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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, 1998
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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
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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, 1999 of the Registrant's voting
stock held by non-affiliates was $8,696,583.25. 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 $16.75 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, 1999, 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
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TABLE OF CONTENTS
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Item No. Caption Page
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PART I.................................................................................... 1
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 8
Item 3. Legal Proceedings........................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...................... 9
PART II................................................................................... 9
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................................... 9
Item 6. Selected Financial Data.................................................. 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 29
Item 8. Consolidated Financial Statements........................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................. 69
PART III.................................................................................. 69
Item 10. Directors and Executive Officers of the Registrant....................... 69
Item 11. Executive Compensation/Board Compensation................................ 74
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 75
Item 13. Certain Relationships and Related Transactions........................... 78
PART IV................................................................................... 79
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................................... 79
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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 $1,500,000 of its capital to purchase loans
from the Bank which were in excess of authorized lending limits of the Bank. As
of March 1, 1999, the Company was participating in an aggregate of $854,514 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. The loans are either demand or term in nature. These
loans are made to business entities for equipment purchases and other capital
improvements, inventory acquisition and general
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working capital. Dependent upon the size and perceived risk for a particular
loan, the loans usually are secured and often are guaranteed by the principals
of the business. 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% or less. 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 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 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. These loans may be viewed as more risky than 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.
The primary correspondent institutions of the Bank are NationsBank, N.A.,
Jacksonville and Independent Bankers' Bank of Florida, Inc., Orlando.
NationsBank, 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 NationsBank, N.A.
nor Independent Bankers' Bank of Florida has provided trust services, nor have
such services been provided by the Bank.
COMPETITION
As of March 1, 1999, there were sixteen (16) commercial banks, three (3)
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 banks 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
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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 June 30, 1998, the Bank had approximately 1.45% 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
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.
The Bank is in competition with existing area financial institutions other
than commercial banks and savings banks, 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 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
3
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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.
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.
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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
four percent (4%), 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 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.
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The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, insurance companies, 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted in 1991. Among other things, FDICIA requires federal
bank regulatory authorities to take "prompt corrective action" with respect to
banks that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The FRB and the FDIC have adopted regulations to implement the prompt
corrective action provisions of FDICIA. Among other things, the regulations
define the relevant capital measures for the five capital categories. An
institution is deemed to be "well capitalized" if it has a total risk-based
capital ratio (total capital to risk-weighted assets) of ten percent (10%) or
greater, a Tier 1 risk-based capital ratio (Tier 1 Capital to risk-weighted
assets) of six percent (6%) or greater, and a Tier 1 leveraged capital ratio
(Tier 1 Capital to total assets) of five percent (5%) or greater, and is not
subject to a regulatory order, agreement or directive to meet and maintain a
specific capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of eight
percent (8%) or greater, a Tier 1 risk-based capital of four percent (4%) or
greater, and (generally) a Tier 1 leveraged capital ratio of four percent (4%)
or greater, and the institution does not meet the definition of a "well
capitalized" institution. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than two percent (2%).
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. If an "undercapitalized" bank fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized. "Significantly undercapitalized" banks may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions may not, beginning 60 days after
becoming "critically undercapitalized," make any payment of principal or
interest on their subordinated debt.
The Bank currently meets the regulatory definition of 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
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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 (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.
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On September 30, 1996, legislation was signed by the President to combine
the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF") of the FDIC. The legislation, known as the Deposit Insurance Funds Act
of 1996, provided for a special assessment on institutions that pay assessments
to the SAIF. The Bank does not pay assessments to the SAIF. The legislation
also provides for the payment of interest on bonds issued in connection with the
clean up of the savings and loan crisis by both banks and savings associations.
Because of the recent adoption of the law, it is not possible to accurately
predict what impact, if any, this will have upon the Bank or the Company in the
future.
PROPOSED LEGISLATION
There have been proposed a number of legislative and regulatory proposals
designed to strengthen the federal deposit insurance system and to improve the
overall financial stability of the U.S. banking system. It is impossible to
predict whether or in what form these proposals may be adopted in the future,
and if adopted, what their effect would be on the Company. There are proposals
in the Florida legislature which would amend the Florida Tax Code and
subsequently affect the taxes paid by the business community. The passage of
these proposals and to what extent these proposals would affect banks domiciled
in Florida is unknown at this point.
EMPLOYEES
The Company and the Bank as of March 1, 1999, had 52 full-time employees
and 6 part-time employees. The employees of the Bank are not part of any
collective bargaining unit.
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. In addition, the Bank leases 947 square feet on the fourth floor
for document storage on a month to month basis.
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 $444,385 for
the year ended 1998 which represented $319,966 due under the lease agreement
between the Company and Gateway Plaza, Ltd. and $124,419 due under the lease
agreement between the Bank and Rollins College.
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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. The Bank
exercised its first renewal option on December 14, 1998, and extended the lease
until January 17, 2004.
ITEM 3. LEGAL PROCEEDINGS
-----------------
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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As of March 1, 1999, 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 465 shareholders based on the
number of record holders. To date there has been little secondary trading in
the Common Stock and, to the Company's knowledge, the Common Stock has not
received any over-the-counter quotations. The trading of the Common Stock
between third parties reflected values ranging between $10.00 and $18.00 per
share during the year ended 1998.
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1998 1997 1996
MARKET PRICE RANGE MARKET PRICE RANGE MARKET PRICE RANGE
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QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
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December 31 $16.75 $16.75 $15.00 $14.50 $14.50 $14.50
- ----------------------------------------------------------------------------------
September 30 $18.00 $15.00 $13.50 $13.00 $15.50 $13.00
- ----------------------------------------------------------------------------------
June 30 $16.00 $15.00 $13.50 $13.00 $15.00 $10.00
- ----------------------------------------------------------------------------------
March 31 $10.00 $10.00 $13.00 $13.00 $14.71 $12.00
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On June 21, 1993, the Company adopted a Stock Redemption/Repurchase Policy.
As of March 1, 1999, 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 Board of Directors declared a cash dividend of $0.11 per share on the
Company's outstanding shares of common stock payable to shareholders of record
as of January 1, 1998. The dividend was paid on May 1, 1998.
ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)
-----------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------
DECEMBER 31
1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Net Interest Income $ 6,286,227 $ 5,330,982 $ 4,305,644 $ 3,767,327 $ 3,413,990
- ---------------------------------------------------------------------------------------------
Provisions for Loan $ 424,012 $ 179,000 $ 90,000 $ 175,000 $ 50,000
Losses
- ---------------------------------------------------------------------------------------------
Net Income $ 1,439,507 $ 538,506 $ 648,336 $ 472,965 $ 724,209
- ---------------------------------------------------------------------------------------------
Earnings Per Share - $ 2.03 $0.88 $1.13 $0.90 $1.26
Diluted
- ---------------------------------------------------------------------------------------------
Total Assets $156,907,492 $126,630,682 $114,865,968 $100,365,487 $83,802,977
- ---------------------------------------------------------------------------------------------
Long-Term Obligations $ 4,266,621 $ 1,395,977 $ 1,476,111 $ 1,547,309 $ 4,327,922
- ---------------------------------------------------------------------------------------------
Average Equity $ 12,214,771 $ 9,492,971 $ 8,857,813 $ 7,613,835 $ 6,927,701
- ---------------------------------------------------------------------------------------------
Average Assets $140,446,293 $120,729,118 $108,608,555 $ 89,803,441 $84,371,159
- ---------------------------------------------------------------------------------------------
Cash Dividends $ 0.11 -0- -0- -0- -0-
Per Share
- ---------------------------------------------------------------------------------------------
Average Shares 710,421 614,748 573,426 523,565 523,565
Outstanding - 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.
10
<PAGE>
SUMMARY
For fiscal 1998, the Company had a profit of $1,439,507 as compared to a
profit of $538,506 in 1997, and $648,336 in 1996. Net loans outstanding
increased 26% to $122,929,105 from the 1997 year-end figure of $97,317,521.
While interest expense on deposits and borrowed money in 1998 grew to
$4,918,056, as opposed to $4,360,146 for year-end 1997 and $4,155,519 for year-
end 1996. Total assets at year-end 1998 were $156,907,492, a 24% increase over
1997, and a 37% increase over 1996. Stockholder equity at year-end 1998 was
$12,966,729 or 8.3% of year-end assets. This compares to year-end 1997
stockholder equity of $10,403,847, and year-end 1996 stockholder equity of
$9,228,420. Net income per common share-diluted for 1998 was $2.03 per share,
compared to $0.88 per share for 1997 and $1.13 per share for 1996.
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>
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
--------------------------------------------------------------------
ROAA 1.02% 0.45% 0.60%
--------------------------------------------------------------------
ROAE 11.78% 5.67% 7.32%
--------------------------------------------------------------------
Net Income $ 1,439,507 $ 538,506 $ 648,336
--------------------------------------------------------------------
Average Assets $140,446,293 $120,729,118 $108,608,555
--------------------------------------------------------------------
Average Equity $ 12,214,771 $ 9,492,971 $ 8,857,813
--------------------------------------------------------------------
Equity to Assets 0.86% 0.79% 0.82%
--------------------------------------------------------------------
Dividend Payout 5.42% N/A N/A
--------------------------------------------------------------------
</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:
11
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------
1998 1997 1996
<S> <C> <C> <C>
------------------------------------------------------------
Interest Income $11,204,283 $9,691,128 $8,461,163
------------------------------------------------------------
Interest Expense $ 4,918,056 $4,360,146 $4,155,519
------------------------------------------------------------
NET INTEREST INCOME $ 6,286,227 $5,330,982 $4,305,644
------------------------------------------------------------
</TABLE>
Net interest income of $6,286,227 represented a 18% increase over 1997 and
a 46% increase over 1996. This is primarily the result of the increase in loan
interest income which was $9,945,556, $8,488,762, and $7,051,323 at December
31, 1998, 1997, and 1996, respectively. Investment security income increased in
1996 to $1,119,534, decreased in 1997 to $1,031,804 and decreased in 1998 to
$865,727. Federal funds sold income, typically a lower-yielding investment
class, was $355,148, $137,240, and $257,766 at December 31, 1998, 1997, and
1996, respectively. For further information, refer to the Rate/Volume
Information chart.
At the same time, interest-bearing deposits increased from $85,055,755 at
year-end 1996 to $92,644,084 at year-end 1997 to $115,798,941 at year-end 1998.
Interest expense on deposits and borrowed money was $4,918,056, $4,360,146, and
$4,155,519 at December 31, 1998, 1997, and 1996, respectively. The major reason
for the increase in deposit interest expense was due to total time deposit
interest expense of $3,147,798, $2,798,560, and $2,661,881 for December 31,
1998, 1997, and 1996, respectively. For further information, refer to the
Rate/Volume Information chart.
The Company's net interest margin was 4.84% for the year ended December 31,
1998, compared to 4.79% for 1997 and 4.32% for 1996.
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 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
12
<PAGE>
Monthly review and evaluation of loans identified as having loss potential.
If as a result of such monthly reviews, a loan is judged to be
uncollectible, the carrying value of the loan is reduced to that portion
that is considered to be collectible.
In addition to the continuing internal assessment of the loan portfolio,
the Bank engages an independent, third party loan review consultant to review
the loan portfolio every six months. The Bank's loan portfolio is also subject
to examination by the OCC.
The allowance for loan losses for year-end 1998 was $1,323,143, a 1.06%
reserve of total loans outstanding. This compares to a year-end 1997 allowance
of $1,013,081, a 1.03% reserve of total loans outstanding, and compares to year-
end 1996 allowance of $887,803, a 1.01% reserve of total loans outstanding. The
charge-offs for 1998 were $186,047 while recoveries totaled $72,097. This
compares to charge-offs in 1997 of $71,588 and recoveries of $17,866, as
compared to charge-offs in 1996 of $103,516 and recoveries of $44,516. Non-
accruing loans totaled $782,547, $1,113,608, and $1,159,868 at December 31,
1998, 1997 and 1996, respectively. The loan loss provision for 1998 was
$424,012, compared to $179,000 for 1997 and $90,000 for 1996. Management of the
Bank believes that the allowance for loan losses was adequate as of December 31,
1998, in light of the significant reduction in nonaccrual loans, past loan loss
experience and the continued strong economy in the Bank's market area.
The Company and the Bank continue to be examined by the FRB, OCC (National
Bank Examiners), a private loan review consultant, and a private compliance
consultant.
The most recent OCC safety and soundness examination was as of January
1999. 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 $707,363 in 1996 to $746,721
in 1997 to $959,235 in 1998. Part of the increases were a result of increased
income on service charges for demand accounts as all branches obtained more
checking accounts during 1998. With the branches obtaining more customers
during 1998, both debit card fee income and check order fee income increased.
The other major reason is the continued stringent policies on NSF charges.
NON-INTEREST EXPENSE
Total operating expenses decreased $292,513, or 6%, to $4,569,677 for year-
end 1998, compared to $4,862,190 for year-end 1997, and $3,938,297 for year-end
1996. The 1997 figure included a one-time expense for a Directors' Stock Option
Plan. The Directors' Stock Option expense of $650,000 was 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 130,000 options.
The 1998 salary and benefit expense of $2,216,495 was an increase of
$217,258 over the year-end 1997 figure of $1,999,237. Part of this increase was
the result of annual salary adjustments and cost-of-living benefit increases.
Also, during 1998, the Bank added an additional loan officer and administrative
assistant. The 1997 figure of $1,999,237 was an increase of $165,033 over the
13
<PAGE>
year-end 1996 figure of $1,834,204, 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 year-end occupancy expense figure of $909,041 was an increase of
$61,683 over the year-end figure of $847,358. The year-end 1996 figure was
$777,524. Part of the increase in 1998 can be attributed to the 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 and
maintenance of furniture, fixture and equipment. Depreciation expense on
computer software increased from $11,696 in 1997 to $17,039 in 1998. Also,
depreciation expense of computers increased from $43,154 in 1997 to $71,261 at
year-end 1998. Maintenance and repair expenses of furniture, fixture, and
equipment increased from $34,430 at year-end 1997 to $55,781 at year-end 1998.
Advertising and public relation expenses increased $13,603 to $162,967 at
year-end 1998. The main reason for this increase from the 1997 figure of
$149,364 is the result of the Bank hiring a new marketing firm in 1998 to
establish a more defined strategic marketing plan. The plan will provide the
Bank and the Company with necessary marketing, advertising research, and
training support needed to go forward into 1999, and years beyond.
In 1998, legal and professional fees declined by $59,826 to $221,224 over
the 1997 year-end figure of $281,050. The 1996 year-end figure was $212,527.
During the last half of 1998, the Bank experienced recoveries on two large loans
which included recouping all legal fees. These legal fees have been expensed
during 1997 and the first part of 1998.
Stationery and printing supplies in 1998 increased by $20,132 to a 1998
year-end figure of $79,937 from the 1997 year-end figure of $59,805. Within
this expense category, there were large increases in both photocopy expenses and
stationery and forms expenses.
The data processing expense for year-end 1998 was $224,744. This is an
increase of $37,379 over the year-end 1997 figure of $187,365. The year-end
1996 figure was $160,483. The main reason for this increase in expense was that
the Bank replaced all computer monitors in the teller areas to become Y2K
compliant.
The 1998 other expense total of $664,500 was an increase of $48,809 from
the year-end figure for 1997 of $615,611. The 1996 figure was $641,711. Also,
office supplies increased by $7,721 to $21,951 at year-end 1998. Postage
expense during 1998 increased by $6,314 to $61,516 at year-end 1998. Also,
telephone expense during 1998 increased by $3,713 to $59,575 at year-end 1998 as
the Bank continues to upgrade its communication system.
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.
14
<PAGE>
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 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
Like other financial institutions, the Bank must ensure that sufficient
funds are available to meet deposit withdrawals, loan commitments, investment
needs and expenses. Control of the Bank's cash flow requires, in addition to
cash flow from operations, the anticipation of deposit flows and loan payments.
The Bank's primary sources of funds are deposit accounts, Federal Home Loan Bank
("FHLB") advances and principal and interest payments on loans.
15
<PAGE>
The Bank requires funds in the short term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in securities
and invest in loans. The Bank funds short-term requirements through advances
from the FHLB, the sale of temporary investments, deposit growth and loan
principal payments. In addition, management has no plans to significantly
change long-term funding requirements. The Bank requires funds in the long-term
to invest in loans for its portfolio, purchase fixed assets and provide for the
liquidation of deposits maturing in the future. The Bank funds its long-term
requirements with proceeds from maturing loans, the sale of loans, the sale of
investments in securities and deposits and the sale of real estate.
During the year ended December 31, 1998, the Company increased its cash
position by $6,925,382. The primary sources of this net cash position increase
was a result of $25,974,753 in new demand deposits and certificates of deposit.
In addition, the Company received $2,949,000 in advances from the FHLB and
$1,215,000 in proceeds from employee stock options that were exercised. In
addition, there were proceeds of $225,444 from the sale of real estate. The
primary use of funds was a result of increased lending. Net new loans booked
during the course of the year were $26,159,208.
It is management's opinion that the Company's liquidity is adequate.
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, 1998,
the Bank had a total risk based capital ratio (i.e., Tier One plus Tier Two
capital) of 10.10% (10.87% for the Company on a consolidated basis). The Bank
and the Company are well capitalized. 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 condensed consolidated financial statements and related financial data
and notes presented herein have been prepared in accordance with Generally
Accepted Accounting Principles
16
<PAGE>
("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 the local demographics.
For the year ended December 31, 1998, the Company saw an increase in total
assets, total shareholders' equity and earnings. These are the result of a
number of factors but principally the community acceptance of the branches of
the Bank which opened in 1995 and 1996 and which have started to produce the
desired results. In addition, improvement in the loan portfolio of the Bank and
reallocation of the assets of the Bank into higher income producing loans, as
compared to other investments like Federal funds sold, has benefited the
Company. Earnings per share-diluted increased to $2.03 per share in 1998 from
$0.88 per share in 1997 compared to $1.13 per share in 1996.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
STATISTICAL INFORMATION
CONSOLIDATED DAILY AVERAGE BALANCES, INCOME/EXPENSE
AND AVERAGE YIELDS EARNED AND RATES PAID -- 1998 AND 1997
(Dollars in thousands, yields on taxable equivalent basis)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
ASSETS AVERAGE INCOME YIELD AVERAGE INCOME YIELD
BALANCES (1) RATES BALANCES (1) RATES
(1) (1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $108,226 $ 9,945 9.19% $ 91,662 $8,489 9.26%
- ---------------------------------------------------------------------------------------------------------
Investment Securities $ 14,316 $ 866 6.05% $ 16,372 $1,032 6.30%
- ---------------------------------------------------------------------------------------------------------
Funds Sold $ 6,636 $ 355 5.35% $ 2,504 $ 137 5.47%
- ---------------------------------------------------------------------------------------------------------
Interest-Bearing Deposits $ 783 $ 38 4.85% $ 731 $ 33 4.51%
- ---------------------------------------------------------------------------------------------------------
Other Short-Term Investments -0- -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $129,961 $11,204 8.62% $111,269 $9,691 8.71%
- ---------------------------------------------------------------------------------------------------------
Cash $ 4,861 N/A N/A $ 3,468 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Premises and Equipment $ 3,812 N/A N/A $ 3,558 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Allowance for Loan Losses ($1,130) N/A N/A ($948) N/A N/A
- ---------------------------------------------------------------------------------------------------------
Other Assets $ 2,942 N/A N/A $ 3,383 N/A N/A
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $140,446 N/A N/A $120,730 N/A N/A
- ---------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND AVERAGE AVERAGE YIELD
SHAREHOLDER'S BALANCES YIELD BALANCES RATES
EQUITY (1) EXPENSES RATES (1) EXPENSES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Deposits:
- --------------------------------------------------------------------------------------------------------
NOW Accounts $ 11,471 $ 229 2.00% $ 9,184 $ 184 2.00%
- --------------------------------------------------------------------------------------------------------
Savings $ 24,104 $ 979 4.06% $ 19,115 $ 774 4.05%
- --------------------------------------------------------------------------------------------------------
Money Market $ 9,265 $ 282 3.04% $ 11,015 $ 323 2.93%
- --------------------------------------------------------------------------------------------------------
Certificates of Deposits $ 56,589 $ 3,148 5.56% $ 50,657 $2,799 5.53%
- --------------------------------------------------------------------------------------------------------
Other Time -0- N/A N/A -0- N/A N/A
- --------------------------------------------------------------------------------------------------------
TOTAL INTEREST- $101,429 $ 4,638 4.57% $ 89,971 $4,080 4.53%
BEARING DEPOSITS
- --------------------------------------------------------------------------------------------------------
Funds Purchased $ 49 $ 3 6.12% $ 23 $ 1 4.35%
- --------------------------------------------------------------------------------------------------------
Other Short-Term $ 3,700 $ 188 5.08% $ 3,641 $ 188 5.16%
Borrowings
- --------------------------------------------------------------------------------------------------------
Long-Term Debt $ 1,916 $ 89 4.65% $ 1,214 $ 91 7.50%
- --------------------------------------------------------------------------------------------------------
TOTAL INTEREST- $ 5,665 $ 280 4.94% $ 4,878 $ 280 5.74%
BEARING
LIABILITIES
- --------------------------------------------------------------------------------------------------------
Demand Deposits $ 19,863 N/A N/A $ 15,420 N/A N/A
- --------------------------------------------------------------------------------------------------------
Other Liabilities $ 1,274 N/A N/A $ 968 N/A N/A
- --------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 12,215 N/A N/A $ 9,493 N/A N/A
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND
SHAREHOLDERS'
EQUITY $140,446 N/A N/A $120,730 N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Interest Rate Spread 4.03% 4.11% 3.69% 3.89% 3.87%
- --------------------------------------------------------------------------------------------------------
Net Interest Income (in thousands) $6,286 $5,331 $4,306 $3,767 $3,414
- --------------------------------------------------------------------------------------------------------
Net Interest Margin (2) 4.84% 4.79% 4.32% 4.47% 4.26%
- --------------------------------------------------------------------------------------------------------
</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, 1998 VS. 1997 DECEMBER 31, 1997 VS. 1996
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 $1,681 $(224) $1,457 $1,531 $ (93) $1,438
- ------------------------------------------------------------------------------------------
Investments (86) (80) (166) (136) 48 (88)
- ------------------------------------------------------------------------------------------
Fed Funds Sold 212 6 218 (119) (2) (121)
- ------------------------------------------------------------------------------------------
Interest Bearing 4 1 5 2 (1) 1
Assets
- ------------------------------------------------------------------------------------------
Total Earning Assets $1,811 $(297) $1,514 $1,278 $ (48) $1,230
==========================================================================================
Interest Expenses
- -----------------
- ------------------------------------------------------------------------------------------
Deposits $ 706 $(148) $ 558 $ 243 $(116) $ 127
- ------------------------------------------------------------------------------------------
Borrowings 67 (67) -0- 73 4 77
- ------------------------------------------------------------------------------------------
Total Interest Bearing $ 773 $(215) $ 558 $ 316 $(112) $ 204
Liabilities
- ------------------------------------------------------------------------------------------
Net Margin $1,038 $ (82) $ 956 $ 962 $ 64 $1,026
- ------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
December 31, 1998 and December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------
1998 1997
-----------------------------------------
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 $ 5,021 5.80% $ 7,974 5.81%
- --------------------------------------------------------------------------------
Due After One Year Through Five 8,472 5.85% 7,526 6.52%
Years
- --------------------------------------------------------------------------------
Due After Five Years Through -0- -0- -0- -0-
Ten Years
- --------------------------------------------------------------------------------
Due After Ten Years -0- -0- -0- -0-
- --------------------------------------------------------------------------------
TOTAL $13,493 5.83% $15,500 6.16%
- --------------------------------------------------------------------------------
States and Political Subdivisions:
- --------------------------------------------------------------------------------
Due In One Year Or Less -0- -0- 190 4.05%
- --------------------------------------------------------------------------------
Due After One Year Through Five -0- -0- -0- -0-
Years
- --------------------------------------------------------------------------------
Due After Five Years Through Ten -0- -0- -0- -0-
Years
- --------------------------------------------------------------------------------
Due After Ten Years -0- -0- -0- -0-
- --------------------------------------------------------------------------------
Other Securities -0- -0- -0- -0-
- --------------------------------------------------------------------------------
TOTAL INVESTMENT $13,493 5.83% $15,690 6.28%
SECURITIES
- --------------------------------------------------------------------------------
</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,
1998 1997
-------------------------------------------------------
<S> <C> <C>
COMMERCIAL:
-------------------------------------------------------
Secured $ 12,472 $11,114
-------------------------------------------------------
Unsecured 2,887 4,326
-------------------------------------------------------
REAL ESTATE:
-------------------------------------------------------
Construction 29,868 15,774
-------------------------------------------------------
Mortgage 75,953 64,450
-------------------------------------------------------
Other Consumer Loans 3,559 3,040
-------------------------------------------------------
TOTAL LOANS $124,739 $98,704
-------------------------------------------------------
</TABLE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1998
(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 $ 15,359 $11,275 $ 3,668 $ 416
- ---------------------------------------------------------------------------
Real Estate 105,821 21,675 30,430 53,716
- ---------------------------------------------------------------------------
Other 3,559 2,507 1,012 40
- ---------------------------------------------------------------------------
TOTAL $124,739 $35,457 $35,110 $54,172
- ---------------------------------------------------------------------------
</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 $ 32,052 $10,024 $15,304 $ 6,994
- --------------------------------------------------------------------------------
Floating or Adjustable $ 92,687 $25,433 $20,128 $47,126
Interest Rates
- --------------------------------------------------------------------------------
TOTAL $124,739 $35,457 $35,162 $54,120
- --------------------------------------------------------------------------------
</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
------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual Loans $782,547 $1,113,608 $1,159,868
------------------------------------------------------------------
Accruing Loans Past Due 90 -0- -0- -0-
Days or More
------------------------------------------------------------------
Troubled Debt Restructurings $115,217 -0- $ 11,880
------------------------------------------------------------------
</TABLE>
If interest due on all non-accrual loans had been accrued at the original
contract rates, interest income would have been approximately $28,536 greater
for 1996, approximately $83,917 greater for 1997, and approximately $42,776
greater for 1998.
On December 31, 1998, the Bank had ten (10) non-accrual loans totaling
$782,547. The 1998 figure is a reduction of $331,061 from the 1997 year-end
total of $1,113,608, and $377,321 from the 1996 year-end total of $1,159,868.
Of the 1998 figure, four (4) loans totaling $566,552 are collateralized with
first mortgages. One loan secured by a first mortgage on a residence in the
amount of $314,559 is in the process of foreclosure. A Summary Judgment was
issued January 6,1999; however, a contract to sell the property was entered into
between the owner and a third party and, as a result, the judgment has been
stayed for 60 days pending closing on the contract. Another loan in the amount
of $91,674 is secured by a first mortgage on a commercial building. A demand
letter has been sent to the borrower. It is anticipated that this loan will be
brought current during the first quarter of 1999. Another loan in the amount of
$11,139 is secured by a first mortgage on a residential lot in Lake County. It
is anticipated that this lot will be sold before the foreclosure process is
completed.
23
<PAGE>
The final first mortgage loan in the amount of $149,180 is secured by
a residence. The foreclosure suit has been filed. It is anticipated that there
will be minimal loss to the Bank at this time.
There are three (3) non-accrual loans that are made to the same borrower
through different entities. One non-accrual loan in the amount of $9,781 is
secured by a second mortgage on a residence for an abundance of collateral. A
second non-accrual loan in the amount of $54,925 is secured by a lien on an
airplane. The third non-accrual loan in the amount of $9,881 is unsecured. At
present, the Bank is attempting to restructure the three (3) loans with the
second mortgage on the house, and the unsecured loan being brought current. At
present, there are two (2) bidders desiring to purchase the airplane. It is
anticipated, at this time, that there will be minimal loss to the Bank.
There is one (1) non-accrual loan in the amount of $51,899. This loan is
secured by a Small Business Administration guarantee on business assets. It is
anticipated that there will be an unspecified balance charged off on this loan.
There is one (1) unsecured loan in the amount of $3,372. Three (3) payments were
made on this loan at year-end to bring the loan current.
The final non-accrual loan in the amount of $86,137 is secured by a lien on
a commercial boat and trailer. A suit has been filed against the guarantors of
this loan, but the suit has been stayed since the guarantors have brought the
loan current.
As of December 31, 1998, there were three (3) loans which have been
restructured totaling $115,217. Two (2) of these loans totaling $83,503 were
paid off during January 1999. The final loan in the amount of $31,714 was
brought current before the end of the year and is currently being handled in a
proper manner.
The following table, entitled Analysis of the Allowance for Loan Losses,
summarizes the Bank's allowance for loan losses as of December 31, 1998.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
24
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/98 12/31/97 12/31/96
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $1,013,081 $ 887,803 $856,803
- -------------------------------------------------------------------------------
Charge-offs
- -------------------------------------------------------------------------------
Domestic:
- -------------------------------------------------------------------------------
Commercial 104,790 63,064 101,387
- -------------------------------------------------------------------------------
Real estate -- construction -0- -0- -0-
- -------------------------------------------------------------------------------
Real estate -- mortgage -0- -0- -0-
- -------------------------------------------------------------------------------
Installment loans to individuals 81,257 8,524 2,129
- -------------------------------------------------------------------------------
Recoveries:
- -------------------------------------------------------------------------------
Domestic:
- -------------------------------------------------------------------------------
Commercial 72,097 17,866 44,516
- -------------------------------------------------------------------------------
Real estate -- construction -0- -0- -0-
- -------------------------------------------------------------------------------
Real estate -- mortgage -0- -0- -0-
- -------------------------------------------------------------------------------
Installment loans to individuals -0- -0- -0-
- -------------------------------------------------------------------------------
Additions charged to operations 424,012 179,000 90,000
- -------------------------------------------------------------------------------
Balance at end of period $1,323,143 $1,013,081 $887,803
- -------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
----------------------------------------------------------
1998 1997
----------------------------------------------------------
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 $ 729,510 55.47% $ 716,552 70.73%
- --------------------------------------------------------------------------------
Real Estate 541,027 40.53% 243,444 24.03%
- --------------------------------------------------------------------------------
Consumer 52,606 4.00% 53,085 5.24%
- --------------------------------------------------------------------------------
ACTUAL TOTAL $1,323,143 100.00% $1,013,081 100.00%
- --------------------------------------------------------------------------------
</TABLE>
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.
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.
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
26
<PAGE>
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.
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 1998, 1997 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
% OF AVERAGE % OF AVERAGE
AVERAGES TOTAL RATE PAID AVERAGES TOTAL RATE PAID
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 19,863 16.37% -0- $ 15,420 14.63% -0-
- ------------------------------------------------------------------------------
NOW $ 11,471 9.46% 2.99% $ 9,184 8.71% 2.00%
- ------------------------------------------------------------------------------
Savings $ 24,104 19.87% 4.00% $ 19,115 18.13% 4.00%
- ------------------------------------------------------------------------------
Money
Market $ 9,265 7.64% 2.75% $ 11,015 10.45% 2.75%
- ------------------------------------------------------------------------------
Certificate
of Deposit $ 56,589 46.66% 5.45% $ 50,657 48.08% 5.40%
- ------------------------------------------------------------------------------
TOTAL $121,292 100.00% 3.73% $105,391 100.00% 3.79%
- ------------------------------------------------------------------------------
<CAPTION>
1996
----------------------------
% OF AVERAGE
AVERAGES TOTAL RATE PAID
----------------------------
<S> <C> <C> <C>
Demand $12,314 12.88% -0-
- ----------------------------------------------
NOW $ 7,565 7.90% 2.00%
- ----------------------------------------------
Savings $15,088 15.76% 4.00%
- ----------------------------------------------
Money
Market $14,953 15.62% 2.75%
- ----------------------------------------------
Certificate
of Deposit $45,799 47.84% 4.41%
- ----------------------------------------------
TOTAL $95,719 100.00% 3.90%
- ----------------------------------------------
</TABLE>
MATURITY OF CDS AND OTHER TIME DEPOSITS
IN AMOUNTS OF $100,000 OR MORE
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
------------------------------------------------------
MONTHS TO CD'S DOMESTIC OTHER TIME
MATURITY DEPOSITS TOTAL
------------------------------------------------------
<S> <C> <C> <C>
3 Or less $32,152 0 $32,152
------------------------------------------------------
Over 3 through 12 $ 7,647 0 $ 7,647
------------------------------------------------------
Over 12 $ 907 0 $ 907
------------------------------------------------------
TOTAL $40,706 0 $40,706
------------------------------------------------------
</TABLE>
27
<PAGE>
YEAR 2000 (Y2K)
The Bank is aware of the potential risks involved in its technology-guided
equipment that has been identified by the coming of the year 2000 ("Y2K") The
Board of Directors has been proactive in appointing a committee and coordinator,
approving a budget and contingency plan for the Y2K. The Board of Directors
monitors the Bank's Y2K progress on a monthly basis.
The Bank does not write its own software or perform programming. Instead,
it uses the services of M&I Data Services, Inc. ("M&I") for customer item
processing, CORE application, ATM services, voice response unit, and other
related Bank services. The other direct software link is with Independent
Bankers' Bank of Florida, a correspondence bank for customer wire transfers and
federal funds transfers. Both of these entities have provided the Bank with
adequate responses to the Bank's inquiries as to the status of their Y2K plans.
Ongoing monitoring will continue until all pieces are in place.
The Bank's Y2K Action Plan consists of five phases: awareness, assessment,
renovation, validation and implementation.
The awareness phase defines the Y2K problem and commits the necessary
resources to perform the required compliance responsibilities. The Bank
has successfully concluded the awareness phase.
The assessment phase requires the Bank to determine the size and complexity
of potential problems. This phase has been completed.
The renovation phase includes software, hardware enhancements, upgrades or
replacements as deemed necessary for Y2K readiness. The Bank has replaced
all computer hardware that was evaluated as impossible to enhance or
upgrade to become Y2K compliant. Computer software has been enhanced or
replaced as necessary.
The validation phase involves testing the renovated or replaced hardware
and software components for Y2K readiness. The Bank is in this validation
stage and will continue until all components are deemed compliant.
The final stage of implementation is the certification of the validation of
Y2K compliancy and the use of the validated resources. As the Bank
completes various stages of the validation stage, the implementation stage
will be completed.
Through the various phases mentioned above, the Bank has identified that
power, telephone, and CORE application are the components that are "mission
critical" to the operation of the Bank and the standards it has set. The Board
of Directors has approved a contingency plan for each mission critical
component. These contingency plans are in line with the Bank's established
disaster contingency plan, and management is confident of their performance.
28
<PAGE>
The Board of Directors has approved a Y2K budget as prepared by the Y2K
committee in the approximate amount of $70,000. Any substantive increases the
committee deems necessary will be submitted to the Board of Directors for
approval.
The Bank's regulatory agency, the OCC, has frequently visited or telephoned
the Bank's committee coordinator for continual oversight of the Bank's progress
in the Y2K compliancy. The FRB and the Office of Thrift Supervision review the
progress of M&I for assurance that M&I is progressing satisfactorily with M&I's
Y2K action plan.
IMPACT OF RECENT 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
operating segments in interim financial reports issued to shareholders. The
Statement is required for fiscal years beginning after December 15, 1997.
The adoption of this standard did not have a significant impact on the
consolidated financial statements.
SFAS No. 133
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedge Activities" (FASB
133). This standard, which is effective for all fiscal quarters and all fiscal
years beginning after June 15, 1999, requires all derivatives be measured at
fair value and be recognized as assets and liabilities in the statement of
financial position. FASB 133 sets forth the accounting for changes in fair
value of a derivative depending on the intended use and designation of the
derivative. Implementation of FASB 133 is not expected to have a significant
impact on the financial position or results of operations of the Company.
SFAS No. 134
In October 1998, the FASB issued Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement
requires that, after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage
backed security as a trading security. The statement is effective for the first
fiscal quarter beginning after December 15, 1998. The Company does not expect
the adoption of this standard to have any impact on its consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The business of the Company and the composition of its consolidated balance
sheet consists of investments in interest-earning assets (primarily loans and
investment securities) which are
29
<PAGE>
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. 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, 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.
ECONOMIC VALUE OF EQUITY
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 economic value of equity ("EVE") to changes in interest rates. An
institution's EVE 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 EVE 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.
The following table presents the Bank's ratio of EVE to the present value
of total assets as of December 31, 1998.
30
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CHANGE IN PRESENT VALUE CHANGE IN EQUITY
------------------------
INTEREST RATES OF TOTAL ASSETS
(IN BASIS POINTS) ($000) EVE $ CHANGE % CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+200 152,773 9,157 ($2,784) -23.31%
- --------------------------------------------------------------------------------
+100 154,452 10,746 ($1,195) -10.01%
- --------------------------------------------------------------------------------
Static 156,452 12,330 $ 389 3.26%
- --------------------------------------------------------------------------------
-100 158,281 13,907 $ 1,966 16.47%
- --------------------------------------------------------------------------------
-200 160,102 15,477 $ 3,536 29.61%
- --------------------------------------------------------------------------------
</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.
31
<PAGE>
KPMG
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
32
<PAGE>
KPMG
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, 1998 and 1997, the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
February 4, 1999
Orlando, FL
33
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------------- ----------------
<S> <C> <C>
Cash and due from banks $ 5,221,144 6,095,762
Federal funds sold 8,100,000 300,000
Investment securities available for sale 13,492,660 15,499,777
Investment securities held to maturity (estimated market
value of $190,454 in 1997) -- 190,000
Loans, less allowance for loan losses of $1,323,143
for 1998 and $1,013,081 for 1997 122,929,105 97,317,521
Accrued interest receivable 813,736 748,897
Premises and equipment, net 3,698,955 3,925,251
Other real estate owned -- 251,622
Federal Reserve Bank stock, at cost 178,500 171,000
Federal Home Loan Bank stock, at cost 378,600 341,300
Deferred income taxes, net 458,990 401,545
Prepaid expenses and other assets 168,470 85,301
Executive supplemental income plan - cash surrender value
life insurance policies 1,467,332 1,302,706
----------------- ----------------
Total assets $ 156,907,492 126,630,682
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------ -----------------
<S> <C> <C>
Deposits:
Noninterest bearing $ 21,301,512 18,481,616
Interest bearing 115,798,941 92,644,084
--------------- -----------------
Total deposits 137,100,453 111,125,700
Federal Home Loan Bank advances 4,125,534 1,176,534
Other borrowed funds 2,189,251 3,455,470
Accrued interest payable 191,744 133,134
Accounts payable and other liabilities 333,781 335,997
--------------- --------------
Total liabilities 143,940,763 116,226,835
--------------- --------------
Shareholders' equity:
Common stock, $.10 par value per share. Authorized
1,000,000 shares; 742,819 and 618,035 shares issued,
721,019 and 596,235 shares outstanding at December 31,
1998 and 1997 74,282 61,804
Additional paid-in capital 7,927,804 6,721,129
Retained earnings 5,182,057 3,808,136
Treasury stock, at cost (21,800 shares at December 31, 1998
and 1997) (208,640) (208,640)
Accumulated other comprehensive income (8,774) 21,418
--------------- --------------
Total shareholders' equity 12,966,729 10,403,847
Commitments and contingencies
--------------- --------------
Total liabilities and shareholders' equity $ 156,907,492 126,630,682
=============== ==============
</TABLE>
35
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Interest income:
Loans $ 9,945,556 8,488,762 7,051,323
Investment securities held to maturity and
investments securities available for sale 865,727 1,031,804 1,119,534
Federal funds sold 355,148 137,240 257,766
Other 37,852 33,322 32,540
------------------ ----------------- ------------------
Total interest income 11,204,283 9,691,128 8,461,163
Interest expense:
Deposits and other borrowed money 4,918,056 4,360,146 4,155,519
------------------ ----------------- ------------------
Net interest income 6,286,227 5,330,982 4,305,644
Provision for loan losses 424,012 179,000 90,000
------------------ ----------------- ------------------
Net interest income after provision
for loan losses 5,862,215 5,151,982 4,215,644
------------------ ----------------- ------------------
Other income, primarily customer service fees 959,235 746,721 707,363
------------------ ----------------- ------------------
Other expenses:
Salaries and benefits 2,216,495 1,999,237 1,834,204
Directors stock option plan -- 650,000 --
Occupancy expense 909,041 847,358 777,524
Advertising and public relations 162,967 149,364 92,639
Legal and professional fees 221,224 281,050 212,527
Stationery and printing supplies 79,937 59,805 111,562
Data processing expense 224,744 187,365 160,483
Insurance 58,696 65,713 52,546
Loss on sale of other real estate owned 32,073 6,687 55,101
Other expenses 664,500 615,611 641,711
------------------ ----------------- ------------------
4,569,677 4,862,190 3,938,297
------------------ ----------------- ------------------
Net operating income 2,251,773 1,036,513 984,710
Income tax expense 812,266 498,007 336,374
================== ================= ==================
Net income $ 1,439,507 538,506 648,336
================== ================= ==================
Basic earnings per share $ 2.03 0.90 1.13
================== ================= ==================
Diluted earnings per share $ 2.03 0.88 1.13
================== ================= ==================
Dividends paid per share $ 0.11 -- --
================== ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL TREASURY OTHER
COMMON PAID-IN RETAINED STOCK, COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS AT COST INCOME INCOME
--------- ----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 $ 54,537 5,350,342 2,621,294 (208,640) 116,441
Employee stock options exercised 7,222 714,968 -- -- --
Comprehensive income:
Net income -- -- 648,336 -- -- 648,336
Other comprehensive income, net of tax
unrealized loss on securities -- -- -- -- (76,080) (76,080)
-------------
Comprehensive income $ 572,256
=============
--------- ----------- ---------- ---------- -------------
Balances, December 31, 1996 61,759 6,065,310 3,269,630 (208,640) 40,361
Directors stock option plan -- 650,000 -- -- --
Sale of common stock 45 5,819 -- -- --
Comprehensive income:
Net income -- -- 538,506 -- -- 538,506
Other comprehensive income, net of tax
unrealized loss on securities -- -- -- -- (18,943) (18,943)
-------------
Comprehensive income $ 519,563
=============
--------- ----------- ---------- ---------- -------------
Balances, December 31, 1997 61,804 6,721,129 3,808,136 (208,640) 21,418
Directors stock options exercised 12,451 1,202,549 -- -- --
Sale of common stock 27 4,126 -- -- --
Dividends paid -- -- (65,586) -- --
Comprehensive income:
Net income -- -- 1,439,507 -- -- 1,439,507
Other comprehensive income, net of tax
unrealized loss on securities -- -- -- -- (30,192) (30,192)
-------------
Comprehensive income $ 1,409,315
=============
--------- ----------- ---------- ---------- -------------
Balances, December 31, 1998 $ 74,282 7,927,804 5,182,057 (208,640) (8,774)
========= =========== ========== ========== =============
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balances, December 31, 1995 7,933,974
Employee stock options exercised 722,190
Comprehensive income:
Net income 648,336
Other comprehensive income, net of tax
unrealized loss on securities (76,080)
Comprehensive income
-------------
Balances, December 31, 1996 9,228,420
Directors stock option plan 650,000
Sale of common stock 5,864
Comprehensive income:
Net income 538,506
Other comprehensive income, net of tax
unrealized loss on securities (18,943)
Comprehensive income
-------------
Balances, December 31, 1997 10,403,847
Directors stock options exercised 1,215,000
Sale of common stock 4,153
Dividends paid (65,586)
Comprehensive income:
Net income 1,439,507
Other comprehensive income, net of tax
unrealized loss on securities (30,192)
Comprehensive income
-------------
Balances, December 31, 1998 12,966,729
=============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 1,439,507 538,506 648,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 310,388 306,327 256,682
Deferred income taxes (39,280) (147,901) (28,582)
Net amortization of premiums and
accretion of discounts on investment
securities held to maturity and
investment securities available for sale (22,119) (64,937) (23,973)
Provision for loan losses 424,012 179,000 90,000
Deferred loan origination fees 113,417 25,635 121,615
Loss on sale of other real estate owned 32,073 6,687 55,101
Writedown to fair value on other real
estate owned -- -- 26,829
Provision for other real estate owned -- -- 7,080
Executive supplemental income plan -
additional cash surrender value (64,626) (63,897) (67,709)
Cash provided by (used in) changes in:
Accrued interest receivable (64,839) (25,568) (90,393)
Prepaid expenses and other assets (83,169) 28,997 35,103
Accrued interest payable 58,610 (3,142) (69,755)
Accounts payable and other liabilities (2,216) 87,930 26,403
------------ ------------ ------------
Net cash provided by operating activities 2,101,758 867,637 986,737
------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Loans (net of collections) (26,159,208) (11,037,444) (20,802,136)
Purchases of investment securities available
for sale (11,519,121) (7,500,815) (7,899,762)
Proceeds from maturity of investment securities
held to maturity 190,000 -- 2,500,000
Proceeds from maturity of investment securities
available for sale 7,000,000 7,000,000 3,000,000
Proceeds from called investment securities
available for sale 6,500,000 1,000,000 1,000,000
Purchase of cash surrender value life insurance
policies to fund executive supplemental income (100,000) -- --
Purchase of Federal Home Loan Bank Stock (37,300) (41,300)
Proceeds from sale of Federal Home Loan
Bank stock -- -- 107,200
Purchase of Federal Reserve Bank stock (7,500) (21,000) --
Purchase of premises and equipment (84,092) (279,703) (272,069)
Proceeds from refinancing of other real
estate owned 4,300 -- --
Proceeds from the sale of other real estate owned 225,444 358,372 401,048
------------ ------------ ------------
Net cash used in investing activities (23,987,477) (10,521,890) (21,965,719)
------------ ------------ ------------
</TABLE>
(Continued)
38
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by financing activities:
Net increase in demand deposits, NOW accounts
and passbook savings accounts 12,194,941 7,819,123 7,906,958
Net increase in certificates of deposit 13,779,812 2,262,307 3,794,533
Federal funds purchased -- -- --
Principal repayments on mortgage notes payable (28,120) (25,949) (23,917)
Increase (decrease) in repurchase agreements (1,238,099) 495,131 1,615,261
Proceeds (repayments) on Federal Home Loan
Bank borrowings 2,949,000 (46,113) (43,448)
Directors stock option plan -- 650,000 --
Shareholder dividends paid (65,586) -- --
Proceeds from employee stock options exercised 1,215,000 -- 722,190
Proceeds from sale of common stock 4,153 5,864 --
------------ ------------ ------------
Net cash provided by financing activities 28,811,101 11,160,363 13,971,577
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 6,925,382 1,506,110 (7,007,405)
Cash and cash equivalents at the beginning
of the year 6,395,762 4,889,652 11,897,057
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 13,321,144 6,395,762 4,889,652
============ ============ ============
Cash paid during the year for:
Interest $ 4,859,446 4,363,288 4,225,274
============ ============ ============
Taxes $ 806,798 622,080 353,685
============ ============ ============
Supplemental disclosures of non-cash transactions:
Transfer of other real estate owned to premises
and equipment $ -- 450,000 --
============ ============ ============
Financing of other real estate owned $ 38,700 25,058 --
============ ============ ============
Transfer of loans to other real estate owned $ 44,447 73,334 706,318
============ ============ ============
Market value adjustment - investment securities available for sale:
Market value adjustment - investments $ (14,016) 34,341 64,711
Deferred income tax liability (5,242) 12,923 24,350
------------ ------------ ------------
Unrealized gain on investments
available for sale, net $ (8,774) 21,418 40,361
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(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.
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.
(Continued)
40
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(E) LOANS
Loans receivable 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.
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.
(Continued)
41
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
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.
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.
(Continued)
42
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(I) 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 consolidated balance sheet.
The Company adopted this Statement effective January 1, 1998 and
restated prior year financial statements to reflect the adoption. The
Company's other comprehensive income is the unrealized gain (loss) on
investment securities available for sale.
(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" except for fixed rate loan commitments which the Company
believes are at market value at December 31, 1998.
(L) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information".
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision make in deciding how to
allocate resources and in assessing performance. This Statement is
effective for fiscal years beginning after December 15, 1997. The
Company adopted the Statement effective January 1, 1998, however, the
Company has only one reportable segment.
(Continued)
43
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedge
Activities". This Statement, which is effective for all fiscal
quarters and all fiscal years beginning after June 15, 1999, requires
all derivatives be measured at fair value and be recognized as assets
and liabilities in the statement of financial position. This Statement
sets forth the accounting for changes in fair value of a derivative
depending on the intended use and designation of the derivative.
Implementation of the Statement is not expected to have a significant
impact on the financial position or results of operations of the
Company.
In October 1998, the FASB issued Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This Statement requires that after the securitization of
a mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a
trading security. The Statement is effective for the first fiscal
quarter beginning after December 15, 1998. The Company does not expect
the adoption of this Statement to have any impact on its consolidated
financial statements.
(M) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. These estimates include the
allowances for loan loss, other real estate owned and the valuation
for the deferred tax asset. Actual results could differ from these
estimates.
(2) RESTRICTIONS ON CASH
The Company is required to maintain reserve balances in accordance with
Federal Reserve Bank requirements. At December 31, 1998 and 1997, these
reserve balances were $709,000 and $556,000, respectively.
(Continued)
44
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(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, 1998 and 1997 are
as follows:
INVESTMENT SECURITIES HELD TO MATURITY:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORITZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
1997:
Municipals $ 190,000 454 -- 190,454
============= ============== ============== ===========
</TABLE>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORITZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
1998:
Municipals $ 13,506,676 40,984 55,000 13,492,660
============= ============== ============== ===========
1997:
Municipals $ 15,465,436 43,415 9,074 15,499,777
============= ============== ============== ===========
</TABLE>
(Continued)
45
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The amortized cost and estimated market value of investment securities at
December 31, 1998, 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>
ESTIMATED
AMORTIZED COST MARKET VALUE
---------------- ------------
<S> <C> <C>
Investment securities available for sale:
Due within one year $ 5,007,095 5,020,939
Due after one year through five years 8,499,581 8,471,721
------------- ------------
$ 13,506,676 13,492,660
============= ============
</TABLE>
At December 31, 1998 and 1997 investment securities with a book value of
$503,750 and $496,214 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,
1998 and 1997 are:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commercial - secured $ 12,471,553 11,113,710
Commercial - unsecured 2,886,847 4,326,247
Real estate, primarily commercial 105,820,828 80,223,450
Other (installments and overdrafts) 3,559,619 3,040,377
------------- ------------
124,738,847 98,703,784
Less:
Allowance for loan losses (1,323,143) (1,013,081)
Deferred loan origination fees, net (486,599) (373,182)
-------------- ------------
$ 122,929,105 97,317,521
============= ============
</TABLE>
(Continued)
46
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
Certain principal shareholders, directors and employees and their related
interest were indebted to the Bank as summarized below:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Balance, beginning of year $ 12,996,264 12,717,857
Additional new loans 3,068,704 2,589,693
Repayments on outstanding loans (7,162,501) (2,311,286)
------------- ------------
$ 8,902,467 12,996,264
============= ============
</TABLE>
All such loans were made in the ordinary course of business. At December
31, 1998 and 1997, principal shareholders, directors and employees of the
Company and their related interests had $3,359,124 and $1,240,272,
respectively, available in lines of credit and commitments.
The recorded investment in impaired loans and the related allowance for
loan losses at December 31, 1998 and 1997 were $1,207,759 and $110,380 and
$1,168,036 and $37,912, respectively. The average recorded investment in
impaired loans during 1998 and 1997 was $1,187,898 and $1,163,952,
respectively. Interest income recognized in impaired loans during 1998 and
1997 was $-0-.
Changes in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 1,013,081 887,803 856,803
Provisions charged to operations 424,012 179,000 90,000
Charge offs:
Real estate loans -- -- --
Installment loans (81,257) (8,524) (2,129)
Commercial loans (104,790) (63,064) (101,387)
Recoveries:
Real estate loans -- -- --
Installment loans -- -- --
Commercial loans 72,097 17,866 44,516
----------- ---------- ---------
Balance, end of year $ 1,323,143 1,013,081 887,803
=========== ========== =========
</TABLE>
(Continued)
47
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
At December 31, 1998 and 1997, nonaccrual loans were $782,547 and
$1,113,608, respectively. If interest due on all nonaccrual loans had been
accrued at the original contract rates, estimated interest income would
have been increased by $42,776 in 1998, $83,917 in 1997 and $28,536 in
1996.
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land and land improvements $ 1,949,971 1,949,971
Furniture, fixtures and equipment 1,907,258 1,823,166
Bank buildings 1,137,669 1,137,669
Leasehold improvements 228,796 228,796
------------- -------------
5,223,694 5,139,602
Less accumulated depreciation (1,524,739) (1,214,351)
------------- -------------
$ 3,698,955 3,925,251
============= =============
</TABLE>
(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.
INVESTMENTS - The Company's investment securities available for sale and
held to maturity represent investments in U.S. Government obligations, U.S.
Government Agency securities, and state and political subdivisions. The
Company's equity investments at year end represents stock investments in
the Federal Home Loan Bank and the Federal Reserve Bank. The stock is not
publicly traded and the carrying amount was used to estimate the fair
value. The fair value of the U.S. Government obligations and U.S.
Government Agency obligations and state and local political subdivision
portfolios was estimated based on quoted market prices.
(Continued)
48
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
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, 1998 (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 borrowing rates for similar types
of borrowing arrangements. The carrying amount of the repurchase agreements
approximate their fair value.
COMMITMENTS - Fair values for off-balance-sheet lending commitments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
(Continued)
49
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The following tables present the carrying amounts and estimated fair values of
the Company's financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------
CARRYING AMOUNT FAIR VALUE
---------------- ----------
<S> <C> <C>
Financial assets:
Cash and due from banks and federal
funds sold $ 13,321,144 13,321,144
Investment securities available for sale 13,492,660 13,492,660
Loans (carrying amount less allowance
for loan losses of $1,323,143) 122,929,105 123,233,682
Financial liabilities:
Deposits:
Without stated maturities $ 73,922,966 73,922,966
With stated maturities 63,177,487 62,395,096
Federal Home Loan Bank advances 4,125,534 4,125,534
Other borrowings 2,189,251 2,187,626
Commitments:
Letter of credit $ -- --
Loan commitments -- --
</TABLE>
(Continued)
50
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
<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>
The carrying amounts shown in the tables are included in the consolidated
balance sheets under the indicated captions.
(Continued)
51
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(7) DEPOSITS
A detail of deposits at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Noninterest-bearing demand deposits $ 21,301,512 18,481,616
Interest-bearing:
NOW accounts 17,555,353 11,784,328
Money market 9,254,044 8,865,311
Savings accounts 25,812,057 22,596,770
Time accounts less than $100,000 22,471,157 19,905,866
Time accounts greater than $100,000 40,706,330 29,491,809
-------------- ------------
$ 137,100,453 111,125,700
============== ============
</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,
1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Three months or less $ 32,151,951 23,954,183
Three through twelve months 7,647,112 4,921,535
Over one year 907,267 616,091
------------- -----------
$ 40,706,330 29,491,809
============= ===========
</TABLE>
A summary of interest expense on deposits and other borrowed money is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Time deposits of $100,000 or greater $ 1,863,450 1,599,542 1,486,139
Time deposits less than $100,000 1,284,348 1,199,018 1,175,742
Interest-bearing demand deposits 511,261 507,149 658,742
Savings deposits 978,846 774,011 631,850
Interest on borrowings 280,151 280,426 203,046
----------- --------- ---------
Interest on deposits and other
borrowed money $ 4,918,056 4,360,146 4,155,519
=========== ========= =========
</TABLE>
(Continued)
52
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The Company had deposits from principal shareholders, directors and
employees and their related interests of approximately $21,345,867 and
$18,737,571 at December 31, 1998 and 1997, respectively. There were no
brokered deposits outstanding at year end.
(8) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31, 1998 and 1997, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Advances from the Federal Home Loan Bank (interest
rates ranging from 4.94% to 8.18% and 6.32% to
8.18% at December 31, 1998 and 1997, respectively) $ 4,125,534 1,176,534
============ ==========
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"),
advances are secured by first mortgage loans in the amount of $8,292,200
and $2,244,278 respectively. Advances at December 31, 1998 have calendar-
year maturity dates as follows:
<TABLE>
<S> <C>
1999 $ 50,450
2000 55,000
2001 60,500
2002 108,200
2003 360,600
Thereafter 3,490,784
-----------
$ 4,125,534
===========
</TABLE>
In addition, the advances are secured by Federal Home Loan Bank stock
valued at $378,600 on December 31, 1998.
(Continued)
53
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(9) OTHER BORROWED FUNDS
Other borrowed funds consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997
---------------------------------------------------
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 $1,917,182
and $3,151,678 as of December
31, 1998 and 1997,
respectively, repurchase dates
in January 1999 and 1998 $ 1,918,807 4.58% $ 3,156,906 4.85%
------------ ----------- ------------ ----------
Total short-term borrowings 1,918,807 4.58% 3,156,906 4.85%
------------ ----------- ------------ ----------
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 78,799 8.00% 95,658 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 52,193 8.00% 55,665 8.00%
</TABLE>
(Continued)
54
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1998 1997
----------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
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 $375,000 139,452 8.00% 147,241 8.00%
----------- ----------- ----------- ----------
Total long-term borrowings 270,444 8.00% 298,564 8.00%
----------- ----------- ----------- ----------
Total other borrowed money $ 2,189,251 5.00% $ 3,455,470 5.12%
=========== =========== =========== ==========
</TABLE>
Aggregate maturities on the mortgage notes payable at December 31, 1998 are as
follows:
1999 $ 78,907
2000 28,940
2001 31,380
2002 29,944
2003 11,604
Thereafter 89,669
---------
$ 270,444
=========
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.
(Continued)
55
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The repurchase agreements were to repurchase the identical securities as
those which were sold. Retail repurchase agreements averaged $3,416,081
and $3,329,828 during the years ended December 31, 1998 and 1997,
respectively. The maximum amount outstanding at any month-end for the
corresponding periods was $4,888,175 and $3,714,990, respectively. Total
interest expense paid on retail repurchase agreements for the years
ending December 31, 1998, 1997 and 1996 was $165,219, $163,261 and
$78,318, respectively.
(10) INCOME TAXES
The provision for income taxes for 1998, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ---------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Federal $ 745,351 (35,492) 709,859
State 106,195 (3,788) 102,407
--------- ---------- --------
$ 851,546 (39,280) 812,266
========= ========== ========
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
========= ========== ========
</TABLE>
(Continued)
56
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Loan receivable, due to allowance for loan losses $ 458,787 342,110
Directors stock option plan -- 117,000
Executive supplemental income 79,322 57,421
Unrealized loss on investment securities available
for sale 5,242 --
Other real estate owned allowance -- 9,445
Other 3,769 7,758
--------- --------
Total deferred tax assets 547,120 533,734
--------- --------
Deferred tax liabilities;
Unrealized gain on investment securities available
for sale -- 12,923
Premises and equipment, due to differences in
depreciation methods and useful lives 67,308 70,731
Investments, due to accretion 11,862 39,575
FHLB stock dividend 8,960 8,960
--------- --------
Total deferred tax liabilities 88,130 132,189
--------- --------
Net deferred tax asset $ 458,990 401,545
========= ========
</TABLE>
The Company has recorded a deferred tax asset of $458,990 and $401,545 as of
December 31, 1998 and 1997, 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.
Management believes no valuation allowance is required at December 31, 1998 and
1997.
Continued
57
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
A reconciliation between the actual tax expense and the "expected" tax
expense (computed by applying the U.S. federal corporate tax rate of 34% to
earnings before income taxes) is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
"Expected" tax expense $ 765,603 352,414 334,801
Directors stock option plan -- 110,774 --
State income tax expense, net of federal benefit 66,300 40,683 22,468
Life insurance premiums on officers (21,976) (21,722) (21,243)
Meals and entertainment and dues 6,229 10,788 7,620
Club dues 2,948 1,368 --
Tax exempt interest (1,084) (2,148) (2,616)
Other (5,754) 5,850 (4,656)
---------- ---------- ---------
Actual tax expense $ 812,266 498,007 336,374
========== ========== =========
</TABLE>
(11) SHAREHOLDERS' EQUITY
At fiscal years ended December 31, 1998 and 1997, the Bank's balance
in undivided profits was $5,182,057 and $3,808,136, respectively. The
restrictions on dividend payments are imposed by the Bank's primary
regulator, The Office of the Comptroller of the Currency (OCC).
On February 12, 1998, the Trustees of the National Bank of Commerce
401(k) plan purchased 268 shares of Commerce National Corporation
stock at $15.50 per share.
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.
Continued
58
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(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:
<TABLE>
<CAPTION>
YEAR ENDED
----------
<S> <C>
1999 $ 492,469
2000 503,669
2001 515,171
2002 526,979
2003 539,105
----------
$ 2,577,393
==========
</TABLE>
Rent expense for the years ending December 31, 1998, 1997 and 1996 was
$444,386, $410,803 and $373,701, 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.
(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, 1998, 1997 and 1996
was $49,992, $32,509 and $31,000, respectively.
Continued
59
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(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, 1998, that the Company meets all capital adequacy requirements to which
it is subject.
As of December 31, 1998, 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
60
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
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
these amounts.
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------- ----------------------------------------------
AMOUNT RATIO AMOUNT RATIO
------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total capital (to risk weighted
assets) $ 13,195,622 10.10% $ 10,451,095 greater than or equal to 8.0%
Tier I capital (to risk weighted
assets) 11,880,478 9.09% 5,225,547 greater than or equal to 4.0%
Tier I capital (to average assets) 11,880,478 8.00% 5,942,026 greater than or equal to 4.0%
AS OF DECEMBER 31, 1997:
Total capital (to risk weighted
assets) $ 10,896,989 10.43% $ 8,356,580 greater than or equal to 8.0%
Tier I capital (to risk weighted
assets) 9,891,991 9.47% 4,178,290 greater than or equal to 4.0%
Tier I capital (to average assets) 9,891,919 8.00% 4,949,326 greater than or equal to 4.0%
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------------------------------
AMOUNT RATIO
------------------------------------------------
<S> <C> <C>
AS OF DECEMBER 31, 1998:
Total capital (to risk weighted
assets) $ 13,063,868 greater than or equal to 10.0%
Tier I capital (to risk weighted
assets) 7,838,321 greater than or equal to 6.0%
Tier I capital (to average assets) 7,427,533 greater than or equal to 5.0%
AS OF DECEMBER 31, 1997:
Total capital (to risk weighted
assets) $ 10,445,725 greater than or equal to 10.0%
Tier I capital (to risk weighted
assets) 6,267,435 greater than or equal to 6.0%
Tier I capital (to average assets) 6,186,658 greater than or equal to 5.0%
</TABLE>
(15) STOCK OPTION PLANS
Pursuant to the Company's stock option plans, each of the directors had
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 were
exercisable from June 14, 1986 through February 1, 1998. Furthermore,
pursuant to the Plan, employees of the Company were granted 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, 1998 and 1997, the number of options vested and
exercisable was -0- and 130,000, respectively. On April 24, 1996, 72,219
shares were exercised under the Employees Stock Option Plan at $10 per
share.
(Continued)
61
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Company's stock-based
compensation plan been determined consistent with FASB Statement No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Net income:
As reported $ 1,439,507 538,506 648,336
Pro forma 1,439,507 538,506 638,547
Earnings per share:
As reported 2.03 .88 1.13
Pro forma 2.03 .88 1.11
</TABLE>
The fair value of each option granted was estimated on the date of grant using
the minimum value method with the following weighted-average assumptions used
for grants in 1998, 1997 and 1996, respectively; dividend yield of -0- percent
for all years; expected volatility of -0- percent for all years; risk-free
interest rates of -0-%, 5.36% and 5.8% and expected lives of .-0- years, .17 and
.81 years for the plan options.
A summary of the status of the Bank's stock option plan as of December 31, 1998,
1997, and 1996 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
FIXED OPTIONS 1998 1997 1996
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of year: 130,000 122,000 194,000
Granted -- 138,000 3,000
Exercised 130,000 -- 72,219
Forfeited -- 130,000 2,781
---------- ---------- -----------
Outstanding at end of year -- 130,000 272,000
---------- ---------- -----------
Options exercisable at year-end -- 130,000 122,000
========== ========== ===========
Weighted-average fair value of
options granted during the year per
share $ -- 5.00 4.94
========== ========== ===========
</TABLE>
(Continued)
62
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(16) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial statements of Commerce National Corporation (parent
company only) follow:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
------------------------
December 31, 1998 and 1997
ASSETS: 1998 1997
------------- ------------
<S> <C> <C>
Cash and interest bearing deposits $ 24,209 169,485
Investment in wholly-owned bank subsidiary 11,940,897 9,796,337
Loans, net 849,659 289,626
Other assets 151,964 148,399
------------- ------------
$ 12,966,729 10,403,847
============= ============
STOCKHOLDERS' EQUITY:
Common stock $ 74,282 61,804
Additional paid-in capital 7,927,804 6,721,129
Retained earnings 5,182,057 3,808,136
Treasury stock, at cost (21,800 shares) (208,640) (208,640)
Accumulated other comprehensive income (8,774) 21,418
------------- ------------
$ 12,966,729 10,403,847
============= ============
</TABLE>
(Continued)
63
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
No dividends were paid by the Bank subsidiary to Commerce National Corporation
for 1998, 1997 or 1996. The Bank is in compliance with banking regulations
regarding the payment of dividends.
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
Revenue - interest income $ 110,412 49,373 70,299
------------- ------------- -----------
Expenses:
Directors stock option plan -- 650,000 --
Legal and professional fees 27,279 12,328 6,659
Other, net 68,379 (85,045) 42,347
------------- ------------- -----------
Total expenses 95,658 577,283 49,006
------------- ------------- -----------
Income (loss) before equity in net
earnings of subsidiary 14,754 (527,910) 21,293
Equity in net earnings of subsidiary 1,424,753 1,066,416 627,043
------------- ------------- -----------
Net income $ 1,439,507 538,506 648,336
============= ============= ===========
</TABLE>
(Continued)
64
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $ 1,439,507 538,506 648,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment -- -- 3,955
Equity in subsidiary (1,424,752) (1,066,416) (627,042)
Decrease (increase) in other assets (3,565) (111,072) (5,866)
------------- ------------ -----------
Net cash provided by (used for) operating activities 11,190 (638,982) 19,383
------------- ------------ -----------
Cash flows provided by (used in) investing activities:
Net repayment of loans (net loans to customers) (560,033) 800,968 (747,610)
------------- ------------ -----------
Cash flows used in financing activities:
Capital infusion to the subsidiary (750,000) (700,000) --
Directors stock option plan -- 650,000 --
Shareholder dividends paid (65,586) -- --
Employee stock options exercised 1,215,000 -- 722,190
Sale of common stock 4,153 5,864 --
------------- ------------ -----------
Net cash provided by (used for) financing activities 403,567 (44,136) 722,190
------------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents
(145,276) 117,850 (6,037)
Cash and cash equivalents at beginning of year 169,485 51,635 57,672
------------- ------------ -----------
Cash and cash equivalents at end of year $ 24,209 169,485 51,635
------------- ------------ -----------
Supplemental disclosure of noncash transactions:
Market value adjustment - Bank investment
securities available for sale:
Market value adjustment - investments (14,016) 34,341 64,771
Deferred income tax liability (5,242) 12,923 24,350
------------- ------------ -----------
Unrealized gain (loss) on investment securities
available for sale, net $ (8,774) 21,418 40,361
============= ============ ===========
</TABLE>
(Continued)
65
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
(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 accounting for the Plan is as follows:
Monthly, the Company records the mortality cost as a reduction of the
asset. Interest for the policies is recorded to the asset and salary
continuation expenses are accrued.
The Bank has approximately $211,000 and $153,000 accrued at December 31,
1998 and 1997, 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 1998.
(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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Standby letters of credit $ 714,583 870,486
Total lines of credit 68,306,642 50,832,223
Unfunded firm loan commitments-variable rate 29,135,729 20,605,454
</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%.
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.
(Continued)
66
<PAGE>
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
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
December 31, 1998 and 1997
(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>
<CAPTION>
INCOME SHARES PER SHARE
(NUMBERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- -----------
<S> <C> <C> <C>
For the year ended 1998:
BASIC EARNINGS PER SHARE:
Net income $ 1,439,507 710,421 $ 2.03
===========
EFFECT OF DILUTIVE SECURITIES:
Stock options -- --
--------------- ---------------
DILUTED EARNINGS PER SHARE:
Income and assumed conversions $ 1,439,507 710,421 $ 2.03
=============== =============== ===========
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 $ 538,506 617,748 $ .88
=============== =============== ===========
For the year ended 1996:
BASIC EARNINGS PER SHARE:
Net income $ 648,336 573,426 $ 1.13
=============== =============== ===========
</TABLE>
68
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The name, age, affiliation with the Company and date such affiliation
commenced of each executive officer and director of the Company is presented in
the following chart. Each director listed below was elected by the Company's
shareholders and will hold office for the term designated and until his
successor is duly elected and qualified. Additional information concerning
business experience of each individual is set forth in the narrative section
following the chart.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
69
<PAGE>
<TABLE>
<CAPTION>
YEARS
REMAINING APPROXIMATE
IN TERM HELD OFFICE
NAME AGE POSITION ELECTED (1) SINCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald J. Barker 85 Director/ 1 February, 1985
Chairman
- --------------------------------------------------------------------------------
Russell Barkett 59 Director 0(1) December, 1992
- --------------------------------------------------------------------------------
C. Durham Barnes, M.D. 57 Director 2 February, 1985
- --------------------------------------------------------------------------------
Robert E. Battaglia 52 Director 1 February, 1985
- --------------------------------------------------------------------------------
Robert B. Boswell, M.D. 53 Director 0(1) February, 1985
- --------------------------------------------------------------------------------
Kenneth M. Clayton 50 Director 2 February, 1985
- --------------------------------------------------------------------------------
Guy D. Colado 54 President & 2 February, 1985
Director
- --------------------------------------------------------------------------------
J. Blair Culpepper 61 Executive N/A May, 1995
Vice President
- --------------------------------------------------------------------------------
Ernst R. Janvrin 53 Director 1 April, 1996
- --------------------------------------------------------------------------------
Anthony Lombardi, Jr. 51 Director 2 April, 1996
- --------------------------------------------------------------------------------
Jane H. Louttit 53 Director 1 April, 1996
- --------------------------------------------------------------------------------
Stephen G. Miller 43 Director 0(1) April, 1996
- --------------------------------------------------------------------------------
Willie C. Moss 64 Director 0(1) December, 1992
- --------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D. 55 Director 0(1) February, 1985
- --------------------------------------------------------------------------------
Alan M. Scarboro 49 Vice President N/A March, 1989
Sec./Treas.
- --------------------------------------------------------------------------------
W. Charles Shuffield 54 Director 1 February, 1985
- --------------------------------------------------------------------------------
</TABLE>
(1) Has been nominated for election for a three year term which nomination will
be voted on at the Annual Shareholders' Meeting scheduled for April 19,
1999.
70
<PAGE>
Each individual designated above, other than Mr. Barker, also is a member of the
board of directors for the Bank. The members of the Compensation Committee of
the Company for 1998 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
through 1997, 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
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.
71
<PAGE>
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.
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. 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 retired from the
U.S. Army Reserves.
J. BLAIR CULPEPPER is a native Floridian and a resident of Orlando,
Florida. Since May 1995, Mr. Culpepper has served as Executive Vice President of
the Company. On January 2, 1996, Mr. Culpepper opened the New England Avenue
Branch for the Bank. A graduate of the University of Florida, Mr. Culpepper was
employed as an executive officer of other financial institutions in Central
Florida and the Tampa Bay area. He is past chairman of the Greater Orlando
Chamber of Commerce and the Orlando Museum of Art.
ERNST R. JANVRIN has been a resident of Orlando, Florida since 1975. Mr.
Janvrin is the senior partner and partner-in-charge of Janvrin & Regan, P.A., a
local CPA firm created in 1984 in Winter Park, Florida, which concentrates their
practice in small business and individual accounting and tax matters. Mr.
Janvrin is past president of the Florida Institute of CPA's (Central Florida
Chapter), a member of the American Institute of CPA's and the Florida Institute
of CPA's. He is currently serving as chairman of the Special Project Committee
of the local chapter of the Florida Institute of CPA's.
ANTHONY 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
72
<PAGE>
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.
FREDERICK A. RAFFA, PH.D. is a resident of Maitland, Florida. From 1969
until 1998, Dr. Raffa was a member of the faculty of the University of Central
Florida's Department of Economics, including service as Chairman of the
Department of Economics from 1976 through 1998. In May 1998, Dr. Raffa became
Professor Emeritus and began a five year phased retirement period. Dr. Raffa was
the founding editor of the Business Barometer of Central Florida. Since 1971,
-------------------------------------
Dr. Raffa has been self-employed as a consulting economist. He currently serves
as President of Raffa Consulting Economists, Inc. 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. Mr. Shuffield is a
73
<PAGE>
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); Member
of the Board of Directors of Orlando Union Rescue Mission.
ITEM 11. EXECUTIVE COMPENSATION/BOARD COMPENSATION
-----------------------------------------
The executive officers for the Company and the Bank received salaries, in
aggregate, equal to approximately $398,000, received the benefit of automobile
allowances for an aggregate $18,000 and the payment of various club fees and
insurance in the amount of approximately $11,040. There were no other executive
officers other than the President with salaries in excess of $100,000 per year.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMP.
- -------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
------------------------------------
NAME AND ALL OTHER
PRINCIPAL RESTRICTED COMPEN-
POSITION YEAR SALARY BONUS OTHER STOCK OPTIONS LTIP SATION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guy D. 1998 $130,000 $12,000 $9,600/(1)/ $0 0 $0 $0
------------------------------------------------------------------------------------------------
Coladon 1997 $118,250 $11,250 $14,704/(2)/ $0 0 $0 $0
------------------------------------------------------------------------------------------------
President 1996 $100,000 $11,982 $12,247/(3)/ $0 0 $0 $0
(CEO)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $6,000 car allowance and $3,600 medical insurance premium.
(2) Includes a $6,000 car allowance and $8,704 medical insurance premium.
(3) Includes a $6,000 car allowance and $6,247 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:
74
<PAGE>
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 1998 of $42,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Guy D. Colado, President of the Company, has sole voting and dispositive
power over 32,118 shares of the Company's common stock. Mr. Colado's wife has
sole voting and dispositive power over 8,000 shares of common stock for which
beneficial ownership is not disclaimed. Mr. Colado's children have sole voting
and dispositive power over 2,304 shares of common stock, for which beneficial
ownership is not disclaimed. Such 42,422 shares of common stock represent
approximately 5.88% of the total outstanding shares of common stock of the
Company. Accordingly, pursuant to Rule 13d-3 promulgated by the SEC, Mr. Colado
is the beneficial owner of such 42,422 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, 1999, the beneficial ownership
interest in the Company's Common Stock held by each of the Company's directors,
and by all officers and directors
75
<PAGE>
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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
AS OF MARCH 1, 1999
-----------------------------------------------------------------------
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>
Donald J. Barker 15,260(4) 0 15,260 2.12%
1037 Lakemont Circle
Winter Park, Florida 32792
- -----------------------------------------------------------------------------------------------------------
Russell Barkett 5,100 0 5,100 0.70%
612 Arapaho Trail
Maitland, Florida 32751-3813
- -----------------------------------------------------------------------------------------------------------
C. Durham Barnes, M.D. 15,000(5) 0 15,000 2.08%
481 Virginia Drive
Winter Park, Florida 32789-5701
- -----------------------------------------------------------------------------------------------------------
Robert E. Battaglia 16,000 0 16,000 2.22%
1466 Alabama Drive
Winter Park, Florida 32789-2646
- -----------------------------------------------------------------------------------------------------------
Robert B. Boswell, M.D. 20,950(6) 0 20,950 2.91%
2320 N. Orange Avenue
Orlando, Florida 32804-5522
- -----------------------------------------------------------------------------------------------------------
Kenneth M. Clayton 17,300(7) 0 17,300 2.40%
2800 Lake Shore Drive
Orlando, Florida 32803-1320
- -----------------------------------------------------------------------------------------------------------
Guy D. Colado 42,422(8) 0 42,422 5.88%
1936 Fawsett Road
Winter Park, Florida 32789-6069
- -----------------------------------------------------------------------------------------------------------
J. Blair Culpepper 4,500 0 4,500 0.62%
1106 Eastin Avenue
Orlando, FL 32804
- -----------------------------------------------------------------------------------------------------------
Ernst R. Janvrin 1,850(9) 0 1,850 0.26%
1477 West Fairbanks Avenue
Winter Park, Florida 32789-7113
- -----------------------------------------------------------------------------------------------------------
Anthony Lombardi, Jr. 900 0 900 0.12%
7491 Brokerage Drive
Orlando, Florida 32809-5623
- -----------------------------------------------------------------------------------------------------------
Jane H. Louttit 900 0 900 0.12%
402 Lake Howell Road
Maitland, Florida 32751-5907
- -----------------------------------------------------------------------------------------------------------
Stephen G. Miller 900 0 900 0.12%
143 Fairbanks Avenue
Winter Park, Florida 32789-4377
- -----------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
AS OF MARCH 1, 1999
--------------------------------------------------------------
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 18,059(10) 0 18,059 2.51%
5858 Cove Drive
Orlando, Florida 32812-2819
------------------------------------------------------------------------------------------------
Frederick A. Raffa, Ph.D. 25,429(11) 0 25,429 3.53%
45 Eastwind Lane
Maitland, Florida 32751-5812
------------------------------------------------------------------------------------------------
Alan M. Scarboro 7,250(12) 0 7,250 1.01%
3218 Edgecliffe Drive
Orlando, FL 32806
------------------------------------------------------------------------------------------------
W. Charles Shuffield 10,000(13) 0 10,000 1.39%
2307 Lakeside Drive
Orlando, Florida 32803-1517
------------------------------------------------------------------------------------------------
All Directors and Officers as a 201,820 0 201,820 27.99%
Group (Consisting of 16 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) 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.
(8) Includes 10,304 shares held by family members for which beneficial
ownership is not disclaimed.
(9) Includes 300 shares held by a Florida corporation in which he has an
interest and for which beneficial ownership is not disclaimed.
(10) 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.
77
<PAGE>
(11) Includes 17,029 shares held jointly with a family member with shared voting
and shared investment power, 7,400 shares held in pension/profit sharing
plans for Mr. Raffa's benefit, and 1,000 shares held by family members for
which beneficial ownership is not disclaimed.
(12) Includes 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.
(13) 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 $319,966 for fiscal 1998.
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 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, 1998, the Bank had approximately $3,359,124 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.
78
<PAGE>
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, 1998 and 1997.
- Consolidated Statements of Operations - Years ended December 31, 1998,
1997 and 1996.
- Consolidated Statements of Shareholders' Equity - Years ended December
31, 1998, 1997, and 1996.
- Consolidated Statement of Cash Flows - Years ended December 31, 1998,
1997 and 1996.
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.
A. 3. EXHIBITS
--------
- -----------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- -----------------------------------------------------------------------------
3.2 First Amended and Restated Bylaws of Commerce *
National Corporation effective January 14, 1988,
incorporated by referenc from Exhibit 3.2 to the
Company's Report on Form 10-K for the fiscal year
ended December 31, 1992.
- -----------------------------------------------------------------------------
3.3 First Amendment to First Amended and Restated *
Bylaws of Commerce National Corporation dated
effective May 26, 1998, incorporated by reference from
Exhibit 3.3 to the Company's Report on Form 10-Q for
the fiscal quarter ended June 30, 1998.
- -----------------------------------------------------------------------------
79
<PAGE>
- -------------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- -------------------------------------------------------------------------------
3.4 Articles of Restatement of the Articles of Incorporation *
of Commerce National Corporation, and Amended and
Restated Articles of Incorporation, filed June 22, 1998,
incorporated by reference from Exhibit 3.4 to the
Company's Report on Form 10-Q for the fiscal quarter
ended June 30, 1998.
- -------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
21 Subsidiaries of Commerce National Corporation 88
- --------------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use only). 89
- --------------------------------------------------------------------------------
* Incorporated by reference as noted in the narrative under "Description."
B. REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed by the Company for the fiscal quarter
ended December 31, 1998.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
80
<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, 1999 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.
Signature and Title Date
- ------------------- ----
By:/s/ Guy Colado March 30, 1999
--------------------------------
Guy D. Colado
President and Director
(Principal Executive Officer)
By:/s/ Alan M. Scarboro March 30, 1999
--------------------------------
Alan M. Scarboro
Secretary/Treasurer
By:/s/ Donald J. Barker March 30, 1999
--------------------------------
Donald J. Barker
Director/Chairman
81
<PAGE>
Signature and Title Date
- ------------------- ----
By:
--------------------------------
Russell Barkett
Director
By:/s/ Durham Barnes March 30, 1999
--------------------------------
C. Durham Barnes, M.D.
Director
By:/s/ Robert E. Battaglia March 30, 1999
--------------------------------
Robert E. Battaglia
Director
By:
--------------------------------
Robert B. Boswell, M.D.
Director
By:/s/ Kenneth M. Clayton March 30, 1999
--------------------------------
Kenneth M. Clayton
Director
By:/s/ Ernst R. Janvrin March 30, 1999
--------------------------------
Ernst R. Janvrin
Director
By:
--------------------------------
Tony Lombardi, Jr.
Director
82
<PAGE>
Signature and Title Date
- ------------------- ----
By:
--------------------------------
Jane H. Louttit
Director
By:/s/ Stephen G. Miller March 30, 1999
--------------------------------
Stephen G. Miller
Director
By:/s/ Willie C. Moss March 30, 1999
--------------------------------
Willie C. Moss
Director
By:
--------------------------------
Frederick A. Raffa
Director
By:/s/ W. Charles Shuffield March 30, 1999
--------------------------------
W. Charles Shuffield
Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
Four copies of the proxy statement and form of proxy sent to the
Registrant's shareholders with respect to its Annual Meeting of Shareholders to
be held on April 19, 1999, and four copies of the annual report for the 1998
fiscal year which were given to the Registrant's shareholders will follow via
expedited delivery.
83
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------
21 Subsidiaries of Commerce National Corporation 88
- --------------------------------------------------------------------------------
27 Article 9 Financial Data Schedule (for SEC use only). 89
- --------------------------------------------------------------------------------
* Incorporated by reference as noted in the narrative under "Description."
84
<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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR COMMERCE NATIONAL CORPORATION
AND SUBSIDIARY DATED DECEMBER 31, 1998 AND DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,221,144
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,492,660
<INVESTMENTS-CARRYING> 13,506,676
<INVESTMENTS-MARKET> 13,492,660
<LOANS> 122,929,105
<ALLOWANCE> 1,323,143
<TOTAL-ASSETS> 156,907,492
<DEPOSITS> 137,100,453
<SHORT-TERM> 2,048,164
<LIABILITIES-OTHER> 525,525
<LONG-TERM> 4,266,621
0
0
<COMMON> 74,282
<OTHER-SE> 12,892,447
<TOTAL-LIABILITIES-AND-EQUITY> 156,907,492
<INTEREST-LOAN> 9,945,556
<INTEREST-INVEST> 865,727
<INTEREST-OTHER> 393,000
<INTEREST-TOTAL> 11,204,283
<INTEREST-DEPOSIT> 4,637,905
<INTEREST-EXPENSE> 4,918,056
<INTEREST-INCOME-NET> 6,286,227
<LOAN-LOSSES> 424,012
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,569,677
<INCOME-PRETAX> 2,251,773
<INCOME-PRE-EXTRAORDINARY> 2,251,773
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,439,507
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.03
<YIELD-ACTUAL> 0.043
<LOANS-NON> 782,547
<LOANS-PAST> 0
<LOANS-TROUBLED> 86,137
<LOANS-PROBLEM> 1,909,030
<ALLOWANCE-OPEN> 1,613,081
<CHARGE-OFFS> 186,047
<RECOVERIES> 72,097
<ALLOWANCE-CLOSE> 1,323,143
<ALLOWANCE-DOMESTIC> 1,323,143
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 954,713
</TABLE>
