<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 March 31, 1997
[ ] 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 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) 629-1818
(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 is found on page 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 May 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 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)--March 31, 1997 and
December 31, 1996
Condensed consolidated statements of operations (unaudited)--Three months ended
March 31, 1997 and 1996
Condensed consolidated statements of cash flows (unaudited)--Three months ended
March 31, 1997 and 1996
Selected notes to condensed consolidated financial statements (unaudited)--
March 31, 1997
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 March 31, 1997 and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 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 financial statements from which it has been
derived.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
April 16, 1997
5
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1997 1996
------ --------------- ---------------
<S> <C> <C>
Cash and due from banks $ 4,369,941 3,389,652
Federal funds sold 4,250,000 1,500,000
Investment securities available for sale (note 2) 14,887,520 15,964,395
Investment securities held to maturity (note 2) 190,000 190,000
Loans, net (note 3) 87,305,358 86,532,988
Accrued interest receivable 745,807 723,329
Premises and equipment, net 3,535,425 3,501,875
Other real estate owned, net 747,222 1,018,405
Federal Reserve Bank stock, at cost 150,000 150,000
Federal Home Loan Bank stock, at cost 341,300 300,000
Deferred tax asset 278,053 242,217
Prepaid expenses and other assets 144,276 114,298
Executive supplemental income plan - cash
surrender value life insurance policies 1,254,587 1,238,809
----------- -----------
Total assets $ 118,199,489 114,865,968
=========== ===========
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and accompanying
selected notes to condensed consolidated financial statements (unaudited).
6
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ ------------------ ------------------
<S> <C> <C>
Deposits (note 4):
Noninterest bearing $ 14,563,832 15,988,515
Interest bearing 89,637,749 85,055,755
------------ ------------
Total deposits 104,201,581 101,044,270
Federal Home Loan Bank advances 1,218,735 1,222,647
Other borrowed funds 2,904,602 2,986,288
Accrued interest payable 153,858 136,276
Accounts payable and other liabilities 349,811 248,067
-------------- -------------
Total liabilities 108,828,587 105,637,548
----------- -----------
Common stock, par value $.10 per share
(1,000,000 shares authorized;
617,584 shares issued and 595,784
outstanding at March 31, 1997
and December 31, 1996) 61,759 61,759
Additional paid in capital 6,065,310 6,065,310
Retained earnings 3,471,393 3,269,630
Treasury stock, at cost (21,800 shares at
March 31, 1997 and December 31, 1996) (208,640) (208,640)
Unrealized gain (loss) on investment securities
available for sale, net (18,920) 40,361
------------- --------------
Total stockholders' equity 9,370,902 9,228,420
Commitments (note 5)
----------- -----------
Total liabilities and stockholders' equity $ 118,199,489 114,865,968
=========== ===========
</TABLE>
7
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------
March 31,
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans $ 1,985,842 1,737,722
Investment securities 244,658 238,554
Federal funds sold 14,783 128,616
Federal Reserve Bank stock 2,250 2,342
Federal Home Loan Bank stock 5,478 -
Due from banks 535 15,190
--------- ---------
Total interest income 2,253,546 2,122,424
Interest expense 1,035,664 1,061,910
--------- ---------
Net interest income 1,217,882 1,060,514
Provision for loan losses 36,000 60,000
--------- ---------
Net interest income after provision for loan losses 1,181,882 1,000,514
--------- ---------
Other operating income:
Customer service fees 152,696 198,179
Other operating expenses:
Salaries and benefits 501,294 462,292
Occupancy expense 198,648 158,852
Legal and professional fees 61,012 27,370
Other expenses 251,364 283,286
--------- ---------
1,012,318 931,800
--------- ---------
Net operating income before taxes 322,260 266,893
Income tax expense 120,497 105,447
--------- ---------
Net earnings $ 201,763 161,446
========= =========
Earnings per common and common equivalent share (note 6) $ .34 .31
========= =========
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and accompanying
selected notes to condensed consolidated financial statements (unaudited).
8
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 201,763 161,446
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of premises and equipment 64,306 63,020
Net amortization of premiums and accretion of
discounts on investment securities held to maturity
and investment securities available for sale (16,504) 49,568
Provision for loan losses 36,000 60,000
Deferred loan origination fees (1,768) 9,534
Deferred tax asset (1,738) -
Executive supplemental income plan -
additional cash surrender value (15,778) -
Cash provided by (used in) changes in:
Accrued interest receivable (22,478) (38,621)
Prepaid expenses and other assets (29,978) (46,871)
Accrued interest payable 17,582 (23,348)
Accounts payable and other liabilities 101,744 36,094
---------- ----------
Net cash provided by operating activities 333,151 270,822
---------- ----------
Cash flows provided by (used in) investing activities:
Net loans made to customers (783,619) (1,039,692)
Decrease (increase) in federal funds sold (2,750,000) 2,500,000
Purchases of investment securities available for sale - (4,000,000)
Proceeds from sale of other real estate owned 248,200 -
Proceeds from maturity of investment securities held
to maturity - 500,000
Proceeds from maturity of investments available for sale 1,000,000 -
Purchase of premises and equipment (97,856) (242,169)
Purchase of Federal Home Loan Bank stock (41,300) -
Redemption of Federal Reserve Bank stock - 107,200
---------- ----------
Net cash used in investing activities (2,424,575) (2,174,661)
---------- ----------
(Continued)
</TABLE>
9
<PAGE>
2
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by financing activities:
Net decrease in demand deposits, NOW accounts and
passbook savings accounts (378,860) (1,807,887)
Net increase in certificates of deposit 3,536,171 4,946,375
Principal payment on mortgage note payable (6,322) (5,813)
Increase (decrease) in repurchase agreements (75,364) (22,325)
Proceeds (repayments) from borrowings from the Federal
Home Loan Bank (3,912) (3,700)
Sale of treasury stock - 24,411
Purchase of treasury stock - (24,411)
------------- -------------
Net cash provided by financing activities 3,071,713 3,106,650
------------- -------------
Net increase in cash and cash equivalents 980,289 1,202,811
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 $ 4,369,941 5,099,868
============= =============
Cash paid during the period for:
Interest $ 1,018,082 1,085,258
============= =============
Income taxes $ 96,000 13,650
============= =============
Supplemental disclosures of noncash transactions:
Market value adjustment - investment securities available for sale:
Investments (28,667) 59,428
Deferred income tax (asset) liability (9,747) 20,206
------------- -------------
Unrealized gain (loss) on investment securities
available for sale $ (18,920) 39,222
============= =============
Loan for other real estate owned $ 22,983 -
============= =============
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and accompanying
selected notes to condensed consolidated financial statements (unaudited).
10
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 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 three months ended March 31, 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) Effective New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 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
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.
(Continued)
11
<PAGE>
-2-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
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 of retroactive application is not permitted.
The adoption of this Statement did not have a material impact on
the Company.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 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
earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share", and makes them comparable to international
EPS standards. 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
period 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.
(Continued)
12
<PAGE>
-3-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(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 March 31, 1997 and December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and municipals $ 190,000 190,760 190,000 191,310
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market value of investment securities
available for sale as of March 31, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $4,916,187 14,887,520 15,899,684 15,964,395
========== ========== ========== ==========
</TABLE>
As of March 31, 1997, the Company had securities sold under agreement to
repurchase of $2,586,410. All agreements were one-day transactions, thus
the carrying value, market value, and borrowings were equal at quarter
end.
(Continued)
13
<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 Company enters into sales of securities under agreements to
repurchase ("Agreements"). Fixed coupon Agreements are treated as
financings, and the obligations to repurchase securities sold are
reflected as other borrowed funds in the condensed consolidated balance
sheet. The dollar amount of securities underlying the Agreements remain
in the asset accounts. At March 31, 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 March
31, 1997, Agreements outstanding averaged approximately $2,951,033 and
the maximum amount outstanding during the quarter ended was $42,731,198.
Total interest expense paid on repurchase Agreements was $34,239 for the
quarter ended March 31, 1997.
(3) Loans
Major categories of loans included in the loan portfolio at March 31,
1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Commercial-secured $ 10,544,072 10,461,047
Commercial-unsecured 3,779,394 3,988,842
Real estate - primarily commercial 70,663,115 69,924,987
Other (installment and overdrafts) 3,577,515 3,393,462
--------- -----------
88,564,096 87,768,338
Allowance for loan losses (912,959) (887,803)
Deferred loan origination fees (345,779) (347,547)
----------- -----------
$ 87,305,358 86,532,988
=========== ===========
</TABLE>
(Continued)
14
<PAGE>
-5-
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 March 31, 1997
and December 31, 1996 were $1,525,617 and $86,211 and $1,159,868 and
$24,930, respectively. Those loans with a probable loss have a specific
reserve established. All other impaired loans are accounted for in the
general allowance for loan loss. The average recorded investment in
impaired loans during the first quarter 1997 was $86,439. No interest
income was recognized during the first quarter 1997 on impaired loans.
The activity in the allowance for loan losses for the three months ended
March 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 887,803 856,803
Charge offs (13,547) (26,277)
Recoveries 2,703 8,704
Provision for loan losses 36,000 60,000
-------- --------
Balance at the end of the period $ 912,959 899,230
======= =======
</TABLE>
At March 31, 1997 and December 31, 1996, certain stockholders, directors
and employees and their related interests were indebted to the Company in
the aggregate amounts of $12,909,263 and $12,717,857, respectively. All
such loans were made in the ordinary course of business.
(Continued)
15
<PAGE>
-6-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(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 March 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Three months or less $ 21,081,150 19,976,908
Three through twelve months 8,946,707 7,044,986
Over one year 1,158,593 1,425,096
--------- ---------
$ 31,186,450 28,446,990
========== ==========
</TABLE>
(5) Commitments
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 condensed consolidated financial statements. At March 31, 1997 and
December 31, 1996, the Company had commitments to customers of
approximately $46,683,524 and $46,992,675 for approved lines of credit,
$1,449,992 and $991,880 for standby letters of credit, and $13,806,000
and $11,904,430 for unfunded firm loan commitments, respectively.
(6) Earnings Per Common 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 for March
31, 1997 and December 31, 1996 of 2,843.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The accompanying condensed consolidated 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 Condensed Consolidated Financial Condition and Results of Operations.
This review should be read in conjunction with the condensed consolidated
financial statements and other financial data presented herein.
Summary:
- -------
At the end of the first quarter of 1997, the Company had a profit of
$201,763 as compared to a profit of $161,446 for the same period in 1996. The
total interest expense during the first quarter of 1997 decreased 2.5% to
$1,035,664. this is the result of premium rates paid on new deposits when the
Bank opened three (3) branches in 1995 and early 1996. A large percentage of
these deposits were 1-year CD's which have since matured and rolled over at a
lower rate.
Two indicators which measure profitability are net income as a
percentage of average assets (ROAA) and net income as a percentage of average
stockholder equity (ROAE). A comparison of these ratios for the first quarter of
the last two years is as follows:
<TABLE>
<CAPTION>
------------------------------------------
For the Three Months Ending
------------------------------------------
3/31/97 3/31/96
-------------------------------------------------------------------------
<S> <C> <C>
ROAA .69% .64%
-------------------------------------------------------------------------
ROAE 8.64% 8.04%
-------------------------------------------------------------------------
NET INCOME $201,763 $161,446
-------------------------------------------------------------------------
AVERAGE ASSETS $116,594,805 $103,546,868
-------------------------------------------------------------------------
AVERAGE CAPITAL $9,346,359 $8,015,759
-------------------------------------------------------------------------
</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 stockholders' equity. Net interest income for
the first quarter of the last two years is as follows:
17
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------
For the Three Months Ending
-----------------------------------------
3/31/97 3/31/96
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME $2,253,546 $2,122,424
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE $1,035,664 $1,061,910
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME $1,217,882 $1,060,514
- --------------------------------------------------------------------------------------------
</TABLE>
Net interest income of $1,217,882 for the first quarter of 1997 was a
14.9% increase over the same period in 1996, which had a net interest income of
$1,060,514.
On an annualized basis, the Company's net interest margin was 4.55%
through the first quarter of 1997 compared to 4.92% through the first 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 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.
18
<PAGE>
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 Bank's loan portfolio is also
subject to examination by the Office of the Comptroller of the Currency ("OCC").
There are currently thirteen (13) non-accruing loans totaling
$1,409,558 as of March 31, 1997. This compares with non-accruing loans of
$1,639,830 as of March 31, 1996. Of the 1997 figure, four (4) loans totaling
$735,974 are collateralized with first mortgages. One of the properties secured
by a first mortgage is under contract to sell. Also, there are three (3) loans
totaling $258,445 secured by second mortgages. Of the three (3) second mortgage
loans, one (1) property which is secured by a second mortgage is under contract
to sell and should close before the end of the second quarter of 1997. There are
three (3) installment loans totaling $24,218, all secured by vehicles. Of the
three (3) installment loans, two (2) continue to be current. There are three (3)
unsecured loans totaling $390,921. The largest unsecured loan in the amount of
$318,329 is a collateral pledge of a buy-out of a doctor's practice. This loan
continues to be current with interest paid monthly and principal reductions made
quarterly. Also, another unsecured loan in the amount of $16,384 will be paid
from the proceeds of a sale of property.
The Company's allowance for loan losses at March 31, 1997 was $912,959,
a 1.03% reserve on total loans outstanding. This compares to an allowance of
$899,230, a 1.31% reserve of total loans outstanding, at March 31, 1996.
Non-Interest Income
- -------------------
During the first quarter of 1997, fees collected on real estate
construction loan closings totaled $40,177, as compared to $79,644 for the first
quarter of 1996. These fees are classified under the Other Operating Income
section of the condensed consolidated statement of operations. This is the major
reason for customer service fees for March 31, 1997 in the amount of $152,696
declining from $198,179 for the same period in 1996. The Bank continues to have
strict controls on operations which allows for collecting penalties on
Insufficient Funds checks and the like.
Non-Interest Expense
- --------------------
Operating expenses increased $80,518 to $1,012,318 for the three (3)
months ended March 31, 1997, compared with the same period for 1996, which had
operating expenses of $931,800. A portion of the increase was for annual salary
adjustments which go into effect during the first quarter of each year. Also,
occupancy expense increased $39,796 during the first quarter of 1997 as a result
of the annual Consumer Price Index increases on the leases for the Bank's main
office and the branch which opened in January 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
19
<PAGE>
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. Secondly,
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. Finally, 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 March 31,
1997, the Bank had a total risk based capital ratio (i.e. Tier One plus Tier Two
capital) of 10.16% (10.85% 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 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
20
<PAGE>
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.
Legal Action
- ------------
Neither the Company nor the Bank are 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. 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 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 of retroactive application is not
permitted.
The adoption of this Statement did not have a material impact on the
Company.
SFAS No. 128
In February 1997, the Financial Accounting Standards Board (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. It replaces the
presentation of primary EPS with a
21
<PAGE>
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.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on April 21,
1997. At that meeting, Donald J. Barker, Robert E. Battaglia, Jane H. Louttit,
Ernst R. Janvrin and W. Charles Shuffield were each elected as a director for a
three (3) year term. Russell Barkett, C. Durham Barnes, M.D., Robert B. Boswell,
M.D., Stephen C. Cahill, Kenneth M. Clayton, Guy D. Colado, Tony Lombardi, Jr.,
Stephen G. Miller, Willie C. Moss, and Frederick A. Raffa, Ph.D., will continue
as directors following the annual meeting.
Item 5. Other Information
The Trustees of the National Bank of Commerce 401(k) Plan purchased 451
shares of the Company's common stock at a price of $13.00 per share on April 10,
1997.
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) FORM 8-K
--------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended March 31, 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: May 15, 1997
By:/s/ Guy D. Colado
--------------------------------
GUY D. COLADO, President and
Chief Executive Officer
Dated: May 15, 1997
By:/s/ Alan M. Scarboro
---------------------------------
ALAN M. SCARBORO,
Secretary/Treasurer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR COMMERCE NATIONAL CORPORATION
AND SUBSIDIARY DATED MARCH 31, 1997 AND DECEMBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,369,941
<INT-BEARING-DEPOSITS> 3,611,182
<FED-FUNDS-SOLD> 4,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,887,520
<INVESTMENTS-CARRYING> 190,000
<INVESTMENTS-MARKET> 191,310
<LOANS> 88,564,096
<ALLOWANCE> 912,959
<TOTAL-ASSETS> 118,199,489
<DEPOSITS> 104,201,581
<SHORT-TERM> 1,218,735
<LIABILITIES-OTHER> 3,090,079
<LONG-TERM> 318,192
0
0
<COMMON> 61,759
<OTHER-SE> 9,309,143
<TOTAL-LIABILITIES-AND-EQUITY> 118,199,489
<INTEREST-LOAN> 1,985,842
<INTEREST-INVEST> 244,658
<INTEREST-OTHER> 23,046
<INTEREST-TOTAL> 2,253,546
<INTEREST-DEPOSIT> 972,445
<INTEREST-EXPENSE> 1,035,664
<INTEREST-INCOME-NET> 1,217,882
<LOAN-LOSSES> 36,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,012,318
<INCOME-PRETAX> 322,260
<INCOME-PRE-EXTRAORDINARY> 322,260
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201,763
<EPS-PRIMARY> .34
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0.046
<LOANS-NON> 1,409,556
<LOANS-PAST> 0
<LOANS-TROUBLED> 10,536
<LOANS-PROBLEM> 1,659,923
<ALLOWANCE-OPEN> 887,803
<CHARGE-OFFS> 13,547
<RECOVERIES> 2,703
<ALLOWANCE-CLOSE> 912,959
<ALLOWANCE-DOMESTIC> 912,959
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 568,904
</TABLE>
