<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ____________ to _____________
Commission file number: 2-98960A
COMMERCE NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA
(State or Other Jurisdiction of Incorporation or Organization)
59-2497676
(I.R.S. Employer Identification No.)
1201 South Orlando Avenue
Winter Park, Florida 32789
(Address of principal executive offices)
(Zip Code)
(407) 629-1818
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
This filing contains 28 pages. The Exhibit Index is found on page 27.
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On May 1, 1998, Commerce National Corporation (the "Company") had 721,019
shares of common stock, par value $0.10 per share, issued and outstanding.
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
2
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PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements.
The financial statements begin on the following page.
3
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COMMERCE NATIONAL CORPORATION
AND SUBSIDIARY
Table of Contents
Accountants' Review Report
Condensed consolidated balance sheets (unaudited)--March 31, 1998 and
December 31, 1997
Condensed consolidated statements of operations (unaudited)--Three months ended
March 31, 1998 and 1997
Condensed consolidated statements of cash flows (unaudited)--Three months ended
March 31, 1998 and 1997
Selected notes to condensed consolidated financial statements (unaudited)--
March 31, 1998
4
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KPMG Peat Marwick LLP
111 North Orange Avenue, Suite 1600
P.O. Box 3031
Orlando, FL 32802
The Board of Directors
Commerce National Corporation:
We have reviewed the condensed consolidated balance sheet of Commerce National
Corporation and subsidiary as of March 31, 1998 and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 1998 and 1997. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Commerce National Corporation and
subsidiary as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended not
presented herein; and in our report dated January 27, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1997, is fairly presented, in all material respects, in
relation to the consolidated financial statements from which it has been
derived.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
April 22, 1998
5
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COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
March 31, December 31,
Assets 1998 1997
------ ----------- ------------
Cash and due from banks $ 4,149,131 6,095,762
Federal funds sold 6,750,000 300,000
Investment securities available for sale (note 2) 15,505,376 15,499,777
Investment securities held to maturity (note 2) 190,000 190,000
Loans, net (note 3) 97,641,639 97,317,521
Accrued interest receivable 861,764 748,897
Premises and equipment, net 3,855,240 3,925,251
Other real estate owned, net 214,022 251,622
Federal Reserve Bank stock, at cost 171,000 171,000
Federal Home Loan Bank stock, at cost 378,600 341,300
Deferred tax asset 310,335 401,545
Prepaid expenses and other assets 132,467 85,301
Executive supplemental income plan - cash
surrender value life insurance policies 1,318,927 1,302,706
----------- -----------
Total assets $131,478,501 126,630,682
=========== ===========
See accompanying accountants' review report.
6
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March 31, December 31,
Liabilities and Stockholders' Equity 1998 1997
------------------------------------ ---- ----
Deposits (note 4):
Noninterest bearing $ 18,423,253 18,481,616
Interest bearing 94,415,232 92,644,084
---------- ----------
Total deposits 112,838,485 111,125,700
Federal Home Loan Bank advances 1,172,234 1,176,534
Other borrowed funds 5,179,896 3,455,470
Accrued interest payable 138,969 133,134
Accounts payable and other liabilities 236,741 335,997
Dividends payable 65,586 -
----------- -----------
Total liabilities 119,631,911 116,226,835
------------ -----------
Common stock, par value $.10 per share
(1,000,000 shares authorized; 742,819 and
618,035 shares issued and 721,019 and 596,235
outstanding at March 31, 1998 and
December 31, 1997) 74,282 61,804
Additional paid-in capital 7,927,804 6,721,129
Retained earnings 4,035,856 3,808,136
Treasury stock, at cost (21,800 shares at
March 31, 1998 and December 31, 1997) (208,640) (208,640)
Accumulated other comprehensive income 17,288 21,418
---------- ----------
Total stockholders' equity 11,846,590 10,403,847
Commitments (note 5)
----------- -----------
Total liabilities and stockholders' equity $131,478,501 126,630,682
=========== ===========
7
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COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
Three months ended
---------------------
March 31,
1998 1997
---- ----
Interest income:
Loans $2,264,095 1,985,842
Investment securities 242,255 244,658
Federal funds sold 49,900 14,783
Federal Reserve Bank stock 2,509 2,250
Federal Home Loan Bank stock 6,101 5,478
Due from banks 2,773 535
--------- ---------
Total interest income 2,567,633 2,253,546
Interest expense 1,122,465 1,035,664
--------- ---------
Net interest income 1,445,168 1,217,882
Provision for loan losses 62,253 36,000
--------- ---------
Net interest income after provision for loan
losses 1,382,915 1,181,882
--------- ---------
Other operating income:
Customer service fees 215,209 152,696
Other operating expenses:
Salaries and benefits 526,811 501,294
Occupancy expense 224,468 198,648
Legal and professional fees 70,812 61,012
Other expenses 312,007 251,364
Loss on sale of other real estate owned 2,017 -
--------- ---------
1,136,115 1,012,318
--------- ---------
Net operating income before taxes 462,009 322,260
Income tax expense 168,703 120,497
------- -------
Net earnings $ 293,306 201,763
======= =======
Basic and diluted earnings per share (note 6) $ .43 .34
======= =======
See accompanying accountants' review report.
8
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COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended
-------------------
March 31,
1998 1997
---- ----
Cash flows provided by (used in) operating
activities:
Net income $ 293,306 201,763
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of premises and equipment 79,191 64,306
Net amortization of premiums and accretion
of discounts on investment securities held
to maturity and investment securities
available for sale (12,235) (16,504)
Provision for loan losses 62,253 36,000
Deferred loan origination fees (10,576) (1,768)
Loss on sale of other real estate owned 2,017 -
Deferred income taxes 93,716 (1,738)
Executive supplemental income plan -
additional cash surrender value (16,221) (15,778)
Cash provided by (used in) changes in:
Accrued interest receivable (112,867) (22,478)
Prepaid expenses and other assets (47,166) (29,978)
Accrued interest payable 5,835 17,582
Accounts payable and other liabilities (99,256) 101,744
------- -------
Net cash provided by operating activities 237,997 333,151
------- -------
Cash flows provided by (used in) investing
activities:
Net loans made to customers (419,291) (783,619)
Decrease (increase) in federal funds sold (6,450,000) (2,750,000)
Purchases of investment securities
available for sale (2,000,000) -
Proceeds from sale of other real estate owned 79,079 248,200
Proceeds from maturity of investments
available for sale 2,000,000 1,000,000
Purchase of premises and equipment (9,180) (97,856)
Purchase of Federal Home Loan Bank stock (37,300) (41,300)
------- ----------
Net cash used in investing activities (6,836,692) (2,424,575)
---------- ----------
(Continued)
9
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2
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited), Continued
Three months ended
------------------
March 31,
1998 1997
---- ----
Cash flows provided by financing activities:
Net decrease in demand deposits, NOW accounts and
passbook savings accounts (879,523) (378,860)
Net increase in certificates of deposit 2,592,308 3,536,171
Principal payment on mortgage note payable (6,843) (6,322)
Increase (decrease) in repurchase agreements 1,731,269 (75,364)
Proceeds (repayments) from borrowings from the
Federal Home Loan Bank (4,300) (3,912)
Proceeds from employee stock options exercised 1,215,000 -
Proceeds from sale of common stock 4,153 -
--------- ---------
Net cash provided by financing activities 4,652,064 3,071,713
--------- ---------
Net (decrease) increase in cash and cash
equivalents (1,946,631) 980,289
Cash and cash equivalents at the beginning of the
period 6,095,762 3,389,652
--------- ---------
Cash and cash equivalents at the end of the period $ 4,149,131 4,369,941
========= =========
Cash paid during the period for:
Interest $ 1,116,630 1,018,082
========= =========
Income taxes $ 154,346 96,000
========= =========
Supplemental disclosures of noncash transactions:
Market value adjustment - investment securities
available for sale:
Investments (27,705) (28,667)
Deferred income tax asset (10,417) (9,747)
---------- ---------
Unrealized loss on investment securities
available for sale $ (17,288) (18,920)
========== =========
Dividends declared $ 65,586 -
========== =========
Financing of other real estate owned $ 43,496 22,983
========== =========
See accompanying accountants' review report.
10
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COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1998
See accompanying review report of KPMG Peat Marwick LLP
(1) Basis of Presentation
(a) Interim Financial Information
The accompanying unaudited condensed consolidated financial statements
of Commerce National Corporation and Subsidiary (the Company) have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-
Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial information. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
1997.
(b) Comprehensive Income
In June 1997, the Financial Accounting Standards Board established
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a
full set of financial statements. This Statement requires that an
enterprise classify items or other comprehensive income by nature in a
financial statement, and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a balance sheet.
The Company adopted this Statement effective January 1, 1998. The
Company's other comprehensive income is the unrealized gain/(loss) on
investment securities available for sale.
(Continued)
11
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-2-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(c) Derivative Financial Instruments
The Company has interest rate risk exposure relating to its investments
in interest sensitive assets and funding through interest sensitive
liabilities. Management continually monitors the Company's interest rate
risk level by determining the effect of various interest rate movements
on the level of exposure. Management considers the level of exposure in
determining the appropriate duration mix of interest sensitive assets in
relation to interest sensitive liabilities, and the pricing of such
assets and liabilities. The Company does not have any investment in
derivative financial instruments.
(2) Investment Securities Held to Maturity and Investment Securities Available
for Sale
The amortized cost and estimated market values of investment securities
held to maturity at March 31, 1998 and December 31, 1997 are summarized as
follows:
March 31, 1998 December 31, 1997
-------------------- --------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
U.S. Treasury securities
and municipals $ 190,000 190,270 190,000 190,454
======= ======= ======= =======
The amortized cost and estimated market value of investment securities
available for sale as of March 31, 1998 and December 31, 1997 are as follows:
March 31, 1998 December 31, 1997
-------------------- --------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
U.S. Treasury securities $15,477,671 15,505,376 15,465,436 15,499,777
=========== ========== ========== ==========
(Continued)
12
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-3-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
As of March 31, 1998, the Company had securities sold under agreement to
repurchase of $4,888,175. All agreements were one-day transactions, thus
the carrying value, market value, and borrowings were equal at quarter end.
The Company enters into sales of securities under agreements to repurchase
("Agreements"). Fixed coupon Agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as other borrowed
funds in the condensed consolidated balance sheet. The dollar amount of
securities underlying the Agreements remain in the asset accounts. At March
31, 1998, all of the Agreements were to repurchase identical securities.
The assets underlying the Agreements, were held in safekeeping by a third
party. During the quarter ended March 31, 1998, Agreements outstanding
averaged approximately $3,349,764 and the maximum amount outstanding during
the quarter ended was $4,888,175. Total interest expense paid on repurchase
Agreements was $40,278 for the quarter ended March 31, 1998.
(3) Loans
Major categories of loans included in the loan portfolio at March 31, 1998
and December 31, 1997 are summarized as follows:
March 31, December 31,
1998 1997
-------- --------
Commercial-secured $11,702,768 11,113,710
Commercial-unsecured 3,213,216 4,326,247
Real estate - primarily commercial 80,891,368 80,223,450
Other (installment and overdrafts) 3,267,408 3,040,377
----------- ----------
99,074,760 98,703,784
Allowance for loan losses (1,070,515) (1,013,081)
Deferred loan origination fees (362,606) (373,182)
----------- ----------
$97,641,639 97,317,521
=========== ==========
(Continued)
13
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-4-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
The recorded investment in loans for which an impairment has been recognized
and the related allowance for loan losses at March 31, 1998 and December 31,
1997 were $1,164,481 and $3,938 and $1,168,036 and $37,912, respectively.
Those loans with a probable loss have a specific reserve established. All
other impaired loans are accounted for in the general allowance for loan
loss. The average recorded investment in impaired loans during the first
quarter 1998 was $1,166,000. No interest income was recognized during the
first quarter 1998 on impaired loans.
The activity in the allowance for loan losses for the three months ended
March 31, 1998 and 1997 is as follows:
Three months ended March 31,
----------------------------
1998 1997
---- ----
Balance at the beginning of the period $ 1,013,081 887,803
Charge offs (41,600) (13,547)
Recoveries 36,781 2,703
Provision for loan losses 62,253 36,000
--------- -------
Balance at the end of the period $ 1,070,515 912,959
========= =======
At March 31, 1998 and December 31, 1997, certain stockholders, directors and
employees and their related interests were indebted to the Company in the
aggregate amounts of $9,733,678 and $12,996,264, respectively. All such
loans were made in the ordinary course of business.
(Continued)
14
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-5-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(4) Deposits
Included in interest bearing deposits are certificates of deposit issued in
amounts of $100,000 or more. These certificates and their remaining
maturities at March 31, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Three months or less $ 22,607,438 23,954,183
Three through twelve months 7,950,623 4,921,535
Over one year 1,380,460 616,091
---------- ----------
$ 31,938,521 29,491,809
========== ==========
(5) Commitments
In the normal course of business, the Company has various commitments to
extend credit and standby letters of credit which are not reflected in the
condensed consolidated financial statements. At March 31, 1998 and December
31, 1997, the Company had commitments to customers of approximately
$58,610,463 and $50,832,223 for approved lines of credit, $453,379 and
$870,486 for standby letters of credit, and $26,685,357 and $20,605,454 for
unfunded firm loan commitments, respectively.
(Continued)
15
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-6-
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Selected Notes to Condensed Consolidated Financial Statements (Unaudited)
See accompanying review report of KPMG Peat Marwick LLP
(6) Basic and Diluted 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:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
For the quarter ended March 31, 1998:
Basic and diluted earnings per share:
Net income $ 293,306 678,038 $ .43
======== ======= ===
For the quarter ended March 31, 1997:
Basic and diluted earnings per share:
Net income $ 201,763 595,784 $ .34
======== ======= ===
16
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that involve substantial risks and uncertainties. When used in this
report, or in the documents incorporated by reference herein, the words
"anticipate", "believe", "estimate", "may", "intend", "expect" and similar
expressions identify certain of such forward-looking statements. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements contained
herein. These forward-looking statements are based largely on the expectations
of the Company and are subject to a number of risks and uncertainties,
including, but not limited to, economic, competitive and other factors affecting
the Company's operations, markets, products and services, as well as expansion
strategies and other factors discussed elsewhere in this report filed by the
Company with the Securities and Exchange Commission. Many of these factors are
beyond the Company's control.
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 Operations. This review should
be read in conjunction with the consolidated financial statements and other
financial data presented herein.
Summary:
- -------
At the end of the first quarter of 1998, the Company had a profit of
$293,306, as compared to a profit of $201,763 for the same period in 1997. This
is primarily the result of interest income on loans increasing to $2,264,095 at
March 31, 1998 compared to the same time period in 1997 of $1,985,842. This
resulted in total interest income of $2,567,633 at the end of the first quarter
of 1998 compared to $2,253,546 at the end of the first quarter of 1997.
Interest expense for the first quarter of 1998 was $1,122,465, compared to
$1,035,664 for the same time period in 1997. While interest-bearing deposits
increased to $94,415,232 as of March 31, 1998, compared to the year-end 1997
figure of $92,644,084, the rates paid on these deposits have remained the same
since the second quarter of 1997.
Two indicators which measure profitability are net income as a percentage
of average assets (ROAA) and net income as a percentage of average stockholder
equity (ROAE). A comparison of these ratios for the first quarter of the last
two years is as follows:
17
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-----------------------------------
For the Three Months Ending
-----------------------------------
3/31/98 3/31/97
- --------------------------------------------------
ROAA .92% .69%
- --------------------------------------------------
ROAE 10.20% 8.64%
- --------------------------------------------------
NET INCOME $293,306 $201,763
- --------------------------------------------------
AVERAGE ASSETS $129,455,636 $116,594,805
- --------------------------------------------------
AVERAGE CAPITAL $11,499,782 $9,346,359
- --------------------------------------------------
Net Interest Income
- -------------------
Net interest income, the difference between interest earned on interest-
earning assets and interest expense incurred on interest-bearing liabilities, is
the most significant component of the Company's earnings. Net interest income is
affected by changes in the volumes and rates of interest-earning assets and
interest-bearing liabilities and the volume of interest-earning assets funded
with interest-bearing deposits, non-interest-bearing deposits, and stockholders'
equity. Net interest income for the first quarter of the last two years is as
follows:
----------------------------------
For the Three Months Ending
----------------------------------
3/31/98 3/31/97
- ------------------------------------------------------
INTEREST INCOME $2,567,633 $2,253,546
- ------------------------------------------------------
INTEREST EXPENSE $1,122,465 $1,035,664
- ------------------------------------------------------
NET INTEREST INCOME $1,445,168 $1,217,882
- ------------------------------------------------------
Net interest income of $1,445,168 for the first quarter of 1998 was a 18.7%
increase over the same period in 1997, which had a net interest income of
$1,217,882.
On an annualized basis, the Company's net interest margin was 4.79% through
the first quarter of 1998 compared to 4.55% through the first quarter of 1997.
Changes in net interest income from period to period result from increases
or decreases in the average balances of interest-earning assets and interest-
bearing liabilities, increases or decreases in the average rates earned and paid
on such assets and liabilities, the banks' ability to manage their earning asset
portfolios and the availability of particular sources of funds.
18
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/Provision for Loan Losses
- --------------------------
There are currently eight (8) non-accruing loans totaling $1,246,771 as of
March 31, 1998. This compares with non-accruing loans of $1,409,558 as of March
31, 1997. Of the 1998 figure, two (2) loans totaling $303,021 are
collateralized with first mortgages. One property that is secured by a first
mortgage in the amount of $208,443 has been leased and the loan continues to be
current. The second loan secured by a first mortgage on a commercial building in
the amount of $94,578 continues to run no more than 30 days past due.
There is one loan in the amount of $35,485 that has a 90% guarantee on
business assets from the Small Business Administration. This loan continues to
be current. There is one loan on a personal unsecured line of credit in the
amount of $25,352 for which the borrower is in the process of filing personal
bankruptcy. Whether this loan will be reaffirmed by the borrower is uncertain
at this time. There is a loan in the amount of $50,731 to a local builder which
had been used as a line of credit for working capital purposes. This loan has
been restructured to pay out in one year. One installment loan in the amount of
$1,916 is secured by two vehicles.
A loan in the amount of $508,081 is secured by the limited guarantees of 51
physicians, each of whom is a limited partner in a limited partnership, the
majority of which guarantees range between $10,000 and $20,000. There are also
guarantees from three (3) general partners in this partnership totaling $177,500
and a lien against accounts receivable currently totaling $495,616. This
partnership has filed a Chapter 11 reorganization plan, and it is currently
anticipated that no loss will be incurred by the Bank. The partnership has
entered into a purchase contract to be acquired by a national concern in the
same field. It is anticipated that this loan will either be paid off or
restructured and put on an accruing basis by the end of the second quarter of
1998.
The largest unsecured loan in the amount of $322,186 is a collateral pledge
of a buy-out of a physician's practice. This loan continues to be current with
interest paid monthly and principal reductions made quarterly.
The Company's allowance for loan losses at March 31, 1998 was $1,070,515, a
1.08% reserve on total loans outstanding. This compares to an allowance of
$912,959, a 1.03% reserve of total loans outstanding, at March 31, 1997.
Non-Interest Income
- -------------------
Non-interest income in the first quarter of 1998 increased 41% to $215,209
compared to $152,696 for the same period in 1997. Service charge income on
deposits increased to $22,442 for the first quarter of 1998 compared to $14,899
for the same period in 1997. Other income on deposit accounts, which includes
collecting penalties on insufficient funds and checks, increased to $49,782 for
the first quarter of 1998 compared to $36,231 for the same time period in 1997.
19
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Non-Interest Expense
- --------------------
Operating expenses increased $123,797 to $1,136,115 for the three (3)
months ended March 31, 1998, compared with the same period for 1997, which had
operating expenses of $1,012,318. Salary expense increased by $25,517 as the
result of annual salary adjustments which went into effect during the first
quarter of this year. Also, occupancy expense increased $25,820 to $224,468
during the first quarter of 1998. Equipment expense, which is included under
occupancy expense, increased $19,824 during the first quarter of 1998 as
compared to the same period in 1997. The investment in equipment is expected to
continue to grow due to the Company's commitment to maintain state-of-the-art
capabilities and computer software information as it heads toward the year 2000.
Advertising, marketing, public relations, and consultant fees increased in the
first quarter of 1998 by $39,954 as compared to the same quarter of 1997 due to
expenditures made in connection with various projects to continue to stimulate
business growth and development. Also, data processing expense, which is
included in the other expense category, increased by $11,160 during the first
quarter of 1998 as more customers continued to open more accounts with the Bank.
Liquidity
- ---------
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits and to
take advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations,
require continuous analysis in order to match the maturities of specific
categories of specific short-term loans and investments with specific types of
deposits and borrowings. The objective of liquidity management is to maintain a
balance between sources and uses of funds such that the cash flow needs of the
Company are met in the most economical manner. On the asset side, the Company's
liquidity is provided by Federal funds sold, loan principal repayments, and by
investment securities of which 100% have maturities of five years or less.
Moreover, liquidity is provided by an investment portfolio that is readily
marketable.
Closely related to the concept of liquidity is the management of interest-
earning assets and interest-bearing liabilities, which focuses on maintaining
stability in the net interest spread, an important factor in earnings' growth
and stability. The interest rate volatility of recent years and rate
deregulation have significantly affected the way in which banks manage their
business and have highlighted the importance of asset and liability management.
For the Company, the most important objectives in assets and liability
management include: (1) controlling interest rate exposure, (2) ensuring
adequate liquidity, and (3) maintaining strong capital foundation.
Capital Resources
- -----------------
On January 27, 1989, the Office of the Comptroller of the Currency 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
20
<PAGE>
required to systematically hold capital against such off-balance sheet
activities as loans sold with recourse, loan commitments, guarantees and standby
letters of credit. Finally, the guidelines strengthen the quality of capital by
increasing the emphasis on common equity and restricting the amount of loss
reserves and other forms of equity, such as preferred stock, that can be counted
as capital.
Under the terms of the guidelines, banks must meet minimum capital adequacy
based upon both total assets and risk adjusted assets. To the extent that an
institution has a favorable risk based capital ratio, it would more likely be
permitted to operate at or near minimum primary capital levels. On December 31,
1992, the guidelines took effect in their final form whereupon all banks are
required to maintain a risk based capital ratio of 8.0%. At March 31, 1998, the
Bank had a total risk based capital ratio (i.e. Tier One plus Tier Two capital)
of 10.35% (11.92% for the Company on a consolidated basis).
The Company stands ready to infuse additional capital into the Bank should
it be warranted.
Impact of Inflation
- -------------------
The condensed consolidated financial statements and related financial data
and notes presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company and the Bank are monetary in nature. As a result,
interest rates have a more significant impact on the performance of the Company
and the Bank than the effects of general price levels. Although interest rates
generally move in the same direction as inflation, the magnitude of such changes
varies.
Competition
- -----------
All areas of the Company's business are highly competitive. The Company
faces heavy competition, both from local and national financial institutions and
from various other providers of financial services. By industry standards, the
Company relies heavily on large deposit customers. In the opinion of management,
this factor is a result of its customer base and local demographics. The Bank
and the Company are well capitalized.
Accounting Pronouncements
- -------------------------
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
21
<PAGE>
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 3. 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 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 which is done on a monthly basis. 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
March 31, 1998 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.
22
<PAGE>
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 to the hypothetical 200 basis point change will
require the institution to deduct form its regulatory capital 50% of that excess
decline. Based on quarterly calculations, the Bank experienced no such decline.
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. Finally,
the ability of many borrowers to service their debt may decrease in the event of
a significant interest rate increase.
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. There were no substantial changes in the Company's
asset/liability position in the quarter ended March 31, 1998.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is involved at this time in any
claims or lawsuits other than routine matters arising out of the normal day-to-
day banking business.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Under Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
--------
- --------------------------------------------------------------------------------
SEQUENTIAL
PAGE
EXHIBIT DESCRIPTION NUMBER
- -------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------
24
<PAGE>
- -------------------------------------------------------------------------
SEQUENTIAL
PAGE
EXHIBIT DESCRIPTION NUMBER
- -------------------------------------------------------------------------
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 *
Commerce National Corporation Directors' Stock
Plan dated October 20, 1997 incorporated by
reference from Exhibit 10.1 to the company's
Report on Form 10-K for the fiscal year ended
December 31, 1997.
- -------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use 28
only).
- -------------------------------------------------------------------------
* Incorporated by reference as noted in the narrative under "Description."
(b) FORM 8-K
--------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended March 31, 1998.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE NATIONAL CORPORATION
Dated: May 15, 1998
By:/s/ Guy D. Colado
---------------------------------------
GUY D. COLADO, President and
Chief Executive Officer
Dated: May 15, 1998
By:/s/ Alan M. Scarboro
---------------------------------------
ALAN M. SCARBORO,
Secretary/Treasurer
26
<PAGE>
EXHIBIT INDEX
-------------
- -------------------------------------------------------------------------
SEQUENTIAL
PAGE
EXHIBIT DESCRIPTION NUMBER
- -------------------------------------------------------------------------
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 *
Commerce National Corporation Directors' Stock
Plan dated October 20, 1997 incorporated by
reference from Exhibit 10.1 to the company's
Report on Form 10-K for the fiscal year ended
December 31, 1997
- -------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use 28
only).
- -------------------------------------------------------------------------
* Incorporated by reference as noted in the narrative under "Description."
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR COMMERCE NATIONAL CORPORATION
AND SUBSIDIARY DATED MARCH 31, 1998 AND DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,149,131
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,750,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,505,376
<INVESTMENTS-CARRYING> 15,505,376
<INVESTMENTS-MARKET> 15,505,376
<LOANS> 97,641,639
<ALLOWANCE> 1,070,515
<TOTAL-ASSETS> 131,478,501
<DEPOSITS> 112,838,485
<SHORT-TERM> 1,172,234
<LIABILITIES-OTHER> 441,296
<LONG-TERM> 5,179,896
0
0
<COMMON> 74,282
<OTHER-SE> 11,772,308
<TOTAL-LIABILITIES-AND-EQUITY> 131,478,501
<INTEREST-LOAN> 2,264,095
<INTEREST-INVEST> 242,255
<INTEREST-OTHER> 61,283
<INTEREST-TOTAL> 2,567,633
<INTEREST-DEPOSIT> 1,051,246
<INTEREST-EXPENSE> 1,122,465
<INTEREST-INCOME-NET> 1,445,168
<LOAN-LOSSES> 62,253
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 920,906
<INCOME-PRETAX> 462,009
<INCOME-PRE-EXTRAORDINARY> 462,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,306
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 0.048
<LOANS-NON> 1,125,103
<LOANS-PAST> 0
<LOANS-TROUBLED> 86,778
<LOANS-PROBLEM> 3,848,053
<ALLOWANCE-OPEN> 1,013,081
<CHARGE-OFFS> 41,600
<RECOVERIES> 36,781
<ALLOWANCE-CLOSE> 1,070,515
<ALLOWANCE-DOMESTIC> 1,070,515
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 694,723
</TABLE>
