<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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to _____________
Commission file number: 2-98960A
COMMERCE NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA
(State or Other Jurisdiction of Incorporation 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 _______
-------
This filing contains 25 pages. The Exhibit List commences on the
sequential page number 23.
<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, 1997, Commerce National Corporation (the "Company") had
596,235 shares of common stock, par value $0.10 per share, issued and
outstanding.
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements begin on the following page.
3
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Table of Contents
Independent Accountants' Review Report
Condensed consolidated balance sheets (unaudited)--September 30, 1997
and December 31, 1996
Condensed consolidated statements of operations (unaudited)--Three months ended
September 30, 1997 and 1996; Nine months ended September 30, 1997
and 1996
Condensed consolidated statements of cash flows (unaudited)--Nine months ended
September 30, 1997 and 1996
Selected notes to condensed consolidated financial statements (unaudited)--
September 30, 1997
4
<PAGE>
Independent Accountants' Review Report
--------------------------------------
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, 1997 and the related condensed
consolidated statements of operations for the three month and nine month periods
ended September 30, 1997 and September 30, 1996 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1997 and
1996. 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, 1996, 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 February 5, 1997, 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, 1996, 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 17, 1997
5
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 3,553,241 3,389,652
Federal funds sold 8,000,000 1,500,000
Investment securities available for sale (note 2) 16,011,513 15,964,395
Investment securities held to maturity (note 2) 190,000 190,000
Loans, net (note 3) 91,982,694 86,532,988
Accrued interest receivable 805,216 723,329
Premises and equipment, net 3,541,503 3,501,875
Other real estate owned 701,622 1,018,405
Deferred tax asset, net 243,781 242,217
Federal Reserve Bank stock, at cost 150,000 150,000
Federal Home Loan Bank stock, at cost 341,300 300,000
Prepaid expenses and other assets 98,421 114,298
Executive supplemental income plan - cash
surrender value life insurance policies 1,286,518 1,238,809
----------- -----------
Total assets $ 126,905,809 114,865,968
=========== ===========
</TABLE>
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 1997 1996
----------- ---- ----
<S> <C> <C>
Deposits (note 4):
Noninterest bearing $ 16,622,283 15,988,515
Interest bearing 94,983,724 85,055,755
------------ -----------
Total deposits 111,606,007 101,044,270
Federal Home Loan Bank advances 1,215,034 1,222,647
Other borrowed funds 3,525,690 2,986,288
Accrued interest payable 159,603 136,276
Accounts payable and other liabilities 434,443 248,067
------------ -----------
Total liabilities 116,940,777 105,637,548
------------ -----------
Stockholders' Equity
--------------------
Common stock, par value $.10 per share
(1,000,000 shares authorized; 618,035 and
617,584 shares issued and 596,235 and
595,784 outstanding at September 30, 1997
and December 31, 1996) 61,804 61,759
Additional paid-in capital 6,071,128 6,065,310
Treasury stock, at cost (21,800 shares at
September 30, 1997 and December 31, 1996) (208,640) (208,640)
Retained earnings 4,002,924 3,269,630
Unrealized gain on investments available for
sale, net 37,816 40,361
------------ -----------
Total stockholders' equity 9,965,032 9,228,420
Commitments (note 6)
------------ -----------
Total liabilities and stockholders' equity $126,905,809 114,865,968
============ ===========
</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,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $2,163,611 1,796,049 6,291,837 5,146,533
Investment securities 274,320 310,006 764,312 835,211
Federal funds sold 50,925 11,391 107,452 235,802
Federal Reserve Bank stock 2,250 2,250 6,750 6,841
Federal Home Loan Bank
stock 12,338 - 17,808 12,514
Due from banks 443 1,426 1,654 43,130
---------- --------- --------- ---------
Total interest income 2,503,887 2,121,122 7,189,813 6,280,031
Interest expense 1,127,062 995,961 3,242,698 3,107,880
---------- --------- --------- ---------
Net interest income 1,376,825 1,125,161 3,947,115 3,172,151
Provision for loan losses 36,000 - 108,000 60,000
---------- --------- --------- ---------
Net interest income after
provision for loan losses 1,340,825 1,125,161 3,839,115 3,112,151
---------- --------- --------- ---------
Other operating income:
Customer service fees 185,928 157,146 516,301 498,670
Other operating expenses:
Salaries and benefits 527,920 444,980 1,526,581 1,341,923
Occupancy expense 219,501 210,147 627,747 574,634
Legal and professional fees 61,525 73,605 181,770 161,779
Other expenses 257,941 222,141 803,397 759,666
Loss on sale and write down of
other real estate owned 5,316 27,975 6,687 61,883
---------- --------- --------- ---------
1,072,203 978,848 3,146,182 2,899,885
---------- --------- --------- ---------
Net income before taxes 454,550 303,459 1,209,234 710,936
Income tax expense 179,245 114,448 475,940 277,585
---------- --------- --------- ---------
Net income $ 275,305 189,011 733,294 433,351
========== ========= ========= =========
Earnings per share (note 7) $.46 .34 1.23 .77
========== ========= ========= =========
Weighted average shares
outstanding 596,235 555,915 596,066 562,794
========== ========= ========= =========
</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,
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 733,294 433,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 223,064 193,656
Net amortization of premiums and accretion of
discounts on investment securities held to
maturity and investment securities available
for sale (51,226) (11,131)
Provision for loan losses 108,000 60,000
Deferred loan origination fees 39,599 84,506
Provision for other real estate owned - 7,080
Loss on sale of other real estate owned 6,687 27,975
Write down to fair value on other real estate
owned - 26,828
Executive supplemental income plan -
additional cash surrender value (47,709) (51,939)
Cash provided by (used in) changes in:
Accrued interest receivable (81,887) (116,002)
Prepaid expenses and other assets 15,877 17,802
Accrued interest payable 23,327 (79,152)
Accounts payable and other liabilities 186,376 68,545
------------ -----------
Net cash provided by operating activities 1,155,402 661,519
------------ -----------
Cash flows provided by (used in) investing
activities:
Net loans made to customers (5,645,581) (12,351,851)
Decrease (increase) in federal funds sold (6,500,000) 6,500,000
Purchases of investment securities available for
sale (5,500,000) (7,899,762)
Proceeds from maturity of investment securities
available for sale 4,500,000 1,500,000
Proceeds from calls of investment securities
available for sale 500,000 -
Proceeds from sales of investment securities
available for sale 500,000 -
Proceeds from maturities of investment securities
held to maturity - 2,000,000
Purchase of premises and equipment (262,692) (266,619)
Redemption/(purchase) of Federal Home Loan Bank
stock (41,300) 107,200
Proceeds from sale of other real estate owned 358,371 371,195
------------ -----------
Net cash used in investing activities (12,091,202) (10,039,837)
------------ -----------
</TABLE>
(Continued)
9
<PAGE>
2
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by financing activities:
Net increase in demand deposits, NOW accounts
and passbook savings accounts 7,947,554 3,764,542
Net increase in certificates of deposit 2,614,183 3,622,732
Principal repayment on mortgage note payable (19,260) (17,743)
Increase in repurchase agreements 558,662 1,083,492
Repayment of borrowings from the Federal Home
Loan Bank (7,613) (6,950)
Sale of treasury stock - 24,411
Purchase of treasury stock - (24,411)
Sale of common stock 5,863 722,190
----------- ---------
Net cash provided by financing activities 11,099,389 9,168,263
----------- ---------
Net increase (decrease) in cash and cash
equivalents 163,589 (210,055)
Cash and cash equivalents at the beginning of the
period 3,389,652 3,897,057
----------- ---------
Cash and cash equivalents at the end of the period $ 3,553,241 3,687,002
=========== =========
Cash paid during the period for:
Interest $ 3,219,317 3,187,032
=========== =========
Income taxes $ 406,200 249,035
=========== =========
</TABLE>
(Continued)
10
<PAGE>
3
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosures for noncash transactions:
Market value adjustment - investments available for sale:
Investments $60,603 (26,552)
Deferred income tax liability 22,787 (9,028)
------- -------
Unrealized gain on investments available for sale $37,816 (17,524)
======= =======
Transfer foreclosed loan to other real estate owned $48,277 504,527
======= =======
</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, 1997
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, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
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, 1996.
(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, 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) Derivative Financial Instruments
The Company has interest rate risk exposure relating to its
investments in interest sensitive assets and funding through interest
sensitive liabilities. Management continually monitors the Company's
interest rate risk level by determining the effect of various
interest rate movements on the level of exposure. Management
considers the level of exposure in determining the appropriate
duration mix of interest sensitive assets in relation to interest
sensitive liabilities, and the pricing of such assets and
liabilities. The Company does not have any investment in derivative
financial instruments.
(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, 1997 and December 31, 1996 are summarized
as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Municipal security $190,000 190,505 190,000 191,310
======== ======= ======= =======
</TABLE>
The amortized cost and estimated market value of investments available for
sale at September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,950,910 16,011,513 15,899,648 15,964,395
=========== ========== ========== ==========
</TABLE>
(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
As of September 30, 1997, the Company had securities sold under agreements
to repurchase of $3,220,436. All agreements were one day transactions, thus
the carrying value, market value and borrowings were equal at quarter end.
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,
1997, 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, 1997, Agreements outstanding
averaged approximately $3,768,722 and the maximum amount outstanding during
the quarter was $4,485,363. Total interest expense paid on repurchase
Agreements was $45,569 and $14,012 for the quarter ended September 30, 1997
and September 30, 1996, respectively, and $118,988 and $45,604 for the nine
months ended September 30, 1997 and September 30, 1996, respectively.
(3) Loans
Major categories of loans included in the loan portfolio at September 30,
1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial-secured $10,696,210 10,461,047
Commercial-unsecured 3,813,311 3,988,842
Real estate - mortgage 75,923,274 69,924,987
Other (installment and overdrafts) 2,924,253 3,393,462
----------- ----------
93,357,048 87,768,338
Allowance for loan losses (987,208) (887,803)
Deferred loan origination fees (387,146) (347,547)
----------- ----------
$91,982,694 86,532,988
=========== ==========
</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 recorded investment in loans for which an impairment has been
recognized and the related allowance for loan losses at September 30, 1997
and December 31, 1996 were $1,491,520 and $36,716 and $1,159,868 and
$24,930, respectively. All impaired loans had an associated allowance for
loan losses. The average recorded investment in impaired loans during the
third quarter was $1,296,940. No interest income was recognized during the
quarter on impaired loans.
The activity in the allowance for loan losses for the three months ended
September 30, 1997 and 1996 and the nine months ended September 30, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at the beginning
of the period $952,902 854,482 887,803 856,803
Charge offs (7,436) (23,966) (20,983) (101,287)
Recoveries 5,742 21,500 12,388 36,500
Provision for loan losses 36,000 - 108,000 60,000
-------- ------- ------- --------
Balance at the end of the
period $987,208 852,016 987,208 852,016
======== ======= ======= ========
</TABLE>
At September 30, 1997 and December 31, 1996, certain stockholders,
directors and employees were indebted to the Bank in the aggregate amounts
of $13,490,618 and $12,717,857, respectively. All such loans were made in
the ordinary course of business.
(4) Deposits
Included in interest bearing deposits are certificates of deposit and
individual retirement accounts issued in amounts of $100,000 or more. These
certificates and retirement accounts and their remaining maturities at
September 30, 1997 and December 31, 1996 are as follows:
(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
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Three months or less $21,827,567 19,976,908
Three through twelve months 7,747,867 7,044,986
Over one year 1,712,176 1,425,096
---------- ----------
$31,287,610 28,446,990
---------- ----------
</TABLE>
(5) Common Stock
As of April 10, 1997, the Trustees of the National Bank of Commerce 401k
plan purchased 451 shares of Commerce National Corporation common stock at
$13.00 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, 1997 and December 31, 1996, the
Company had commitments to customers of approximately $48,029,763 and
$46,992,674 for approved lines of credit, $1,042,765 and $991,880 for
standby letters of credit and $18,794,133 and $15,435,441 for unfunded firm
loan commitments, respectively.
(7) Earnings Per Share and Common Equivalent Share
Earnings per share is calculated based on the weighted average number of
shares outstanding during the period including the assumed conversion of
stock options using the modified treasury stock method. The effect of the
conversion of these common stock equivalents was an increase of shares
outstanding for September 30, 1997 and December 31, 1996 of 10,753 and
2,843, respectively.
16
<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 present 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:
- -------
During the third quarter and the first nine months of 1997, the Company had
net income of $275,305 and $733,294, respectively. This compares with net income
of $189,011 for the third quarter of 1996 and $433,351 for the first nine months
of 1996. This is a result of loans increasing 6% from year-end 1996 to an all
time high of $91,982,694 at the end of the third quarter of 1997. Interest
income for the third quarter ending September 30, 1997 was $2,503,887 compared
to $2,121,122 for the same period in 1996. Total interest income was $7,189,813
for the first nine months of 1997 compared to $6,280,031 for the same period in
1996. Interest expense for the third quarter ending September 30, 1997 was
$1,127,062 compared to $995,961 for the same period in 1996, while interest
expense totaled $3,242,698 for the first nine months of 1997 compared to
$3,107,880 for the same period in 1996. While total deposits increased 11% to
$111,606,007 for year-end 1996 to September 30, 1997, the rates paid on these
deposits have remained basically unchanged.
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 first nine months of the
last two years is as follows:
<TABLE>
<CAPTION>
-----------------------------------
For the Nine Months Ending
-----------------------------------
9/30/97 9/30/96
-----------------------------------------------------
<S> <C> <C>
ROAA .81% .54%
-----------------------------------------------------
ROAE 10.20% 6.75%
-----------------------------------------------------
NET INCOME $ 733,294 $ 433,351
-----------------------------------------------------
AVERAGE ASSETS $119,919,724 $106,527,366
-----------------------------------------------------
AVERAGE CAPITAL $ 9,584,052 $ 8,562,993
-----------------------------------------------------
</TABLE>
17
<PAGE>
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 shareholders'
equity. Net interest income for the first nine months of the last two years is
as follows:
<TABLE>
<CAPTION>
--------------------------------
For the Nine Months Ending
--------------------------------
9/30/97 9/30/96
-----------------------------------------------------
<S> <C> <C>
INTEREST INCOME $7,189,813 $6,280,031
-----------------------------------------------------
INTEREST EXPENSE $3,242,698 $3,107,880
-----------------------------------------------------
NET INTEREST INCOME $3,947,115 $3,172,151
-----------------------------------------------------
</TABLE>
Net interest income increased 22.4% in the third quarter and 24.4% in the
first nine months of 1997 compared to the same periods in 1996.
On an annualized basis, the Company's net interest margin was 4.51% through
the third quarter of 1997 compared to 4.32% through the third quarter of 1996.
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 Loan Losses
- -------------------------
There were nine (9) non-accruing loans totaling $1,532,831 as of September
30, 1997. Of the September 30, 1997 figure, three (3) loans totaling $313,734
are collateralized with first mortgages. One property that is secured by a first
mortgage has been leased and the loan has continued to be current. Another
property that is secured by a first mortgage is under contract and should close
by year-end. There is one loan secured by a second mortgage in the amount of
$85,672 which has a 90% guarantee from the Small Business Administration. This
loan is currently being liquidated with a minimal loss being anticipated. There
are two (2) installment loans totaling $47,677. One installment loan is secured
by two vehicles and the other loan is secured by medical equipment. There is one
loan in the amount of $719,119 which is secured by the limited guarantees of 51
physicians, each of whom is a limited partner in a limited partnership, the
majority of which guarantees range between $10,000 and $20,000. There are also
guarantees from three (3) general
18
<PAGE>
partners in this partnership totaling $177,500 and a lien against accounts
receivable currently totaling $440,000. This partnership has filed a Chapter 11
reorganization plan, and it is currently anticipated that no loss will be
incurred by the Bank. There are two (2) unsecured loans totaling $366,629. The
largest unsecured loan in the amount of $322,772 is a collateral pledge of a
buy-out of a physician's practice. This loan continues to be current with
interest paid monthly and principal reductions made quarterly. Another unsecured
loan in the amount of $43,857 continues to be current.
The Company's allowance for loan losses at September 30, 1997, was
$987,208, or a 1.06% reserve on total loans outstanding. This compares to an
allowance of $852,016, a 1.10% reserve of total loans outstanding, at September
30, 1996. While management uses the best information available to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions.
Non-Interest Income
- -------------------
Non-interest income in the third quarter of 1997 increased 18% compared to
the same period in 1996, while non-interest income for the first nine months of
1997 increased 4% compared to the same period in 1996. Service charge income on
deposits increased 13% through the first three quarters of 1997 as a result of
non-interest bearing account balances increasing 4% to $16,622,283 as of
September 30, 1997. The Bank continues to have strict controls on operations
which allows for collecting penalties on insufficient funds, checks, and the
like.
Non-Interest Expense
- --------------------
Non-interest expense increased 9.5% in the third quarter and 8.5% in the
first nine months of 1997 compared to the same period in 1996. Personnel
expenses, consisting of salaries, other compensation and employment benefits,
increased 18.6% and 13.8% over the aforementioned periods. Occupancy expense
increased 16% in the third quarter and 9.2% in the first nine months of 1997 as
compared to the same periods in 1996. A portion of this increase is the result
of the annual consumer price index increases on the leases for the Bank's main
office and one branch. Also, equipment expense, which is included under
occupancy expense, increased in 1997 over 1996 as a result of acquisitions and
enhancements to the computer program for the Bank. This investment is expected
to continue due to the Company's commitment to maintaining state-of-the-art
capabilities in computer software information. Data processing expense, which is
included in the Other Expense category, has continued to increase each quarter
in 1997 as more customers have opened more accounts with the Bank. Advertising
and marketing expenses increased in the third quarter of this year as compared
to the third quarter of 1996 due to expenditures made in connection with various
projects to stimulate business growth and development.
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
19
<PAGE>
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 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. 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, 1997,
the Bank had a total risk based capital ratio (i.e. Tier One plus Tier Two
capital) of 10.54% (11.06% for the Company on a consolidated basis).
The Company stands ready to infuse additional capital into the Bank should
it be warranted.
Impact of Inflation
- -------------------
The condensed consolidated financial statements and related financial data
and notes presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results in terms of
20
<PAGE>
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of the Company and the Bank are monetary in
nature. As a result, interest rates have a more significant impact on the
performance of the Company and the Bank than the effects of general price
levels. Although interest rates generally move in the same direction as
inflation, the magnitude of such changes varies.
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. In the opinion of management,
this factor is a result of its customer base and local demographics. The Bank
and the Company are adequately capitalized.
Accounting Pronouncements
- -------------------------
SFAS No. 125
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." 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 Company adopted this Statement as of January 1, 1997. The adoption of
this Statement did not have a material impact on the Company.
SFAS No. 128
In February 1997, the FASB issued Statement of Financial Accounting
Standards #128, "Earnings Per Share." This Statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly-held common stock or potential common stock. This Statement simplifies
the standards for computing earning per share previously found in APB Opinion
15, "Earnings Per Share," and makes them comparable to international EPS
standards.
21
<PAGE>
It replaces the presentation of primary EPS with a presentation of basic EPS.
This Statement supersedes Opinion 15 and AICPA Accounting Interpretations 1-102
of Opinion 15.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior period EPS
data presented.
The adoption of this Statement will not have a material impact on the
Company.
SFAS No. 130
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement also requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Statement is required for fiscal years
beginning after December 15, 1997.
The adoption of this standard will require the Bank to disclose as a
component of comprehensive income the activity in its unrealized gain or loss on
investment securities available for sale.
SFAS No. 131
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. The
Statement is required for fiscal years beginning after December 15, 1997.
The Bank does not anticipate that adoption of this standard will have a
significant impact on its consolidated financial statements upon adoption.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is involved at this time in any
claims or lawsuits other than routine matters arising out of the normal day-to-
day banking business.
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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit No. Description and Location
----------- ------------------------
27 Article 9 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended September 30, 1997.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
23
<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 14, 1997
By: /s/ Guy D. Colado
-----------------------------------
GUY D. COLADO, President and
Chief Executive Officer
Dated: November 14, 1997 By: /s/ Alan M. Scarboro
-----------------------------------
ALAN M. SCARBORO
Secretary/Treasurer
24
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<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,553,241
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,011,513
<INVESTMENTS-CARRYING> 190,000
<INVESTMENTS-MARKET> 190,505
<LOANS> 92,969,902
<ALLOWANCE> 987,208
<TOTAL-ASSETS> 126,905,809
<DEPOSITS> 111,606,007
<SHORT-TERM> 0
<LIABILITIES-OTHER> 594,046
<LONG-TERM> 4,740,724
0
0
<COMMON> 61,804
<OTHER-SE> 9,903,228
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<INTEREST-DEPOSIT> 3,035,657
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<INTEREST-INCOME-NET> 1,376,825
<LOAN-LOSSES> 36,000
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<EXPENSE-OTHER> 1,072,203
<INCOME-PRETAX> 454,550
<INCOME-PRE-EXTRAORDINARY> 454,550
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 275,305
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 0.045
<LOANS-NON> 1,438,278
<LOANS-PAST> 0
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<LOANS-PROBLEM> 3,280,718
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