 3, 1999 at Commerce Bank located at 2410
Paces Ferry Road, Suite 190, Atlanta, GA 30339.
<TABLE>
<CAPTION>
CORPORATE OFFICE: GENERAL COUNSEL:
<S> <C>
2410 Paces Ferry Road/Suite 190 Nelson, Mullins, Riley & Scarborough, L.L.P.
Atlanta, GA 30339 First Union Plaza
(770) 863-9225 999 Peachtree Street, Suite 1400
(770) 863-9228 Atlanta, GA 30309
STOCK TRANSFER AGENT: INDEPENDENT AUDITORS:
Continental Stock Transfer & Trust Company BDO Seidman, LLP
2 Broadway 3700 Crestwood Parkway, Suite 590
New York, NY 10004 Duluth, GA 30096
</TABLE>
STOCK INFORMATION:
Since its public offering on August 6, 1998, the Company's common stock has
been quoted on the OTC Bulletin Board under the symbol STCH. The Company's
articles of incorporation authorize it to issue up to 10,000,000 shares of
common stock, of which 1,469,250 shares, for a total of $14,692,500, were sold
in the initial public offering and are outstanding as of March 29, 1999. The
Company has 198 shareholders of record. To date, the Company has not paid cash
dividends on its common stock. The Company currently intends to retain earnings
to support operations and finance expansion and therefore does not anticipate
paying cash dividends in the foreseeable future.
The following table sets forth the high and low sales price information as
quoted on the OTC Bulletin Board during the period indicated since the
Company's common stock began trading publicly on August 6, 1998.
<TABLE>
<CAPTION>
STOCK PRICE
-----------
HIGH LOW
<S> <C> <C>
1998
Third Quarter $12.375 $8.25
Fourth Quarter $ 9.75 $7.75
</TABLE>
All outstanding shares of common stock of the Company are entitled to share
equally in dividends from funds legally available therefor, when, as and if
declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future. See "Item 1. Description of Business --
Dividends."
40
<PAGE> 42
FORM 10-K
The Company will furnish upon request, free of charge, copies of the Annual
Report and the Company's Report to the Securities and Exchange Commission (Form
10-K) by contacting Mark Little, Chief Financial Officer, Commerce Bank.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT
FURNISHED PURSUANT TO Part 350 of the Federal Deposit Insurance Corporation
Rules and Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR
ACCURACY OR RELEVANCE BY THE FDIC.
41
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Commerce Bank
Commerce Mortgage Company, LLC
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHEAST COMMERCE HOLDING COMPANY FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 603,677
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,320,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,986,491
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,405,557
<ALLOWANCE> 165,000
<TOTAL-ASSETS> 25,499,836
<DEPOSITS> 12,801,123
<SHORT-TERM> 26,552
<LIABILITIES-OTHER> 51,413
<LONG-TERM> 0
0
0
<COMMON> 14,693
<OTHER-SE> 12,606,055
<TOTAL-LIABILITIES-AND-EQUITY> 25,499,836
<INTEREST-LOAN> 207,468
<INTEREST-INVEST> 46,512
<INTEREST-OTHER> 323,689
<INTEREST-TOTAL> 557,669
<INTEREST-DEPOSIT> 98,011
<INTEREST-EXPENSE> 110,124
<INTEREST-INCOME-NET> 467,545
<LOAN-LOSSES> 165,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,171,390
<INCOME-PRETAX> (956,092)
<INCOME-PRE-EXTRAORDINARY> (956,092)
<EXTRAORDINARY> 0
<CHANGES> (84,926)
<NET-INCOME> (1,041,018)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> (1.48)
<YIELD-ACTUAL> 5.10
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 165,000
</TABLE>
