<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to _____________
COMMERCE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA
(State or other jurisdiction or organization)
59-2497676
(I.R.S. Employer Identification No.)
1201 South Orlando Avenue
Winter Park, Florida 32789
(Address of principal executive offices)
(Zip Code)
(407) 741-8900
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No N/A X
------- ------- -------
This filing contains 28 pages. The Exhibit List commences on the
sequential page number 24.
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On November 1, 1996, Commerce National Corporation (the "Company") had
595,784 shares of common stock, par value $0.10 per share, issued and
outstanding.
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
2
<PAGE>
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements.
The financial statements begin on the following page.
3
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Table of Contents
Accountants' Review Report
Condensed consolidated balance sheets (unaudited)--September 30, 1996 and
December 31, 1995
Condensed consolidated statements of operations (unaudited)--Three months ended
September 30, 1996 and 1995; Nine months ended September 30, 1996 and
1995
Condensed consolidated statements of cash flows (unaudited)--Nine months ended
September 30, 1996 and 1995
Selected notes to condensed consolidated financial statements (unaudited)--
September 30, 1996
4
<PAGE>
The Board of Directors
Commerce National Corporation:
We have reviewed the condensed consolidated balance sheet of Commerce National
Corporation and subsidiary as of September 30, 1996 and the related condensed
consolidated statements of operations for the three month and nine month periods
ended September 30, 1996 and September 30, 1995 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1996 and
1995. These condensed consolidated financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Commerce National Corporation and
subsidiary as of December 31, 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended not
presented herein; and in our report dated January 19, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1995, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
\s\ KPMG Peat Marwick LLP
Orlando, Florida
October 23, 1996
5
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,687,002 3,897,057
Federal funds sold 1,500,000 8,000,000
Investment securities available for sale (note 2) 17,410,175 12,136,418
Investment securities held to maturity (note 2) 1,693,219 2,705,957
Loans, net (note 3) 78,351,603 66,648,785
Accrued interest receivable 748,938 632,936
Premises and equipment, net 3,559,451 3,486,488
Other real estate owned 873,594 802,145
Deferred tax assets 228,957 178,000
Federal Reserve Bank stock, at cost 150,000 150,000
Federal Home Loan Bank stock, at cost 300,000 407,200
Independent Bankers Bank stock, at cost 19,750 19,750
Prepaid expenses and other assets 111,849 129,651
Executive supplemental income plan - cash
surrender value life insurance policies 1,223,039 1,171,100
</TABLE>
------------ -----------
Total assets $109,857,577 100,365,487
============ ===========
See accompanying review report of KPMG Peat Marwick LLP and selected notes to
condensed consolidated financial statements (unaudited).
6
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities 1996 1995
----------- ------------- ------------
<S> <C> <C>
Deposits (note 4):
Noninterest bearing $ 12,482,112 13,285,944
Interest bearing 84,247,941 76,056,835
---------- ----------
Total deposits 96,730,053 89,342,779
Federal Home Loan Bank advances 1,259,145 1,266,095
Other borrowed funds 2,460,693 1,394,944
Accrued interest payable 126,879 206,031
Accounts payable and other liabilities 290,209 221,664
------- -------
Total liabilities 100,866,979 92,431,513
----------- ----------
Stockholders' Equity
--------------------
Common stock, par value $.10 per share
(1,000,000 shares authorized; 617,584 and
545,365 shares issued and 595,784 and
523,565 outstanding at September 30, 1996
and December 31, 1995) 61,759 54,537
Additional paid in capital 6,065,310 5,350,342
Treasury stock, at cost (21,800 shares at
September 30, 1996 and
December 31, 1995) (208,640) (208,640)
Retained earnings 3,054,645 2,621,294
Unrealized gain on investments available for
sale, net 17,524 116,441
------ -------
Total stockholders' equity 8,990,598 7,933,974
Commitments (note 6) ----------- -----------
Total liabilities and stockholders'
equity $109,857,577 100,365,487
=========== ===========
</TABLE>
7
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
1996 1995 1996 1995
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans $1,796,049 1,741,909 5,146,533 4,607,687
Investment securities 310,006 251,386 835,211 734,051
Federal funds sold 11,391 62,391 235,802 84,870
Federal Reserve Bank stock 2,250 2,138 6,841 6,413
Federal Home Loan Bank
stock - - 12,514 27,758
Due from banks 1,426 6,380 43,130 7,791
----- ----- ------ -----
Total interest income 2,121,122 2,064,204 6,280,031 5,468,570
Interest expense 995,961 1,045,457 3,107,880 2,613,060
------- --------- --------- ---------
Net interest income 1,125,161 1,018,747 3,172,151 2,855,510
Provision for loan losses - 95,000 60,000 175,000
---------- ------ ------ -------
Net interest income after
provision for loan
losses 1,125,161 923,747 3,112,151 2,680,510
--------- ------- --------- ---------
Other operating income:
Customer service fees 157,146 118,607 498,670 339,758
Management fees - - - 6,000
Other operating expenses:
Salaries and benefits 444,980 337,832 1,341,923 1,058,754
Occupancy expense 210,147 144,657 574,634 349,862
Legal and professional
fees 73,605 57,748 161,779 164,190
Other expenses 222,141 199,786 759,666 798,363
Loss on sale and write
down of other real estate owned 27,975 3,257 61,883 26,001
------ ----- ------ ------
978,848 743,280 2,899,885 2,397,170
------- ------- --------- ---------
Net income before taxes 303,459 299,074 710,936 629,098
Income tax expense 114,448 117,329 277,585 246,478
------- ------- ------- -------
Net income $ 189,011 181,745 433,351 382,620
======= ======= ======= =======
Earnings per share (note 7) $ .34 .35 .77 .73
=== === === ===
Primary earnings per common and
common equivalent share (note 8) $ .31 .35 .72 .68
=== === === ===
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and
selected notes to condensed consolidated financial statements (unaudited).
8
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Net income $433,351 382,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 193,656 77,175
Net amortization of premiums and accretion of
discounts on investment securities held to
maturity and investment securities available for
sale (11,131) 40,986
Provision for loan losses 60,000 175,000
Deferred loan origination fees 84,506 66,915
Provision for other real estate owned 7,080 -
Loss on sale of other real estate owned 27,975 6,001
Write down to fair value on other real estate
owned 26,828 20,000
Executive supplemental income plan - additional
cash surrender value (51,939) -
Cash provided by (used in) changes in:
Accrued interest receivable (116,002) (19,374)
Prepaid expenses and other assets 17,802 (142,667)
Accrued interest payable (79,152) 125,686
Accounts payable and other liabilities 68,545 (24,672)
------ -------
Net cash provided by operating activities 661,519 707,670
------- -------
Cash flows provided by (used in) investing
activities:
Net loans made to customers (12,351,851) (6,948,967)
Decrease in federal funds sold 6,500,000 -
Purchases of investment securities available for
sale (7,899,762) (5,380,986)
Proceeds from maturity of investment securities
available for sale 1,500,000 5,000,000
Proceeds from maturities of investment securities
held to maturity 2,000,000 -
Purchase of premises and equipment (266,619) (1,228,373)
Redemption/(purchase) of Federal Home Loan Bank
stock 107,200 102,900
Proceeds from sale of other real estate owned 371,195 130,348
------- -------
Net cash used in investing activities (10,039,837) (8,325,078)
---------- ---------
</TABLE>
(Continued)
9
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows provided by financing activities:
Net increase in demand deposits, NOW
accounts and passbook savings accounts 3,764,542 (2,206,977)
Net increase (decrease) in certificates of
deposit 3,622,732 24,615,431
Decrease in federal funds purchased - (2,500,000)
Principal repayment on mortgage note payable (17,743) (16,398)
Increase (decrease) in repurchase agreements 1,083,492 (5,438,914)
Net proceeds from (repayments of) borrowings from
the Federal Home Loan Bank (6,950) (2,881,409)
Sale of treasury stock 24,411 -
Purchase of treasury stock (24,411) -
Sale of common stock 722,190 -
------- ----------
Net cash provided by financing activities 9,168,263 11,571,733
--------- ----------
Net (decrease) increase in cash and cash
equivalents (210,055) 3,954,325
Cash and cash equivalents at the beginning
of the period 3,897,057 1,850,183
--------- ---------
Cash and cash equivalents at the end of the
period $ 3,687,002 5,804,508
========= =========
Cash paid during the period for:
Interest $ 3,187,032 2,487,374
========= =========
Income taxes $ 249,035 242,483
======= =======
</TABLE>
(Continued)
10
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosures for noncash
transactions:
Market value adjustment - investments available
for sale:
Investments (26,552) (78,678)
Deferred income tax liability (9,028) (26,751)
----- ------
Unrealized gain on investments available for
sale $ (17,524) (51,927)
======= =======
Transfer land to other real estate owned from
premises and equipment $ - 150,000
======= =======
Transfer foreclosed loan to other real estate
owned $ 504,527 48,857
======= ======
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and
selected notes to condensed consolidated financial statements (unaudited).
11
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1996
See accompanying review report of KPMG Peat Marwick LLP
(1) Basis of Presentation
(a) Interim Financial Information
The accompanying unaudited condensed consolidated financial statements
of Commerce National Corporation and Subsidiary (the Company) have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial information. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September
30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 1995.
(b) Statement of Cash Flows
For purposes of the condensed consolidated statement of cash flows,
the Company considers cash and due from banks, noninterest bearing
deposits in other banks, federal funds sold, and investment securities
with less than three months maturity at acquisition, to be cash
equivalents.
(Continued)
12
<PAGE>
-2-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(c) Long-Lived Assets
On January 1, 1996, the Company adopted Financial Accounting Standards
Board (FASB)Statement of Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be disposed of. It requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. It also prescribes the value of these assets
to be disposed be reported at the lower of carrying amount or fair
value less cost to sell.
Adoption of this Statement did not have a material impact on the
Company.
(d) Mortgage Servicing Rights
On January 1, 1996, the Company adopted FASB Statement of Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights". This
Statement amends FASB Statement No. 65, "Accounting for Certain
Mortgage Banking Activities". This Statement requires that a mortgage
banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. A mortgage
banking enterprise should satisfy its mortgage servicing rights that
are capitalized after the adoption of this Statement based on one or
more of the predominant risk characteristics of the underlying loans.
Impairment should be recognized through a valuation allowance for each
impaired stratum.
Adoption of this Statement did not have a material impact on the
Company.
(Continued)
13
<PAGE>
-3-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(e) Stock-Based Compensation
On January 1, 1996, the Company adopted FASB Statement of Accounting
Standards No. 123, "Accounting for Stock Based Compensation". This
Statement applies to all transactions in which an entity acquires
goods or services by issuing equity instruments or by incurring
liabilities where the payment amounts are based on the entity's common
stock price, except for employee stock ownership plans (ESOPs). This
Statement establishes a fair value based method, accounting for stock
based compensation plans and covers transactions with employees and
nonemployees and is applicable to both public and nonpublic entities.
Adoption of this Statement did not have a material impact on the
Company as the Company elected to follow the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees".
(2) Investment Securities Held to Maturity and
Investment Securities Available for Sale
The amortized cost and estimated market values of investment securities
held to maturity at September 30, 1996 and December 31, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Estimated
Amortized Estimated Amortized market
cost market value cost value
------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and municipals $1,693,219 1,694,091 2,705,957 2,714,950
========== ========= ========= =========
</TABLE>
(Continued)
14
<PAGE>
-4-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
The amortized cost and estimated market value of investments available for sale
at September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Amortized Estimated Amortized Estimated
cost market value cost market value
----------- ---------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $17,383,623 17,410,175 11,959,992 12,136,418
=========== ========== ========== ==========
</TABLE>
Included in U.S. Treasury securities are securities sold under agreements to
repurchase. The following is a summary of securities sold under agreement to
repurchase as of September 30, 1996:
<TABLE>
<CAPTION>
U.S. Treasury Securities Within 30 days Total
- -------------------------- -------------- ---------
<S> <C> <C>
Carrying value $ 2,130,005 2,130,005
Borrowings 2,130,005 2,130,005
Market value 2,130,005 2,130,005
</TABLE>
The Company enters into sales of securities under agreements to repurchase
("Agreements"). Fixed-coupon Agreements are treated as financing, and the
obligations to repurchase securities sold are reflected as a liability in the
condensed consolidated balance sheet. The dollar amount of securities
underlying the Agreements remain in the asset accounts. At September 30, 1996,
all of the Agreements were to repurchase identical securities. The assets
underlying the Agreements, were held in safekeeping by a third party. During
the quarter ended September 30, 1996, Agreements outstanding averaged
approximately $1,153,653 and the maximum amount outstanding during the quarter
was $2,186,680. Total interest expense paid on repurchase Agreements was
$14,012 for the quarter ended September 30, 1996 and $45,604 for the nine months
ended September 30, 1996.
(Continued)
15
<PAGE>
-5-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(3) Loans
Major categories of loans included in the loan portfolio at September 30,
1996 and December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial-secured $ 10,557,207 7,695,479
Commercial-unsecured 3,996,649 2,681,485
Real estate - mortgage 61,618,690 55,345,499
Other 3,341,511 2,009,057
--------- ---------
79,514,057 67,731,520
Allowance for loan losses (852,016) (856,803)
Deferred loan origination fees (310,438) (225,932)
------- -------
$ 78,351,603 66,648,785
========== ==========
</TABLE>
The recorded investment in loans for which an impairment has been
recognized and the related allowance for loan losses at September 30, 1996
were $90,052 and $90,052, respectively. All impaired loans had an
associated allowance for loan losses. The average recorded investment in
impaired loans during the third quarter was $137,403. No interest income
was recognized during the quarter on impaired loans.
(Continued)
16
<PAGE>
-6-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
The activity in the allowance for loan losses for the three months ended
September 30, 1996 and 1995 and the nine months ended September 30, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at the beginning
of the period $ 854,482 741,071 856,803 657,569
Charge offs (23,966) (57,988) (101,287) (60,550)
Recoveries 21,500 44,315 36,500 50,379
Provision for loan losses - 95,000 60,000 175,000
-------- ------ ------ -------
Balance at the end of the
period $ 852,016 822,398 852,016 822,398
======= ======= ======= =======
</TABLE>
At September 30, 1996 and December 31, 1995, certain stockholders, directors and
employees were indebted to the Bank in the aggregate amounts of $13,442,590 and
$11,520,498, respectively. All such loans were made in the ordinary course of
business.
(4) Deposits
Included in interest bearing deposits are certificates of deposit issued in
amounts of $100,000 or more. These certificates and their remaining
maturities at September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Three months or less $18,948,151 13,117,216
Three through twelve months 8,486,012 9,948,335
Over one year 1,252,642 816,491
----------- ----------
$28,686,805 23,882,042
=========== ==========
</TABLE>
(Continued)
17
<PAGE>
-7-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(5) Common Stock
As of April 26, 1996, the Company's employees exercised options for 72,219
shares of common stock at $10 per share.
(6) Commitments and Contingencies
In the normal course of business, the Company has various commitments to
extend credit and standby letters of credit which are not reflected in the
financial statements. At September 30, 1996 and December 31, 1995, the
Company had commitments to customers of approximately $46,089,488 and
$41,949,096 for approved lines of credit, $1,112,888 and $832,133 for
standby letters of credit and $18,158,061 and $15,189,767 for unfunded firm
loan commitments, respectively.
(7) Earnings Per Share
Earnings per share is calculated based on the weighted average number of
shares outstanding.
(8) Primary Earnings Per Common and Common Equivalent Share
Primary earnings per share is calculated based on stock options outstanding
of 121,781 and 194,000 as of September 30, 1996 and 1995, respectively. The
effect of the conversion of these common stock equivalents was an increase
for September 30, 1996 and 1995 of 38,993 and 89,287, respectively.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The accompanying financial statements of the Company are primarily affected
by the operation of the NATIONAL BANK OF COMMERCE (the "Bank"), its wholly owned
subsidiary.
The following discussion and analysis presents a review of the Company's
Consolidated Financial Condition and Results of Operation. This review should
be read in conjunction with the consolidated financial statements and other
financial data presented herein.
Summary:
- -------
For the nine months ending September 30, 1996, the Company had a profit of
$433,351 as compared to a profit of $382,620 for the same period in 1995. Total
interest expense for the first nine months of 1996 increased 19% to $3,107,880
due to the increased flow of new deposits into the Bank during the first nine
months of 1996.
Two indicators which measure profitability are net income as a percentage
of average assets (ROAA) and net income as a percentage of average shareholder
equity (ROAE). A comparison of these ratios for the third quarter of the last
three years is as follows:
<TABLE>
<CAPTION>
----------------------------------------
For the Nine Months Ending
----------------------------------------
<S> <C> <C> <C>
9/30/96 9/30/95 9/30/94
- -----------------------------------------------------------
ROAA .54% .59% .71%
- -----------------------------------------------------------
ROAE 6.75% 6.77% 8.76%
- -----------------------------------------------------------
NET INCOME $ 433,351 $ 382,620 $ 448,928
- -----------------------------------------------------------
AVERAGE ASSETS $106,527,366 $87,050,693 $84,237,854
- -----------------------------------------------------------
AVERAGE CAPITAL $ 8,562,993 $ 7,535,549 $ 6,837,045
- -----------------------------------------------------------
</TABLE>
Net Interest Income
- -------------------
Net interest income, the difference between interest earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, is the most significant component of the Company's earnings. Net
interest income is affected by changes in the volumes and rates of interest-
earning assets and interest-bearing liabilities and the volume of interest-
earning assets funded with interest-bearing deposits, non-interest-bearing
deposits, and shareholder's equity. Net interest income for the first nine
months of the last three years is as follows:
19
<PAGE>
<TABLE>
<CAPTION>
----------------------------------
For the Nine Months Ending
----------------------------------
<S> <C> <C> <C>
9/30/96 9/30/95 9/30/94
- ---------------------------------------------------------
INTEREST INCOME $6,280,031 $5,468,570 $4,405,742
- ---------------------------------------------------------
INTEREST EXPENSE $3,107,880 $2,613,060 $1,953,202
- ---------------------------------------------------------
NET INTEREST INCOME $3,172,151 $2,855,510 $2,452,540
- ---------------------------------------------------------
</TABLE>
Net interest income of $3,172,151 for the first nine months ending
September 30, 1996 was a 11% increase over the same period in 1995, which had a
net interest income of $2,855,510.
On an annualized basis, the Company's net interest margin was 4.32%
through the third quarter of 1996 compared to 4.65% through the third quarter of
1995.
Changes in net interest income from period to period result from
increases or decreases in the average balances of interest-earning assets and
interest-bearing liabilities, increases or decreases in the average rates earned
and paid on such assets and liabilities, the banks' ability to manage their
earning asset portfolios and the availability of particular sources of funds.
Provision for Possible Loan Losses
- ----------------------------------
It is the Company's practice to maintain the allowance for loan losses
at a level considered by management to be adequate to provide for reasonably
foreseeable loan losses. There is no precise method of predicting specific
losses or amounts that ultimately may be charged off on particular segments of
the loan portfolio. The conclusion that a loan may become uncollectible, in
whole or in part, is a matter of judgment. Similarly, the adequacy of the
allowance for loan losses can be determined only on a judgmental basis, after
full review, including consideration of:
Borrower's financial data, together with evaluations of industry data,
competition, the borrower's management capabilities and the underlying
collateral for secured loans, including, when appropriate, independent
appraisals of real estate properties, and other factors;
Consumer loan growth trends and delinquency and default rates,
together with an analysis of past and present repayment performance;
A continuing evaluation of the loan portfolio by management, the Board
of Directors and consultants; and
Monthly review and evaluation of loans identified as having loss
potential. If, as a result of such monthly reviews, a loan is judged
to be uncollectible, the carrying value of the loan is reduced to that
portion that is considered to be collectible.
In addition to the continuing internal assessment of the loan
portfolio, the Bank engages an independent, third-party loan review consultant
to review the loan portfolio every six months. The
20
<PAGE>
Bank's loan portfolio is also subject to examination by the Office of the
Comptroller of the Currency ("OCC").
There were eight (8) non-accruing loans totaling $443,903 as of
September 30, 1996. Three (3) of the eight non-accrual loans, totaling
$149,822, are collateralized with first mortgages, and two loans in the
aggregate amount of $222,991 are collateralized with second mortgages.
The Company's allowance for loan losses at September 30, 1996, was
$852,016, or a 1.10% reserve on total loans outstanding.
Non-Interest Expense
- --------------------
Operating expenses increased 20% for the nine-month period ended
September 30, 1996, to $2,899,885 compared with the same period for 1995, which
had operating expenses of $2,397,170. A large portion of the rise in non-
interest expense is due to increases in staffing and occupancy expense due to
two branches opening in 1995, and one branch opening on January 2, 1996.
Liquidity
- ---------
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits and to
take advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations
require continuous analysis in order to match the maturities of specific
categories of specific short-term loans and investments with specific types of
deposits and borrowings. The objective of liquidity management is to maintain a
balance between sources and uses of funds such that the cash flow needs of the
Company are met in the most economical manner. On the asset side, the Company's
liquidity is provided by Federal funds sold, loan principal repayments, and by
investment securities of which 100% have maturities of five years or less.
Moreover, liquidity is provided by an investment portfolio that is readily
marketable.
Closely related to the concept of liquidity is the management of
interest-earning assets and interest-bearing liabilities, which focuses on
maintaining stability in the net interest spread, an important factor in
earnings' growth and stability. The interest rate volatility of recent years and
rate deregulation have significantly affected the way in which banks manage
their business and have highlighted the importance of asset and liability
management. For the Company, the most important objectives in assets and
liability management include: (1) controlling interest rate exposure, (2)
ensuring adequate liquidity, and (3) maintaining strong capital foundation.
Capital Resources
- -----------------
On January 27, 1989, the OCC issued an amendment to 12 CFR Part 3
adopting final risk based capital guidelines for national banks. Developed in
conjunction with the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System, these guidelines provide an additional
measure of a bank's capital adequacy and are intended to reflect the relative
degree of credit risk associated with various assets by setting different
capital requirements for assets having less credit risk than others. Banks are
required to systematically hold capital against such
21
<PAGE>
off-balance sheet activities as loans sold with recourse, loan commitments,
guarantees and standby letters of credit. The guidelines strengthen the quality
of capital by increasing the emphasis on common equity and restricting the
amount of loss reserves and other forms of equity, such as preferred stock, that
can be counted as capital.
Under the terms of the guidelines, banks must meet minimum capital
adequacy based upon both total assets and risk adjusted assets. To the extent
that an institution has a favorable risk based capital ratio, it would more
likely be permitted to operate at or near minimum primary capital levels. The
risk based requirements became effective on December 31, 1990.
The risk-based guidelines provided for a two-year transition period,
beginning on December 31, 1990. On December 31, 1992, the guidelines took
effect in their final form whereupon all banks are required to maintain a risk
based capital ratio of 8.0%. At September 30, 1996, the Bank had a total risk
based capital ratio (i.e. Tier One plus Tier Two capital) of 10.20% (11.51% for
the Company on a consolidated basis).
The Company stands ready to infuse additional capital into the Bank
should it be warranted. The Bank and the Company are well capitalized.
Effects of Inflation
- --------------------
The impact of inflation on banks differs from its impact on non-
financial institutions. Banks, as financial intermediaries, have assets which
may move in concert with inflation. This is especially true for banks with a
high percentage of rate-sensitive interest-earning assets and interest-bearing
liabilities. A bank can reduce the impact of inflation if it can manage its
rate-sensitivity gap. The Company attempts to structure its assets and
liabilities and manage its gap in a manner which will minimize the potential
adverse effects of inflation or other market forces on its profitability and
capital position.
Legal Action
- ------------
The Company and the Bank are not involved at this time in any claims
or lawsuits other than routine matters arising out of the normal day-to-day
banking business.
Competition
- -----------
All areas of the Company's business are highly competitive. The
Company faces heavy competition, both from local and national financial
institutions and from various other providers of financial services. By industry
standards, the Company relies heavily on large deposit customers. This factor is
a result of the Bank's customer base and local demographics.
Accounting Pronouncements
- -------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards #125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities".
22
<PAGE>
This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
The adoption of this Statement did not have a material impact on the
Company.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Under Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company is currently not using derivatives.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
--------
Exhibit No. Description and Location
----------- ------------------------
4.1 Specimen copy of the Company's stock certificate
incorporated by reference from Exhibit 4.1 to the
Company's Report on Form 10-K for the fiscal year
ended December 31, 1992.
4.2 Article IV of the Company's Articles of
Incorporation, included by reference from Exhibit
3.1 to Registration No. 2-98960-A.
4.3 Stock Redemption/Repurchase Policy incorporated by
reference from Exhibit 4.3 to the Company's Report
on Form 10-Q for the fiscal quarter ended June 30,
1993.
24
<PAGE>
Exhibit No. Description and Location
----------- ------------------------
10.1 Contract for Sale and Purchase dated June 15, 1993,
by and between Commerce National Corporation and
John M. Bocchicchio for branch location real
estate, incorporated by reference from Exhibit 10.1
to the Company's Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
10.2 Offer to Purchase by and between Commerce National
Corporation and Star Enterprises dated November 29,
1993, for branch location real estate, incorporated
by reference from Exhibit 10.2 to the Company's
Report on Form 10-Q for the fiscal quarter ended
September 30, 1994.
10.3 Contract for Sale and Purchase by and between
National Bank of Commerce and Louis Campese and W.
Riley Allen, Co-trustees, dated September 15, 1993,
for branch location real estate, incorporated by
reference from Exhibit 10.3 to the Company's Report
on Form 10-Q for the fiscal quarter ended September
30, 1994.
10.4 Contract for Sale and Purchase by and between Li'l
Big Horn Farm Market, Inc. and National Bank of
Commerce dated December 10, 1993, for branch
location real estate, incorporated by reference
from Exhibit 10.4 to the Company's Report on Form
10-Q for the fiscal quarter ended September 30,
1994.
10.5 Contract for Sale and Purchase by and between
National Bank of Commerce and Robert R. Garofalo,
Jr. dated May 6, 1994, for branch location real
estate, incorporated by reference from Exhibit 10.5
to the Company's Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
10.6 Contract for Sale and Purchase by and between
National Bank of Commerce and Donald D. Donovan
dated September 23, 1993, for branch location real
estate, incorporated by reference from Exhibit 10.6
to the Company's Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
25
<PAGE>
Exhibit No. Description and Location
----------- ------------------------
10.7 Standard Form of Agreement between National Bank of
Commerce and Aagaard-Juergensen, Inc. dated October
27, 1994, for the Aloma Avenue Branch Bank Site,
incorporated by reference from Exhibit 10.7 to the
Company's Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
27 Article 9 Financial Data Schedule (for SEC use
only).
(b) FORM 8-K
--------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended September 30, 1996.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE NATIONAL CORPORATION
Dated: November 13, 1996
By:/s/ Guy D. Colado
-----------------------------
GUY D. COLADO, President and
Chief Executive Officer
Dated: November 13, 1996 By:/s/ Alan M. Scarboro
-----------------------------
ALAN M. SCARBORO
Secretary/Treasurer
27
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,687,002
<INT-BEARING-DEPOSITS> 2,969,183
<FED-FUNDS-SOLD> 1,500,000
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<DEPOSITS> 96,730,053
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0
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<NET-INCOME> 189,011
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