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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]
For the fiscal year ended December 31, 1996
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OR
[ ]
For the transition period from N/A
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Commission File Number 2-98960-A
COMMERCE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
59-2497676
(I.R.S. Employer Identification No.)
1201 SOUTH ORLANDO AVENUE,
WINTER PARK, FLORIDA 32789
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 629-1818
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in
THIS FILING CONTAINS 93 PAGES. THE EXHIBIT LIST COMMENCES ON THE
SEQUENTIAL PAGE NUMBER 84.
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. Not Applicable.
The aggregate market value on March 1, 1997, of the Registrant's voting
stock held by non-affiliates was $6,934,784. There was no formalized active
market for Common Stock on said date, although there have been transactions in
the last twelve months. The most recent transaction had a purchase price in the
amount of $14.50 per share which is the amount the Registrant used for purposes
of this disclosure.
At March 1, 1997, the Registrant had outstanding:
595,784 shares of Common Stock
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: (1) Any
annual report to security holders; (2) Any proxy or information statement; and
(3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933. The listed documents should be clearly described for identification
purposes.
Registration No. 2-98960-A is incorporated by reference in Part IV,
Item 14 a.3. Exhibits as noted.
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TABLE OF CONTENTS
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Item No. Caption Page
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PART I ....................................................................................................... 1
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................. 11
PART II ...................................................................................................... 11
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................................. 11
Item 6. Selected Financial Data............................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 12
Item 8. Consolidated Financial Statements and Supplementary Data............................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 69
PART III ...................................................................................................... 69
Item 10. Directors and Executive Officers of the Registrant.................................. 69
Item 11. Executive Compensation/Board Compensation .......................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 76
Item 13. Certain Relationships and Related Transactions...................................... 79
PART IV ...................................................................................................... 80
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................................. 80
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PART I
Item 1. Business
Commerce National Corporation
Commerce National Corporation, a Florida corporation (the "Company" or
"CNC"), was incorporated under the laws of the State of Florida on February 21,
1985, for the purpose of purchasing 100% of the capital stock of the National
Bank of Commerce (the "Bank") in order to adequately capitalize the Bank and for
the purpose of organizing and acting as a bank holding company.
CNC was organized as a bank holding company to enhance the Bank's
ability to serve its customers' requirements for financial services. Currently,
the Company engages in only the management of the Bank; however, CNC's structure
is intended to provide flexibility for the provision of additional
banking-related services which a traditional commercial bank may not provide
under present laws.
The Company was authorized by the Board of Governors of the Federal
Reserve System (the "FRB") to invest up to $1,000,000 of its capital to purchase
loans from the Bank which were in excess of authorized lending limits of the
Bank. As of March 1, 1997, the Company was participating in an aggregate of
$905,102 on eight different loans with the Bank which were in excess of the
authorized lending limits of the Bank.
The Bank
The Bank has been in operation since August 4, 1986, the date it was
granted the requisite charter from the United States Office of the Comptroller
of the Currency (the "OCC"). The Bank conducts a general, commercial and retail
banking business emphasizing in its marketing efforts its local management and
ownership. The Bank presently offers a full range of accounts with a variety of
features which management believes are compatible with the Bank's plan of
business. Management will continue to assess the needs of its customers and to
structure its types of accounts and services to meet their needs.
The Bank has been marketing its services to depositors on the basis of
the convenience of the Bank's four locations; of its status as an institution
managed locally; of its emphasis on personal attention to its customers and its
full range of services. Thus far, the Bank has utilized traditional advertising
media, as well as an active and community-involved management and board of
directors to promote the Bank.
The Bank makes a variety of loans to persons and businesses as the
principal source of its revenue. The three main categories of loans at the Bank
are commercial, real estate (both residential and commercial), and consumer
loans.
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The commercial loans made by the Bank usually are secured but may be
made on an unsecured basis to particularly well-financed businesses. The loans
are either demand or term in nature with the ordinary term varying between three
and seven years. These loans are made to business entities for equipment
purchases and other capital improvements, inventory acquisition and general
working capital. Dependent upon the size and perceived risk for a particular
loan, the loans usually are secured and often, for smaller to mid-sized
companies, are guaranteed by the principals of the business. This category of
loans is originated by the loan officers of the Bank and usually is not sold in
any secondary market, although certain larger loans may be participated with
other community banks. Because of the vagaries in the economy, commercial loans
typically are viewed as some of the most risky loans. The Bank attempts to
address this issue by careful monitoring of the credit quality of these loans
and by having a preexisting relationship with these loan customers.
The second major category of loans, real estate, is divided into
residential loans and commercial loans, which includes agricultural loans. The
majority of loans in the real estate area are commercial real estate loans.
These loans typically are made on a loan-to-value basis of 80%. Because these
loans are almost always secured by first mortgages on commercial property, they
are seen as some of the least risky loans made by the Bank. The term for the
loans is usually 15-20 years with rate review every 3-5 years.
The final loan category is consumer loans, which includes all loans to
individuals not captured in one of the categories above. Types of loans in this
category include auto loans, educational loans and other personal loans. While
some of these loans are demand type loans, most are term loans with terms of
between three to five years. Most of the loans are secured by the asset acquired
by the loan or some other asset, although it is not unusual to have personal
loans that are not secured based upon the significant financial status of the
borrower. These loans may be viewed as more risky than residential real estate
loans and, therefore, the interest rate that the Bank can charge for such loans
is higher than real estate loans. The Bank originates, processes and holds
almost all of these loans.
In addition to depository and credit services, the Bank offers as part
of its normal bank operations a variety of customer services, including notary
services, photocopying, and signature guarantees. Additionally, safe deposit
boxes, custodial services and account reconciliations are available. It is
perceived that these services complement the depository and credit services
offered by the Bank. The Bank joined the Federal Home Loan Bank of Atlanta in
October of 1992. One of the purposes for joining this organization was to make
single-family residential loans. It is the Bank's intention to invest short-term
funds and to control the interest rate risk associated with fixed rate lending.
The primary correspondent institutions of the Bank are Barnett Bank,
N.A., Jacksonville and Independent Bankers' Bank of Florida, Inc., Orlando.
Barnett Bank, N.A. acts as the primary clearing agent in the collection of
checks received in the normal course of business by the Bank. In addition to the
daily handling of checks, M&I Data Services Inc. serves as data processor for
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the Bank's loan and deposit services. Independent Bankers' Bank of Florida,
Inc. provides advice and counseling in the area of securities investment and is
agent in the Bank's overnight investment of federal funds. Neither Barnett Bank,
N.A. nor Independent Bankers' Bank has provided trust services, nor have such
services been provided by the Bank.
Competition
As of March 1, 1997, there were ten (10) commercial banks, two (2)
savings banks and several consumer finance companies in the Bank's perceived
market area. Although the principal competition for the Bank is thought to come
from existing financial institutions within the market area, it should be noted
that there are several commercial banks and savings and loan associations
located outside but near the perceived market area. Most of the Bank's
competitors have greater resources, broader geographic markets and higher
lending limits and offer more services than the Bank. The right of banks in
Florida to branch statewide and also the elimination of certain restrictions on
interstate banking has heightened the competition of the Bank's market area.
As of September 30, 1996, the Bank had approximately 1.4% of the
deposits of Orange County, Florida.
Offices affiliated with out-of-state financial institutions have
entered Florida to offer limited financial services, including loans and deposit
gathering activities. The State of Florida has adopted a reciprocal interstate
regional banking law which permits bank holding companies headquartered outside
of Florida to acquire Florida banks, provided Florida bank holding companies may
likewise make bank acquisitions in the reciprocal state. Other out-of-state bank
holding companies have entered the Florida banking market by acquiring failing
thrift institutions. Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), effective June 1, 1997,
subject to legislation by Florida, banks and bank holding companies from any
state in the country will be able to acquire a bank based in the State of
Florida. Subject to legislation in Florida, banks from outside of Florida will
be able to branch de novo into the State of Florida. Competition for deposit and
loan opportunities in the Bank's market area is intense because of the
accelerating pace of deregulation and geographic expansion noted above.
Changes in the economic, legislative and regulatory areas have
substantially increased the competitive environment and brought about changes in
the financial services industry. Thrift institutions are direct competitors of
the Bank with respect to both deposit gathering and loan opportunities.
The Bank is in competition with existing area financial institutions
other than commercial banks and savings and loan associations, including
insurance companies, consumer finance companies, brokerage houses, credit unions
and other business entities which have recently been encroaching upon the
traditional banking markets. In certain instances, federal and state
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regulation of the Bank will make it more difficult to compete with these
non-banking institutions. See "Supervision and Regulation," below.
The Bank believes there is a continuing need for locally owned and
operated banks in Orange County and competes on the basis of location, service
to its customers and interest rates.
Supervision and Regulation
CNC and the Bank operate in a highly regulated environment, and their
respective business activities are governed by statute, regulation and
administrative policies. The business activities of CNC and the Bank are
supervised by a number of federal regulatory agencies, including the Board of
Governors of the Federal Reserve Board ("FRB"), the OCC and the Federal Deposit
Insurance Corporation ("FDIC"). Additionally, CNC is supervised and regulated by
the Securities and Exchange Commission ("SEC").
CNC is regulated by the FRB under the Bank Holding Company Act of 1956,
as amended, which required CNC to register as a bank holding company and which
subjects CNC to FRB examinations and certain reporting requirements. A bank
holding company is generally prohibited from acquiring control of any company
which is not a bank and from engaging in any business other than the business of
banking or managing and controlling banks. However, there are certain activities
which have been identified by the FRB to be so closely related to banking as to
be a proper incident thereto and thus permissible for bank holding companies
assuming the proper authorization is obtained prior to commencing the
activities.
Banking regulations allow for an assessment of CNC as the sole
stockholder of the Bank to cover any impairment of capital, such assessment to
be enforced by sale, to the extent necessary, of the Bank stock held by CNC if
CNC fails to pay the assessment. Additionally there are restrictions on the
amount of dividends the Bank is allowed to pay. Prior regulatory approval must
be obtained before declaring any dividends if the amount of capital, surplus and
retained earnings is below certain statutory limits.
Presently, with respect to expansion, the Bank may establish branches
within the limits of the State of Florida, with the approval of the OCC. To
date, the Bank operates three branches. In addition, the Bank, as a subsidiary
of CNC, will be subject to restrictions under federal law in dealing with CNC
and other affiliates. These restrictions apply to extensions of credit to an
affiliate, investments in the securities of an affiliate, the purchase of assets
from an affiliate and the amount of advances to a third party collateralized by
securities of an affiliate.
The operations of the Bank are affected by various requirements and
restrictions imposed by the laws of the United States and the State of Florida,
including requirements to maintain reserves against deposits, limitations on the
interest rates that may be charged on certain types of loans, and restrictions
on the nature and amount of loans that may be granted and on the types of
investments that may be made. The operations of the Bank are also affected by
various consumer
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laws and regulations, including those relating to equal credit opportunity and
regulation of consumer lending practices. All subsidiary banks of a bank holding
company must become and remain insured banks under the Federal Deposit Insurance
Act.
The scope of regulation and permissible activities of CNC and the Bank
are subject to change by future federal and state legislation.
Capital
The FRB, OCC and FDIC require banks and bank holding companies to
maintain minimum capital ratios.
In December 1988, the FRB approved final "risk-adjusted" capital
guidelines for bank holding companies. The new guidelines became fully
implemented as of December 31, 1992. The FDIC has adopted substantially similar
risk-based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the Company's
capital base. The rules set the minimum guidelines for the ratio of capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at eight percent (8%). At least half of the total
capital is to be composed of common equity, retained earnings, and a limited
amount of perpetual preferred stock less certain goodwill items ("Tier 1
Capital"). The remainder may consist of a limited amount of subordinated debt,
other preferred stock, or a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted
leverage capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
three percent (3%), Tier 1 Capital (as defined for purposes of the year-end 1992
risk-based capital guidelines) to total assets. However, most banking
organizations are expected to maintain capital ratios well in excess of the
minimum levels and generally must keep such Tier 1 ratio at or above five
percent (5%). The capital ratios for the Company and Bank are discussed below.
Regulatory authorities may increase such minimum requirements for all
banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect the
Bank and the Company, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any consolidation, issuance or retirement by
the Bank of its own securities, limitations upon the payment of dividends and
other aspects of banking operations. In addition, the activities and
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operations of the Bank are subject to a number of additional detailed, complex
and sometimes overlapping laws and regulations. These include state usury and
consumer credit laws, laws relating to fiduciaries, the Federal Truth-in-Lending
Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B,
the Fair Credit Reporting Act, the Truth in Savings Act, the Community
Reinvestment Act, anti-redlining legislation and antitrust laws.
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by its subsidiary, the Bank. Generally, a national banking
association may not declare a dividend without the approval of the OCC if the
total of dividends declared by such bank in a calendar year exceeds the total of
its net profits for that year combined with its retained profits of the
preceding two years. In addition, national banks are subject to dividend
regulation by their primary federal bank regulatory agency in connection with
general supervisory authority as it relates to a bank's requirement to maintain
adequate capital.
Government Policies and Legislation
The policies of regulatory authorities, including the OCC, FRB, FDIC
and the Depository Institutions Deregulation Committee, have had a significant
effect on the operating results of commercial banks in the past and are expected
to do so in the future. An important function of the Federal Reserve System is
to regulate aggregate national credit and money supply through such means as
open market dealings in securities, establishment of the discount rate on member
bank borrowings, and changes in reserve requirements against member bank
deposits. Policies of these agencies may be influenced by many factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balance and fiscal policies of the United States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of the Bank or the Company.
In addition to the relaxation or elimination of geographic restrictions
on banks and bank holding companies, a number of regulatory and legislative
initiatives have the potential for eliminating many of the product line barriers
presently separating the services offered by commercial banks from those offered
by nonbanking institutions. For example, Congress recently has considered
legislation which would expand the scope of permissible business activities for
bank holding companies (and in some cases banks) to include securities
underwriting, insurance services and various real estate- related activities as
well as allowing interstate branching.
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Recent Legislation
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted in 1991. Among other things, FDICIA requires federal bank
regulatory authorities to take "prompt corrective action" with respect to banks
that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The FRB and the FDIC have adopted regulations to implement the prompt
corrective action provisions of FDICIA. Among other things, the regulations
define the relevant capital measures for the five capital categories. An
institution is deemed to be "well capitalized" if it has a total risk-based
capital ratio (total capital to risk-weighted assets) of ten percent (10%) or
greater, a Tier 1 risk-based capital ratio (Tier 1 Capital to risk-weighted
assets) of six percent (6%) or greater, and a Tier 1 leveraged capital ratio
(Tier 1 Capital to total assets) of five percent (5%) or greater, and is not
subject to a regulatory order, agreement or directive to meet and maintain a
specific capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of eight
percent (8%) or greater, a Tier 1 risk-based capital of four percent (4%) or
greater, and (generally) a Tier 1 leveraged capital ratio of four percent (4%)
or greater, and the institution does not meet the definition of a "well
capitalized" institution. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than two percent (2%).
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. If an "undercapitalized" bank fails to submit
an acceptable plan, it is treated as if it is significantly undercapitalized.
"Significantly undercapitalized" banks may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
their subordinated debt.
The Bank currently meets the regulatory definition of an "adequately
capitalized" financial institution.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares and such other standards as the agency deems appropriate.
On September 29, 1994, the Interstate Act, which effectively permits
nationwide banking, was signed into law. The Interstate Act provides that one
year after enactment, adequately capitalized and adequately managed bank holding
companies may acquire banks in any state, even
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in those jurisdictions that currently bar acquisitions by out-of-state
institutions, subject to deposit concentration limits. The deposit concentration
limits provide that regulatory approval by the FRB may not be granted for a
proposed interstate acquisition if, after the acquisition, the acquirer on a
consolidated basis would control more than 10 percent of the total deposits
nationwide or would control more than 30 percent of deposits in the state where
the acquiring institution is located. The deposit concentration state limit does
not apply for initial acquisitions in a state and may be waived by the state
regulatory authority. Interstate acquisitions are subject to compliance with the
Community Reinvestment Act ("CRA"). States are permitted to impose age
requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking. National
banks are impacted as well since the OCC generally refers to state law to
determine appropriate branching provisions for a national bank located in a
particular state.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks is not permitted until
June 1, 1997, provided that the state has not passed legislation "opting-out" of
interstate branching. If a state opts-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state may
opt-in to interstate branching by bank consolidation or by de novo branching by
passing appropriate legislation earlier than June 1, 1997. Interstate branching
is also subject to a 30 percent statewide deposit concentration limit on a
consolidated basis, and a 10 percent nationwide deposit concentration limit. The
laws of the host state regarding community reinvestment, fair lending, consumer
protection (including usury limits) and establishment of branches shall apply to
the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
On May 17, 1995, the FDIC, together with the FRB, OCC and Office of
Thrift Supervision ("OTS"), issued new regulations under the CRA. Under the
regulations, an institution's performance in meeting the credit needs of its
entire community, including low- and moderate-income areas, as required by the
CRA, is generally to be evaluated under three tests: the "lending test," which
would consider the extent to which the institution makes loans in the low- and
moderate-income areas of its market; the "service test," which considers the
extent to which the institution makes branches accessible to low- and
moderate-income areas of its market and provides other services that promote
credit availability; and the "investment test," which considers the extent to
which the institution invests in community and economic development activities.
Because the Bank is defined as a "small institution" under the new rules (i.e.,
one with less than $250 million in total assets), the regulations will focus
upon the "lending test" specified above. The new regulations will be used to
evaluate CRA compliance commencing July 1, 1995, and were fully phased in on
January 1, 1996. Based upon a review of the regulations, management of the Bank
does not anticipate that the regulations will adversely affect the Bank.
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On September 30, 1996, legislation was signed by the President to
combine the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF") of the FDIC. The legislation, known as the Deposit Insurance Funds
Act of 1996, provided for a special assessment on institutions that pay
assessments to the SAIF. The Bank does not pay assessments to the SAIF. The
legislation also provides for the payment of interest on bonds issued in
connection with the clean up of the savings and loan crisis by both banks and
savings associations. Because of the recent adoption of the law, it is not
possible to accurately predict what impact, if any, this will have upon the Bank
or the Company in the future.
Proposed Legislation
There have been proposed a number of legislative and regulatory
proposals designed to strengthen the federal deposit insurance system and to
improve the overall financial stability of the U.S. banking system. It is
impossible to predict whether or in what form these proposals may be adopted in
the future, and if adopted, what their effect would be on the Company. There are
proposals in the Florida legislature which would amend the Florida Tax Code and
subsequently affect the taxes paid by the business community. The passage of
these proposals and to what extent these proposals would affect banks domiciled
in Florida is unknown at this point.
Employees
The Company and the Bank as of March 1, 1997, had 49 full-time
employees and 3 part-time employees. The employees of the Bank are not part of
any collective bargaining unit.
Item 2. Properties
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At year-end 1996, the Bank had Other Real Estate Owned (OREO) inventory
consisting of eight parcels of real property.
One of the parcels consisting of seven platted residential lots was
under contract for Habitat for Humanity in 1996. However, this contract
was allowed to lapse and the lots are currently being marketed to other
builders in the area.
A second parcel is agricultural in which the Bank has a one-half
interest. The third piece of property is a mobile home located in
Volusia County, Florida. The mobile home is currently being leased with
an option to purchase within six months.
There are two other parcels which are part of the OREO which are excess
property for two of the Bank branches. These are separate parcels of
property which had to be acquired to make each corner branch site
economically feasible. One excess parcel is on the Aloma Avenue branch,
and the other excess parcel is on the Temple branch.
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Two other parcels were houses which have been sold. All principal and
interest payments were repaid on both sales.
The final parcel is a house located in downtown Orlando which is
currently being leased to a tenant with an option to purchase.
Marketing activity for all of these properties held in OREO continues to be
active. It is anticipated that some of these properties will be sold in 1997.
Both the Company and the Bank occupy a leasehold in the National Bank
of Commerce Building located at 1201 South Orlando Avenue, Winter Park, Florida,
which is owned by Gateway Plaza, Ltd., a Florida limited partnership, which
entity is owned in part and controlled by certain directors of the Company and
the Bank and affiliates thereof. See "Item 13--Certain Relationships and Related
Transactions". The Bank and the Company jointly occupy approximately 10,030
square feet on the ground floor and 1,800 square feet of the basement of the
building.
The Bank occupies three branch sites. The Aloma Branch, located at 2200
Aloma Avenue, Winter Park, opened May 15, 1995. The second branch located at
1400 Howell Branch Road, Winter Park, opened October 16, 1995. The above two (2)
branches are located in freestanding buildings which were built in 1995 and are
owned by the Bank. On January 2, 1996, the Bank moved into its third branch site
at 200 E. New England Avenue in downtown Winter Park, Florida. This facility is
owned by Rollins College, a private institution located in Winter Park, which
has leased part of the first floor, basement, and drive-in facility to the Bank.
The Bank paid rental expenses, in aggregate, of approximately $373,701
for the year ended 1996 which represented $249,387 due under the lease agreement
between the Company and Gateway Plaza, Ltd. and $124,314 due under the lease
agreement between the Bank and Rollins College.
The initial term of the lease with Gateway Plaza, Ltd. dated June 12,
1985, which commenced on August 4, 1986, was for 10 years with three consecutive
options to renew for a period of five years each. The Bank exercised its first
renewal option on August 8, 1996. Additionally, the lease provides a first right
of refusal to purchase the building on the terms of any acceptable bona fide
offer.
The term of the lease with Rollins College dated July 10, 1995, is for
four years with the first payment having been made on September 1, 1995. The
expiration of this lease is January 17, 1999, with renewal options.
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Item 3. Legal Proceedings
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The Bank is a party to various legal proceedings in the ordinary course
of its business including its proceedings to collect loans or enforce security
interests. In the opinion of management of the Bank, none of the existing legal
proceedings will have an adversarial impact on the business or the financial
condition of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
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The Company did not submit any matter to a vote of its shareholders
during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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As of March 1, 1997, there was no formally established trading market for
the Company's shares of common stock, par value $0.10 per share (the "Common
Stock"), although there have been recent transactions for the Common Stock. On
that same date, the Company had approximately 472 shareholders based on the
number of record holders. To date there has been little secondary trading in the
Common Stock and, to the Company's knowledge, the Common Stock has not received
any over-the-counter quotations. The trading of the Common Stock between third
parties reflected values ranging between $10.00 and $15.50 per share during the
year ended 1996.
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<CAPTION>
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1996 1995
Market Price Range Market Price Range
---------------------------------------------------------
Quarter Ended High Low High Low
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31 $14.50 $14.50 $14.71 $13.00
- ------------------------------------------------------------------------------
September 30 $15.50 $13.00 $13.00 $10.00
- ------------------------------------------------------------------------------
June 30 $15.00 $10.00 $10.00 $10.00
- ------------------------------------------------------------------------------
March 31 $14.71 $12.00 $10.00 $10.00
- ------------------------------------------------------------------------------
</TABLE>
On June 21, 1993, the Company adopted a Stock Redemption/Repurchase
Policy. As of March 1, 1997, 21,800 shares of the Company's common stock had
been redeemed at a total price of $213,640, or $9.80 per share, all of which
shares were redeemed in 1993.
11
<PAGE>
The Company has not declared any dividends to date, but continues to
evaluate its options. On December 31, 1992, the Bank paid a $250,000 dividend to
the Company. These funds were used to purchase loan participations from the
Bank. This amount was later contributed back to the Bank for capital purposes.
The Bank will continue to evaluate the payment of dividends to the Company on a
quarterly basis. As a practical matter, in order for the Company to issue a
dividend to its shareholders, the Bank would have to issue a dividend to its
shareholder, the Company. Under the national banking laws, a national bank may
not pay dividends from its capital; all dividends must be paid out of its net
profits after deducting expenses. In addition, a national bank may not pay
dividends on its shares of common stock unless its surplus equals its stated
capital, unless in the case of annual dividends there has been transferred, to
surplus, no less than one-tenth (1/10) of the bank's net profits for the
preceding two consecutive half year periods. Additional approval is required in
other circumstances where total dividends exceed certain preset amounts. See
Item 1 - Business -- Supervision and Regulation, concerning the Bank.
--------
Item 6. Selected Financial Data (Consolidated)
-----------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
DECEMBER 31
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $4,305,644 $3,767,327 $3,413,990 $2,971,364 $2,775,852
- ------------------------------------------------------------------------------------------------------------------------------
Provisions for Loan Losses $90,000 $175,000 $50,000 $79,280 $81,000
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $648,336 $472,965 $724,209 $746,460 $639,982
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share $1.13 $0.84 $1.26 $1.39 $ 1.17
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $114,865,968 $100,365,487 $83,802,977 $77,056,684 $64,782,578
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations $1,476,111 $1,547,309 $4,305,825 $3,915,059 $1,336,350
- ------------------------------------------------------------------------------------------------------------------------------
Average Equity $8,857,813 $7,613,835 $6,927,701 $6,399,098 $5,846,348
- ------------------------------------------------------------------------------------------------------------------------------
Average Assets $108,608,555 $89,803,441 $84,371,159 $73,813,776 $63,006,516
- ------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------
Average Shares Outstanding 571,711 523,565 523,565 536,948 545,365
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The accompanying consolidated financial statements of the Company are
primarily affected by the operation of the National Bank of Commerce (the
"Bank"), its wholly owned subsidiary.
12
<PAGE>
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 fiscal 1996, the Company had a profit of $648,336 as compared to a
profit of $472,965 in 1995 and $724,209 in 1994. One of the major reasons for
the increased profit in 1996 from 1995 was the result of net loans outstanding
increasing 30% to $86,532,988. While interest expense on deposits and borrowed
money in 1996 grew to $4,155,519, as opposed to $3,651,880 for year-end 1995,
this increase was much smaller than the $1,024,641 increase from year-end 1994
to year-end 1995. Total assets at year-end 1996 were $114,865,968, a 14.5%
increase over 1995 and a 37.1% increase over 1994. Stockholder equity at
year-end 1996 was $9,228,420 or 8% of year-end assets. This compares to year-end
1995 stockholder equity of $7,933,974 and year-end 1994 stockholder equity of
$7,220,599. Net income per common share for 1996 was $1.13 per share compared to
$.84 per share for 1995 and $1.26 per share in 1994.
Two indicators which measure profitability are net income as a percentage
of average assets (ROAA) and net income as a percentage of average shareholders'
equity (ROAE). A comparison of these ratios for the last three years is as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C>
ROAA 0.60% 0.54% 0.86%
-----------------------------------------------------------------------------
ROAE 7.32% 6.21% 10.45%
-----------------------------------------------------------------------------
Net Income $648,336 $472,965 $724,209
-----------------------------------------------------------------------------
Average Assets $108,608,555 $89,803,441 $84,371,159
-----------------------------------------------------------------------------
Average Equity $8,857,813 $7,613,835 $6,927,701
-----------------------------------------------------------------------------
</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 and non-interest
bearing deposits. Net interest income for the last three years is as follows:
13
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income $8,461,163 $7,419,207 $6,041,229
-------------------------------------------------------------------------
Interest Expense $4,155,519 $3,651,880 $2,627,239
-------------------------------------------------------------------------
NET INTEREST INCOME $4,305,644 $3,767,327 $3,413,990
-------------------------------------------------------------------------
</TABLE>
Net interest income of $4,305,644 represented a 14.3% increase over 1995
and a 26.1% increase over 1994. This is primarily the result of the increase in
loan interest income which was $7,051,323, $6,217,599 and $4,782,060, at
December 31, 1996, 1995 and 1994, respectively. Investment security income
remained flat between 1994 and 1995. The 1994 figure was $983,101, and the 1995
figure was $979,436. However, investment security income increased in 1996 to
$1,119,534. Federal funds sold income, typically a lower-yielding investment
class, was $257,767, $170,917, and $132,464 at December 31, 1996, 1995, and
1994, respectively. For further information, refer to the Rate/Volume
Information chart.
At the same time, interest-bearing liabilities increased from $53.6
million at year-end 1994 to $76 million at year-end 1995 to $85 million at year-
end 1996. Interest expense on deposits and borrowed money was $4,155,519,
$3,651,880, and $2,627,239, at December 31, 1996, 1995 and 1994, respectively.
The major reason for the increase in deposit interest expense was due to total
time deposit interest expense of $2,661,881, $2,018,440 and $888,955 for
December 31, 1996, 1995 and 1994, respectively. For further information, refer
to the Rate/Volume Information chart.
The Company's net interest margin was 4.18% for the year ended
December 31, 1996, compared to 4.47% for 1995 and 4.26% for 1994.
Provision for 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 loan 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 judgement. Similarly, the adequacy of the allowance for
loan losses can be determined only on a judgmental basis, after full review,
including consideration of:
Borrowers' 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;
14
<PAGE>
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 lending
officers and senior management; 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 Bank's loan portfolio is also subject
to examination by the OCC.
The allowance for loan losses for year-end 1996 was $887,803, a 1.01%
reserve of total loans outstanding at year-end 1996. This compares to a year-end
1995 allowance of $856,803, a 1.26% reserve of total loans outstanding, and
compares to a year-end 1994 allowance of $650,569, a 1.06% reserve of total
loans outstanding. The charge-offs for 1996 totaled $103,516 while recoveries
totaled $44,516. Net recoveries for 1995 totaled $24,234, compared to net
chargeoffs in 1994 of $102,886. Non-accruing loans totaled $1,159,868,
$2,182,812, and $2,355,375 at December 31, 1996, 1995 and 1994, respectively.
The loan loss provision for 1996 was $90,000, significantly reduced from the
$175,000 provision for 1995 but above the 1994 provision of $50,000. This was
the result of the resolution of certain nonaccrual and problem loans during
1996. This was an increase in charge-offs for commercial loans from 1995 to 1996
and a lower amount of recoveries. Management of the Bank believes that the
allowance for loan losses was adequate as of December 31, 1996, in light of the
significant reduction in nonaccrual loans and the continued strong economy in
the Bank's market area.
The Company and the Bank continue to be examined by the Federal Reserve
Bank, Office of the Comptroller of Currency (National Bank Examiners), and a
private loan review consultant.
The most recent Comptroller of the Currency (OCC) safety and soundness
examination was as of May 1995. The allowance for loan and lease losses was
evaluated as part of this review. No change was recommended.
Non-Interest Income
The total Non-Interest Income increased from $429,621 in 1994 and from
$491,519 in 1995 to $707,363 in 1996. One of the main reasons for the increase
is that all branches were opened for the full 12 months during 1996. The other
reason is the continued stringent policies on NSF charges.
15
<PAGE>
Non-Interest Expense
Operating expenses increased $653,416 or 20% to $3,938,297 for year-end
1996 compared to the same period in 1995, which had operating expenses of
$3,284,881. The year-end 1994 operating expense figure was $2,625,402. The
increase of salary expense for 1996 of $342,497 was due mainly to the staff
hired to open three branches. These three branches were open for the entire year
of 1996. Also, a portion of this increase was for annual salary adjustments.
Occupancy expenses in 1996 increased $285,642 due mainly to the New
England Avenue branch being opened for the full year of 1996. Also, there were
additional purchases of furniture and computers during 1996.
Stationery and printing supplies declined by $16,493 to $111,562 since
the bulk of the stationery that was needed to open the three branches was
purchased in 1995. Insurance declined by $58,174 to $52,546 at year-end 1996.
The primary reason for the decline is due to the FDIC restructuring insurance
assessments on banks during 1996.
In the Other Expense category, the increase in 1996 was $89,888,
resulting in the year-end figure of $696,812. The year-end 1995 Other Expense
figure was $606,924, compared to the year-end 1994 figure of $417,272. The main
increase in the Other Expense category during 1996 was the loss on the sale of
OREO totaling $89,010. A large percentage of the increase in 1995 as opposed to
1994 was the result of business development activities that were done for the
branch openings in 1995 and early 1996. Also, director fees increased from
$27,000 in 1995 to $42,000 in 1996 as a result of five new directors being added
during 1996. With the purchase of two branch sites, property tax on land took
full effect in 1996 with this expense increasing from $1,392 in 1995 to $11,552
in 1996. Telephone expenses also increased from $28,347 in 1995 to $58,223 in
1996 as a result of the three branches being open for the full year of 1996.
Also, tangible taxes increased from $8,100 in 1995 to $20,234 in 1996.
Income Taxes
Federal
The Company files a consolidated federal income tax return on behalf of
itself and the Bank and reports their income and expenses under the accrual
method of accounting.
Under the applicable provisions of the Internal Revenue Code of 1986 (the
"Code"), banks and bank holding companies are generally subject to the same
rules concerning federal income taxes as are other corporations. There are,
however, special rules applicable to banks. The most significant rule relates to
the deduction of bad debts.
The Company uses the reserve method in calculating its bad debt
deduction. Under the reserve method, a bank is required to use the experience
method in calculating its deduction.
16
<PAGE>
Under the experience method, a bank computes the ratio of total bad-debt
charge-offs for its most recent six taxable years, including the current taxable
year (adjusted for recoveries of bad debts during such period), to the sum of
loans outstanding at the close of each such six years. The ratio so computed is
applied to loans outstanding at the close of the current taxable year, and the
result constitutes the permissible reserve balance.
Depending on the composition of its items of income and expense, a bank
may be subject to the alternative minimum tax ("AMT"). For tax years beginning
after 1986, a bank must pay an alternative minimum tax equal to the amount (if
any) by which 20 percent of alternative minimum taxable income ("AMTI") as
reduced by an exemption varying with AMTI, exceeds the regular tax due, AMTI
equals regular taxable income increased or decreased by certain adjustments and
increased by certain tax preferences, including depreciation deductions in
excess of that allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes). AMTI may be
reduced only up to 90 percent by AMT net operating loss carryovers. Alternative
minimum tax paid can be carried forward indefinitely and credited against
regular tax due in later years to reduce regular tax to the amount of
alternative minimum tax payable in those years. The alternative minimum tax
applicable to tax years after 1986 is significantly broader in scope than the
pre-1986 minimum tax and substantially increases the likelihood that banks and
savings institutions will have to pay alternative minimum tax.
State
The State of Florida imposes a corporate franchise tax on banks which
subjects the taxable income of such institutions to a 5.5 percent tax (or, if
greater, an alternative minimum tax equal to 3.3 percent of alternative minimum
taxable income). The Florida franchise tax may be reduced by a credit for
intangible taxes paid, but such credit cannot exceed 65 percent of the franchise
tax due for the year. The Florida franchise tax is deductible in determining
federal taxable income. Florida taxable income is substantially similar to
federal taxable income, except that it includes interest income on obligations
of any state or political subdivision thereof which is not otherwise exempt
under Florida laws and that net operating losses cannot be carried back to prior
taxable years.
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
and providing for liability outflows while at the same time monitoring 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 borrowing. 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
17
<PAGE>
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 asset and
liability management include: (1) controlling interest rate exposure, (2)
ensuring adequate liquidity, and (3) maintaining strong capital foundation.
The following table, entitled The Rate Sensitivity Balance Sheet,
summarizes the Bank's asset and liability balances as of December 31, 1996
which, due to the rate adjustments for principal prepayments and amortization
and maturities, are expected to reprice within the specified time frame. The
Investment Portfolio total on The Rate Sensitivity Balance Sheet differs from
the total on the subsequent table entitled Maturity Distribution of Investment
Securities because the FASB 115 adjustment, the FRB stock and the Federal Home
Loan Bank of Atlanta stock alters the totals with the rate sensitivity
calculation. The Rate Sensitivity Balance Sheet on the following page is for the
Bank.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
18
<PAGE>
THE RATE-SENSITIVE BALANCE SHEET
WITH 10% CALCULATION FOR RETURN ON EQUITY
WITH DEPOSITS SPREAD BY BUCKET STRUCTURE OF IRR SUPERVISORY MODEL
<TABLE>
<CAPTION>
REVOLVES 1-90 DAYS 90-180 DAYS 181-365 DAYS 1-3 YEARS
-------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Investment Portfolio 0 1,000,703 1,500,257 4,489,509 8,099,215
Loans 17,506,912 2,906,738 2,850,769 6,835,469 20,058,310
Loan Loss Reserve -279,803 -100,000 -100,000 -100,000 -100,000
FF Sold/Interest Bearing Deposits 1,549,792 0 0 0 0
Cash & Due From 0 0 0 0 0
All Other Assets 0 0 0 0 0
TOTAL 18,776,901 3,807,441 4,251,026 11,224,978 28,057,525
========== ========= ========= ========== ==========
Demand Deposits 0 0 0 0 0
Regular Savings 4,463,510 1,000,000 1,000,000 1,000,000 5,000,000
NOW 376,751 1,250,000 1,250,000 1,250,000 1,250,000
Money Market Deposits Accounts 1,080,125 1,000,000 2,000,000 3,000,000 2,000,000
Certificates of Deposit 0 16,962,292 1,232,202 5,177,128 22,015,585
Reverse Repurchase 0 0 0 0 0
Federal Funds Purchased 0 0 0 0 0
Repurchase Agreements 2,661,774 0 0 0 0
Other Borrowed Money 0 9,000 0 42,200 115,550
Mortgage Indebtedness 0 0 0 0 0
Other Liabilities 0 0 0 0 0
Capital Notes 0 0 0 0 0
Equity 0 0 0 0 0
--------- ---------- --------- ---------- ----------
TOTAL LIABILITIES & EQUITY 8,582,160 20,221,292 5,482,202 10,469,328 30,381,135
========= ========== ========= ========== ==========
GAP 10,194,741 -16,413,851 -1,231,176 755,650 -2,323,610
GAP/Total Assets 8.94% -14.39% -1.08% 0.66% -2.04%
Cumulative GAP 10,194,741 -6,219,110 -7,450,286 -6,694,636 -9,018,246
Cumulative GAP/Total Assets 8.94% -5.45% -6.53% -5.87% -7.91%
<CAPTION>
3-5 YEARS ALL OTHER TOTALS
--------- --------- ------
<S> <C> <C> <C>
Investment Portfolio 1,000,000 450,000 16,539,684
Loans 11,676,374 24,835,272 86,669,844
Loan Loss Reserve -100,000 -100,000 -879,803
FF Sold/Interest Bearing Deposits 0 0 1,549,792
Cash & Due From 0 3,339,859 3,339,859
All Other Assets 0 6,840,948 6,840,948
--------- ---------
TOTAL 12,576,374 35,366,079 114,060,324
========== ========== ===========
Demand Deposits 0 16,040,150 16,040,150
Regular Savings 6,000,000 0 18,463,510
NOW 3,000,000 0 8,376,751
Money Market Deposits Accounts 2,000,000 0 11,080,125
Certificates of Deposit 1,748,162 0 47,135,369
Reverse Repurchase 0 0 0
Federal Funds Purchased 0 0 0
Repurchase Agreements 0 0 2,661,774
Other Borrowed Money 135,250 920,646 1,222,646
Mortgage Indebtedness 0 324,514 324,514
Other Liabilities 0 748,478 748,478
Capital Notes 0 5,000,000 5,000,000
Equity 0 3,007,007 3,007,007
--------- --------- ---------
TOTAL LIABILITIES & EQUITY 12,883,412 26,040,795 114,060,324
========== ========== ===========
GAP -307,038 9,325,284
GAP/Total Assets -0.27% 8.18%
Cumulative GAP -9,325,284 0
Cumulative GAP/Total Assets -8.18%
</TABLE>
19
<PAGE>
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 be 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 December
31, 1996, the Bank had a total risk based capital ratio (i.e., Tier One plus
Tier Two capital) of 9.67% (10.87% for the Company on a consolidated basis). See
Item 1 - Business -- Supervision and Regulation.
--------
The Company stands ready to infuse additional capital into the Bank
should it be warranted.
Impact of Inflation
The 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 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
20
<PAGE>
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 the local demographics. The Bank and the Company are
adequately capitalized. For the year ended December 31, 1996, the Company saw an
increase in total assets, total shareholders' equity and earnings. These are the
result of a number of factors but principally the community acceptance of the
branches of the Bank which opened in 1995 and 1996 and which have started to
produce the desired results. In addition, improvement in the loan portfolio of
the Bank and reallocation of the assets of the Bank into higher income producing
loans, as compared to other investments like Federal funds sold, has benefited
the Company. Earnings per share rose to $1.13 in 1996 from $0.84 in 1995. While
the earnings still are not as high as in 1994, management believes that the
investment in the new branches, when combined with the resolution of certain
problem loans, bodes well for the future of the Bank and the Company.
Statistical Information
CONSOLIDATED DAILY AVERAGE BALANCES, INCOME/EXPENSE
AND AVERAGE YIELDS EARNED AND RATES PAID -- 1996 and 1995
(Dollars in thousands, yields on taxable equivalent basis)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCES INCOME YIELD BALANCES INCOME YIELD
ASSETS (1) (1) RATES (1) (1) RATES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $75,334 $7,051 9.36% $65,180 $6,218 9.54%
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Securities $17,978 $1,120 6.21% $14,981 $979 6.53%
- ---------------------------------------------------------------------------------------------------------------------------------
Funds Sold $4,855 $258 5.31% $2,971 $171 5.76%
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Deposits $1,500 $32 2.20% $1,174 $52 4.43%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Short-Term Investments -0- -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $99,667 $8,461 8.49% $84,306 $7,419 8.80%
- ---------------------------------------------------------------------------------------------------------------------------------
Cash $2,913 N/A N/A $1,849 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment $3,611 N/A N/A $2,448 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses ($880) N/A N/A ($748) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Other Assets $3,298 N/A N/A $1,948 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $108,609 N/A N/A $89,803 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------
LIABILITIES AND AVERAGE AVERAGE
SHAREHOLDER'S BALANCES YIELD BALANCES YIELD
EQUITY (1) EXPENSES RATES (1) EXPENSES RATES
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Deposits:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $7,565 $162 2.14% $6,051 $168 2.79%
- ----------------------------------------------------------------------------------------------------------------------------------
Savings $15,088 $632 4.19% $14,335 $580 4.05%
- ----------------------------------------------------------------------------------------------------------------------------------
Money Market $14,953 $497 3.32% $12,823 $495 3.86%
- ----------------------------------------------------------------------------------------------------------------------------------
Certificates of Deposits $45,799 $2,662 5.81% $33,172 $2,018 6.08%
- ----------------------------------------------------------------------------------------------------------------------------------
Other Time -0- N/A N/A -0- N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING DEPOSITS $83,405 $3,953 4.74% $66,381 $3,261 4.91%
- ----------------------------------------------------------------------------------------------------------------------------------
Funds Purchased $27 $2 7.41% $202 $14 6.93%
- ----------------------------------------------------------------------------------------------------------------------------------
Other Short-Term $1,978 $105 5.31% $2,812 $168 5.97%
Borrowings
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $1,258 $96 7.63% $2,940 $209 7.11%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST- $3,263 $203 6.22% $5,954 $391 6.57%
BEARING LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Demand Deposits $12,314 N/A N/A $9,234 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Other Liabilities $769 N/A N/A $620 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $8,858 N/A N/A $7,614 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $108,609 N/A N/A $89,803 N/A N/A
AND SHAREHOLDERS'
EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Spread 3.75% 3.89% 3.87% 3.94% 3.90%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (in thousands) $4,306 $3,767 $3,414 $2,971 $2,776
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin (2) 4.18% 4.47% 4.26% 4.24% 4.64%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations were based on average balances for asset and liability
accounts and actual year end income and expense totals, causing some
distortion in yield verses rates actually earned on interest earning
assets and paid on interest bearing liabilities.
(2) Net interest income divided by total earning assets.
22
<PAGE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
December 31, 1996 and December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD* VALUE YIELD*
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Other U.S. Government
Agencies and Corporations:
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due In One Year Or Less $7,036 6.50% $5,544 6.14%
- -----------------------------------------------------------------------------------------------------------------------------
Due After One Year Through Five 8,928 5.87% 9,108 6.52%
Years
- -----------------------------------------------------------------------------------------------------------------------------
Due After Five Years Through -0- -0- -0- -0-
Ten Years
- -----------------------------------------------------------------------------------------------------------------------------
Due After Ten Years -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $15,964 6.24% $16,652 6.38%
- -----------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
- ------------------------------------------------------------------------------------------------------------------------------
Due In One Year Or Less -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
Due After One Year Through Five Years 190 4.05% 190 4.05%
- -----------------------------------------------------------------------------------------------------------------------------
Due After Five Years Through Ten Years -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
Due After Ten Years -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
Other Securities -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $16,154 6.21% $16,842 6.35%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Weighted average yields are calculated on the basis of the carrying value
of the security.
23
<PAGE>
LOAN PORTFOLIO BY TYPES OF LOANS
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial:
- --------------------------------------------------------------------------------
Secured $10,461 $7,695
- --------------------------------------------------------------------------------
Unsecured 3,989 2,681
- --------------------------------------------------------------------------------
Real Estate:
- --------------------------------------------------------------------------------
Construction 15,634 5,231
- --------------------------------------------------------------------------------
Mortgage 54,291 50,116
- --------------------------------------------------------------------------------
Credit Card -0- -0-
- --------------------------------------------------------------------------------
Other Consumer Loans 3,393 2,009
- --------------------------------------------------------------------------------
Lease Financing -0- -0-
- --------------------------------------------------------------------------------
TOTAL LOANS $87,768 $67,732
- --------------------------------------------------------------------------------
</TABLE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
REMAINING MATURITIES OF LOANS
---------------------------------------------------------------------------
LOAN MATURITY (1) TOTAL 1 YEAR WITHIN AFTER 5
1-5 YEARS YEARS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, Financial and $14,450 $9,161 $4,741 $548
Agricultural
- -----------------------------------------------------------------------------------------------------------------
Real Estate 69,925 19,688 26,092 24,145
- -----------------------------------------------------------------------------------------------------------------
Other 3,393 1,858 1,205 330
- -----------------------------------------------------------------------------------------------------------------
TOTAL $87,768 $30,707 $32,038 $25,023
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon scheduled principal payments.
24
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
REMAINING MATURITIES OF LOANS
-------------------------------------------------------------------------
INTEREST RATE SENSITIVITY TOTAL 1 YEAR WITHIN AFTER 5
1-5 YEARS YEARS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans With:
- -----------------------------------------------------------------------------------------------------------------------------
Predetermined Interest Rates $24,024 $7,043 $12,626 $4,355
- -----------------------------------------------------------------------------------------------------------------------------
Floating or Adjustable 63,744 23,803 19,109 20,832
Interest Rates
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $87,768 $30,846 $31,735 $25,187
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rate/Volume Information
The table below sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. Information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by old rate) and (ii) changes in rates (change in rate multiplied by
old volume). For purposes of this table, changes attributable to both volume and
rate which cannot be segregated have been allocated proportionately to volume
and to rate.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
YE December 31, 1996 vs. 1995 YE December 31, 1995 vs. 1994
Increase (Decrease) Due To Increase (Decrease) Due to
--------------------------------------------------------------------------------------------
Final Volume Rate Total Volume Rate Total
=============================================================================================================================
Interest Income
- ---------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $948 $(115) $833 $676 $750 $1,426
- -----------------------------------------------------------------------------------------------------------------------------
Investments $184 $(43) $141 $(99) $65 $(34)
- -----------------------------------------------------------------------------------------------------------------------------
Fed Funds Sold $99 $(12) $87 $(15) $54 $39
- -----------------------------------------------------------------------------------------------------------------------------
Interest Bearing Deposits $12 $(32) $(20) $(66) $13 $(53)
- -----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $1,243 $(202) $1,041 $496 $882 $1,378
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expenses
- -----------------
- -----------------------------------------------------------------------------------------------------------------------------
Deposits $802 $(110) $692 $137 $829 $966
- -----------------------------------------------------------------------------------------------------------------------------
Borrowings $(168) $(20) $(188) $19 $40 $59
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing $634 $(130) $504 $156 $869 $1,025
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Non-performing Assets and Loans Past Due 90 Days or More
The following table summarizes the Company's non-accrual and past due
loans as of December 31 for each year indicated. A common presentation for
non-performing assets and loans past due 90 days or more is as follows:
<TABLE>
<CAPTION> -------------------------------------------------------------
DECEMBER 31
-------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual Loans $1,159,868 $2,182,812 $2,355,375
- -------------------------------------------------------------------------------------------------------
Accruing Loans Past Due 90
Days or More -0- -0- -0-
- -------------------------------------------------------------------------------------------------------
Troubled Debt Restructurings $11,880 $55,532 $545,526
- -------------------------------------------------------------------------------------------------------
</TABLE>
If interest due on all non-accrual loans had been accrued at the original
contract rates, interest income would have been approximately $114,017 greater
for 1994, approximately $203,476 greater for 1995, and approximately $28,536
greater for 1996.
Potential Problem Loans
On December 31, 1996, the Bank had non-accrual loans totaling
$1,159,868, a reduction of $1,022,944 from the 1995 year-end total of
$2,182,812, and a reduction of $1,195,507 from the 1994 year-end total of
$2,355,375. Of the 1996 amount, two Small Business Administration ("SBA") loans
totaling $486,762 are also secured by their first or second mortgages. There are
three additional loans secured by first and second mortgages totaling $217,423,
and there are four unsecured loans totaling $435,159. Installment credit loans
that are non-accrual total $20,524.
At year-end 1996, there were 11 loans on non-accrual, including two SBA
loans. The largest non-accrual credit in the amount of $354,213 is an SBA loan
which is also secured by a first mortgage on commercial property in downtown
Orlando. The second SBA loan in the amount of $132,549 is collateralized by a
second mortgage on property in Orlando and a first mortgage on a residential lot
in New York State. Upon the sale of these properties, it is felt that the Bank
will incur no principal loss.
One installment loan in the amount of $17,596 secured by a vehicle has
since been paid current. A second installment loan in the amount of $2,928
continues to run past due, but it is felt that with a work-out agreement this
loan will be paid in full.
26
<PAGE>
The largest unsecured loan in the amount of $350,000 has since been
reduced to $315,000 and brought current on both principal and interest. A second
unsecured loan in the amount of $54,816 is now only one month past due with
$2,000 monthly principal payments being maintained. The third unsecured credit
in the amount of $15,240 has since been brought current. The final unsecured
credit in the amount of $15,103 is anticipated to be brought current within 90
days.
One of the first mortgage loans in the amount of $45,722 has been paid
off. A second loan is a home equity line of credit in the amount of $124,834.
The foreclosure process has been commenced; however, it is felt that this loan
will be paid in full before the Bank takes possession of this house. The last
mortgage is a first mortgage in the amount of $46,867. It is felt that the
foreclosure process will be completed and that the Bank will take possession of
this house.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
PERCENT
OF PERCENT OF
ESTIMATED ESTIMATED
LOANS IN LOANS IN
EACH EACH
BALANCE AT CATEGORY CATEGORY
DECEMBER 31, TO TOTAL TO TOTAL
APPLICABLE TO AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $310,731 16.46% $359,857 15.32%
- ------------------------------------------------------------------------------------------------------------------------------
Real Estate 532,682 79.67% 471,242 81.71%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer 44,390 3.87% 25,704 2.97%
- ------------------------------------------------------------------------------------------------------------------------------
ACTUAL TOTAL $887,803 100.00% $856,803 100.00%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In general, the Bank calculates its Loan Loss Reserve by allocating
historical loss percentages of all criticized and classified loans, as well as
delinquent and non-accrual credits. The historical loss percentages are
calculated on a moving three (3) year weighted average by loan category, i.e.,
----
real estate, commercial, or installment. For large real estate credits, a
percentage discount is applied to current appraised values to determine
potential loss exposure. For the unallocated portion of the loan portfolio, the
methodology applies to various percentage allocations based on the quality of
liquidity of collateral, i.e., certificate of deposit, secured loans versus
----
unsecured loans.
27
<PAGE>
Management also allocates loan loss provisions for certain loans representing
a concentration of capital and off balance sheet risk, such as letters of
credit and unfunded loan commitments.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure", on January 1, 1995. The Company,
considering current information and events regarding the borrower's ability to
repay their obligations, considers a loan to be impaired when it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, the
secondary market value of the loan, or the fair value of the collateral for
collateral dependent loans. Impaired loans are written down to the extent that
principal is judged to be uncollectible and, in the case of impaired collateral
dependent loans where repayment is expected to be provided solely by the
underlying collateral and there is no other available and reliable sources of
repayment, are written down to the lower of cost or collateral value. Impairment
losses are included in the allowance for loan losses through a charge to the
provisions for loan losses. Cash receipts on impaired loans are applied to
reduce the principal amount of such loans until the principal has been recovered
and are recognized as interest income thereafter. Prior periods have not been
restated.
In accordance with SFAS No. 114 as amended by SFAS No. 118, the Company
records impairment in the value of its loans as an addition to the allowance for
loan losses. Any changes in the value of impaired loans due to the passage of
time or revisions in estimates are reported as adjustments to provision expense
in the same manner in which impairment initially was recognized. Adoption of
SFAS No. 114 as amended by SFAS No. 118 had no impact on the level of the
overall allowance for loan losses or on operating results, and does not affect
the Company's policies regarding write-offs, recoveries or income recognition.
Chargeoffs by loan type are illustrated in the consolidated financial statements
at Footnote (4).
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
28
<PAGE>
COMPOSITION OF DEPOSITS FOR 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE
% OF RATE % OF AVERAGE % OF AVERAGE
AVERAGES TOTAL PAID AVERAGES TOTAL RATE PAID AVERAGES TOTAL RATE PAID
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $12,314 12.88% -0- $9,234 12.21% -0- $8,245 11.60% -0-
- ------------------------------------------------------------------------------------------------------------------------------------
NOW $7,565 7.90% 2.00% 6,051 8.00% 2.79% 6,103 8.60% 2.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Savings $15,088 15.76% 4.00% 14,335 18.96% 4.05% 19,554 27.52% 4.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Money
Market $14,953 15.62% 2.75% 12,823 16.96% 3.86% 14,393 20.26% 3.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Certificate
of Deposit $45,799 47.84% 4.41% 33,172 43.87% 6.08% 22,757 32.02% 4.75%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $95,719 100.00% 3.90% $75,615 100.00% 4.31% $71,052 100.00% 3.57%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY OF CDS AND OTHER TIME DEPOSITS
IN AMOUNTS OF $100,000 OR MORE
December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MONTHS TO CD'S DOMESTIC OTHER TIME
MATURITY DEPOSITS TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
3 Or less $19,977 -0- $19,977
- --------------------------------------------------------------------------------
Over 3 through 6 4,550 -0- 4,550
- --------------------------------------------------------------------------------
Over 6 through 12 2,495 -0- 2,495
- --------------------------------------------------------------------------------
Over 12 1,425 -0- 1,425
- --------------------------------------------------------------------------------
TOTAL $28,447 -0- $28,447
- --------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Impact of Recent Accounting Pronouncements
SFAS No. 121
In March 1995, the Financial Accounting Standards Board issued
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This Statement 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. This Statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the
lower of the carrying amount or fair value less costs to sell, except
for assets that are covered by APB Opinion No. 30 which will continue
to be reported at the lower of the carrying amount or net realizable
value. This Statement is effective for financial statements with fiscal
years beginning after December 15, 1995. The Company has determined
that FAS 121 had no impact in 1996.
SFAS No. 122
In May 1995, the Financial Accounting Standards Board issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." This
Statement amends FASB Statement No. 65, "Accounting for Certain
Mortgage Banking Activities", to require that a mortgage banking
enterprise recognize as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. This
Statement requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair
value of those rights. Impairment should be recognized through a
valuation allowance for each impaired stratum. This Statement is
applied prospectively in fiscal years beginning after December 15,
1995. The Company has determined that FAS 122 is not applicable in 1996
as the bank does not engage in this activity.
SFAS No. 125
In June 1996, the Financial Accounting Standards Board issued
SFAS 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 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.
30
<PAGE>
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.
This Statement will be adopted in 1997.
Item 8. Consolidated Financial Statements and Supplementary Data
--------------------------------------------------------
The required financial information begins on the following page.
31
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Commerce National Corporation
and Subsidiary:
We have audited the accompanying consolidated balance sheets of Commerce
National Corporation and subsidiary as of December 31, 1996 and 1995, the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commerce National
Corporation and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
February 5, 1997
32
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and due from banks (note 2) $ 3,389,652 3,897,057
Federal funds sold 1,500,000 8,000,000
Investment securities available for sale (note 3) 15,964,395 12,136,418
Investment securities held to maturity (estimated market
value of $191,310 and $2,714,950 in 1996 and 1995,
respectively) (note 3) 190,000 2,705,957
Loans, less allowance for loan losses of $887,803
for 1996 and $856,803 for 1995 (note 4) 86,532,988 66,648,785
Accrued interest receivable 723,329 632,936
Premises and equipment, net (note 5) 3,501,875 3,486,488
Other real estate owned 1,018,405 802,145
Federal Reserve Bank stock, at cost 150,000 150,000
Federal Home Loan Bank stock, at cost 300,000 407,200
Deferred income taxes, net (note 10) 242,217 178,000
Prepaid expenses and other assets 114,298 149,401
Executive supplemental income plan - cash surrender value
life insurance policies (note 18) 1,238,809 1,171,100
---------- ----------
Total assets $ 114,865,968 100,365,487
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ---- ----
<S> <C> <C>
Deposits (note 7):
Noninterest bearing $ 15,988,515 13,285,944
Interest bearing 85,055,755 76,056,835
---------- ----------
Total deposits 101,044,270 89,342,779
Federal Home Loan Bank advances (note 8) 1,222,647 1,266,095
Other borrowed funds (note 9) 2,986,288 1,394,944
Accrued interest payable 136,276 206,031
Accounts payable and other liabilities 248,067 221,664
------- -------
Total liabilities 105,637,548 92,431,513
----------- ----------
Shareholders' equity (notes 11, 13, 14 and 15):
Common stock, $.10 par value per share. Authorized
1,000,000 shares; 617,584 and 545,365 shares issued,
595,784 and 523,565 shares outstanding at December 31,
1996 and 1995 61,759 54,537
Additional paid-in capital 6,065,310 5,350,342
Retained earnings 3,269,630 2,621,294
Treasury stock, at cost (21,800 shares at December 31, 1996
and 1995) (208,640) (208,640)
Unrealized gain on investment securities available for
sale, net 40,361 116,441
------ -------
Total shareholders' equity 9,228,420 7,933,974
Commitments and contingencies (note 18)
---------- ----------
Total liabilities and shareholders' equity $ 114,865,968 100,365,487
=========== ===========
</TABLE>
34
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 7,051,323 6,217,599 4,782,060
Investment securities held to maturity and
investments securities available for sale 1,119,534 979,436 983,101
Federal funds sold 257,766 170,917 132,464
Other 32,540 51,255 143,604
------ ------ -------
Total interest income 8,461,163 7,419,207 6,041,229
Interest expense:
Deposits and other borrowed money (note 7) 4,155,519 3,651,880 2,627,239
--------- --------- ---------
Net interest income 4,305,644 3,767,327 3,413,990
Provision for loan losses (note 4) 90,000 175,000 50,000
------ ------- ------
Net interest income after provision
for loan losses 4,215,644 3,592,327 3,363,990
--------- --------- ---------
Other income, primarily customer service fees 707,363 491,519 429,621
------- ------- -------
Other expenses:
Salaries and benefits 1,834,204 1,491,707 1,197,881
Occupancy expense 777,524 491,882 398,621
Advertising and public relations 92,639 102,766 86,915
Legal and professional fees 212,527 223,464 174,800
Stationery and printing supplies 111,562 128,055 58,825
Data processing expense 160,483 129,363 102,036
Insurance 52,546 110,720 189,052
Other expenses 696,812 606,924 417,272
------- ------- -------
3,938,297 3,284,881 2,625,402
--------- --------- ---------
Net operating income 984,710 798,965 1,168,209
Income tax expense (note 10) 336,374 326,000 444,000
------- ------- -------
Net income $ 648,336 472,965 724,209
======= ======= =======
Earnings per common and common equivalent
share (note 21) $ 1.13 .84 1.26
==== === ====
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of
Shareholders' Equity For each of the years in
the three-year period ended December 31, 1996
<TABLE>
<CAPTION>
Unrealized
gain (loss) on
investment
Additional securities Treasury Total
Common paid-in Retained available stock, shareholders'
stock capital earnings for sale, net at cost equity
----- ------- -------- ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $ 54,537 5,350,342 1,424,120 46,327 (208,640) 6,666,686
Net income - - 724,209 - - 724,209
Changes in unrealized (loss) on investment
securities available for sale, net - - - (170,296) - (170,296)
------ ------- ------- ------- ------- -------
Balances, December 31, 1994 54,537 5,350,342 2,148,329 (123,969) (208,640) 7,220,599
Net income - - 472,965 - - 472,965
Changes in unrealized gain (loss) on investment
securities available for sale, net - - - 240,410 - 240,410
------ ------- ------- ------- ------- -------
Balances, December 31, 1995 54,537 5,350,342 2,621,294 116,441 (208,640) 7,933,974
Net income - - 648,336 - - 648,336
Employee stock options exercised 7,222 714,968 - - - 722,190
Changes in unrealized gain (loss) on investment
securities available for sale, net - - - (76,080) - (76,080)
------ ------- ------- ------- ------- -------
Balances, December 31, 1996 $ 61,759 6,065,310 3,269,630 40,361 (208,640) 9,228,420
====== ========= ========= ====== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 648,336 472,965 724,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 256,682 119,767 68,227
Deferred income taxes (28,582) (51,760) 9,000
Net amortization of premiums and accretion of discounts
on investment securities held to maturity and
investment securities available for sale (23,973) 84,676 141,825
Provision for loan losses 90,000 175,000 50,000
Deferred loan origination fees 121,615 41,774 53,596
Loss on sale of investment securities available for sale - - 6,851
Loss on sale of other real estate owned 55,101 2,744 21,331
Writedown to fair value on other real estate owned 26,829 25,257 3,100
Provision for other real estate owned 7,080 - -
Executive supplemental income plan - additional
cash surrender value (67,709) - -
Cash provided by (used in) changes in:
Accrued interest receivable (90,393) 47,049 (121,260)
Prepaid expenses and other assets 35,103 (60,143) (9,919)
Accrued interest payable (69,755) 151,193 (12,374)
Accounts payable and other liabilities 26,403 (47,543) 12,066
------ ------- ------
Net cash provided by operating activities 986,737 960,979 946,652
------- ------- -------
(Continued)
</TABLE>
37
<PAGE>
-2-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Loans (net of collections) (20,802,136) (5,795,836) (9,696,490)
Purchases of investment securities available for sale (7,899,762) (5,489,677) (9,498,545)
Proceeds from sale of investment securities available for sale - - 2,455,865
Proceeds from maturity of investment securities held to
maturity 2,500,000 6,000,000 -
Proceeds from maturity of investment securities available
for sale 3,000,000 1,500,000 5,000,000
Proceeds from callable investment securities available for sale 1,000,000 - -
Purchase of cash surrender value life insurance policies to fund
executive supplemental income - (1,171,100) -
Purchase of Federal Home Loan Bank stock - - (90,000)
Proceeds from sale of Federal Home Loan Bank stock 107,200 165,900 -
Purchase of Federal Reserve Bank stock - (7,500) -
Purchase of premises and equipment (272,069) (1,990,725) (927,005)
Proceeds from the sale of other real estate owned 401,048 129,348 163,524
------- ------- -------
Net cash used in investing activities (21,965,719) (6,659,590) (12,592,651)
----------- ---------- -----------
Cash flows provided by financing activities:
Net increase in demand deposits, NOW accounts and passbook
savings accounts 7,906,958 871,508 5,628,901
Net increase (decrease) in certificates of deposit 3,794,533 26,435,789 (9,578,374)
Federal funds purchased - (1,500,000) 1,500,000
Decrease (increase) in federal funds sold 6,500,000 (8,000,000) -
Principal repayments on mortgage notes payable (23,917) (22,097) (12,653)
Increase (decrease) in other borrowed funds 1,615,261 (7,123,056) 8,099,569
Proceeds from borrowings from the Florida Home Loan Bank - - 172,064
Principal payments on Federal Home Loan Bank borrowings (43,448) (2,916,659) -
Proceeds from employee stock options exercised 722,190 - -
------- ---------- -------
Net cash provided by financing activities 20,471,577 7,745,485 5,809,507
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (507,405) 2,046,874 (5,836,492)
Cash and cash equivalents at the beginning of the year 3,897,057 1,850,183 7,686,675
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 3,389,652 3,897,057 1,850,183
========= ========= =========
</TABLE>
(Continued)
38
<PAGE>
-3-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 4,225,274 3,500,687 2,639,613
========= ========= =========
Taxes $ 353,685 411,389 420,098
======= ======= =======
Supplemental disclosures of non-cash transactions:
Transfer of loans to other real estate owned $ 706,318 48,857 270,945
======= ====== =======
Market value adjustment - investment securities available for sale:
Market value adjustment - investments 64,711 176,426 (187,832)
Deferred income tax liability (asset) 24,350 59,985 (63,863)
------ ------ --------
Unrealized gain (loss) on investments
available for sale, net $ 40,361 116,441 (123,969)
====== ======= =========
</TABLE>
During 1995, the Company reclassified $150,000 in land held for bank premises to
other real estate owned.
During 1994, the Company purchased land for a branch site. In connection with
the purchases, $200,000 in other real estate owned was exchanged, and $383,181
in mortgage notes payable were assumed. In addition, the Company reclassified
$300,000 in land held for bank premises to other real estate owned.
See accompanying notes to consolidated financial statements.
39
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Commerce National Corporation
and its subsidiary conform to generally accepted accounting principles
and prevailing practices within the banking industry.
(a) Reporting Entity
Commerce National Corporation (the "Company") is a bank holding
company which owns National Bank of Commerce (the "Bank"). The
Bank's primary market is Central Florida. The Bank is a member
of the Federal Reserve System and its deposits are insured by
the Federal Deposit Insurance Corporation.
(b) Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Commerce National Corporation and its wholly owned
subsidiary, National Bank of Commerce. The operations of the
Company consist primarily of the operations of the Bank. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Cash Equivalents
For purposes of the statement of cash flows, the Company
considers cash and due from banks, noninterest bearing deposits
in other banks with original maturities of three months or less
and federal funds sold to be cash equivalents.
(d) Investment Securities Held to Maturity and Investments
Securities Available for Sale
Investments to be held for indefinite periods of time and not
intended to be held to maturity are classified as available for
sale and are carried at fair value. Unrealized holding gains and
losses are included in shareholders' equity net of the effect of
income taxes.
(Continued)
40
<PAGE>
-2-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Securities that management has the intent and the Company has the
ability at the time of purchase or origination to hold until
maturity are classified as investment securities held to maturity.
Securities in this category are carried at amortized cost adjusted
for accretion of discounts and amortization of premiums using the
level yield method over the estimated life of the securities. If a
security has a decline in fair value below its amortized cost that
is other than temporary, then the security will be written down to
its new cost basis by recording a loss in the consolidated
statements of operations. Realized gains and losses on investment
securities are computed using the specific identification method.
(e) Loans
Loans receivable that the Company has the intent and ability to
hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balance reduced by
any charge-offs or specific valuation accounts, net of any deferred
fees on originated loans.
Loan origination fees are capitalized and recognized in income over
the contractual life of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience.
Commitment fees and costs relating to the commitments are
recognized over the commitment period on a straight-line basis. If
the commitment is exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is
recognized over the life of the loan as an adjustment of yield.
Loans are placed on nonaccrual status when the loan becomes 90 days
past due as to interest or principal, unless the loan is both well
secured and in the process of collection, or when the full timely
collection of interest or principal becomes uncertain. When a loan
is placed on nonaccrual status, the accrued and unpaid interest
receivable is written off and the loan is accounted for on the cash
or cost recovery method thereafter until qualifying for return to
accrual status.
(Continued)
41
<PAGE>
-3-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(f) Allowance for Loan Losses
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against the
allowance when management believes that the collectibility of the
principal is unlikely. The allowance is an estimated amount that
management believes will be adequate to absorb losses inherent in
the loan portfolio and commitments to extend credit, based on
evaluations of its collectibility. The evaluations take into
consideration such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, specific problem loans
and commitments, and current and anticipated economic conditions
that may affect the borrowers' ability to pay. 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.
The Company records impairment in the value of its loans as an
addition to the allowance for loan losses. Any changes in the value
of impaired loans due to the passage of time or revisions in
estimates are reported as adjustments to provision expense in the
same manner in which impairment initially was recognized. The
Company, considering current information and events regarding the
borrower's ability to repay their obligations, considers a loan to
be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the
loan agreement. The Company evaluates all loans on a loan-by-loan
basis. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate,
the secondary market value of the loan, or the fair value of the
collateral for collateral dependent loans. Impaired loans are
written down to the extent that principal is judged to be
uncollectible and, in the case of impaired collateral dependent
loans where repayment is expected to be provided solely by the
underlying collateral and there is no other available and reliable
sources of repayment, are written down to the lower of cost or
collateral value. Impairment losses are included in the allowance
for loan losses through a charge to the provisions for loan losses.
Cash receipts on impaired loans are applied to reduce the principal
amount of such loans until the principal has been recovered and are
recognized as interest income thereafter. As a general rule,
impaired loans are also on non-accrual status.
(Continued)
42
<PAGE>
-4-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Regulatory examiners may require the Company to recognize additions
to the allowance based upon their judgments about the information
available to them at the time of their examination.
(g) Other Real Estate Owned
Real estate acquired in the settlement of loans is initially
recorded at the lower of cost (principal balance of the former loan
plus costs of obtaining title and possession) and carried at fair
value less costs to dispose. Costs relating to development and
improvement of the property are capitalized, whereas those relating
to holding the property are charged to operations.
(h) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation which is computed principally on the straight-line
method over the estimated useful lives (3-40 years) of the assets.
Leasehold improvements are amortized on the straight-line method
over the shorter of the estimated useful lives (10-20 years) of the
improvements or the terms of the related lease.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that included the enactment date. Deferred tax
assets are recognized subject to management's judgment that
realization is more likely than not.
(Continued)
43
<PAGE>
-5-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(j) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. These estimates include the allowances for loan loss, other
real estate owned and the valuation for the deferred tax asset.
Actual results could differ from these estimates.
(2) Restrictions on Cash
The Company is required to maintain reserve balances in accordance with
Federal Reserve Bank requirements. At December 31, 1996 and 1995, these
reserve balances were $483,000 and $214,049, respectively.
(3) Investment Securities Held to Maturity and Investment Securities
Available for Sale
The amortized cost and estimated market values of investment securities
held to maturity and available for sale at December 31, 1996 and 1995
are as follows:
Investment securities held to maturity:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996:
Municipals $ 190,000 1,310 - 191,310
======= ===== ========= =======
1995:
U.S. Treasury securities 2,515,957 7,953 - 2,523,910
Municipals 190,000 1,040 - 191,040
------- ----- --------- -------
Total $2,705,957 8,993 - 2,714,950
========= ===== ========= =========
</TABLE>
(Continued)
44
<PAGE>
-6-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Investment securities available for sale:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996:
U.S. Treasury securities $15,899,684 80,830 16,119 15,964,395
========== ====== ====== ==========
1995:
U.S. Treasury securities $11,959,992 176,426 - 12,136,418
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated market value of investment securities
at December 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost market value
---- ------------
<S> <C> <C>
Investment securities held to maturity:
Due after one year through five years $ 190,000 191,310
======= =======
Investment securities available for sale:
Due within one year 6,990,468 7,035,640
Due after one year through five years 8,909,216 8,928,755
--------- ---------
$ 15,899,684 15,964,395
========== ==========
</TABLE>
At December 31, 1996 and 1995 investment securities with a book value
of $498,361 and $499,076 were pledged to collateralize the treasury tax and loan
account, respectively.
(Continued)
45
<PAGE>
-7-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Loans
Major categories of loans included in the loan portfolio at December 31,
1996 and 1995 are:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial - secured $ 10,461,047 7,695,479
Commercial - unsecured 3,988,842 2,681,485
Real estate, primarily commercial 69,924,987 55,345,499
Other (installments and overdrafts) 3,393,462 2,009,057
--------- ---------
87,768,338 67,731,520
Less:
Allowance for loan losses (887,803) (856,803)
Deferred loan origination fees, net (347,547) (225,932)
-------- --------
Net loans $ 86,532,988 66,648,785
========== ==========
</TABLE>
Certain principal shareholders, directors and employees and their related
interest were indebted to the Bank as summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 11,520,498 12,094,216
Additional new loans 5,739,232 2,733,732
Repayments on outstanding loans (4,541,873) (3,307,450)
---------- ----------
Balance, end of year $ 12,717,857 11,520,498
========== ==========
</TABLE>
All such loans were made in the ordinary course of business. At December
31, 1996 and 1995, principal shareholders, directors and employees of the
Company and their related interests had $3,564,217 and $3,541,783,
respectively, available in lines of credit and commitments.
(Continued)
46
<PAGE>
-8-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The recorded investment in loans for which an impairment has been recognized and
the related allowance for loan losses at December 31, 1996 and 1995 were
$1,159,868 and $24,930 and $2,182,812 and $220,489, respectively. Those loans
with a possible loss have a related reserve established. All other impaired
loans are accounted for in the general allowance for loan loss. The average
recorded investment in impaired loans during 1996 and 1995 was $1,671,340 and
$1,216,334, respectively. Interest income recognized in impaired loans during
1996 and 1995 was $-0- and $36,793, respectively.
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 856,803 657,569 710,455
Provisions charged to operations 90,000 175,000 50,000
Charge offs:
Real estate loans - - (118,003)
Installment loans (2,129) (1,450) (1,299)
Commercial loans (101,387) (61,449) (20,365)
Recoveries:
Real estate loans - - 7,121
Installment loans - 1,073 13,611
Commercial loans 44,516 86,060 16,049
------ ------ ------
Balance, end of year $ 887,803 856,803 657,569
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, nonaccrual loans were $1,159,868 and $2,182,812,
respectively. If interest due on all nonaccrual loans had been accrued at the
original contract rates, estimated interest income would have been increased by
$28,536 in 1996, $203,476 in 1995 and $114,017 in 1994.
(Continued)
47
<PAGE>
-9-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Premises and Equipment
A summary of premises and equipment at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and land improvements $ 1,499,971 1,497,206
Furniture, fixtures and equipment 1,552,975 1,357,067
Bank buildings 1,137,669 1,137,669
Leasehold improvements 219,284 181,461
------- -------
4,409,899 4,173,403
Less accumulated depreciation (908,024) (686,915)
--------- ---------
$ 3,501,875 3,486,488
========= =========
</TABLE>
(6) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for financial instruments. The following methods and
assumptions were used by the Company in estimating fair values of financial
instruments as disclosed herein:
Cash and Cash Equivalents - The carrying amount of cash and cash
equivalents represents fair value.
Investments - The Company's investment securities available for sale and
held to maturity represent investments in U.S. Government obligations,
U.S. Government Agency securities, and state and political subdivisions.
The Company's equity investments at year end represents stock investments
in the Federal Home Loan Bank and the Federal Reserve Bank. The stock is
not publicly traded and the carrying amount was used to estimate the fair
value. The fair value of the U.S. Government obligations and U.S.
Government Agency obligations and state and local political subdivision
portfolios was estimated based on quoted market prices.
(Continued)
48
<PAGE>
-10-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Loans - For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for commercial real estate, commercial and consumer
loans other than variable rate loans are estimated using discounted cash
flow analysis, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
impaired loans are estimated using discounted cash flow analysis or
underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at December 31, 1996
(that is their carrying amounts). The carrying amounts of variable rate,
fixed term money market accounts and certificates of deposit (CDs)
approximate their fair value at the reporting date. Fair values for fixed
rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances and Other Borrowings - Fair values of
Federal Home Loan Bank advances and other borrowings are estimated using
discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
amount of the repurchase agreements approximate their fair value.
Commitments - Fair values for off-balance-sheet lending commitments are
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing.
(Continued)
49
<PAGE>
-11-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996.
<TABLE>
<CAPTION>
Carrying amount Fair value
--------------- ----------
<S> <C> <C>
Financial assets:
Cash and due from banks and federal
funds sold $ 4,889,652 4,889,652
Investment securities available for sale 15,964,395 15,964,395
Investment securities held to maturity 190,000 191,310
Loans (carrying amount less allowance
for loan losses of $877,803) 86,532,988 86,502,039
Financial liabilities:
Deposits:
Without stated maturities $ 53,908,902 53,908,902
With stated maturities 47,135,368 46,997,363
Federal Home Loan Bank advances 1,222,647 1,222,647
Other borrowings 2,986,288 2,983,942
Commitments:
Letter of credit $ - 991,880
Loan commitments - 46,992,675
</TABLE>
The carrying amounts shown in the table are included in the consolidated balance
sheet under the indicated captions.
(Continued)
50
<PAGE>
-12-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Deposits
A detail of deposits at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Noninterest-bearing demand deposits $ 15,988,515 13,285,944
Interest-bearing:
NOW accounts 8,376,751 6,803,359
Money market 11,080,125 13,295,200
Savings accounts 18,463,511 12,617,441
Time accounts less than $100,000 18,588,378 19,458,793
Time accounts greater than $100,000 28,546,990 23,882,042
---------- ----------
$ 101,044,270 89,342,779
=========== ==========
</TABLE>
Included in interest-bearing deposits are certificates of deposit
issued in amounts of $100,000 or more which have remaining maturities at
December 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Three months or less $ 19,976,908 13,117,216
Three through twelve months 7,044,986 9,948,335
Over one year 1,425,096 816,491
--------- -------
$ 28,446,990 23,882,042
========== ==========
</TABLE>
(Continued)
51
<PAGE>
-13-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of interest expense on deposits and other borrowed money is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Time deposits of $100,000 or greater $ 1,486,139 1,198,004 643,420
Time deposits less than $100,000 1,175,742 820,436 245,535
Interest-bearing demand deposits 658,742 662,806 622,872
Savings deposits 631,850 579,570 783,095
Interest on borrowings 203,046 391,064 332,317
------- ------- -------
Interest on deposits and other borrowed
money $ 4,155,519 3,651,880 2,627,239
========= ========= =========
</TABLE>
The Company had deposits from principal shareholders, directors and
employees and their related interests of approximately $18,713,024 and
$15,717,564 at December 31, 1996 and 1995, respectively. There were no
brokered deposits outstanding at year end.
(8) Federal Home Loan Bank Advances
Federal Home Loan Bank advances at December 31, 1996 and 1995, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Advances from the Federal Home Loan Bank (interest rates ranging from
5.8% to 8.18% and 4.62% to
7.51% at December 31, 1996 and 1995, respectively) $ 1,222,647 1,266,095
========= =========
</TABLE>
(Continued)
52
<PAGE>
-14-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by first mortgage loans in the amount of
$2,687,557 and $3,889,126, respectively. Advances at December 31, 1996
have calendar-year maturity dates as follows:
<TABLE>
<S> <C>
1997 $ 45,100
1998 51,000
1999 54,950
2000 59,850
2001 1,011,747
---------
$ 1,222,647
=========
</TABLE>
(9) Other Borrowed Funds
Other borrowed funds consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Short-term borrowings:
Repurchase agreements secured by U.S.
Treasury securities with market values
of $2,759,428 and $1,046,842 as of
December 31, 1996 and 1995,
respectively, repurchase dates in
January 1997 and 1996 $ 2,661,774 4.43% $ 1,046,513 5.04%
--------- ---- --------- ----
Total short-term borrowings 2,661,774 4.43% 1,046,513 5.04%
--------- ---- --------- ----
</TABLE>
(Continued)
53
<PAGE>
-15-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1996 1995
--------------------------- --------------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Long-term borrowings:
Mortgage note payable with monthly
installments of $2,000, including
interest at 8%, maturing October
2002 and secured by real estate with
a book value of $400,000 111,209 8.00% 125,525 8.00%
Mortgage note payable with monthly
installments of $650, including
interest at 8%, maturing November 1999 and
secured by real estate with a book value
of $65,000 58,871 8.00% 61,832 8.00%
Mortgage note payable with monthly
installments of $1,607, including
interest at 8%, maturing October 2009
and secured by real estate with a book
value of $375,000 154,434 8.00% 161,074 8.00%
------- ----- ------- -----
Total long-term borrowings 324,514 8.00% 348,431 8.00%
------- ----- ------- -----
Total other borrowed money $2,986,288 4.82% $1,394,944 5.78%
========= ===== ========= =====
</TABLE>
Aggregate maturities on the mortgage notes payable at December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 $ 25,949
1998 28,121
1999 78,907
2000 28,940
2001 31,380
Thereafter 131,216
-------
$ 324,513
=======
</TABLE>
(Continued)
54
<PAGE>
-16-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank enters into sales of securities under agreements to
repurchase. These fixed-coupon agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheet. The dollar amount of
securities underlying the agreements remain in the asset accounts.
The repurchase agreements were to repurchase the identical securities
as those which were sold. Retail repurchase agreements averaged
$1,641,167 and $1,777,941 during the years ended December 31, 1996 and
1995, respectively. The maximum amount outstanding at any month-end for
the corresponding periods was $4,128,051 and $2,936,245, respectively.
Total interest expense paid on retail repurchase agreements for the
years ending December 31, 1996, 1995 and 1994 was $78,318, $95,085 and
$51,866, respectively.
The Bank has available repurchase lines equal to the amount of all
unpledged investment securities.
(10) Income Taxes
The provision for income taxes for 1996, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal $ 328,156 (25,825) 302,331
State 36,800 (2,757) 34,043
------- ------- ------
$ 364,956 (28,582) 336,374
======= ======= =======
Year ended December 31, 1995:
Federal 336,000 (44,000) 292,000
State 41,760 (7,760) 34,000
------- ------- ------
$ 377,760 (51,760) 326,000
======= ======= =======
Year ended December 31, 1994:
Federal 380,000 7,300 387,300
State 55,000 1,700 56,700
------- ----- ------
$ 435,000 9,000 444,000
======= ===== =======
</TABLE>
(Continued)
55
<PAGE>
-17-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loan receivable, due to allowance for loan losses $ 289,693 259,108
Executive supplemental income 45,642 24,900
Other real estate owned allowance 22,778 -
Other 9,455 21,063
----- ------
Total deferred tax assets 367,568 305,071
------- -------
Deferred tax liabilities:
Unrealized gain on investment securities available
for sale 24,350 59,985
Premises and equipment, due to differences in
depreciation methods and useful lives 56,099 37,671
Investments, due to accretion 35,942 20,455
FHLB stock dividend 8,960 8,960
----- -----
Total deferred tax liabilities 125,351 127,071
------- -------
Net deferred tax asset $ 242,217 178,000
======= =======
</TABLE>
(Continued)
56
<PAGE>
-18-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company has recorded a deferred tax asset of $242,217 and $178,000
as of December 31, 1996 and 1995, respectively. The amount of the
deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the
carryforward periods are reduced. No valuation allowance is required at
December 31, 1996 and 1995.
A reconciliation between the actual tax expense and the "expected" tax
expense (computed by applying the U.S. federal corporate tax rate of
34% to earnings before income taxes) is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
"Expected" tax expense $ 334,801 271,648 397,191
State income tax expense, net of federal
benefit 22,468 22,440 37,422
Life insurance premiums on officers (21,243) 10,012 -
Meals and entertainment and dues 7,620 13,000 9,101
Tax exempt interest (2,616) (2,100) (2,616)
Other (4,656) 11,000 2,902
------- ------ -----
Actual tax expense $ 336,374 326,000 444,000
======= ======= =======
</TABLE>
(11) Shareholders' Equity
At fiscal years ended December 31, 1996 and 1995, the Bank's balance in
undivided profits was $3,269,630 and $2,621,294, respectively. The
restrictions on dividend payments are imposed by the Bank's primary
regulator, The Office of the Comptroller of the Currency (OCC).
(Continued)
57
<PAGE>
-19-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(12) Rent
The following is a schedule of future minimum annual rentals under the
noncancellable operating leases:
<TABLE>
<CAPTION>
Year ended
<S> <C>
1997 $ 442,182
1998 131,885
-------
$ 574,067
=======
</TABLE>
Rent expense for the years ending December 31, 1996, 1995 and 1994 was
$373,701, $285,144 and $266,956, respectively.
The landlord of the Company's facilities is a partnership which is
owned in part by certain of the Company's directors. This lease expires
on January 1, 1998.
(13) Employee Savings Plan
The Company sponsors an employee savings plan which qualifies as a
401(k) plan under the Internal Revenue Code. Under the plan, employees
may contribute up to 20% of their pre-tax compensation. The Company
makes contributions on a discretionary basis as approved by the Board
of Directors. Participants vest immediately in their own contributions
and after one year of service in contributions made by the Company.
Employee savings plan expense for the years ending December 31, 1996,
1995 and 1994 was $31,000, $30,000 and $30,000, respectively.
(Continued)
58
<PAGE>
-20-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(14) Regulatory Capital
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets. Management believes, as of
December 31, 1996, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company as adequately
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Company must maintain total
risk-based, Tier I risk-based, Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification
that management believes have changed in the institution's category.
(Continued)
59
<PAGE>
-21-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios are also presented in the
table. If the holding company were included, amounts would be in excess
of this amount.
<TABLE>
<CAPTION>
To be well capitalized
under prompt
For capital corrective action
Actual adequacy purposes provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk
weighted assets) $ 8,888,306 9.67% $ 7,356,552 > 8.0% $ 9,195,690 > 10.0%
- -
Tier I capital (to risk
weighted assets) 8,008,503 8.71% 3,678,276 > 4.0% 5,517,414 > 6.0%
- -
Tier I capital (to average
assets) 8,008,503 7.00% 4,579,046 > 4.0% 5,723,807 > 5.0%
- -
As of December 31, 1995:
Total capital (to risk
weighted assets) 8,245,031 11.37% 5,803,188 > 8.0% 7,253,985 > 10.0%
- -
Tier I capital (to risk
weighted assets) 7,396,229 10.20% 2,901,594 > 4.0% 4,352,391 > 6.0%
- -
Tier I capital (to average
assets) 7,396,229 7.30% 4,052,359 > 4.0% 5,065,448 > 5.0%
- -
</TABLE>
(Continued)
60
<PAGE>
-22-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(15) Stock Option Plans
Pursuant to the Company's stock option plans, each of the directors have
been granted options to purchase 10,000 shares at $10 per share not to
exceed a combined total of 130,000 shares. This exercise price was
established at $10 to reflect the market price for the Bank's shares at
the time the stock option plan was initially adopted in 1986. The options
are exercisable from June 14, 1986 through December 31, 1997.
Furthermore, pursuant to the Plan, there has been granted to the
employees of the Company an incentive stock option to purchase 75,000
shares of common stock at $10 per share of which the President of the
Company has the option to purchase 25,000 shares. The employee shares
were exercisable from April 24, 1988 to April 24, 1996. At December 31,
1996 and 1995, the number of options vested and exercisable was 122,000
and 194,000, respectively. As of April 24, 1996, 72,219 shares were
exercised at $10 per share.
At December 31, 1996, the Company has one stock-based compensation plan,
which is described below. The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock-based compensation plan been
determined consistent with FASB Statement No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Net income:
<S> <C> <C> <C>
As reported $ 648,336 472,965 724,209
Pro forma 638,547 462,277 705,079
Earnings per common and common
equivalent share:
As reported 1.13 .84 1.26
Pro forma 1.11 .83 1.23
</TABLE>
(Continued)
61
<PAGE>
-23-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The fair value of each option granted is estimated on the date of grant using an
acceptable option-pricing model with the following weighted-average assumptions
used for grants in 1996, 1995 and 1994, respectively; dividend yield of -0-
percent for all years; expected volatility of -0- percent for all years; risk-
free interest rates of 5.8%, 5.22% and 7.76% and expected lives of .81 years,
1.78 and 2.77 years for the plan options.
A summary of the status of the Bank's stock option plan as of December 31, 1996,
1995, and 1994 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
Fixed options 1996 1995 1994
------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 194,000 190,750 174,250
Granted 3,000 3,250 16,500
Exercised 71,919 - -
Forfeited 3,081 - -
----- ---- ----
Outstanding at end of year 122,000 194,000 190,750
------- ------- -------
Options exercisable at year-end 122,000 194,000 190,750
======= ======= =======
Weighted-average fair value of options granted
during the year per share $ 4.94 $ 5.57 $ 1.87
==== ==== ====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
average
Number Number exercise
outstanding Weighted Weighted exercisable price
Range of at remaining average at at
exercise December 31, contractual exercise December 31, December 31,
prices 1996 life price 1996 1996
-------- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
$ 10.00 122,000 1 year $ 10.00 122,000 $ 10.00
</TABLE>
(Continued)
62
<PAGE>
-24-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(16) Parent Company Only Financial Statements
Condensed financial statements of Commerce National Corporation (parent
company only) follow:
Condensed Balance Sheets
------------------------
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets: 1996 1995
------- ---- ----
<S> <C> <C>
Cash and interest bearing deposits $ 51,635 57,672
Investment in wholly-owned bank subsidiary 8,048,864 7,497,902
Loans, net 1,090,594 342,984
Other assets 37,327 35,416
------ ------
$ 9,228,420 7,933,974
========= =========
<CAPTION>
Shareholders' equity:
--------------------
<S> <C> <C>
Common stock 61,759 54,537
Additional paid-in capital 6,065,310 5,350,342
Retained earnings 3,269,630 2,621,294
Treasury stock, at cost (21,800 shares) (208,640) (208,640)
Unrealized gain (loss) on Bank's investment securities
available for sale, net 40,361 116,441
------ -------
$ 9,228,420 7,933,974
========= =========
</TABLE>
(Continued)
63
<PAGE>
-25-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
No dividends were paid by the Bank subsidiary to Commerce National Corporation
for 1996, 1995 or 1994. The Bank is in compliance with banking regulations
regarding the payment of dividends.
Condensed Statements of Operations
----------------------------------
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Revenue:
<S> <C> <C> <C>
Interest income $ 70,299 39,582 33,897
Management fee - 6,000 18,420
------ ----- ------
Total revenue 70,299 45,582 52,317
------ ------ ------
Expenses:
Salaries and benefits - 11,924 33,239
Legal and professional fees 6,659 3,461 13,884
Other 42,347 19,506 5,651
------ ------ -----
Total expenses 49,006 34,891 52,774
------ ------ ------
Income (loss) before equity in net
earnings of subsidiary 21,293 10,691 (457)
Equity in net earnings of subsidiary 627,043 462,274 724,666
------- ------- -------
Net income $ 648,336 472,965 724,209
======= ======= =======
</TABLE>
(Continued)
64
<PAGE>
-26-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
----------------------------------
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net income $ 648,336 472,965 724,209
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 3,955 3,953 3,952
Equity in subsidiary (627,042) (462,274) (724,666)
Decrease (increase) in other assets (5,866) 2,062 (1,127)
------ ----- ------
Net cash provided by operating activities 19,383 16,706 2,368
------ ------ -----
Cash flows provided by (used in) investing activities:
Net repayments of loans (net loans to customers) (747,610) (4,283) 33,274
-------- ------ ------
Cash flows used in financing activities:
Employee stock options exercised 722,190 - -
------- ----- -----
Net increase (decrease) in cash and cash
equivalents (6,037) 12,423 35,642
Cash and cash equivalents at beginning of year 57,672 45,249 9,607
------ ------ -----
Cash and cash equivalents at end of year $ 51,635 57,672 45,249
====== ====== ======
Supplemental disclosure of noncash transactions:
Market value adjustment - Bank investment
securities available for sale:
Market value adjustment - investments $ 64,711 176,426 (187,832)
Deferred income tax liability (asset) 24,350 59,985 (63,863)
------ ------ --------
Unrealized gain (loss) on investment
securities available for sale, net $ 40,361 116,441 (123,969)
====== ======= ========
</TABLE>
(Continued)
65
<PAGE>
-27-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) Branch Openings
During 1995, the Bank opened two branches which are located on Aloma Avenue
and Temple Avenue in Winter Park, Florida. The Aloma Avenue branch began
operations in May, while the Temple Avenue branch opened in October. In
January 1996, the Bank opened a branch on New England Avenue also in Winter
Park, Florida.
(18) Executive Supplemental Income Plan
The Bank implemented an executive supplemental income plan (the "Plan")
during 1995 to provide supplemental income to four of its current
executives after their retirement. The funding of the Plan involved the
purchase of four cash surrender value life insurance policies which totaled
$1,195,000. The Plan is structured such that each participant is scheduled
to receive specified levels of income after the retirement age of 65 for
fifteen years. In the event a participant leaves the employment of the Bank
before retirement, only the benefits vested through that date would be paid
to the employee. The Plan also provides for 100% vesting in the event of a
change in Bank ownership.
The Bank has approximately $99,000 and $51,000 accrued at December 31, 1996
and 1995, respectively, and is included in accounts payable and other
liabilities in the accompanying consolidated balance sheets. The Bank
incurred charges of $69,041 in connection with the Plan during 1995.
(19) Credit Commitments
The Bank has outstanding at any time a significant number of commitments to
extend credit. These arrangements are subject to strict credit control
assessments and each customer's credit worthiness is evaluated on a
case-by-case basis. A summary of commitments to extend credit and standby
letters of credit written at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Standby letters of credit $ 991,880 832,133
Total lines of credit 46,992,675 41,949,096
Unfunded firm loan commitments 11,904,430 15,189,767
</TABLE>
(Continued)
66
<PAGE>
-28-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Because many commitments expire without being funded in whole or part, the
contract amounts are not estimates of future cash flows.
The majority of loan commitments have terms up to one year, and have
variable interest rates which range from 9% to 9.5%.
Loan commitments written have off-balance-sheet credit risk because only
original fees are recognized in the statement of financial position until
the commitments are fulfilled or expire. Credit risk represents the
accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted. The credit risk
amounts are equal to the contractual amounts, assuming that the amounts are
fully advanced and that collateral or other security is of no value.
The Bank's policy is to require customers to provide collateral prior to
the disbursement of approved loans. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable, inventory, real estate and income
producing commercial properties.
Standby letters of credit are contractual commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
(20) Concentration of Credit Risk
The Bank originates real estate, consumer and commercial loans primarily in
its Central Florida market area. Although the Bank has a diversified loan
portfolio, a substantial portion of its borrowers' ability to honor their
contracts is dependent upon the economy of Central Florida. The Bank does
not have a significant exposure to any individual customer or counterparty.
(Continued)
67
<PAGE>
-29-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(21) Earnings Per Common and Common Equivalent Share
Earnings per share is calculated based on the weighted average shares
outstanding during the year 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
December 31, 1996, 1995 and 1994 of 2,843, 89,287 and 85,037, respectively.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
68
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
On April 15, 1996, the number of directors was increased to fifteen
(15) members, and the following individuals were elected to the Board of
Directors of the Company and the Bank to fill the resulting vacancies:
<TABLE>
<CAPTION>
==================================================================
Name of Director Class Term of Office
------------------------------------------------------------------
<S> <C> <C>
Stephen C. Cahill A 1996-1998
------------------------------------------------------------------
Ernst R. Janvrin C 1996-1997
------------------------------------------------------------------
Tony Lombardi, Jr. A 1996-1998
------------------------------------------------------------------
Jane H. Louttit C 1996-1997
------------------------------------------------------------------
Stephen G. Miller B 1996-1999
==================================================================
</TABLE>
The name, age, affiliation with the Company and date such affiliation
commenced of each executive officer and director of the Company is presented in
the following chart. Each director listed below was elected by the Company's
shareholders and will hold office for the term designated and until his
successor is duly elected and qualified. Additional information concerning
business experience of each individual is set forth in the narrative section
following the chart.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
69
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS
REMAINING IN APPROXIMATE
TERM HELD OFFICE
NAME AGE POSITION ELECTED (1) SINCE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald J. Barker 83 Director/ 0(1) February, 1985
Chairman
- ---------------------------------------------------------------------------------------------------
Russell Barkett 57 Director 2 December, 1992
- ---------------------------------------------------------------------------------------------------
C. Durham Barnes, M.D. 55 Director 1 February, 1985
- ---------------------------------------------------------------------------------------------------
Robert E. Battaglia 50 Director 0(1) February, 1985
- ---------------------------------------------------------------------------------------------------
Robert B. Boswell, M.D. 51 Director 2 February, 1985
- ---------------------------------------------------------------------------------------------------
Stephen C. Cahill 44 Director 1 April, 1996
- ---------------------------------------------------------------------------------------------------
Kenneth M. Clayton 48 Director 1 February, 1985
- ---------------------------------------------------------------------------------------------------
Guy D. Colado 52 President & 1 February, 1985
Director
- ---------------------------------------------------------------------------------------------------
J. Blair Culpepper 59 Executive Vice N/A May, 1995
President
- ---------------------------------------------------------------------------------------------------
Ernst R. Janvrin 51 Director 0(1) April, 1996
- ---------------------------------------------------------------------------------------------------
Tony Lombardi, Jr. 49 Director 1 April, 1996
- ---------------------------------------------------------------------------------------------------
Jane H. Louttit 51 Director 0(1) April, 1996
- ---------------------------------------------------------------------------------------------------
Stephen G. Miller 41 Director 2 April, 1996
- ---------------------------------------------------------------------------------------------------
Willie C. Moss 62 Director 2 December, 1992
- ---------------------------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D. 53 Director 2 February, 1985
- ---------------------------------------------------------------------------------------------------
Alan M. Scarboro 47 Vice President N/A March, 1989
Sec./Treas.
- ---------------------------------------------------------------------------------------------------
W. Charles Shuffield 52 Director 0(1) February, 1985
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Has been nominated for election for a three year term which nomination
will be voted on at the Annual Shareholders' Meeting scheduled for
April 21, 1997.
70
<PAGE>
Each individual designated above, other than Mr. Barker, also is a member of the
board of directors for the Bank. The members of the Compensation Committee of
the Company for 1996 were W. Charles Shuffield, Ernst R. Janvrin, Willie C.
Moss, Kenneth M. Clayton, Guy D. Colado, Marsha J. Wheeler, Russell Barkett and
Stephen G. Miller. Mr. Colado, a member of the Committee, is the President and
CEO of the Company and the Bank and is excused from discussions concerning his
compensation. The Bank's officers are appointed by the board of directors of the
Bank and hold office at the will of such board. The Bank's executive officers
presently are:
NAME POSITION WITH BANK
---- ------------------
Guy D. Colado President and CEO
Marsha J. Wheeler Sr. Vice President/Cashier
Jerry H. Johns, III Sr. Vice President/Lending
John R. Casebier Vice President
DONALD J. BARKER has been a resident of Orlando, Florida since 1941.
Mr. Barker is semi-retired. He serves as Chairman of the Board of Directors.
From 1972 through 1982, Mr. Barker was Senior-Vice President/Manager, Eastern
Division of Bowest Corporation, a mortgage servicing company. From June 1, 1983
to present, Mr. Barker has served on the board of the Florida Hospital
Foundation. Mr. Barker also serves on the Board of Directors of Atlantic
Portfolio Analytics and Management, Inc., a company subject to the reporting
requirements of the Securities Exchange Act of 1934. From January 1983 until
July 1988, Mr. Barker served as Vice President of Development of Southeast
Business Corporation, a commercial printing corporation.
RUSSELL BARKETT is a native of Florida, born in Miami, and a resident
of Maitland, Florida. Mr. Barkett is a graduate of the University of Florida and
the University of West Florida. He is a Certified Public Accountant and a member
of the American and Florida Institutes of Certified Public Accountants and the
American Management Association. Mr. Barkett is past Treasurer of the Downtown
Kiwanis Club and of the Florida Citrus Sports Association. Mr. Barkett is
currently Vice President, Chief Financial Officer and Secretary/Treasurer of all
Davgar Restaurants, Inc. entities, and he has been in this position since 1976.
C. DURHAM BARNES, M.D. is a native of Florida and a resident of
Winter Park, Florida. Dr. Barnes has been a practicing physician and President
of Central Florida Retina Consultants since 1979 and is a member of the Board of
Directors of the Orange County Medical Society. In addition, Dr. Barnes has been
actively involved in community service and has served on the Board of Directors
of the Central Florida Chapter of the American Diabetic Association and Humana
Hospital Lucerne Board of Trustees.
71
<PAGE>
ROBERT E. BATTAGLIA is a native of Florida and a resident of Winter
Park, Florida. Since October 1976, Mr. Battaglia has been President of Battaglia
Fruit Co., Inc., a citrus grower, harvester, and land owner in Central Florida,
and is currently a director of Florida Citrus Mutual. In addition to operating
the citrus activities, Mr. Battaglia is a member at the First Presbyterian
Church of Orlando, a Director of The Orlando Margarita Society (charitable
non-profit organization), Vice Chairman of the Central Region Council to Prevent
Blindness Florida; and a member of the Citrus Advisory Committee of Florida
Citrus Sports Association..
ROBERT B. BOSWELL, M.D. is a resident of Winter Park, Florida.
Since 1979, Dr. Boswell has been engaged in the private practice of cardiology
in Orlando, Florida. In addition, since 1979, Dr. Boswell has been a Fellow of
the American College of Cardiology and a member of the American Heart
Association. He is an invasive cardiologist with interest in pacemakers and
nuclear cardiology.
STEPHEN C. CAHILL is a resident of Orlando, Florida. From 1977 to
the present, Mr. Cahill has been President of Cahill Construction Company, a
well-known builder of luxury custom homes. Also, Mr. Cahill has been President
of Southpoint Homes, Inc. since 1991. Mr. Cahill is the past president of Master
Custom Builders Council. Also, he is a member of the Homebuilders Association of
Central Florida. Mr. Cahill has been on the Board of Directors of House of Hope
since 1985. He has also been a past board member of the Florida Family Council
of Tampa.
KENNETH M. CLAYTON is a native of Florida and a resident of Orlando,
Florida. Mr. Clayton has actively practiced law in Orlando, Florida, since May
of 1974 in a variety of civil law areas. Since October 1987, Mr. Clayton has
been a partner in the law firm of Clayton & McCulloh. Prior to forming Clayton &
McCulloh, Mr. Clayton was a principal in the law firm of Zimmerman, Shuffield,
Kiser & Sutcliffe, P.A. Prior to that, Mr. Clayton was a sole practitioner
(October 1981 - July 1985) and prior to that a partner in Clayton & Landis
(October 1980 - September 1981). In addition, Mr. Clayton is a past president
and founder of the Mid-Florida Chapter of Community Associations Institute. Mr.
Clayton is a member of the Orlando Area Chamber of Commerce, American Bar
Association, The Florida Bar, the Orange County Bar Association and has served
on various committees for such organizations.
GUY D. COLADO is a native Floridian and a lifelong resident of Winter
Park, Florida. From June of 1984 to the present, Mr. Colado has been primarily
engaged in the organization and operation of the Company and the Bank, which
entailed the preparation and filing of the necessary applications with
regulatory authorities, activities concerning the site location and day to day
operations. Since the Bank's opening in August, 1986, he has served as President
and Chief Executive Officer of the Company and the Bank. From March of 1982 to
May of 1984, Mr. Colado served as Vice President of the Florida National Bank of
Orlando. From July of 1980 to February of 1982, Mr. Colado was President of
Tropic Bank of Seminole and was involved in all aspects of a small community
bank which had two branches. From September of 1977 to July of 1980, Mr. Colado
was Vice President and Manager of the Winter Park branch of Sun Bank, National
Association, Orlando, and served from May of 1971 to July of 1980 as assistant
manager of the real estate loan department for Sun Bank as well
72
<PAGE>
as in various other capacities. Mr. Colado is a participant in several
professional community and charitable organizations, groups and committees. He
is also active in the U.S. Army Reserves.
J. BLAIR CULPEPPER is a native Floridian and a resident of Orlando,
Florida. Since May 1995, Mr. Culpepper has served as Executive Vice President of
the Company. On January 2, 1996, Mr. Culpepper opened the New England Avenue
Branch for the Bank. A graduate of the University of Florida, Mr. Culpepper was
employed as an executive officer of other financial institutions in Central
Florida and the Tampa Bay area. He is past chairman of the Greater Orlando
Chamber of Commerce and the Orlando Museum of Art.
ERNST R. JANVRIN has been a resident of Orlando, Florida since 1975.
Mr. Janvrin is the senior partner and partner-in-charge of Janvrin & Regan,
P.A., a local CPA firm created in 1984 in Winter Park, Florida, which
concentrates their practice in small business and individual accounting and tax
matters. Mr. Janvrin is past president of the Florida Institute of CPA's
(Central Florida Chapter), a member of the American Institute of CPA's and the
Florida Institute of CPA's. He is currently serving as chairman of the Special
Project Committee of the local chapter of the Florida Institute of CPA's.
TONY LOMBARDI, JR. is a native of Florida and a resident of
Windermere, Florida. From 1980 to 1996, Mr. Lombardi served as Vice President of
Lombardi's Seafood, Inc., a processor, importer, distributor and retainer of
seafood. In 1996, Mr. Lombardi was elected president of Lombardi's. Mr. Lombardi
has served on the Board of Directors of the Southeastern Fisheries Association
and also The National Fisheries Institute and is a member of the National Shrimp
Processors Association. Mr. Lombardi is a member of Holy Family Catholic Church
in Orlando, Florida.
JANE H. LOUTTIT has lived in the Orlando area since 1975. Mrs.
Louttit has worked for Maitland Family Practice since 1975 and currently serves
as Administrator. Mrs. Louttit has been active in the Junior League of Greater
Orlando, serving on the Board of Directors as Secretary and Treasurer. She is a
member of St. Richard's Episcopal Church and has served on the Vestry, as
Secretary of the Executive Committee, and from 1985 to 1996 as Directress of the
Altar Guild. From 1990 through 1996, Mrs. Louttit was a Trustee at Trinity
preparatory School, including two years on the Executive Committee as Secretary
of the Board. She has served on numerous other church, civic, and school
committees both as a member and as Chairperson.
STEPHEN G. MILLER is a native of Florida and a resident of Winter
Park, Florida. Since 1983, Mr. Miller has been the treasurer of Miller Hardware,
Inc., a well-known establishment in Winter Park, Florida. Before entering the
family business, Mr. Miller was a practicing CPA with KPMG Peat Marwick and
Coopers & Lybrand CPA's. From 1981 - 1984, Mr. Miller served as Corporate
Controller and Vice President of Finance of Applied Devices Corporation, a
publicly-held defense contractor. In addition, Mr. Miller has been actively
involved in community service and has served on the Winter Park Public Library
Board of Trustees, and the Winter Park Chamber of Commerce Board
73
<PAGE>
of Directors and Executive Committee. Mr. Miller is currently a member of the
Florida Institute of CPA's.
WILLIE C. MOSS has been a resident of Orlando, Florida since 1968.
Mr. Moss is currently and has been since 1968, President and owner of Data
Dimensions, Inc., a computer software company that supplies software to savings
and loan, savings banks and banks nationwide. Prior to 1968, Mr. Moss was a Vice
President at Florida National Bank in Jacksonville, Florida, with primary
responsibility for their data processing operations.
FREDERICK A. RAFFA, PhD is a resident of Maitland, Florida. From
1969 to the present, Dr. Raffa has been a professor of Economics at the
University of Central Florida. Dr. Raffa served as Chairman of the Department of
Economics from 1976 to 1980 and was the founding editor of the Business
--------
Barometer of Central Florida. Since 1971, Dr. Raffa has also been self-employed
- ----------------------------
as a consulting economist. From 1976 to 1989, Dr. Raffa served as the NCAA
representative and is currently an associate board member of the Florida Citrus
Sports Association.
ALAN M. SCARBORO is a native of Florida and a resident of Orlando,
Florida. Since March 1989, Mr. Scarboro has served as Vice President of the
Company and supervised the National Bank of Commerce Building, which is owned by
Gateway Plaza, Ltd. On March 15, 1993, Mr. Scarboro was elected
Secretary/Treasurer of the Company. Prior to 1989, Mr. Scarboro was employed in
the Central Florida area and Alabama by other financial institutions. During
this period, Mr. Scarboro also managed the operations of his family-owned
business in Orlando.
W. CHARLES SHUFFIELD is a resident of Orlando, Florida. Since
January, 1984, Mr. Shuffield has been a principal in the law firm of Zimmerman,
Shuffield, Kiser & Sutcliffe, P.A. Mr. Shuffield has been a practicing attorney
in Orlando, Florida, since 1969 when he became associated with the law firm of
Akerman, Senterfitt & Eidson and served as a partner in that law firm from 1972
through 1983. Mr. Shuffield is a member of The Florida Bar, the Orange County
Bar Association and Tennessee Bar Association and has been active on several
committees concerned with Corporation, Banking, Taxation and Real Property for
The Florida Bar and the Orange County Bar Association. Mr. Shuffield is involved
in various community affairs and currently serves or has served in the following
positions: Member of the Board of Directors of Orlando Regional Healthcare
Foundation, Inc. (1982 to 1993); Member of Rotary Club of Orlando (1981 to
present), including serving on Board of Directors; Member of the Committee of
100; Member of the Junior Achievement Endowment Committee; Heart of the City
Foundation Board of Directors (1986-1990); Member of Country Club of Orlando;
Chairman and member of various committees of the Greater Orlando Chamber of
Commerce (1978 to present).
74
<PAGE>
Item 11. Executive Compensation/Board Compensation
-----------------------------------------
The executive officers for the Company and the Bank received
salaries, in aggregate, equal to approximately $320,000, received the benefit of
automobile allowances for an aggregate $18,000 and the payment of various club
fees and insurance in the amount of approximately $7,274. There were no other
executive officers other than the President with salaries in excess of $100,000
per year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMP.
- ----------------------------------------------------------------------------------------------------------------------------------
Awards PayOuts All
Name and ----------------------------------------- Other
Principal Restricted Compen-
Position Year Salary Bonus Other Stock Options LTIP sation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $100,000 $11,982 $12,247/(1)/ $0 0 $0 $0
Guy D. Colado -------------------------------------------------------------------------------------------------------------
President 1995 $101,864 -0- $14,933/(2)/ $0 0 $0 $0
-------------------------------------------------------------------------------------------------------------
(CEO) 1994 $100,000 $19,140 $15,336/(3)/ $0 0 $0 $0
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes a $6,000 car allowance and $6,247 medical insurance premium.
/(2)/ Includes a $6,000 car allowance and $5,393 medical insurance premium.
/(3)/ Includes a $6,000 car allowance and $4,951 medical insurance premium.
On April 22, 1996, Mr. Guy D. Colado exercised incentive stock
options for 25,000 shares of Common Stock for his services as President of the
Company. On April 22, 1996 and May 21, 1996, Mr. Colado exercised additional
options aggregating 10,000 shares of Common Stock pursuant to the Amended and
Restated 1986 Commerce National Corporation Employees' Stock Option Plan.
Pursuant to such exercises, Mr. Colado was issued 35,000 shares of the common
stock of the Company at an exercise price of $10.00 per share, $350,000 in the
aggregate. The payment of the exercise price of the 35,000 shares by Mr. Colado
was paid from his own personal funds.
The Bank implemented an executive supplemental income plan (the
"Plan") during 1995 to provide supplemental income to four of its current
executives after their retirement. Those executives are as follows:
75
<PAGE>
Name Position with Bank
---- ------------------
Guy D. Colado President and CEO
Marsha J. Wheeler Sr. Vice President/Cashier
Jerry H. Johns, III Sr. Vice President/Lending
John R. Casebier Vice President
Funding for the Plan involved the purchase of cash surrender value life
insurance policies, one for each executive, which totaled $1,195,000. The Plan
is structured so that each participant is scheduled to receive specified levels
of income for 15 years after the retirement age of 65. In the event a
participant leaves the employment of the Bank before retirement, only the
benefits vested through that date would be paid to the employee. The Plan also
calls for 100% vesting upon a change of control of the Bank.
Each founding director of the Company, including Mr. Colado, has
received a non-qualified stock option for 10,000 shares of Common Stock for his
services in lieu of director's fees for his initial term of office. Mr. Barkett
and Mr. Moss, who joined the Board on December 21, 1992, have received options
of 5,000 shares each. To date, none of these options have been exercised. In
addition, directors' fees in the amount of $3,000 per year are paid to each
non-employee director for an aggregate amount of directors' fees paid for 1996
of $42,000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Guy D. Colado, President of the Company, has sole voting and
dispositive power over 32,000 shares of the Company's common stock. Mr. Colado
has shared voting and dispositive power over 325 shares of common stock which he
holds jointly with his wife. Such 32,325 shares of common stock represent
approximately 5.43% of the total outstanding shares of common stock of the
Company. Accordingly, pursuant to Rule 13d-3 promulgated by the SEC, Colado is
the beneficial owner of such 32,325 shares of Common Stock.
The following table sets forth, as of March 1, 1997, the beneficial
ownership interest in the Company's Common Stock held by each of the Company's
directors, and by all officers and directors as a group. With the exception of
Guy D. Colado, no shareholder is known by the Company to beneficially own more
than the five percent (5%) of the Company's outstanding Common Stock. Each
person listed has sole voting and investment power with respect to the shares
listed as beneficially owned by him, unless otherwise indicated in the
footnotes.
76
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AS OF MARCH 1, 1997
-----------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF CLASS(2)
OWNERSHIP(1)
- ----------------------------------------------------------------------------------------------------------------------------------
WITHOUT WITH
NAME AND ADDRESS OF ISSUED OPTIONED OPTION OPTION
BENEFICIAL OWNER SHARES SHARES(3) TOTAL SHARES SHARES(4)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donald J. Barker
1037 Lakemont Circle 5,260(5) 10,000 15,260 0.88% 2.25%
Winter Park, Florida 32782
- ----------------------------------------------------------------------------------------------------------------------------------
Russell Barkett
621 Arapaho Trail 100 5,000 5,100 0.02% 0.75%
Maitland, Florida 32751
- ----------------------------------------------------------------------------------------------------------------------------------
C. Durham Barnes, M.D.
481 Virginia Drive 5,000 10,000 15,000 0.84% 2.21%
Winter Park, Florida 32789
- ----------------------------------------------------------------------------------------------------------------------------------
Robert E. Battaglia
1466 Alabama Drive 6,000 10,000 16,000 1.01% 2.36%
Winter Park, Florida 32789
- ----------------------------------------------------------------------------------------------------------------------------------
Robert B. Boswell, M.D.
1301 Alberta Avenue 10,950(6) 10,000 20,950 1.84% 3.09%
Winter Park, Florida 32789
- ----------------------------------------------------------------------------------------------------------------------------------
Stephen C. Cahill
2667 Lake Shore Drive 1,000 0 1,000 0.17% 0.15%
Orlando, Florida 32803
- ----------------------------------------------------------------------------------------------------------------------------------
Kenneth M. Clayton
2800 Lake Shore Drive 7,300(7) 10,000 17,300 1.23% 2.55%
Orlando, Florida 32803
- ----------------------------------------------------------------------------------------------------------------------------------
Guy D. Colado
1936 Fawsett Road 35,325(8) 10,000 45,325 5.93% 6.68%
Winter Park, Florida 32789
- ----------------------------------------------------------------------------------------------------------------------------------
J. Blair Culpepper
1106 Eastin Avenue 4,500 0 4,500 0.76% 0.66%
Orlando, FL 32804
- ----------------------------------------------------------------------------------------------------------------------------------
Ernst R. Janvrin
261 Tollgate Trail 1,050(9) 0 1,050 0.18% 0.15%
Longwood, Florida 32750
- ----------------------------------------------------------------------------------------------------------------------------------
Anthony Lombardi, Jr.
2710 Midsummer Drive 100 0 100 0.02% 0.01%
Windermere, Florida 34786
- ----------------------------------------------------------------------------------------------------------------------------------
Jane H. Louttit
851 Lake Catherine Drive 100 0 100 0.02% 0.01%
Maitland, Florida 32751
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AS OF MARCH 1, 1997
-----------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1) PERCENT OF CLASS(2)
- ------------------------------------------------------------------------------------------------------------------------------------
WITHOUT WITH
NAME AND ADDRESS OF ISSUED OPTIONED OPTION OPTION
BENEFICIAL OWNER SHARES SHARES(3) TOTAL SHARES SHARES(4)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stephen G. Miller
1701 Walnut Avenue 100 0 100 0.02% 0.01%
Winter Park, Florida 32789
- ----------------------------------------------------------------------------------------------------------------------------------
Willie C. Moss
5858 Cove Drive 13,059(10) 5,000 18,059 2.19% 2.66%
Orlando, Florida 32812
- ----------------------------------------------------------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D
45 Eastwind Lane 15,429(11) 10,000 25,429 2.59% 3.75%
Maitland, Florida 32751
- ----------------------------------------------------------------------------------------------------------------------------------
Alan M. Scarboro
3218 Edgecliffe Drive 7,250 0 7,250 1.22% 1.07%
Orlando, FL 32806
- ----------------------------------------------------------------------------------------------------------------------------------
W. Charles Shuffield
2307 Lakeside Drive 5,000(12) 5,000(12) 10,000 0.84% 1.47%
Orlando, Florida 32803
- ----------------------------------------------------------------------------------------------------------------------------------
All Directors and Group Officers 117,523 85,000 202,523 19.73% 29.75%
as a Group (Consisting of 17
Persons)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As used in this table, "beneficial ownership" means the sole or
shared power to vote, or to direct the voting of, and/or to dispose
of, or to direct the disposition of, the Common Stock. Unless
otherwise indicated, the shares are held with sole power to vote and
sole power to dispose.
(2) The percentages have been rounded to the nearest hundredth.
(3) "Option Shares" represent those shares which the indicated individual
has a right to acquire pursuant to an immediately exercisable option
with an exercise price of $10.00 per share.
(4) In calculating this percent only, it is assumed all options are
exercised and therefore the number of option shares has been added to
the number of shares outstanding.
(5) Includes 2,500 shares owned by a family member for which beneficial
ownership is not disclaimed.
(6) Includes 6,500 shares owned by Robert B. Boswell, M.D. FACCPA Defined
Contribution Pension Plans, 500 shares as custodian for a family
member and 2,200 shares held by a family member for which beneficial
ownership is not disclaimed.
(7) Includes 300 shares held in trust for family members for which
beneficial ownership is not disclaimed and 2,000 shares held in trust
for a third party.
78
<PAGE>
(8) Includes 325 shares held jointly with a family member with shared
voting and shared investment powers and 3,000 shares held by a family
member for which beneficial ownership is not disclaimed.
(9) Includes 300 shares held by a general partnership in which he has an
interest and for which beneficial ownership is not disclaimed.
(10) Includes 8,059 shares held in trust for Mr. Moss and 5,000 shares
held in trust for a family member, over which Mr. Moss exercises
shared voting and investment powers.
(11) Includes 7,029 shares held with shared voting and shared investment
power, 7,400 shares held in pension/profit sharing plans for Mr.
Raffa's benefit, and 1,000 shares held by family members for which
beneficial ownership is not disclaimed.
(12) Includes 5,000 shares held jointly with a family member with shared
voting and shared investment power. Does not include 4,000 shares
held by Zimmerman, Shuffield, Kiser & Sutcliffe, P.A. Profit Sharing
Plan & Trust in which Mr. Shuffield has approximately a 22.7%
interest but over which he does not exercise control.
(13) Mr. Shuffield has assigned an aggregate of 5,000 options to certain
members of his law firm for which he disclaims beneficial ownership.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The real estate and the building constructed thereon, which houses
the corporate offices of CNC and the facilities of the Bank, are owned by
Gateway Plaza, Ltd., a Florida limited partnership ("Gateway"). The Directors or
certain of their affiliates, except for Mrs. Louttit and Messrs. Barkett,
Cahill, Janvrin, Lombardi, Miller, Moss, and Raffa, are limited partners of
Gateway and they or their affiliates beneficially own, in aggregate, 4,809 of
the 11,562 presently issued and outstanding limited partnership interests of
Gateway, or approximately 42% thereof. Additionally, the general partner of
Gateway is NBOC, Inc., a Florida corporation, which is owned and controlled by
Guy D. Colado (President and director of both the Bank and CNC) and G. Winston
Lovelace (a former director of both the Bank and CNC and shareholder of CNC). As
general partner, NBOC, Inc. has a 1% interest in the taxable income, gains,
losses and credits realized by Gateway. While it is believed that the leasing
arrangements for CNC, as lessee, and Gateway, as lessor, are fair, such
arrangements have not been arrived at as a result of arms-length negotiations
due to the commonality of control found in both entities. The Bank made payments
under the lease to Gateway in the aggregate amount of approximately $249,387 for
fiscal 1996.
The law firm of Zimmerman, Shuffield, Kiser & Sutcliffe, P.A.
("ZSKS"), in which W. Charles Shuffield is a principal, has provided and will
continue to provide certain legal services to CNC and the Bank and has received
and will continue to receive fees for the services rendered. The amount of fees
paid to ZSKS by the Company and/or Bank did not exceed five percent of ZSKS'
gross revenues. Mr. Shuffield is a director and shareholder of CNC, a director
of the Bank and a limited partner of Gateway. The law firm of Clayton and
McCulloh has provided and will continue
79
<PAGE>
to provide legal services to the Bank and CNC. The amount of fees paid to
Clayton and McCulloh by the Company and/or Bank did not exceed five percent of
Clayton and McCulloh's gross revenues. Mr. Clayton is a director and shareholder
of CNC, a director of the Bank and a limited partner in Gateway.
At December 31, 1996, the Bank had approximately $3,564,217 loaned to
certain CNC/Bank directors and to certain affiliates of certain CNC/Bank
directors. Such loan transactions were made in the ordinary course of business;
on substantially the same terms, including interest and collateral, as those
prevailing at the time for comparable transactions with other persons; and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
The SEC maintains a web site at http://www.sec.gov which contains
reports, proxy and information statements and other information pertaining to
registrants that file electronically with the SEC including the Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
a. 1. Financial Statements
--------------------
The following consolidated financial statements of the Company
are included in Part II, Item 8:
- Consolidated Balance Sheets - December 31, 1996 and 1995.
- Consolidated Statements of Operations - Years ended December
31, 1996, 1995 and 1994.
- Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1995, and 1994.
- Consolidated Statement of Cash Flows - Years ended December
31, 1996, 1995 and 1994.
a. 2. Financial Statement Schedules
-----------------------------
The Company has not included any financial schedules because
they are not applicable, not required, or the information
required to be set forth therein is included in the
consolidated financial statements or in notes thereto.
80
<PAGE>
<TABLE>
<CAPTION>
a. 3. Exhibits
- ----------------------------------------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of Commerce National *
Corporation incorporated by reference from Exhibit
3.1 to Registration No. 2-98960-A.
- ----------------------------------------------------------------------------------------------------------
3.2 First Amended and Restated Bylaws of Commerce *
National Corporation effective January 14, 1988,
incorporated by reference from Exhibit 3.2 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1992.
- ----------------------------------------------------------------------------------------------------------
4.1 Specimen copy of common stock certificate for *
Common Stock of Commerce National Corporation,
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 Articles of Incorporation of Commerce *
National Corporation included in the Articles of
Incorporation of Commerce National Corporation
incorporated 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.
- ----------------------------------------------------------------------------------------------------------
10.1 Lease Agreement dated June 12, 1985, Between *
Gateway Plaza, Ltd. and Commerce National
Corporation for the anticipated corporate headquarters
incorporated by reference from Exhibit 10.4 to
Registration No. 2-98960-A.
- ----------------------------------------------------------------------------------------------------------
10.2 Amended and Restated 1986 Commerce National *
Corporation Employee Stock Option Plan incorporated
by reference from Exhibit 10.2 to the Company's Report
on Form 10-K for the fiscal year ended December 31,
1992.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.3 Amended and Restated 1985 Commerce National *
Corporation Directors' Stock Plan, incorporated by
reference from Exhibit 10.3 to the Company's Report
on Form 10-K for the fiscal year ended December 31,
1992.
- ----------------------------------------------------------------------------------------------------------
10.4 Amended and Restated Stock Option Agreement *
between Guy D. Colado and Commerce National
Corporation, incorporated by reference from Exhibit
10.4 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1992.
- ----------------------------------------------------------------------------------------------------------
10.5 Amended and Restated Commerce National *
Corporation Director's Stock Option Agreement with a
director, which is representative of the other Amended
and Restated Directors' Stock Option Agreements,
incorporated by reference from Exhibit 10.5 to the
Company's Report on Form 10-K for the fiscal year
ended December 31, 1992.
- ----------------------------------------------------------------------------------------------------------
10.6 Contract for Sale and Purchase dated June 15, 1983, 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.
- ----------------------------------------------------------------------------------------------------------
10.7 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.
- ----------------------------------------------------------------------------------------------------------
10.8 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.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.9 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.
- ----------------------------------------------------------------------------------------------------------
10.1 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 fiscal quarter ended
September 30, 1994.
- ----------------------------------------------------------------------------------------------------------
10.11 Contract for Sale and Purchase by and between *
National Bank of Commerce and Donald D. Donoval
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 fiscal quarter
ended September 30, 1994.
- ----------------------------------------------------------------------------------------------------------
10.12 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 fiscal quarter
ended September 30, 1994.
- ----------------------------------------------------------------------------------------------------------
21 Subsidiaries of Commerce National Corporation 92
- ----------------------------------------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use only). 93
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Incorporated by reference as noted in the narrative under "Description."
b. Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended December 31, 1996.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMERCE NATIONAL CORPORATION
(Registrant)
Date: March 30, 1997 By:/s/ Guy D. Colado
---------------------------
GUY D. COLADO, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
By:/s/ Guy D. Colado March 30, 1997
------------------------------------
Guy D. Colado
President and Director
(Principal Executive Officer)
By:/s/ Alan M. Scarboro March 30, 1997
------------------------------------
Alan M. Scarboro
Secretary/Treasurer
By:/s/ Frederick A. Raffa March 30, 1997
------------------------------------
Frederick A. Raffa
Director
By:/s/ Donald J. Barker March 30, 1997
------------------------------------
Donald J. Barker
Director/Chairman
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
By:/s/ Russell Barkett March 30, 1997
------------------------------------
Russell Barkett
Director
By:/s/ C. Durham Barnes March 30, 1997
------------------------------------
C. Durham Barnes, M.D.
Director
By:/s/ Robert E. Battaglia March 30, 1997
------------------------------------
Robert E. Battaglia
Director
By:/s/ Robert B. Boswell, M.D. March 30, 1997
------------------------------------
Robert B. Boswell, M.D.
Director
By:/s/ Stephen C. Cahill March 30, 1997
------------------------------------
Stephen C. Cahill
Director
By:/s/ Kenneth M. Clayton March 30, 1997
------------------------------------
Kenneth M. Clayton
Director
By:/s/ Ernst R. Janvrin March 30, 1997
------------------------------------
Ernst R. Janvrin
Director
By:
------------------------------------
Tony Lombardi, Jr.
Director
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
By:
------------------------------------
Jane H. Louttit
Director
By:/s/ Stephen G. Miller March 30, 1997
------------------------------------
Stephen G. Miller
Director
By:/s/ Willie C. Moss March 30, 1997
------------------------------------
Willie C. Moss
Director
By:/s/ W. Charles Shuffield March 30, 1997
------------------------------------
W. Charles Shuffield
Director
</TABLE>
Supplemental Information to be furnished with reports filed pursuant to Section
15(d) of the Act by Registrants which have not registered securities pursuant to
Section 12 of the Act.
Four copies of the proxy statement and form of proxy sent to the
Registrant's shareholders with respect to its Annual Meeting of Shareholders to
be held on April 21, 1997, and four copies of the annual report for the 1996
fiscal year which were given to the Registrant's shareholders will follow via
expedited delivery.
86
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF COMMERCE NATIONAL CORPORATION
As of the date of this report, Commerce National Corporation ("CNC")
owned all of the outstanding capital stock of the National Bank of Commerce, a
national banking organization and Commerce National Mortgage Company, a Florida
corporation established to process residential mortgages which commenced and
ceased operations during fiscal year 1988.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,389,652
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,964,395
<INVESTMENTS-CARRYING> 190,000
<INVESTMENTS-MARKET> 191,310
<LOANS> 86,532,988
<ALLOWANCE> 887,803
<TOTAL-ASSETS> 114,865,968
<DEPOSITS> 101,044,270
<SHORT-TERM> 2,732,823
<LIABILITIES-OTHER> 384,343
<LONG-TERM> 1,476,111
0
0
<COMMON> 61,759
<OTHER-SE> 9,166,661
<TOTAL-LIABILITIES-AND-EQUITY> 114,865,968
<INTEREST-LOAN> 7,051,323
<INTEREST-INVEST> 1,119,534
<INTEREST-OTHER> 290,306
<INTEREST-TOTAL> 8,461,163
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 4,155,519
<INTEREST-INCOME-NET> 4,305,644
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,938,297
<INCOME-PRETAX> 984,710
<INCOME-PRE-EXTRAORDINARY> 984,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,336
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 1,159,868
<LOANS-PAST> 0
<LOANS-TROUBLED> 11,880
<LOANS-PROBLEM> 1,659,923
<ALLOWANCE-OPEN> 856,803
<CHARGE-OFFS> 103,516
<RECOVERIES> 44,516
<ALLOWANCE-CLOSE> 887,803
<ALLOWANCE-DOMESTIC> 887,803
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 572,691
</TABLE>
