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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
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Commission File Number 2-98960-A
COMMERCE NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA
(State or Other Jurisdiction of Incorporation or Organization)
59-2497676
(I.R.S. Employer Identification No.)
1201 South Orlando Avenue
Winter Park, Florida 32789
(Address of principal executive offices)
(Zip Code)
(407) 741-8900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
THIS FILING CONTAINS 97 PAGES. THE EXHIBIT INDEX APPEARS ON PAGE
NUMBER 82.
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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 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, 1998 of the Registrant's voting
stock held by non-affiliates was $7,760,985. 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 $15.00 per share which is the amount the Registrant used for purposes
of this disclosure.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
At March 1, 1998, the Registrant had 721,019 shares of common stock,
par value $0.10 per share, issued and outstanding.
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.
NONE
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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TABLE OF CONTENTS
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Item No. Caption Page
- -------- ------- ----
PART I .................................................................... 1
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings............................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......... 9
PART II ................................................................... 10
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 10
Item 6. Selected Financial Data...................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 28
Item 8. Consolidated Financial Statements............................. 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 70
PART III .................................................................... 70
Item 10. Directors and Executive Officers of the Registrant............ 70
Item 11. Executive Compensation/Board Compensation .................... 75
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 77
Item 13. Certain Relationships and Related Transactions................ 80
PART IV .................................................................... 81
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 81
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PART I
Item 1. Business
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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, 1998, the Company was participating in an aggregate of
$455,891 on four (4) 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.
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
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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 Bank has
developed a niche in the market place by originating and holding the majority of
these loans.
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
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 of Florida has provided trust services, nor have
such services been provided by the Bank.
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Competition
As of March 1, 1998, 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, 1997, the Bank had approximately 1.50% 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 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
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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 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
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The FRB, OCC and FDIC require banks and bank holding companies to
maintain minimum capital ratios.
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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 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
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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.
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%)
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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 a "well
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 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 was not permitted until
June 1, 1997, provided that the state did not pass legislation "opting-out" of
interstate branching. If a state opted 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
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(including usury limits) and establishment of branches shall apply to the
interstate branches. The State of Florida has elected to participate in
interstate branch banking.
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.
One or more Florida banks may enter into an interstate merger
acquisition with one or more out-of-state banks. An out-of-state bank resulting
from such a transaction may maintain and operate the branches of a Florida bank
that participated in this transaction, provided that all conditions and filing
requirements with the State of Florida are met. An interstate merger transaction
will not be permitted if, upon consummation of this transaction, the resulting
bank, including all insured depository institutions that would be affiliates of
the resulting bank, would control 30% or more of the total amount of deposits
held by all insured depository institutions in the State of Florida. An
interstate merger transaction resulting in the acquisition by an out-of-state
bank of a Florida bank shall not be permitted under Florida Code 658.295 unless
the Florida bank has been in existence and continuously operating on the date of
the acquisition for more than three years.
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, 1998, had 48 full-time
employees and 4 part-time employees. The employees of the Bank are not part of
any collective bargaining unit.
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Item 2. Properties
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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 $410,803
for the year ended 1997 which represented $290,713 due under the lease agreement
between the Company and Gateway Plaza, Ltd. and $120,090 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.
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 adverse impact on the business or the financial
condition of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
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.
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PART II
Item 5. Market for the Registrant's Common Equity and Related
-----------------------------------------------------
Stockholder Matters
-------------------
As of March 1, 1998, 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 459 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 $13.00 and $15.00 per share during the
year ended 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Market Price Range Market Price Range Market Price Range
------------------------------------------------------------------------------------------
Quarter Ended High Low High Low High Low
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31 $15.00 $14.50 $14.50 $14.50 $14.71 $13.00
- ----------------------------------------------------------------------------------------------------------------------
September 30 $13.50 $13.00 $15.50 $13.00 $13.00 $10.00
- ----------------------------------------------------------------------------------------------------------------------
June 30 $13.50 $13.00 $15.00 $10.00 $10.00 $10.00
- ----------------------------------------------------------------------------------------------------------------------
March 31 $13.00 $13.00 $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, 1998, 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.
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.
--------
10
<PAGE>
Item 6. Selected Financial Data (Consolidated)
-----------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $5,330,982 $4,305,644 $3,767,327 $3,413,990 $2,971,364
- ----------------------------------------------------------------------------------------------------------------------------------
Provisions for Loan Losses $179,000 $90,000 $175,000 $50,000 $79,280
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $538,506 $648,336 $472,965 $724,209 $746,460
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share - Diluted $0.88 $1.13 $0.90 $1.26 $1.38
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $126,630,682 $114,865,968 $100,365,487 $83,802,977 $77,056,684
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations $1,424,098 $1,476,111 $1,571,226 $4,327,922 $3,915,059
- ----------------------------------------------------------------------------------------------------------------------------------
Average Equity $9,492,971 $8,857,813 $7,613,835 $6,927,701 $6,399,098
- ----------------------------------------------------------------------------------------------------------------------------------
Average Assets $120,729,118 $108,608,555 $89,803,441 $84,371,159 $73,813,776
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------------
Average Shares Outstanding - 614,748 573,426 523,565 523,565 536,998
Diluted
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
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 1997, the Company had a profit of $538,506 as compared to a
profit of $648,336 in 1996, and $472,965 in 1995. Net loans outstanding
increased 12.5% to $97,317,521 from the 1996 year-end figure of $86,532,988.
While interest expense on deposits and borrowed money in 1997 grew to
$4,360,146, as opposed to $4,155,519 for year-end 1996 and $3,651,880 for year-
end 1995. Total assets at year-end 1997 were $126,630,682, a 10.2% increase over
1996, and a 26.2% increase over 1995. Stockholder equity at year-end 1997 was
$10,403,847 or 8.2% of year-end assets. This compares to year-end 1996
stockholder equity of $9,228,420, and year-end 1995 stockholder equity of
$7,933,974. Net income per common share-diluted for 1997 was $0.88 per share,
compared to $1.13 per share for 1996 and $.90 per share for 1995.
11
<PAGE>
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>
------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ROAA 0.45% 0.60% 0.53%
- -------------------------------------------------------------------------------------------------------------------
ROAE 5.67% 7.32% 6.21%
- -------------------------------------------------------------------------------------------------------------------
Net Income $538,506 $648,336 $472,965
- -------------------------------------------------------------------------------------------------------------------
Average Assets $120,729,118 $108,608,555 $89,803,441
- -------------------------------------------------------------------------------------------------------------------
Average Equity $9,492,971 $8,857,813 $7,613,835
- -------------------------------------------------------------------------------------------------------------------
</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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income $9,691,128 $8,461,163 $7,419,207
- -------------------------------------------------------------------------------------------------------------------
Interest Expense $4,360,146 $4,155,519 $3,651,880
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $5,330,982 $4,305,644 $3,767,327
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income of $5,330,982 represented a 23.8% increase over
1996 and a 41.5% increase over 1995. This is primarily the result of the
increase in loan interest income which was $8,488,762, $7,051,323, and
$6,217,599, at December 31, 1997, 1996 and 1995, respectively. Investment
security income increased in 1995 to $979,436, increased in 1996 to $1,119,534,
and decreased in 1997 to $1,031,804. Federal funds sold income, typically a
lower-yielding investment class, was $137,240, $257,766, and $170,917 at
December 31, 1997, 1996 and 1995, respectively. For further information, refer
to the Rate/Volume Information chart.
At the same time, interest-bearing deposits increased from $76,056,835
at year-end 1995 to $85,055,755 at year-end 1996 to $92,644,084 at year-end
1997. Interest expense on deposits and borrowed money was $4,360,146,
$4,155,519, and $3,651,880, at December 31, 1997, 1996 and 1995, respectively.
The major reason for the increase in deposit interest expense was due to total
time deposit interest expense of $2,798,560, $2,661,881, and $2,018,440 for
December 31, 1997, 1996 and 1995, respectively. For further information, refer
to the Rate/Volume Information chart.
12
<PAGE>
The Company's net interest margin was 4.79% for the year ended December
31, 1997, compared to 4.32% for 1996 and 4.47% for 1995.
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;
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 Office of the Comptroller of the Currency ("OCC").
The allowance for loan losses for year-end 1997 was $1,013,081, a 1.03%
reserve of total loans outstanding at year-end 1997. This compares to a year-end
1996 allowance of $887,803, a 1.01% reserve of total loans outstanding, and
compares to a year-end 1995 allowance of $856,803, a 1.26% reserve of total
loans outstanding. The charge-offs for 1997 totaled $71,588 while recoveries
totaled $17,866. This compares to recoveries of $44,516 for 1996, and $87,133
for 1995. Charge-offs for 1996 totaled $103,516, compared to net chargeoffs in
1995 of $62,899. Nonaccruing loans totaled $1,113,608, $1,159,868, and
$2,182,812 at December 31, 1997, 1996 and 1995, respectively. The loan loss
provision for 1997 was $179,000, compared to $90,000 for 1996, and $175,000 for
1995. This was the result of the resolution of certain nonaccrual and problem
loans during 1996. Management of the Bank believes that the allowance for loan
losses was adequate as of December 31, 1997, in light of the significant
reduction in nonaccrual loans, past loan loss experience and the continued
strong economy in the Bank's market area.
13
<PAGE>
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 OCC safety and soundness examination was as of March
1997. 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 $491,519 in 1995 and from
$707,363 in 1996 to $746,721 in 1997. One of the main reasons for the increase
is that all branches were opened for the full 12 months during both 1996 and
1997. The other reason is the continued stringent policies on NSF charges.
Non-Interest Expense
Operating expenses increased $923,893 or 23% to $4,862,190 for year-end
1997 compared to the same period in 1996, which had operating expenses of
$3,938,297. The year-end 1995 operating expense figure was $3,284,881. The 1997
salary and benefit expenses figure of $1,999,237 was an increase of $165,033
over the year-end 1996 figure of $1,834,204. This increase was the result of
annual salary adjustments and cost-of-living benefit increases. The 1996 figure
of $1,834,204 was an increase of $342,497 over the year-end 1995 figure of
$1,491,707, which was due primarily to staff hiring for the opening of three
branches. These branches were opened for the entire years of 1996 and 1997.
The director stock option expense of $650,000 is to record the expense
at the reimbursement date, based on the stock value of $15.00 per share as
opposed to the option price of $10.00 per share on the 130,000 options.
The year-end occupancy expenses figure of $847,358 was an increase of
$69,834 over the year-end 1996 figure of $777,524. The year-end 1995 figure was
$491,882. Part of the increase in 1997 can be attributed to annual Consumer
Price Index increases in leases for the New England Avenue branch and the main
office. Also classified under occupancy expense is computer expenses. With the
purchase of a new computer system in 1996, the depreciation expense of hardware
and software in 1997 increased by $54,850 from year-end 1996.
Advertising and public relations expenses increased $56,725 to $149,364
at year-end 1997. The main reason for this increase from the 1996 figure of
$92,639 is the result of the Bank hiring a marketing firm in 1997 to establish a
strategic marketing plan. This plan will provide the Bank and the Company with
the necessary marketing, advertising, research and training support needed to go
forward into 1998 and years beyond.
In 1997, legal and professional fees increased by $68,523 to $281,050
over the 1996 year-end figure of $212,527. During the first quarter of 1996, the
Bank experienced a large recovery including all legal fees from a foreclosure
sale. The legal fees applied to this sale were expensed in 1995 and credited to
the legal fee account in 1996. The 1995 year-end figure was $223,464.
14
<PAGE>
Stationery and printing supplies in 1997 declined by $51,757 to a 1997
year-end figure of $59,805 from the 1996 year-end figure of $111,562. The 1995
figure of $128,055 and the 1996 figure of $111,562 were the result of the
purchase of the bulk of the stationery and supplies needed to open the three
branches during those two years.
The data processing expense for year-end 1997 was $187,365. This is an
increase of $26,882 over the year-end 1996 figure of $160,483. The year-end 1995
figure was $129,363. The primary reasons for the data processing expense
increase in 1997 was the one-time cost to install a voice response system in the
Bank. Also, there was extensive training done of PC teller conversion during
1997.
The 1997 Other Expenses total of $622,298 was a decrease of $74,514
from the year-end figure for 1996 of $696,812. The 1995 year-end figure was
$606,924. The increase from the year-end 1995 figure to the year-end 1996 figure
can largely be attributed to the cost incurred in bringing three branches on
line. Those expenses were business development, property taxes, and telephone
expenses. The primary reason for the decline in the 1997 figure is the result of
the expenses attributed to Other Real Estate Owned (OREO). OREO expenses in 1997
were $2,499 compared to $10,674 in 1996. Also, the losses attributed to OREO
declined from $89,010 in 1996 to $6,687 in 1997. At the same time, the business
development figure in 1997 was $9,792, down from the 1996 year-end figure of
$55,253. A large percentage of the business development expenses took place in
1995 and 1996 as the three branches were opened. Business consultant fees in
1997 declined by $4,698 to $68,150 at year-end 1997. Also, general insurance
expenses in 1997 were $38,049 compared to the same time period in 1996 of
$50,546.
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. 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
15
<PAGE>
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 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.
16
<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, 1997, the Bank had a total risk based capital ratio (i.e., Tier One plus
Tier Two capital) of 10.43% (10.79% 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 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,
1997, the
17
<PAGE>
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-diluted
declined to $0.88 per share in 1997 from $1.13 in 1996 compared to $0.90 in
1995.
Statistical Information
CONSOLIDATED DAILY AVERAGE BALANCES, INCOME/EXPENSE
AND AVERAGE YIELDS EARNED AND RATES PAID -- 1997
and 1996 (Dollars in thousands, yields on taxable
equivalent basis)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCES INCOME YIELD BALANCES INCOME YIELD
ASSETS (1) (1) RATES (1) (1) RATES
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $91,662 $8,489 9.26% $75,334 $7,051 9.36%
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities $16,372 $1,032 6.30% $17,978 $1,120 6.23%
- ----------------------------------------------------------------------------------------------------------------------------------
Funds Sold $2,504 $137 5.47% $4,855 $258 5.31%
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Deposits $731 $33 4.51% $1,500 $32 2.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Other Short-Term Investments -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $111,269 $9,691 8.71% $99,667 $8,461 8.49%
- ----------------------------------------------------------------------------------------------------------------------------------
Cash $3,468 N/A N/A $2,913 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment $3,558 N/A N/A $3,611 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses ($948) N/A N/A ($880) N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Other Assets $3,383 N/A N/A $3,298 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $120,730 N/A N/A $108,609 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND AVERAGE AVERAGE
SHAREHOLDER'S BALANCES YIELD BALANCES YIELD
EQUITY (1) EXPENSES RATES (1) EXPENSES RATES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Deposits:
- -------------------------------------------------------------------------------------------------------------
NOW Accounts $9,184 $184 2.00% $7,565 $162 2.14%
- -------------------------------------------------------------------------------------------------------------
Savings $19,115 $774 4.05% $15,088 $632 4.19%
- -------------------------------------------------------------------------------------------------------------
Money Market $11,015 $323 2.93% $14,953 $497 3.32%
- -------------------------------------------------------------------------------------------------------------
Certificates of Deposits $50,657 $2,799 5.53% $45,799 $2,662 5.81%
- -------------------------------------------------------------------------------------------------------------
Other Time -0- N/A N/A -0- N/A N/A
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING DEPOSITS $89,971 $4,080 4.53% $83,405 $3,953 4.74%
- -------------------------------------------------------------------------------------------------------------
Funds Purchased $23 $1 4.35% $27 $2 7.41%
- -------------------------------------------------------------------------------------------------------------
Other Short-Term $3,641 $188 5.16% $1,978 $105 5.31%
Borrowings
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt $1,214 $91 7.50% $1,258 $96 7.63%
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST- $4,878 $280 5.74% $3,263 $203 6.22%
BEARING LIABILITIES
- -------------------------------------------------------------------------------------------------------------
Demand Deposits $15,420 N/A N/A $12,314 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Other Liabilities $968 N/A N/A $769 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Shareholders' Equity $9,493 N/A N/A $8,858 N/A N/A
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $120,730 N/A N/A $108,609 N/A N/A
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Spread 4.11% 3.69% 3.89% 3.87% 3.94%
- -----------------------------------------------------------------------------------------
Net Interest Income (in thousands) $5,331 $4,306 $3,767 $3,414 $2,971
- -----------------------------------------------------------------------------------------
Net Interest Margin (2) 4.73% 4.32% 4.47% 4.26% 4.24%
- -----------------------------------------------------------------------------------------
</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.
19
<PAGE>
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, 1997 vs. 1996 YE December 31, 1996 vs. 1995
Increase (Decrease) Due To Increase (Decrease) Due to
---------------------------------------------------------------------------------------------
Final Volume Rate Total Volume Rate Total
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest Income
- ---------------
- ---------------------------------------------------------------------------------------------------------------------------
Loans $1,531 $(93) $1,438 $948 $(115) $833
- ---------------------------------------------------------------------------------------------------------------------------
Investments (136) 48 (88) 184 (43) 141
- ---------------------------------------------------------------------------------------------------------------------------
Fed Funds Sold (119) (2) (121) 99 (12) 87
- ---------------------------------------------------------------------------------------------------------------------------
Interest Bearing Assets 2 (1) 1 12 (32) (20)
- ---------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $1,278 $(48) 1230 $1,243 $(202) $1,041
===========================================================================================================================
Interest Expenses
- -----------------
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $243 $(116) $127 $802 $(110) $692
- ---------------------------------------------------------------------------------------------------------------------------
Borrowings 73 4 77 $(168) $(20) $(188)
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities $316 $(112) $204 $634 $(130) $504
- ---------------------------------------------------------------------------------------------------------------------------
Net Margin $962 $64 $1,026 $609 $(72) $537
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
December 31, 1997 and December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD* VALUE YIELD*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Other U.S. Government
Agencies and Corporations:
- -------------------------------------------------------------------------------------------------------------------------------
Due In One Year Or Less $7,974 5.81% $7,036 6.50%
- -------------------------------------------------------------------------------------------------------------------------------
Due After One Year Through Five 7,526 6.52% 8,928 5.87%
Years
- -------------------------------------------------------------------------------------------------------------------------------
Due After Five Years Through -0- -0- -0- -0-
Ten Years
- -------------------------------------------------------------------------------------------------------------------------------
Due After Ten Years -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $15,500 6.16% $15,964 6.24%
- -------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions:
Due In One Year Or Less 190 -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
Due After One Year Through Five Years -0- 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 $15,690 6.28% $16,154 6.21%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Weighted average yields are calculated on the basis of the carrying
value of the security.
21
<PAGE>
LOAN PORTFOLIO BY TYPES OF LOANS
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial:
- -----------------------------------------------------------------------------------------------
Secured $11,114 $10,461
- -----------------------------------------------------------------------------------------------
Unsecured 4,326 3,989
- -----------------------------------------------------------------------------------------------
Real Estate:
- -----------------------------------------------------------------------------------------------
Construction 15,774 15,634
- -----------------------------------------------------------------------------------------------
Mortgage 64,450 54,291
- -----------------------------------------------------------------------------------------------
Other Consumer Loans 3,040 3,393
- -----------------------------------------------------------------------------------------------
TOTAL LOANS $98,704 $87,768
- -----------------------------------------------------------------------------------------------
</TABLE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997
(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 $15,440 $10,818 $4,314 $308
- --------------------------------------------------------------------------------------------------------------------------
Real Estate 80,224 22,026 24,837 33,361
- --------------------------------------------------------------------------------------------------------------------------
Other 3,040 1,947 1,051 42
- --------------------------------------------------------------------------------------------------------------------------
TOTAL $98,704 $34,791 $30,202 $33,711
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon scheduled principal payments.
22
<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 $23,527 $7,584 $11,598 $4,345
- ------------------------------------------------------------------------------------------------------------------------------
Floating or Adjustable 75,177 27,207 18,604 29,366
Interest Rates
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $98,704 $34,791 $30,202 $33,711
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
------------------------------------------------------
DECEMBER 31
------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual Loans $1,113,608 $1,159,868 $2,182,812
- -----------------------------------------------------------------------------------------------------
Accruing Loans Past Due 90
Days or More -0- -0- -0-
- -----------------------------------------------------------------------------------------------------
Troubled Debt Restructurings -0- $11,880 $55,532
- -----------------------------------------------------------------------------------------------------
</TABLE>
If interest due on all non-accrual loans had been accrued at the original
contract rates, interest income would have been approximately$203,476 greater
for 1995, approximately $28,536 greater for 1996 and approximately $83,917
greater for 1997.
Potential Problem Loans
On December 31, 1997, the Bank had seven (7) non-accrual loans totaling
$1,113,608. The 1997 figure is a reduction of $46,260 from the 1996 year-end
total of $1,159,868 and a reduction of $1,069,204 from the 1995 year-end figure
of $2,182,812.
The largest non-accrual credit in the amount of $503,991, which amount
has been reduced from the original balance of $700,000, is secured by the
limited guarantees of 47 medical doctors and three general partners. This
partnership was created to do same-day surgery processes; however, the need to
date has not been met. By Court order, the Bankruptcy Court has authorized a
monthly payment of $5,000 which will cover interest accrual and provide partial
amortization until the
23
<PAGE>
reorganization plan is approved. It is the Bank's feeling that all principal,
interest and legal expenses will be recouped.
The largest unsecured loan in the amount of $289,494 has been reduced
from $350,000. The borrower on this loan is a doctor who is in the process of
trying to finalize a workout agreement with the former practice with which he
was associated. It is the Bank's feeling that, once this matter is resolved, a
repayment plan will be established to bring this loan current. It is anticipated
at this time that no loss will be incurred.
One non-accrual loan in the amount of $206,988 is secured by a first
mortgage on commercial property in Orange County, Florida. This property
continues to be leased, and the loan is current. The next mortgage loan in the
amount of $93,389 is secured by a first mortgage on a professional office
building. At this point, the loan continues to run 60 days past due; however,
the Bank continues to be well collateralized. The final mortgage loan is in the
amount of $15,493, and the borrower has filed personal bankruptcy. The
Bankruptcy Court has agreed to a stipulation so that the borrower will commence
making principal payments, and the Bank should be paid in full. The loan is
current and was removed from the non-accrual loan list in January 1998.
The final non-accrual loan is an installment loan in the amount of
$4,253 secured by two vehicles and continues to be current.
It is anticipated that any losses that would be incurred on the above
non-accrual loans will be minimal.
The following table, entitled Analysis of the Allowance for Loan
Losses, summarizes the Bank's allowance for loan losses as of December 31, 1997.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
24
<PAGE>
ANALYSIS OF THE ALLOANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Year
Ended Ended
12/31/97 12/31/96
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $887,803 $856,803
- -------------------------------------------------------------------------------------------------------
Charge-offs
- -------------------------------------------------------------------------------------------------------
Domestic:
- -------------------------------------------------------------------------------------------------------
Commercial 63,064 101,387
- -------------------------------------------------------------------------------------------------------
Real estate -- construction -0- -0-
- -------------------------------------------------------------------------------------------------------
Real estate -- mortgage -0- -0-
- -------------------------------------------------------------------------------------------------------
Installment loans to individuals 8,524 2,129
- -------------------------------------------------------------------------------------------------------
Recoveries:
- -------------------------------------------------------------------------------------------------------
Domestic:
- -------------------------------------------------------------------------------------------------------
Commercial 17,866 44,516
- -------------------------------------------------------------------------------------------------------
Real estate -- construction -0- -0-
- -------------------------------------------------------------------------------------------------------
Real estate -- mortgage -0- -0-
- -------------------------------------------------------------------------------------------------------
Installment loans to individuals -0- -0-
- -------------------------------------------------------------------------------------------------------
Additions charged to operations 179,000 90,000
- -------------------------------------------------------------------------------------------------------
Balance at end of period $1,013,081 $887,803
- -------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
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 $716,552 70.73% $310,731 16.46%
- -----------------------------------------------------------------------------------------------------------------------
Real Estate 243,444 24.03% 532,682 79.67%
- -----------------------------------------------------------------------------------------------------------------------
Consumer 53,085 5.24% 44,390 3.87%
- -----------------------------------------------------------------------------------------------------------------------
ACTUAL TOTAL $1,013,081 100.00% $887,803 100.00%
- -----------------------------------------------------------------------------------------------------------------------
</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. 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, 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.
26
<PAGE>
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. Chargeoffs by loan type are illustrated in the consolidated
financial statements at Footnote (4).
COMPOSITION OF DEPOSITS FOR 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------
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 $15,420 14.63% -0- $12,314 12.88% -0- $9,234 12.21% -0-
- -------------------------------------------------------------------------------------------------------------------
NOW $9,184 8.71% 2.00% $7,565 7.90% 2.00% 6,051 8.00% 2.79%
- -------------------------------------------------------------------------------------------------------------------
Savings $19,115 18.13% 4.00% $15,088 15.76% 4.00% 14,335 18.96% 4.05%
- -------------------------------------------------------------------------------------------------------------------
Money
Market $11,015 10.45% 2.75% $14,953 15.62% 2.75% 12,823 16.96% 3.86%
- -------------------------------------------------------------------------------------------------------------------
Certificate
of Deposit $50,657 48.08% 5.40% $45,799 47.84% 4.41% 33,172 43.87% 6.08%
- -------------------------------------------------------------------------------------------------------------------
TOTAL $105,391 100.00% 3.79% $95,719 100.00% 3.90% $75,615 100.00% 4.31%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY OF CDS AND OTHER TIME DEPOSITS
IN AMOUNTS OF $100,000 OR MORE
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
MONTHS TO CD'S DOMESTIC OTHER TIME
MATURITY DEPOSITS TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 Or less 23,954 0 23,954
- -------------------------------------------------------------------------------------------
Over 3 through 12 4,922 0 4,922
- -------------------------------------------------------------------------------------------
Over 12 616 0 616
- -------------------------------------------------------------------------------------------
TOTAL 29,492 0 29,492
- -------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Impact of Recent Accounting Pronouncements
SFAS No. 130
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Statement also requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Statement is required for
fiscal years beginning after December 15, 1997.
The adoption of this standard will require the Company to disclose as a
component of comprehensive income the activity in its unrealized gain or loss on
investment securities available for sale.
SFAS No. 131
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information." This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Statement is required for fiscal years beginning after
December 15, 1997.
The Company does not anticipate that adoption of this standard will
have a significant impact on its consolidated financial statements upon
adoption.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans and
investment securities) which are primarily funded by interest-bearing
liabilities (deposits). Such financial instruments have varying levels of
sensitivity to changes in market interest rates resulting in market risk.
Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets and interest-bearing
liabilities are different. In an attempt to manage its exposure to changes in
interest rates, management monitors the Company's interest rate risk.
Management's asset/liability committee meets monthly to review the Company's
interest rate risk position and profitability, and recommend adjustments for
consideration by the Board of Directors. Management also reviews the Bank's
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions to assure attainment of the Board's
objectives in the most effective manner. Notwithstanding the Company's interest
rate risk management
28
<PAGE>
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. The rates, terms and interest rate indices of the
Company's interest-earning assets result primarily from the Company's strategy
of investing in loans and securities which permit the Company to limit its
exposure to interest rate risk, together with credit risk, while at the same
time achieving a positive interest rate spread from the difference between the
income earned on interest-earning assets and the cost of interest-bearing
liabilities.
Interest Rate Risk Measurement
One method of measuring interest rate risk is to determine the
earnings-at-risk for a given change in interest rates. The impact on value
(earnings) is significant because reduced earnings will affect capital. The
simulation model presents the results of the estimated change to net interest
income at current rates, and at hypothetical higher and lower interest rates at
one percent intervals, over a period of twelve months. The change in interest
rates does not necessarily represent an immediate or parallel shift. The
interest income and expense numbers are calculated based on the December 31,
1997 balance sheet contractual maturity and repricing data. Included in the
simulation analysis is the anticipated balance sheet assumptions and pricing
strategies for each interest rate environment.
The following table reflects the projected interest income, interest
expense and net interest income as of December 31, 1997, based upon the
assumptions as outlined above.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CHANGE -200 BP -100 BP Static +100 BP +200 BP
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income ($000) 9,534 9,714 9,895 10,072 10,254
- ------------------------------------------------------------------------------------------------------------------------
Change from static -361 -181 -0- +177 +359
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense ($000) 4,330 4,412 4,479 4,546 4,628
- ------------------------------------------------------------------------------------------------------------------------
Change from static -149 -67 -0- +67 +149
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income ($000) 5,204 5,302 5,416 5,526 5,626
- ------------------------------------------------------------------------------------------------------------------------
Change from static -212 -114 -0- +110 +210
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Economic Value
The interest rate risk ("IRR") component is a dollar amount that is
deducted from total capital for the purpose of calculating an institution's
risk-based capital requirement and is measured in terms of the sensitivity of
its net economic value ("NEV") to changes in interest rates. An institution's
NEV is calculated as the net discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR component is measured as the
change in the ratio of NEV to the net present value of total assets as a result
of a hypothetical 200 basis point change in market interest rates. A resulting
decline in this ratio of more than 2% of the estimated present value of an
institution's total assets prior
29
<PAGE>
to the hypothetical 200 basis point change will require the institution to
deduct form its regulatory capital 50% of that excess decline.
The following table presents the Bank's ratio of NEV to the present
value of total assets as of December 31, 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Ratio of NEV to the Present Value
Change in Present Value of:
Interest Rates of Total Assets -------------------------------------------
(in basis points) ($000) NEV of Equity Total Assets Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+200 125,777 12,874 7.35% -0.43%
- ---------------------------------------------------------------------------------------------------------------------
+100 126,768 11,927 7.95% 0.25%
- ---------------------------------------------------------------------------------------------------------------------
Static 127,786 11,008 8.61% 0.96%
- ---------------------------------------------------------------------------------------------------------------------
-100 128,832 10,115 9.26% 1.68%
- ---------------------------------------------------------------------------------------------------------------------
-200 129,906 9,249 9.91% 2.43%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
In addition, the previous table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest income
because the repricing of certain categories of assets and liabilities are
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
Item 8. Consolidated Financial Statements
---------------------------------
The required financial information begins on the following page.
30
<PAGE>
KPMG Peat Marwick LLP
111 North Orange Avenue, Suite 1600
P.O. Box 3031
Orlando, FL 32802
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, 1997 and 1996, the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 27, 1998, except as to Note 22 which
is as of February 1, 1998
Orlando, Florida
31
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 6,095,762 3,389,652
Federal funds sold 300,000 1,500,000
Investment securities available for sale 15,499,777 15,964,395
Investment securities held to maturity (estimated market
value of $190,454 and $191,310 in 1997 and 1996,
respectively) 190,000 190,000
Loans, less allowance for loan losses of $1,013,081
for 1997 and $887,803 for 1996 97,317,521 86,532,988
Accrued interest receivable 748,897 723,329
Premises and equipment, net 3,925,251 3,501,875
Other real estate owned 251,622 1,018,405
Federal Reserve Bank stock, at cost 171,000 150,000
Federal Home Loan Bank stock, at cost 341,300 300,000
Deferred income taxes, net 401,545 242,217
Prepaid expenses and other assets 85,301 114,298
Executive supplemental income plan - cash surrender value
life insurance policies 1,302,706 1,238,809
---------- ----------
Total assets $ 126,630,682 114,865,968
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
Deposits:
Noninterest bearing $ 18,481,616 15,988,515
Interest bearing 92,644,084 85,055,755
---------- ----------
Total deposits 111,125,700 101,044,270
Federal Home Loan Bank advances 1,176,534 1,222,647
Other borrowed funds 3,455,470 2,986,288
Accrued interest payable 133,134 136,276
Accounts payable and other liabilities 335,997 248,067
------- -------
Total liabilities 116,226,835 105,637,548
----------- -----------
Shareholders' equity:
Common stock, $.10 par value per share. Authorized 1,000,000 shares;
618,035 and 617,584 shares issued, 596,235 and 595,784 shares
outstanding at December 31,
1997 and 1996 61,804 61,759
Additional paid-in capital 6,721,129 6,065,310
Retained earnings 3,808,136 3,269,630
Treasury stock, at cost (21,800 shares at December 31, 1997
and 1996) (208,640) (208,640)
Unrealized gain on investment securities available for sale, net 21,418 40,361
------ ------
Total shareholders' equity 10,403,847 9,228,420
Commitments and contingencies
---------- ----------
Total liabilities and shareholders' equity $ 126,630,682 114,865,968
=========== ===========
</TABLE>
33
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 8,488,762 7,051,323 6,217,599
Investment securities held to maturity and
investments securities available for sale 1,031,804 1,119,534 979,436
Federal funds sold 137,240 257,766 170,917
Other 33,322 32,540 51,255
------ ------ ------
Total interest income 9,691,128 8,461,163 7,419,207
Interest expense:
Deposits and other borrowed money 4,360,146 4,155,519 3,651,880
--------- --------- ---------
Net interest income 5,330,982 4,305,644 3,767,327
Provision for loan losses 179,000 90,000 175,000
------- ------ -------
Net interest income after provision
for loan losses 5,151,982 4,215,644 3,592,327
--------- --------- ---------
Other income, primarily customer service fees 746,721 707,363 491,519
------- ------- -------
Other expenses:
Salaries and benefits 1,999,237 1,834,204 1,491,707
Directors stock option plan 650,000 - -
Occupancy expense 847,358 777,524 491,882
Advertising and public relations 149,364 92,639 102,766
Legal and professional fees 281,050 212,527 223,464
Stationery and printing supplies 59,805 111,562 128,055
Data processing expense 187,365 160,483 129,363
Insurance 65,713 52,546 110,720
Other expenses 622,298 696,812 606,924
------- ------- -------
4,862,190 3,938,297 3,284,881
--------- --------- ---------
Net operating income 1,036,513 984,710 798,965
Income tax expense 498,007 336,374 326,000
------- ------- -------
Net income $ 538,506 648,336 472,965
======= ======= =======
Basic earnings per share $ .90 1.13 .90
=== ==== ===
Diluted earnings per share $ .88 1.13 .90
=== ==== ===
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders'
Equity For each of the years in the three-year
period ended December 31, 1997
<TABLE>
<CAPTION>
Additional Treasury
Common paid-in Retained stock,
stock capital earnings at cost
----- ------- -------- -------
<S> <C> <C> <C> <C>
Balances, December 31, 1994 $ 54,537 5,350,342 2,148,329 (208,640)
Net income - - 472,965 -
Unrealized gain on investment securities available
for sale, net - - - -
------ -------- -------- -------
Balances, December 31, 1995 54,537 5,350,342 2,621,294 (208,640)
Net income - - 648,336 -
Unrealized loss on investment securities available
for sale, net - - - -
Employee stock options exercised 7,222 714,968 - -
----- -------- -------- -------
Balances, December 31, 1996 61,759 6,065,310 3,269,630 (208,640)
Directors stock option plan - 650,000 - -
Net income - - 538,506 -
Unrealized loss on investment securities available
for sale, net - - - -
Sale of common stock 45 5,819 - -
----- -------- -------- -------
Balances, December 31, 1997 $ 61,804 6,721,129 3,808,136 (208,640)
====== ========= ========= =========
<CAPTION>
Unrealized gain
(loss) on investment Total
securities available shareholders'
for sale, net equity
------------- ------
<S> <C> <C>
Balances, December 31, 1994 (123,969) 7,220,599
Net income - 472,965
Unrealized gain on investment securities available
for sale, net 240,410 240,410
----- ---------
Balances, December 31, 1995 116,441 7,933,974
Net income - 648,336
Unrealized loss on investment securities available
for sale, net (76,080) (76,080)
Employee stock options exercised - 722,190
----- ---------
Balances, December 31, 1996 40,361 9,228,420
Directors stock option plan - 650,000
Net income - 538,506
Unrealized loss on investment securities available
for sale, net (18,943) (18,943)
Sale of common stock - 5,864
----- ---------
Balances, December 31, 1997 21,418 10,403,847
====== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 538,506 648,336 472,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 306,327 256,682 119,767
Deferred income taxes (147,901) (28,582) (51,760)
Net amortization of premiums and accretion of discounts on
investment securities held to maturity and investment
securities available
for sale (64,937) (23,973) 84,676
Provision for loan losses 179,000 90,000 175,000
Deferred loan origination fees 25,635 121,615 41,774
Loss on sale of other real estate owned 6,687 55,101 2,744
Writedown to fair value on other real estate owned - 26,829 25,257
Provision for other real estate owned - 7,080 -
Executive supplemental income plan - additional
cash surrender value (63,897) (67,709) -
Cash provided by (used in) changes in:
Accrued interest receivable (25,568) (90,393) 47,049
Prepaid expenses and other assets 28,997 35,103 (60,143)
Accrued interest payable (3,142) (69,755) 151,193
Accounts payable and other liabilities 87,930 26,403 (47,543)
------ ------ -------
Net cash provided by operating activities 867,637 986,737 960,979
------- ------- -------
(Continued)
</TABLE>
36
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Loans (net of collections) (11,037,444) (20,802,136) (5,795,836)
Purchases of investment securities available for sale (7,500,815) (7,899,762) (5,489,677)
Proceeds from maturity of investment securities held to
maturity - 2,500,000 6,000,000
Proceeds from maturity of investment securities available
for sale 7,000,000 3,000,000 1,500,000
Proceeds from called investment securities available
for sale 1,000,000 1,000,000 -
Purchase of cash surrender value life insurance policies to
fund executive supplemental income - - (1,171,100)
Proceeds from sale of Federal Home Loan Bank stock - 107,200 165,900
Purchase of regulatory stock (62,300) - (7,500)
Purchase of premises and equipment (279,703) (272,069) (1,990,725)
Proceeds from the sale of other real estate owned 358,372 401,048 129,348
------- ------- -------
Net cash used in investing activities (10,521,890) (21,965,719) (6,659,590)
------------ ------------ -----------
Cash flows provided by financing activities:
Net increase in demand deposits, NOW accounts and passbook
savings accounts 7,819,123 7,906,958 871,508
Net increase in certificates of deposit 2,262,307 3,794,533 26,435,789
Federal funds purchased - - (1,500,000)
Principal repayments on mortgage notes payable (25,949) (23,917) (22,097)
Increase (decrease) in other borrowed funds 495,131 1,615,261 (7,123,056)
Principal payments on Federal Home Loan Bank borrowings (46,113) (43,448) (2,916,659)
Directors stock option plan 650,000 - -
Proceeds from employee stock options exercised - 722,190 -
Proceeds from sale of common stock 5,864 - -
----- -------- --------
Net cash provided by financing activities 11,160,363 13,971,577 15,745,485
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 1,506,110 (7,007,405) 10,046,874
Cash and cash equivalents at the beginning of the year 4,889,652 11,897,057 1,850,183
--------- ---------- ---------
Cash and cash equivalents at the end of the year $ 6,395,762 4,889,652 11,897,057
========= ========= ==========
(Continued)
</TABLE>
37
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 4,363,288 4,225,274 3,500,687
========= ========= =========
Taxes $ 622,080 353,685 411,389
======= ======= =======
Supplemental disclosures of non-cash transactions:
Transfer of other real estate owned to premises
and equipment $ 450,000 - -
======= ==== ====
Financing of other real estate owned $ 25,058 - -
====== ==== ====
Transfer of loans to other real estate owned $ 73,334 706,318 48,857
====== ======= ======
Transfer of premises and equipment to other
real estate owned $ - - 150,000
==== ==== =======
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments 34,341 64,711 176,426
Deferred income tax liability 12,923 24,350 59,985
------ ------ ------
Unrealized gain on investments
available for sale, net $ 21,418 40,361 116,441
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
(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)
39
<PAGE>
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 available for sale 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)
40
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company considers a loan to be impaired when it is probable
that the Company will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the
loan agreement. When a loan is impaired, the Company may measure
impairment based on (a) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (b) the observable market price of the
impaired loans, or (c) the fair value of the collateral of a
collateral-dependent loan. The Company selects the measurement
method on a loan-by-loan basis, except for collateral-dependent
loans for which foreclosure is probable must be measured at the
fair value of the collateral. In a troubled debt restructuring
involving a restructured loan, the Company measures impairment by
discounting the total expected future cash flows at the loan's
original effective rate of interest.
(f) Allowance for Loan Losses
The Company follows a consistent procedural discipline and
accounts for loan loss contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for
Contingencies" (Statement 5). The following is a description of
how each portion of the allowance for loan losses is determined.
The Company segregates the loan portfolio for loan loss purposes
into the following broad segments such as: commercial real estate;
residential real estate; commercial business; and consumer loan.
The Company provides for a general allowance for losses inherent
in the portfolio by the above categories, which consists of two
components. General loss percentages are calculated based upon
historical analyses. A supplemental portion of the allowance is
calculated for inherent losses which probably exist as of the
evaluation date even though they might not have been identified by
the more objective processes used for the portion of the allowance
described above. This is due to the risk of error and/or inherent
imprecision in the process. This portion of the allowance is
particularly subjective and requires judgments based on
qualitative factors which do not lend themselves to exact
mathematical calculations such as; trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume,
terms, and portfolio mix; new credit products and/or changes in
the geographic distribution of those products; changes in lending
policies and procedures; loan review reports on the efficacy of
the risk identification process; changes in the outlook for local,
regional and national economic conditions; concentrations of
credit; and peer group comparisons.
(Continued)
41
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Specific allowances are provided in the event that the specific
collateral analysis on each classified loan indicates that the
probable loss upon liquidation of collateral would be in excess of
the general percentage allocation. The provision for loan loss is
debited or credited in order to state the allowance for loan losses
to the required level as determined above.
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) or 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) Other Borrowed Funds
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment 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. The Company has repurchase agreements secured by U.S.
Treasury securities at December 31, 1997.
(Continued)
42
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company adopted this Statement as of January 1, 1997. The
Statement did not have a material impact on the Company at point of
adoption.
(j) 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.
(k) Derivative Instruments
The Company does not purchase, sell or enter into derivative
financial instruments or derivative commodity instruments as
defined in Statement of Financial Accounting Standards No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value
of Financial Instruments" for fixed rate loan commitments which the
Company believes are at market value at December 31, 1997.
(l) 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.
(Continued)
43
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Restrictions on Cash
The Company is required to maintain reserve balances in accordance with
Federal Reserve Bank requirements. At December 31, 1997 and 1996, these
reserve balances were $556,000 and $483,000, 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, 1997 and 1996 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>
1997:
Municipals $ 190,000 454 - 190,454
======= === ===== =======
1996:
Municipals $ 190,000 1,310 - 191,310
======= ===== ===== =======
Investment securities available for sale:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
1997:
U.S. Treasury securities $ 15,465,436 43,415 9,074 15,499,777
========== ====== ===== ==========
1996:
U.S. Treasury securities $ 15,899,684 80,830 16,119 15,964,395
========== ====== ====== ==========
</TABLE>
(Continued)
44
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of investment securities at
December 31, 1997, 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 within one year $ 190,000 190,454
======= =======
Investment securities available for sale:
Due within one year 7,964,620 7,973,597
Due after one year through five years 7,500,816 7,526,180
--------- ---------
$ 15,465,436 15,499,777
========== ==========
</TABLE>
At December 31, 1997 and 1996 investment securities with a book value of
$496,215 and $498,361 were pledged to collateralize the treasury tax and
loan account, respectively.
(4) Loans
Major categories of loans included in the loan portfolio at December 31,
1997 and 1996 are:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial - secured $ 11,113,710 10,461,047
Commercial - unsecured 4,326,247 3,988,842
Real estate, primarily commercial 80,223,450 69,924,987
Other (installments and overdrafts) 3,040,377 3,393,462
---------- ---------
98,703,784 87,768,338
Less:
Allowance for loan losses (1,013,081) (887,803)
Deferred loan origination fees, net (373,182) (347,547)
---------- ----------
Net loans $ 97,317,521 86,532,988
========== ==========
</TABLE>
(Continued)
45
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Certain principal shareholders, directors and employees and their related
interest were indebted to the Bank as summarized below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year $ 12,717,857 11,520,498
Additional new loans 2,589,693 5,739,232
Repayments on outstanding loans (2,311,286) (4,541,873)
----------- -----------
Balance, end of year $ 12,996,264 12,717,857
========== ==========
</TABLE>
All such loans were made in the ordinary course of business. At December
31, 1997 and 1996, principal shareholders, directors and employees of the
Company and their related interests had $1,240,272 and $3,564,217,
respectively, available in lines of credit and commitments.
The recorded investment in loans for which an impairment has been
recognized and the related allowance for loan losses at December 31, 1997
and 1996 were $1,168,036 and $37,912 and $1,159,868 and $24,930,
respectively. Those loans with a probable loss have a specific reserve
established. All other impaired loans are accounted for in the general
allowance for loan loss. The average recorded investment in impaired
loans during 1997 and 1996 was $1,163,952 and $1,671,340, respectively.
Interest income recognized in impaired loans during 1997 and 1996 was
$-0-.
Changes in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 887,803 856,803 657,569
Provisions charged to operations 179,000 90,000 175,000
Charge offs:
Real estate loans - - -
Installment loans (8,524) (2,129) (1,450)
Commercial loans (63,064) (101,387) (61,449)
Recoveries:
Real estate loans - - -
Installment loans - - 1,073
Commercial loans 17,866 44,516 86,060
--------- ------- -------
Balance, end of year $ 1,013,081 887,803 856,803
========= ======= =======
</TABLE>
(Continued)
46
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 1997 and 1996, nonaccrual loans were $1,113,608 and
$1,159,868, respectively. If interest due on all nonaccrual loans had
been accrued at the original contract rates, estimated interest income
would have been increased by $83,917 in 1997, $28,536 in 1996 and
$203,476 in 1995.
(5) Premises and Equipment
A summary of premises and equipment at December 31, 1997 and 1996
follows:
1997 1996
---- ----
Land and land improvements $ 1,949,971 1,499,971
Furniture, fixtures and equipment 1,823,166 1,552,975
Bank buildings 1,137,669 1,137,669
Leasehold improvements 228,796 219,284
----------- -----------
5,139,602 4,409,899
Less accumulated depreciation (1,214,351) (908,024)
----------- -----------
$ 3,925,251 3,501,875
=========== ===========
(6) Fair Value of 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.
(Continued)
47
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
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,
1997 (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.
(Continued)
48
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
The following tables present the carrying amounts and estimated fair
values of the Company's financial instruments.
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Carrying amount Fair value
--------------- ----------
<S> <C> <C>
Financial assets:
Cash and due from banks and federal
funds sold $ 6,395,762 6,395,762
Investment securities available for sale 15,499,777 15,499,777
Investment securities held to maturity 190,000 190,454
Loans (carrying amount less allowance
for loan losses of $1,013,081) 97,317,521 97,516,658
Financial liabilities:
Deposits:
Without stated maturities $ 61,728,025 61,728,025
With stated maturities 49,397,675 48,766,992
Federal Home Loan Bank advances 1,176,534 1,176,534
Other borrowings 3,455,470 3,432,081
Commitments:
Letter of credit $ - -
Loan commitments - -
</TABLE>
(Continued)
49
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996
-----------------
Carrying Fair
Amount Value
-------- -----
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 $ -- --
Loan commitments -- --
The carrying amounts shown in the tables are included in the
consolidated balance sheets under the indicated captions.
(Continued)
50
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Deposits
A detail of deposits at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing demand deposits $ 18,481,616 15,988,515
Interest-bearing:
NOW accounts 11,784,328 8,376,751
Money market 8,865,311 11,080,125
Savings accounts 22,596,770 18,463,511
Time accounts less than $100,000 19,905,866 18,588,378
Time accounts greater than $100,000 29,491,809 28,546,990
---------- ----------
$ 111,125,700 101,044,270
=========== ===========
</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, 1997 and 1996 as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Three months or less $ 23,954,183 19,976,908
Three through twelve months 4,921,535 7,044,986
Over one year 616,091 1,525,096
------- ---------
$ 29,491,809 28,546,990
========== ==========
</TABLE>
A summary of interest expense on deposits and other borrowed money is
as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Time deposits of $100,000 or greater $ 1,599,542 1,486,139 1,198,004
Time deposits less than $100,000 1,199,018 1,175,742 820,436
Interest-bearing demand deposits 507,149 658,742 662,806
Savings deposits 774,011 631,850 579,570
Interest on borrowings 280,426 203,046 391,064
------- ------- -------
Interest on deposits and other borrowed
money $ 4,360,146 4,155,519 3,651,880
========= ========= =========
</TABLE>
(Continued)
51
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company had deposits from principal shareholders, directors and
employees and their related interests of approximately $18,737,571 and
$18,713,024 at December 31, 1997 and 1996, respectively. There were no
brokered deposits outstanding at year end.
(8) Federal Home Loan Bank Advances
Federal Home Loan Bank advances at December 31, 1997 and 1996, are
summarized as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Advances from the Federal Home Loan Bank (interest
rates ranging from 6.32% to 8.18% and 5.82% to
8.181% at December 31, 1997 and 1996, respectively) $ 1,176,534 1,222,647
========= =========
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by first mortgage loans in the amount
of $2,244,278 and $2,687,557 respectively. Advances at December 31,
1997 have calendar-year maturity dates as follows:
1998 $ 51,000
1999 54,950
2000 59,850
2001 65,950
2002 114,200
Thereafter 830,584
-------
$ 1,176,534
=========
(Continued)
52
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Other Borrowed Funds
Other borrowed funds consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996
--------------------------- ---------------------
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 $3,151,678 and $2,759,428 as of
December 31, 1997 and 1996,
respectively, repurchase dates in
January 1998 and 1997 $ 3,156,906 4.85% $ 2,661,774 4.43%
--------- ---- --------- ----
Total short-term borrowings 3,156,906 4.85% 2,661,774 4.43%
--------- ---- --------- ----
</TABLE>
(Continued)
53
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
------------------------ ---------------------------
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 95,658 8.00% 111,209 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 55,665 8.00% 58,871 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 $375,000 147,241 8.00% 154,434 8.00%
------- ---- ------- ----
Total long-term borrowings 298,564 8.00% 324,514 8.00%
------- ---- ------- ----
Total other borrowed money $ 3,455,470 5.12% $ 2,986,288 4.82%
========= ==== ========= ====
</TABLE>
Aggregate maturities on the mortgage notes payable at December 31, 1997
are as follows:
1998 $ 28,121
1999 78,907
2000 28,940
2001 31,380
2002 29,944
Thereafter 101,272
-------
$ 298,564
(Continued)
54
<PAGE>
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
$3,329,828 and $1,641,167 during the years ended December 31, 1997 and
1996, respectively. The maximum amount outstanding at any month-end for
the corresponding periods was $3,714,990 and $4,128,051, respectively.
Total interest expense paid on retail repurchase agreements for the
years ending December 31, 1997, 1996 and 1995 was $163,261, $78,318 and
$95,085, 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 1997, 1996 and 1995 consists of the
following:
Current Deferred Total
------- -------- -----
Year ended December 31, 1997:
Federal $ 569,256 (132,890) 436,366
State 76,652 (15,011) 61,641
--------- --------- ---------
$ 645,908 (147,901) 498,007
========= ========= =========
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
========= ========= =========
(Continued)
55
<PAGE>
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, 1997 and
1996 are presented below.
1997 1996
---- ----
Deferred tax assets:
Loan receivable, due to allowance for loan losses $342,110 289,693
Directors stock option plan 117,000 --
Executive supplemental income 57,421 45,642
Other real estate owned allowance 9,445 22,778
Other 7,758 9,455
-------- --------
Total deferred tax assets 533,734 367,568
-------- --------
Deferred tax liabilities:
Unrealized gain on investment securities available
for sale 12,923 24,350
Premises and equipment, due to differences in
depreciation methods and useful lives 70,731 56,099
Investments, due to accretion 39,575 35,942
FHLB stock dividend 8,960 8,960
-------- --------
Total deferred tax liabilities 132,189 125,351
-------- --------
Net deferred tax asset $401,545 242,217
(Continued)
56
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company has recorded a deferred tax asset of $401,545 and $242,217 as
of December 31, 1997 and 1996, respectively. The amount of the deferred
tax asset is 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,
1997 and 1996.
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
"Expected" tax expense $ 352,414 334,801 271,648
Directors stock option plan 110,774 - -
State income tax expense, net of federal
benefit 40,683 22,468 22,440
Life insurance premiums on officers (21,722) (21,243) 10,012
Meals and entertainment and dues 10,788 7,620 13,000
Club dues 1,368 - -
Tax exempt interest (2,148) (2,616) (2,100)
Other 5,850 (4,656) 11,000
----- ------- ------
Actual tax expense $ 498,007 336,374 326,000
======= ======= =======
</TABLE>
(11) Shareholders' Equity
At fiscal years ended December 31, 1997 and 1996, the Bank's balance in
undivided profits was $4,341,136 and $3,269,630, respectively. The
restrictions on dividend payments are imposed by the Bank's primary
regulator, The Office of the Comptroller of the Currency (OCC).
On April 10, 1997, the Trustees of the National Bank of Commerce 401(k)
plan purchased 451 shares of Commerce National Corporation stock at
$13.00 per share.
(Continued)
57
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
On October 20, 1997, the Company amended the director's stock option
plan to extend the expiration date of the options from December 31,
1997 to February 1, 1998, and to include the option for the directors
to exercise their options by paying cash of $10 per share or paying
with stock valued at $15.50 per share and receive shares valued at $10
per share. The Company has elected to account for the options under APB
No. 25 "Accounting for Stock Based Compensation". According to APB No.
25, renewing or extending the option period establishes a new
measurement date as if the right was newly granted. Therefore, the
Company recorded compensation expense to the extent of the excess of
the value of the stock over the purchase price ($15 less $10),
resulting in a $650,000 compensation expense for fiscal year 1997.
(12) Rent
The following is a schedule of future minimum annual rentals under the
noncancellable operating leases relating primarily to the Company's
main office facility:
Year ended
1998 $ 475,156
1999 351,340
2000 359,652
2001 368,212
2002 377,030
-------
$ 1,931,390
=========
Rent expense for the years ending December 31, 1997, 1996 and 1995 was
$410,803, $373,701 and $285,144, 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, 2003.
(Continued)
58
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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, 1997,
1996 and 1995 was $32,509, $31,000, $30,000, respectively.
(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, 1997, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company as well
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>
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, 1997:
Total capital (to risk greater than greater than
weighted assets) $ 10,896,989 10.43% $ 8,356,580 or equal to 8.0% $ 10,445,725 or equal to 10.0%
Tier I capital (to risk greater than greater than
weighted assets) 9,891,919 9.47% 4,178,290 or equal to 4.0% 6,267,435 or equal to 6.0%
Tier I capital (to average greater than greater than
assets) 9,891,919 8.00% 4,949,326 or equal to 4.0% 6,186,658 or equal to 5.0%
As of December 31, 1996:
Total capital (to risk greater than greater than
weighted assets) $ 8,888,306 9.67% $ 7,356,552 or equal to 8.0% $ 9,195,690 or equal to 10.0%
Tier I capital (to risk greater than greater than
weighted assets) 8,008,503 8.71% 3,678,276 or equal to 4.0% 5,517,414 or equal to 6.0%
Tier I capital (to average greater than greater than
assets) 8,008,503 7.00% 4,579,046 or equal to 4.0% 5,723,807 or equal to 5.0%
</TABLE>
(Continued)
60
<PAGE>
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 February 1,
1998. 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,
1997 and 1996, the number of options vested and exercisable was 130,000
and 122,000, respectively. On April 24, 1996, 72,219 shares were
exercised under the Employees Stock Option Plan at $10 per share.
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:
1997 1996 1995
---- ---- ----
Net income:
As reported $ 538,506 648,336 472,965
Pro forma 538,506 638,547 462,277
Earnings per share:
As reported .88 1.13 .84
Pro forma .88 1.11 .83
(Continued)
61
<PAGE>
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 the minimum value method with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively;
dividend yield of -0- percent for all years; expected volatility of -0-
percent for all years; risk-free interest rates of 5.36%, 5.8% and
5.22% and expected lives of .17 years, .81 and 1.78 years for the plan
options.
A summary of the status of the Bank's stock option plan as of December
31, 1997, 1996, and 1995 and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
Fixed options 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 122,000 194,000 190,750
Granted 138,000 3,000 3,250
Exercised - 72,219 -
Forfeited 130,000 2,781 -
------- ----- -
Outstanding at end of year 130,000 122,000 194,000
------- ------- -------
Options exercisable at year-end 130,000 122,000 194,000
======= ======= =======
Weighted-average fair value of options granted
during the year per share $ 5.00 $ 4.94 $ 5.57
======= ======= =======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<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 1997 life price 1997 1997
------ ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
$ 10.00 130,000 2 months $ 10.00 130,000 $ 10.00
</TABLE>
(Continued)
62
<PAGE>
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, 1997 and 1996
<TABLE>
<CAPTION>
Assets: 1997 1996
------- ---- ----
<S> <C> <C>
Cash and interest bearing deposits $ 169,485 51,635
Investment in wholly-owned bank subsidiary 9,796,337 8,048,864
Loans, net 289,626 1,090,594
Other assets 148,399 37,327
------- ------
$ 10,403,847 9,228,420
========== =========
Shareholders' equity:
--------------------
Common stock 61,804 61,759
Additional paid-in capital 6,721,129 6,065,310
Retained earnings 3,808,136 3,269,630
Treasury stock, at cost (21,800 shares) (208,640) (208,640)
Unrealized gain on Bank's investment securities
available for sale, net 21,418 40,361
------ ------
$ 10,403,847 9,228,420
========== =========
</TABLE>
(Continued)
63
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
No dividends were paid by the Bank subsidiary to Commerce National
Corporation for 1997, 1996 or 1995. The Bank is in compliance with
banking regulations regarding the payment of dividends.
Condensed Statements of Operations
----------------------------------
Years ended December 31, 1997, 1996 and 1995
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Interest income $ 49,373 70,299 39,582
Management fee - - 6,000
-------- ------ -----
Total revenue 49,373 70,299 45,582
------ ------ ------
Expenses:
Salaries and benefits - - 11,924
Directors stock option plan 650,000 - -
Legal and professional fees 12,328 6,659 3,461
Other, net (85,045) 42,347 19,506
-------- ------ ------
Total expenses 577,283 49,006 34,891
------- ------ ------
Income (loss) before equity in net
earnings of subsidiary (527,910) 21,293 10,691
Equity in net earnings of subsidiary 1,066,416 627,043 462,274
--------- ------- -------
Net income $ 538,506 648,336 472,965
======= ======= =======
</TABLE>
(Continued)
64
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
----------------------------------
Years ended December 31, 1997, 1996 and 1995
<TABLE>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 538,506 648,336 472,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment - 3,955 3,953
Equity in subsidiary (1,066,416) (627,042) (462,274)
Decrease (increase) in other assets (111,072) (5,866) 2,062
--------- ------- -----
Net cash provided by (used for)
operating activities (638,982) 19,383 16,706
--------- ------ ------
Cash flows provided by (used in) investing activities:
Net repayments of loans (net loans to customers) 800,968 (747,610) (4,283)
------- --------- -------
Cash flows used in financing activities:
Capital infusion to the subsidiary (700,000) - -
Directors stock option plan 650,000 - -
Employee stock options exercised 5,864 722,190 -
----- ------- -------
Net cash provided by (used for)
financing activities (44,136) 722,190 -
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents 117,850 (6,037) 12,423
Cash and cash equivalents at beginning of year 51,635 57,672 45,249
------ ------ ------
Cash and cash equivalents at end of year $ 169,485 51,635 57,672
======= ====== ======
Supplemental disclosure of noncash transactions:
Market value adjustment - Bank investment
securities available for sale:
Market value adjustment - investments 34,341 64,711 176,426
Deferred income tax liability 12,923 24,350 59,985
------ ------ ------
Unrealized gain on investment
securities available for sale, net $ 21,418 40,361 116,441
====== ====== =======
</TABLE>
(Continued)
65
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) 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 $153,000 and $99,000 accrued at December 31,
1997 and 1996, 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.
(18) 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, 1997 and 1996 are as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Standby letters of credit $ 870,486 991,880
Total lines of credit 50,832,223 46,992,675
Unfunded firm loan commitments-variable rate 20,605,454 11,904,430
</TABLE>
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%.
(Continued)
66
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
(19) 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>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(20) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share". This Statement simplifies the calculation of earnings per
share (EPS) under APB 15 and was required to be implemented by
companies for periods ending December 15, 1997 with prior period
restated. The following calculations represent EPS under SFAS 128:
<TABLE>
Income Shares Per share
(numerator) (denominator) amount
----------- ------------ ---------
<S> <C> <C> <C>
For the year ended 1997:
Basic earnings per share:
Net income $ 538,506 596,113 $ .90
===
Effect of Dilutive Securities:
Stock options - 18,635
------- -------
Diluted earnings per share:
Income and assumed conversions $ 538,506 614,748 $ .88
======= ======= ===
For the year ended 1996:
Basic and diluted earnings per share:
Net income $ 648,336 573,426 $ 1.13
======= ======= ====
For the year ended 1995:
Basic and diluted earnings per share:
Net income $ 472,965 523,565 $ .90
======= ======= ===
</TABLE>
(Continued)
68
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(21) Year 2000
In January 1997, the Company developed a plan to deal with the Year
2000 problem and began converting its computer systems to be Year 2000
compliant. The plan provides for the conversion efforts to be completed
by the end of 1999. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. The total cost of the project will be funded through
operating cash flows. The Company is expensing all costs associated
with these systems changes as the costs are incurred. As of December
31, 1997, there have been no charges expensed.
(22) Subsequent Events
As of February 1, 1998, 121,500 shares of stock were purchased at a
$10.00 per share option price. Also an additional 5,484 options were
turned in at $15.50 per share (market value at December 31, 1997) to
receive 8,500 shares at $10.00 per share in the stock exchange plan.
69
<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
--------------------------------------------------
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]
70
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEARS
REMAINING IN APPROXIMATE
TERM HELD OFFICE
NAME AGE POSITION ELECTED (1) SINCE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald J. Barker 84 Director/ 2 February, 1985
Chairman
- ---------------------------------------------------------------------------------------------
Russell Barkett 58 Director 1 December, 1992
- ---------------------------------------------------------------------------------------------
C. Durham Barnes, M.D. 56 Director 0(1) February, 1985
- ---------------------------------------------------------------------------------------------
Robert E. Battaglia 51 Director 2 February, 1985
- ---------------------------------------------------------------------------------------------
Robert B. Boswell, M.D. 52 Director 1 February, 1985
- ---------------------------------------------------------------------------------------------
Stephen C. Cahill 45 Director 0(2) April, 1996
- ---------------------------------------------------------------------------------------------
Kenneth M. Clayton 49 Director 0(1) February, 1985
- ---------------------------------------------------------------------------------------------
Guy D. Colado 53 President & 0(1) February, 1985
Director
- ---------------------------------------------------------------------------------------------
J. Blair Culpepper 60 Executive Vice N/A May, 1995
President
- ---------------------------------------------------------------------------------------------
Ernst R. Janvrin 52 Director 2 April, 1996
- ---------------------------------------------------------------------------------------------
Tony Lombardi, Jr. 50 Director 0(1) April, 1996
- ---------------------------------------------------------------------------------------------
Jane H. Louttit 52 Director 2 April, 1996
- ---------------------------------------------------------------------------------------------
Stephen G. Miller 42 Director 1 April, 1996
- ---------------------------------------------------------------------------------------------
Willie C. Moss 63 Director 1 December, 1992
- ---------------------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D. 54 Director 1 February, 1985
- ---------------------------------------------------------------------------------------------
Alan M. Scarboro 48 Vice President N/A March, 1989
Sec./Treas.
- ---------------------------------------------------------------------------------------------
W. Charles Shuffield 53 Director 2 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 May 26,
1998.
(2) Will not be seeking re-election at the Annual Shareholders' Meeting
scheduled for May 26, 1998.
71
<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 1997 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/COO
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.
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
72
<PAGE>
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 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,
73
<PAGE>
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 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.
74
<PAGE>
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).
Item 11. Executive Compensation/Board Compensation
-----------------------------------------
The executive officers for the Company and the Bank received salaries, in
aggregate, equal to approximately $362,250, 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 $11,040. There were no other executive
officers other than the President with salaries in excess of $100,000 per year.
75
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMP.
--------------------------------------------------------------------------------------------------
Awards PayOuts
------------------------------------------
Name and All Other
Principal Restricted Compens-
Position Year Salary Bonus Other Stock Options LTIP ation
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guy D. 1997 $118,250 $11,250 $14,704/(1)/ $0 0 $0 $0
Colado 1996 $100,000 $11,982 $12,247/(2)/ $0 0 $0 $0
President 1995 $101,864 -0- $14,933/(3)/ $0 0 $0 $0
(CEO) ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $6,000 car allowance and $8,704 medical insurance premium.
(2) Includes a $6,000 car allowance and $6,247 medical insurance premium.
(3) Includes a $6,000 car allowance and $5,393 medical insurance premium.
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:
Name Position with Bank
---- ------------------
Guy D. Colado President and CEO
Marsha J. Wheeler Sr. Vice President/COO
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, 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, received options of 5,000
shares each. Mr. Cahill, Mr. Janvrin, Mr. Lombardi, Mrs. Louttit and Mr. Miller,
who joined the Board on April 15, 1996, received options of 800 shares each. All
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 1997 of $42,000.
76
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Guy D. Colado, President of the Company, has sole voting and dispositive
power over 39,097 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 39,422 shares of common stock represent
approximately 5.47% 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 39,422 shares of Common Stock.
During 1997, options to acquire 4,000 shares which were previously
granted but not exercised under the Amended and Restated 1985 Commerce National
Corporation Directors' Stock Plan (the "Directors' Stock Plan") were distributed
equally among the five new directors elected in 1996. Stephen C. Cahill, Ernst
R. Janvrin, Anthony Lombardi, Jr., Jane H. Louttit and Stephen G. Miller were
each granted an option to acquire 800 shares of the Company's common stock.
On October 20, 1997, the Directors' Stock Plan was amended to extend the
exercise period to February 1, 1998, and to permit optionees under the
Directors' Stock Plan to pay the exercise price with existing stock of the
Company. All of the options granted under the Directors' Stock Plan, including
the options described in the foregoing paragraph, representing an aggregate of
130,000 shares of the Company's common stock, were exercised by February 1,
1998.
The following table sets forth, as of March 1, 1998, 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.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
77
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AS OF MARCH 1, 1998
---------------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1)
- --------------------------------------------------------------------------------------- PERCENT
NAME AND ADDRESS OF ISSUED OPTIONED OF
BENEFICIAL OWNER SHARES SHARES(3) TOTAL CLASS(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald J. Barker
1037 Lakemont Circle 15,260(4) 0 15,260 2.12%
Winter Park, Florida 32792
- ----------------------------------------------------------------------------------------------------------
Russell Barkett
621 Arapaho Trail 5,100 0 5,100 0.70%
Maitland, Florida 32751-3813
- ----------------------------------------------------------------------------------------------------------
C. Durham Barnes, M.D.
481 Virginia Drive 15,000(5) 0 15,000 2.08%
Winter Park, Florida 32789-5701
- ----------------------------------------------------------------------------------------------------------
Robert E. Battaglia
1466 Alabama Drive 16,000 0 16,000 2.22%
Winter Park, Florida 32789-2646
- ----------------------------------------------------------------------------------------------------------
Robert B. Boswell, M.D.
2320 N. Orange Avenue 20,950(6) 0 20,950 2.91%
Orlando, Florida 32804-5522
- ----------------------------------------------------------------------------------------------------------
Stephen C. Cahill
131 Park Lake Street 1,800(7) 0 1,800 0.25%
Orlando, Florida 32803-3821
- ----------------------------------------------------------------------------------------------------------
Kenneth M. Clayton
2800 Lake Shore Drive 17,300(8) 0 17,300 2.40%
Orlando, Florida 32803-1320
- ----------------------------------------------------------------------------------------------------------
Guy D. Colado
1936 Fawsett Road 42,422(9) 0 42,422 5.88%
Winter Park, Florida 32789-6069
- ----------------------------------------------------------------------------------------------------------
J. Blair Culpepper
1106 Eastin Avenue 4,500 0 4,500 0.62%
Orlando, FL 32804
- ----------------------------------------------------------------------------------------------------------
Ernst R. Janvrin
1477 West Fairbanks Avenue 1,850(10) 0 1,850 0.26%
Winter Park, Florida 32789-7113
- ----------------------------------------------------------------------------------------------------------
Anthony Lombardi, Jr.
7491 Brokerage Drive 900 0 900 0.12%
Orlando, Florida 32809-5623
- ----------------------------------------------------------------------------------------------------------
Jane H. Louttit
402 Lake Howell Road 900 0 900 0.12%
Maitland, Florida 32751-5907
- ----------------------------------------------------------------------------------------------------------
Stephen G. Miller
143 Fairbanks Avenue 900 0 900 0.12%
Winter Park, Florida 32789-4377
- ----------------------------------------------------------------------------------------------------------
78
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
AS OF MARCH 1, 1998
--------------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1) PERCENT
- ------------------------------------------------------------------------------------- OF
NAME AND ADDRESS OF ISSUED OPTIONED CLASS(2)
BENEFICIAL OWNER SHARES SHARES(3) TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Willie C. Moss
5858 Cove Drive 18,059(11) 0 18,059 2.51%
Orlando, Florida 32812-2819
- ------------------------------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D
45 Eastwind Lane 25,429(12) 0 25,429 3.53%
Maitland, Florida 32751-5812
- ------------------------------------------------------------------------------------------------------
Alan M. Scarboro
3218 Edgecliffe Drive 7,250(13) 0 7,250 1.01%
Orlando, FL 32806
- ------------------------------------------------------------------------------------------------------
W. Charles Shuffield
2307 Lakeside Drive 10,000(14) 0 10,000 1.39%
Orlando, Florida 32803-1517
- ------------------------------------------------------------------------------------------------------
All Directors and Officers as a 203,620 0 203,620 28.24%
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) Includes 2,500 shares owned by a family member for which beneficial
ownership is not disclaimed.
(5) Includes 2,500 shares held jointly with a family member with shared
voting and shared investment powers and 7,500 shares owned by Central
Florida Retina Consultants Cash Deferred Plan FBO Dr. Barnes 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) All 1,800 shares are owned by Cahill Construction Company Profit Sharing
Plan, for which beneficial ownership is not disclaimed.
(8) 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.
79
<PAGE>
(9) 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.
(10) Includes 300 shares held by a Florida corporation in which he has an
interest and for which beneficial ownership is not disclaimed.
(11) Includes 13,059 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.
(12) Includes 17,029 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.
(13) Includes 3,220 shares held jointly with a family member with shared
voting and shared investment power and 1,500 shares held by Scarboro
Central, Inc. for which beneficial ownership is not disclaimed.
(14) Includes 10,000 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.
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 $290,713 for fiscal 1997.
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 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
80
<PAGE>
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, 1997, the Bank had approximately $12,996,264 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, 1997 and 1996.
- Consolidated Statements of Operations - Years ended December
31, 1997, 1996 and 1995.
- Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1996, and 1995.
- Consolidated Statement of Cash Flows - Years ended December 31,
1997, 1996 and 1995.
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.
81
<PAGE>
a. 3. Exhibits
--------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
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 First Amendment to Amended and Restated 1985 91
Commerce National Corporation Directors' Stock
Plan dated October 20, 1997
- ------------------------------------------------------------------------------------
21 Subsidiaries of Commerce National Corporation 95
- ------------------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use only). 97
- ------------------------------------------------------------------------------------
</TABLE>
* Incorporated by reference as noted in the narrative under "Description."
82
<PAGE>
b. Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company for the fiscal
quarter ended December 31, 1997.
[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, 1998 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 Colado March 30, 1998
---------------------------------------------
Guy D. Colado
President and Director
(Principal Executive Officer)
By:/s/ Alan M. Scarboro March 30, 1998
---------------------------------------------
Alan M. Scarboro
Secretary/Treasurer
By:/s/ Frederick A. Raffa March 30, 1998
----------------------------------------------
Frederick A. Raffa
Director
By:/s/ Donald J. Barker March 30, 1998
-----------------------------------------------
Donald J. Barker
Director/Chairman
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
By:/s/ Russell Barkett March 30, 1998
-----------------------------------------------
Russell Barkett
Director
By:/s/ Durham Barnes March 30, 1998
----------------------------------------------
C. Durham Barnes, M.D.
Director
By:/s/ Robert E. Battaglia March 30, 1998
----------------------------------------------
Robert E. Battaglia
Director
By:/s/ Robert B. Boswell, M.D. March 30, 1998
---------------------------------------
Robert B. Boswell, M.D.
Director
By:/s/ Stephen C. Cahill March 30, 1998
-----------------------------------------------
Stephen C. Cahill
Director
By:/s/ Kenneth M. Clayton March 30, 1998
-------------------------------------------
Kenneth M. Clayton
Director
By:/s/ Ernst R. Janvrin March 30, 1998
------------------------------------------------
Ernst R. Janvrin
Director
By:/s/ Tony Lombardi, Jr. March 30, 1998
--------------------------------------------
Tony Lombardi, Jr.
Director
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
By:/s/ Jane H. Louttit March 30, 1998
-----------------------------------------------
Jane H. Louttit
Director
By:/s/ Stephen G. Miller March 30, 1998
-----------------------------------------------
Stephen G. Miller
Director
By:/s/ Willie C. Moss March 30, 1998
-------------------------------------------------
Willie C. Moss
Director
By:/s/ W. Charles Shuffield March 30, 1998
-------------------------------------------------
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.
Neither the Registrant's annual report for the 1997 fiscal year, not any
proxy statement, form of proxy or other proxy soliciting material with respect
to its Annual Meeting of Shareholders to be held on May 26, 1998, has been sent
to Security holders as of the date hereof. However, such report, proxy
statement and form of proxy will be furnished to security holders subsequent to
the filing of the annual report on this Form, and will subsequently be furnished
to the Securities and Exchange Commission.
86
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
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 First Amendment to Amended and Restated 1985 91
Commerce National Corporation Directors' Stock
Plan dated October 20, 1997
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21 Subsidiaries of Commerce National Corporation 95
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27 Article 9 Financial Data Schedule (for SEC use only). 97
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</TABLE>
* Incorporated by reference as noted in the narrative under "Description."
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT
TO THE AMENDED AND RESTATED
1985 COMMERCE NATIONAL CORPORATION
DIRECTORS' STOCK PLAN
October 20, 1997
Pursuant to Article VI of the AMENDED AND RESTATED 1985 COMMERCE
NATIONAL CORPORATION DIRECTORS' STOCK PLAN adopted by the board of directors of
Commerce National Corporation on January 18, 1988 (the "Plan"), the Plan is
hereby amended as follows:
FIRST, Section 4.3(a) of the Plan shall be amended by replacing the date
"December 31, 1997" with the date "February 1, 1998" in the first sentence of
that Section.
SECOND, a new Section 4.3(c) shall be added which shall read as follows:
(c) Payment for the exercise of the Options granted hereunder
shall be made either in cash or, at the discretion of the Optionee, with
existing stock of the Company owned by Optionee, provided, however, that
any exercise using Company stock as payment for exercise of an Option
shall be limited so that an Optionee may exercise an Option to purchase
one share of stock using Company stock owned by him for each Option to
purchase one share of stock exercised by him using cash. If a portion of
the payment is to be made in stock of the Company, the value of such
stock shall be the fair market value of such stock, as determined in the
reasonable discretion of the Board of Directors of the Company, as of the
date of receipt by the Company of the notice of intent to exercise the
Option required under Section 4.3(b) hereof. If an Optionee desires to
use existing stock of the Company to pay for the exercise of an Option,
the Optionee shall deliver with the notice of intent to exercise the
Option required under Section 4.3(b) a stock certificate or stock
certificates, endorsed in blank, representing a sufficient number of
shares to pay for the exercise of the Option. The Company shall return to
the Optionee a stock certificate or stock certificates representing the
appropriate number of shares after exercise of the Options as required
under the Plan and the return of any excess shares represented by the
stock certificate or stock certificates delivered to exercise such
Option. To the extent an Optionee is unable to procure his original stock
certificate, the Company may issue a stock certificate tendering the
appropriate number of shares, taking into account the outstanding shares
remaining extant under the original certificate.
THIRD, this Amendment shall be effective as of the date first above
written.
Page 1 of 3
<PAGE>
IN WITNESS WHEREOF, the Secretary of the Corporation hereby certifies
that the foregoing Amendment was duly adopted by the Board of Directors of the
Corporation on October 20, 1997.
/s/ Alan M. Scarboro
----------------------------------------
Alan M. Scarboro, Secretary of
Commerce National Corporation
Page 2 of 3
<PAGE>
ACKNOWLEDGMENT AND CONSENT
By signing below, the undersigned, being the holder of an option granted
pursuant to the Plan, hereby acknowledges that the undersigned has read the
foregoing First Amendment to the Plan and consents to the amendment of the Plan
as set forth therein. In addition, the undersigned agrees that the corresponding
provision of the director's stock option agreement under which the undersigned
was granted stock options shall hereby also be amended to extend the date by
which the options may be exercised and to add the payment option as set forth in
the foregoing First Amendment.
Finally, by signing below, the undersigned acknowledges and agrees that
the undersigned will pay all federal income and employment taxes resulting from
the exercise of an option granted pursuant to the Plan and that the Company has
waived the requirement under Section 4.3(b) of the Plan that each Optionee shall
pay to the Company in cash the full amount of all federal and state withholding
or other employment taxes applicable to the taxable income of such Optionee
resulting from the exercise, if any, based upon the undersigned's acknowledgment
and agreement to pay all such taxes.
Dated effective October 20, 1997.
----------------------------------------
Signature of Optionee
----------------------------------------
Printed Name of Optionee
Page 3 of 3
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,095,762
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,499,777
<INVESTMENTS-CARRYING> 15,499,777
<INVESTMENTS-MARKET> 15,499,777
<LOANS> 97,317,521
<ALLOWANCE> 1,013,081
<TOTAL-ASSETS> 126,630,682
<DEPOSITS> 111,125,700
<SHORT-TERM> 3,207,903
<LIABILITIES-OTHER> 469,131
<LONG-TERM> 1,424,098
0
0
<COMMON> 61,804
<OTHER-SE> 10,342,043
<TOTAL-LIABILITIES-AND-EQUITY> 126,630,682
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<INTEREST-OTHER> 170,562
<INTEREST-TOTAL> 9,691,128
<INTEREST-DEPOSIT> 4,079,720
<INTEREST-EXPENSE> 4,360,146
<INTEREST-INCOME-NET> 5,330,982
<LOAN-LOSSES> 179,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,862,190
<INCOME-PRETAX> 1,036,513
<INCOME-PRE-EXTRAORDINARY> 1,036,513
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 538,506
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 0.048
<LOANS-NON> 1,113,608
<LOANS-PAST> 0
<LOANS-TROUBLED> 208,512
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</TABLE>
