<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 14, 1994
-----------------
Southern National Corporation
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 1-10853 56-0939887
------------------------------ --------------- --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 North Chestnut Street, Lumberton, North Carolina 28358
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (910) 773-7500
----------------------
<PAGE>
Item 5. Other Events
The purpose of this Current Report on Form 8-K is to file as Exhibits 99.1,
99.2 and 99.3 hereto the following documents providing financial information
about Commerce Bank. These exhibits were prepared by Commerce Bank, were not
prepared by Registrant, and are not to be considered as being filed as part of
the Registrant's disclosure obligations under the Securities Exchange Act of
1934:
(1) Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended
June 30, 1994;
(2) Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended
March 31, 1994; and
(3) The following financial statements and auditors' reports from
the Form F-2 Annual Report of Commerce Bank for the year ended
December 31, 1993 (as amended by Amendment No. 1 to Form F-2)
(A) Balance Sheet at December 31, 1993 and 1992;
(B) Income Statement for the Three years ended December 31,
1993;
(C) Statement of Cash Flows for the three years ended
December 31, 1993;
(D) Statement of Changes in Shareholders' Equity for the three
years ended December 31, 1993;
(E) Notes to Financial Statements;
(F) Report of Ernst & Young LLP, Independent Auditors, dated
January 21, 1994; and
(G) Report of Coopers & Lybrand, Independent Accountants,
dated January 15, 1993
Such documents will be incorporated by reference into the Registration Statement
on Form S-4 the Registrant intends to file in connection with its merger with
BB&T Financial Corporation.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants
99.1 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended
June 30, 1994
99.2 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended
March 31, 1994
99.3 Financial Statements and Auditors' Reports from the Form F-2
Annual Report of Commerce Bank for the year ended December 31,
1993 (as amended by Amendment No. 1 to Form F-2)
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN NATIONAL CORPORATION
(Registrant)
Date: November 14, 1994 By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
-3-
<PAGE>
EXHIBIT INDEX
Exhibit Number and Description
- - - ------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants
99.1 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended June
30, 1994
99.2 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended
March 31, 1994
99.3 Financial Statements and Auditor's Report from the Form F-2 Annual
Report of Commerce Bank for the year ended December 31, 1993 (as
amended by Amendment No. 1 to Form F-2), including:
(A) Balance Sheet at December 31, 1993 and 1992;
(B) Income Statement for the Three years ended December 31,
1993;
(C) Statement of Cash Flows for the three years ended December
31, 1993;
(D) Statement of Changes in Shareholders' Equity for the three
years ended December 31, 1993;
(E) Notes to Financial Statements;
(F) Report of Ernst & Young LLP, Independent Auditors, dated
January 21, 1994; and
(G) Report of Coopers & Lybrand, Independent
Accountants, dated January 15, 1993
-4-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the inclusion herein of our report dated January 21, 1994,
with respect to the 1993 financial statements and schedule of Commerce Bank for
the year ended December 31, 1993, filed with the Securities and Exchange
Commission as Exhibit 99.3 to this Current Report on Form 8-K of Southern
National Corporation.
Richmond, Virginia Ernst & Young LLP
November 11, 1994
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
----------------------------------
We consent to the inclusion in the current report of Southern National
Corporation on Form 8-K of our report dated January 15, 1993 filed with the
Securities and Exchange Commission as Exhibit 99.3 on our audits of the
financial statements of Commerce Bank as of December 31, 1992 and 1991 and for
each of the two years in the period ended December 31, 1992.
Norfolk, Virginia /s/ COOPERS & LYBRAND L.L.P.
November 11, 1994
<PAGE>
EXHIBIT 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C. 20429
FORM F-4
QUARTERLY REPORT
UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1994
COMMERCE BANK
-------------
(Exact name of bank as specified in charter)
54-1027360 22584
------------------------------------------------------------
(I.R.S. Identification No.) (FDIC Insurance Cert. No.)
------------------------------------------------------------
VIRGINIA
--------
(State of Incorporation)
3450 Pacific Avenue
Virginia Beach, Virginia 23451
(804) 456-1093
---------------
(Address of principal office and telephone number)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date.
2,725,163 shares of common stock ($2.50 par value) were outstanding as of
June 30, 1994.
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
COMMERCE BANK
BALANCE SHEET
(Unaudited)
(In thousands, except common stock data)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 28,303 $ 22,680 $ 25,800
Temporary investments 12,613 17,115 13,431
Securities:
Held to maturity (Market value June 30, 1994 - $88,230
1993 - $262,085, December 31, 1993 - $251,596) 90,494 254,224 247,175
Available for sale 127,203 - -
----------- ----------- -----------
Total Securities 217,697 254,224 247,175
Loans:
Commercial 183,013 149,698 165,409
Consumer 109,634 92,582 102,611
Real estate mortgage 96,327 86,545 88,850
Real estate construction & development 14,871 14,906 17,074
Tax-exempt 6,354 6,443 6,477
Less: Unearned income and deferred fees (1,766) (3,090) (2,163)
----------- ----------- -----------
Loans, net of unearned income and deferred fees 408,433 347,084 378,258
Less: Allowance for loan losses (7,188) (6,645) (6,527)
----------- ----------- -----------
Loans, net 401,245 340,439 371,731
Bank premises and equipment, net 19,229 16,830 18,384
Foreclosed property 2,870 4,433 3,080
Other assets 10,110 10,676 10,029
----------- ----------- -----------
Total assets $ 692,067 $ 666,397 $ 689,630
- - - ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest bearing demand $ 101,268 $ 102,179 $ 103,197
Interest bearing demand 74,792 58,397 72,221
Money market savings 247,108 249,957 227,751
Regular savings 31,198 27,191 28,389
Certificates of deposit less than $100,000 146,027 150,280 164,122
Certificates of deposit greater than $100,000 35,999 28,182 38,461
----------- ----------- -----------
Total deposits 636,392 616,186 634,141
Short-term borrowings - 175 1,400
Long-term debt 6,790 6,866 6,828
Other liabilities 2,292 2,848 3,672
----------- ----------- -----------
Total liabilities 645,474 626,075 646,041
----------- ----------- -----------
Shareholders' Equity
Common stock, $2.50 par: 10,000,000 shares authorized:
2,725,163, 2,533,914, and 2,686,792 issued and outstanding 6,813 6,335 6,717
Capital surplus 29,787 25,721 29,062
Retained earnings 10,587 8,296 7,810
Unrealized loss on marketable equity securities - (30) -
Net unrealized loss on securities available for sale (594) - -
----------- ----------- -----------
Total shareholders' equity 46,593 40,322 43,589
----------- ----------- -----------
Total liabilities and shareholders' equity $ 692,067 $ 666,397 $ 689,630
- - - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
COMMERCE BANK
STATEMENT OF INCOME
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $ 8,659 $ 7,625 $ 16,704 $ 15,002
Securities held to maturity and
available for sale 3,344 4,075 6,885 8,077
Temporary investments 179 164 343 323
------------ ------------ ------------ ------------
Total interest income 12,182 11,864 23,932 23,402
Interest Expense
Deposits 4,865 5,133 9,602 10,311
Short-term borrowings - 7 30 9
Long-term debt 167 159 331 304
------------ ------------ ------------ ------------
Total interest expense 5,032 5,299 9,963 10,624
------------ ------------ ------------ ------------
Net Interest Income 7,150 6,565 13,969 12,778
Provision for loan losses 600 725 1,200 1,525
------------ ------------ ------------ ------------
Net Interest Income After
Provision For Loan Losses 6,550 5,840 12,769 11,253
Noninterest Income
Service charges on deposit accounts 1,021 825 1,960 1,595
Mortgage brokerage income 391 622 981 1,368
Credit card merchant fees 275 234 471 402
Securities gains 10 - 69 86
Trust income 172 165 342 315
Other income 499 344 939 597
------------ ------------ ------------ ------------
Total noninterest income 2,368 2,190 4,762 4,363
Noninterest Expenses
Salaries and benefits 2,818 2,656 5,693 5,211
Occupancy of bank premises 688 591 1,353 1,174
Furniture and equipment 465 387 879 811
Other expenses 2,291 1,908 4,301 3,684
------------ ------------ ------------ ------------
Total noninterest expenses 6,262 5,542 12,226 10,880
------------ ------------ ------------ ------------
Income Before Income Taxes 2,656 2,488 5,305 4,736
Provision for income taxes 815 840 1,703 1,588
------------ ------------ ------------ ------------
Net Income $ 1,841 $ 1,648 $ 3,602 $ 3,148
- - - ---------------------------------------------------------------------------------------------------------------------
Net Income Per Share
Primary $ 0.66 $ 0.60 $ 1.29 $ 1.15
Fully diluted 0.63 0.57 1.23 1.11
Weighted Average Shares Outstanding
Primary 2,789 2,748 2,802 2,726
Fully diluted 3,050 3,018 3,068 2,993
- - - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
COMMERCE BANK
STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30, 1994 1993
------------- -------------
<S> <C> <C>
Cash Flows From Operating
Activities:
Net income $ 3,602 $ 3,148
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 1,200 1,525
Depreciation and amortization of premises and equipment 913 774
Net amortization of premiums and accretion of discounts 361 337
Amortization of intangible assets 136 161
Gain on sale of securities available for sale (69) -
Gain on sale of securities held to maturity - (86)
(Increase) decrease in deferred income tax benefits (90) 6
(Decrease) increase in interest receivable 17 (43)
Decrease in interest payable (273) (66)
Decrease in other liabilities (1,133) (462)
Decrease in other assets 66 1,103
------------- -------------
Net cash provided by operating activities 4,730 6,397
------------- -------------
Cash Flows From Investing Activities:
Securities held to maturity:
Proceeds from maturities, calls and prepayments - 12,651
Proceeds from sales - 5,062
Purchases (23,483) (33,508)
Securities available for sale:
Proceeds from maturities, calls and prepayments 29,016 -
Proceeds from sales 23,653 -
Net decrease (increase) in temporary investments 818 6,800
Purchases of premises and equipment (1,758) (860)
Net sale (repurchase) of loan participations 232 (512)
Net increase in loans (30,946) (19,225)
------------- -------------
Net cash used in investing activities (2,468) (29,592)
------------- -------------
Cash Flows From Financing Activities:
Net increases in deposit accounts 2,251 18,202
Proceeds from issuance of common stock 218 318
Net decrease in short-term borrowing (1,400) (388)
Principal payments on capital lease obligations (38) (45)
Cash dividends paid (790) (444)
------------- -------------
Net cash provided by financing activities 241 17,643
------------- -------------
Net (decrease) increase in cash and due from banks 2,503 (5,552)
Cash and due from banks at beginning of period 25,800 28,232
------------- -------------
Cash and due from banks at end of period $ 28,303 $ 22,680
- - - ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period:
Interest $ 10,236 $ 10,690
Income taxes 2,149 1,887
Noncash financing and investing activities:
Capital lease obligation - 1,285
- - - ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
COMMERCE BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
(In thousands)
Unrealized
Loss on
Marketable
Common Stock Capital Retained Equity
--------------------
Shares Amount Surplus Earnings Security Total
-------- -------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1993
Balance at January 1, 1993 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413
Net income - - - 3,148 - 3,148
Issuance of common stock 23 57 261 - - 318
Cash dividends declared - - - (557) - (557)
-------- -------- --------- ---------- ---------- --------
Balance at June 30, 1993 2,534 $ 6,335 $ 25,721 $ 8,296 $ (30) $ 40,322
-------- -------- --------- ---------- ---------- --------
Six months ended June 30, 1994
Balance at January 1, 1994 2,687 $ 6,717 $ 29,062 $ 7,810 $ - $ 43,589
Adjustment to beginning balance for change in
accounting method for net unrealized gain on
securities available for sale, net of tax of $1,253,000 - - 2,327 - 2,327
Net income - - - 3,602 - 3,602
Issuance of common stock 38 96 725 - - 821
Change in net unrealized loss on securities
available for sale, net of tax effect - - - (2,921) - (2,921)
Cash dividends declared - - - (825) - (825)
-------- -------- --------- ---------- ---------- ---------
Balance at June 30, 1994 2,725 $ 6,813 $ 29,787 $ 9,993 $ - $ 46,593
- - - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
Notes to Financial Statements
- - - -----------------------------
Note 1. General
-------
The financial statements in this report have not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial position and results of operations for the interim periods have been
made. All such adjustments are of a normal recurring nature. These statements
should be read in conjunction with the 1993 annual report on Form F-2 and the
March 31, 1994 report on Form F-4. Results of operations for the six months
ended June 30, 1994 are not necessarily indicative of the results of operations
for the full year or any other interim periods.
Note 2. Merger with BB&T Financial Corporation
--------------------------------------
Commerce Bank ("Commerce") entered into an Agreement and Plan of
Reorganization, dated as of June 24, 1994 (the "Agreement"), with BB&T Financial
Corporation, a bank holding company headquartered in Wilson, North Carolina
("BB&T"). The Agreement provides for the merger of Commerce with and into a
subsidiary of BB&T.
As an inducement for BB&T to enter into the Agreement, Commerce entered
into a Stock Option Agreement, dated as of June 24, 1994 (the "Option
Agreement"), whereby it granted BB&T an irrevocable option (the "Option") to
purchase up to that number of shares of Commerce's common stock (the "Option
Shares") as would equal 19.9% of the aggregate shares of Commerce common stock
that would be outstanding immediately after the issuance of the Option Shares
upon full exercise of the Option, at a price of $31.50 per Option Share. The
Option is exercisable, in whole or in part, at any time and from time to time
for a designated period of time following the occurrence of a "Purchase Event"
(as defined in the Option Agreement).
Note 3. Commitments
-----------
At June 30, 1994, the amount of off-balance sheet commitments to extend
credit were $69.0 million and standby letters of credit and financial guarantees
were $5.25 million.
5
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
Note 4. Accounting Change
-----------------
Effective January 1, 1994, Commerce adopted Statement of Financial
Accounting Standard No. 115 ("SFAS 115") "Accounting for Certain Investments in
Debt and Equity Securities". In accordance with SFAS 115, prior period
financial statements have not been restated to reflect the change in accounting
principle. SFAS 115 requires that certain securities be classified into one of
three categories: held to maturity, available for sale, or trading based on
management's ability and intent at time of purchase. Securities classified as
held to maturity are carried at their amortized cost; securities classified as
available for sale are carried at their fair values with the amount of
unrealized gains or losses, net of income taxes, reported as a separate
component of shareholders' equity; and securities classified as trading are
carried at their fair value with the unrealized gains or losses included in
earnings.
As a result of the adoption of SFAS 115, on January 1, 1994, Commerce
classified securities with a fair value of approximately $155 million as
securities available for sale. The opening balance of shareholders' equity was
increased by $2.32 million relating to net unrealized gain on securities
available for sale of $3.58 million, less applicable income taxes of $1.25
million. Prior to the adoption of SFAS 115, securities deemed available for
sale were carried at the lower of aggregate amortized cost or market value.
Note 5. Earnings Per Share
------------------
Primary earnings per share are calculated on the basis of the weighted
average number of shares outstanding during the period after giving retroactive
effect to the 5% stock dividends declared in 1993 and 1992. Dilutive stock
options have been converted to common stock equivalents for the calculation of
weighted average shares outstanding based upon the average market price of
Commerce's common stock. Fully diluted earnings per share assumes the
conversion of outstanding convertible subordinated capital notes and elimination
of interest paid thereon, after tax effect, and the exercise of dilutive stock
options, as of the beginning of each period. The dilutive effect of outstanding
options and convertible subordinated debt is computed using the greater of the
closing price or the average market price of Commerce's stock. The computation
of earnings per share is provided on the following page.
6
<PAGE>
COMMERCE BANK
Form F-4
June 30,1994
Earnings per share were determined as follows:
(In thousands, except per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary
Average common shares outstanding 2,695 2,674 2,705 2,649
Dilutive common stock options assumed exercised 94 74 97 77
----------------------------------------------------------------------------------------------------
Average primary shares outstanding 2,789 2,748 2,802 2,726
----------------------------------------------------------------------------------------------------
Net Income $1,841 $1,648 $3,602 $3,148
Per Share Amount .66 .60 1.29 1.15
----------------------------------------------------------------------------------------------------
Fully diluted
Average common shares outstanding 2,695 2,674 2,705 2,649
Dilutive common stock options 92 81 100 81
Dilutive convertible subordinated capital
notes assumed converted 263 263 263 263
----------------------------------------------------------------------------------------------------
Average fully diluted shares outstanding 3,050 3,018 3,068 2,993
----------------------------------------------------------------------------------------------------
Net Income $1,841 $1,648 $3,602 $3,148
Add interest on convertible subordinated
capital notes, after taxes 81 81 162 162
----------------------------------------------------------------------------------------------------
Adjusted net income $1,922 $1,729 $3,764 $3,310
----------------------------------------------------------------------------------------------------
Per share amount $.63 $.57 $1.23 $ 1.11
----------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
COMMERCE BANK FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
1994 1993 (Decrease) 1994 1993 (Decrease)
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net interest income $ 7,150 $ 6,565 8.9 % $ 13,969 $ 12,778 9.3 %
Net income 1,841 1,648 11.7 3,602 3,148 14.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Net income :
Primary $ 0.66 $ 0.60 10.0 % $ 1.29 $ 1.15 12.2 %
Fully diluted 0.63 0.57 10.5 1.23 1.11 10.8
Book value at period end - - 17.10 15.91 7.5
Cash dividends 0.15 0.12 25.0 0.30 0.22 36.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios:
Return on average assets 1.07 % 1.01 % 1.06 % 0.99 %
Return on average equity 16.00 16.56 15.62 16.21
Net interest spread 3.94 3.81 3.88 3.80
Net interest margin 4.51 4.37 4.44 4.35
Net overhead ratio 2.46 2.23 2.40 2.25
Average loans / average deposits 63.29 56.48 62.58 56.00
- - - ------------------------------------------------------------------------------------------------------------------------------------
Daily Averages:
Assets $ 688,284 $ 652,170 5.5 % $ 685,716 $ 640,941 7.0 %
Earning assets 635,945 602,499 5.6 633,949 592,057 7.1
Loans, net of unearned income 400,133 339,361 17.9 392,227 333,154 17.7
Investment securities 221,782 246,729 (10.1) 228,293 243,380 (6.2)
Deposits 632,194 600,887 5.2 626,807 590,961 6.1
Shareholders' equity 46,145 39,922 15.6 46,484 39,158 18.7
Primary shares outstanding 2,789 2,748 1.5 2,802 2,726 2.8
Fully diluted shares outstanding 3,050 3,018 1.1 3,068 2,993 2.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
At Period End:
Assets $ 692,067 $ 666,397 3.9 %
Earning assets 638,743 619,422 3.1
Loans, net of unearned income 408,433 347,084 17.7
Investment securities 217,697 254,224 (14.4)
Deposits 636,392 616,186 3.3
Shareholders' equity 46,593 40,322 15.6
Allowance for loan losses 7,188 6,645 8.2
Nonperforming assets 5,273 4,877 8.1
- - - ------------------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier I 10.27 % 9.71 %
Total 12.63 12.23
Tier I leverage 6.67 5.99
Total risk weighted assets $ 450,871 $ 394,039
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
COMMERCE BANK
Selected Quarterly Financial Data
(Dollars in thousands, except
per share data)
<TABLE>
<CAPTION>
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
1994 1994 1993 1993 1993
- - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of operations:
Interest income $ 12,182 $ 11,750 $ 11,888 $ 11,957 $ 11,864
Interest expense 5,032 4,931 5,167 5,192 5,299
- - - -----------------------------------------------------------------------------------------------------------------------
Net interest income 7,150 6,819 6,721 6,765 6,565
Provision for loan losses 600 600 600 700 725
- - - -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,550 6,219 6,121 6,065 5,840
Noninterest income 2,358 2,335 2,346 2,625 2,190
Securities gains 10 59 53 1,268 -
Noninterest expense (1) 6,262 5,964 5,995 6,831 5,542
- - - -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,656 2,649 2,525 3,127 2,488
Provision for income taxes 815 888 834 1,415 840
- - - -----------------------------------------------------------------------------------------------------------------------
Net income $ 1,841 $ 1,761 $ 1,691 $ 1,712 $ 1,648
=======================================================================================================================
Per Share Data:
Net income :
Primary $ 0.66 $ 0.63 $ 0.61 $ 0.62 $ 0.60
Fully diluted 0.63 0.60 0.58 0.60 0.57
Book value at period end 17.10 17.09 16.22 16.48 15.91
Cash dividends 0.15 0.15 0.15 0.14 0.12
Common stock price: (2)
High 39.00 27.50 25.50 25.50 25.50
Low 24.50 25.50 23.00 22.75 22.50
Close 39.00 26.50 24.00 23.75 25.50
=======================================================================================================================
Average Balance Sheet Data
Assets:
Loans, net of unearned income $ 400,133 $ 384,233 $ 369,323 $ 354,239 $ 339,361
Investment securities 221,782 234,876 245,039 240,369 246,729
Temporary Investments 14,030 12,821 12,356 20,941 16,409
- - - -----------------------------------------------------------------------------------------------------------------------
Total earning assets 635,945 631,930 626,718 615,549 602,499
Allowance for loan losses (6,912) (6,809) (6,844) (6,713) (6,313)
Other Assets 59,251 57,998 58,637 56,375 55,984
Total Assets $ 688,284 $ 683,119 $ 678,511 $ 665,211 $ 652,170
=======================================================================================================================
Liabilities and Shareholders'
Equity:
Interest bearing deposits $ 532,136 $ 528,279 $ 529,081 $ 516,719 $ 511,875
Short-term borrowings 77 3,623 1,337 818 859
Long-term borrowings 6,799 6,818 6,837 6,856 6,878
- - - -----------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 539,012 538,720 537,255 524,393 519,612
Non interest bearing liabilities 103,127 93,081 98,291 99,022 92,636
Equity 46,145 46,828 42,965 41,796 39,922
- - - -----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 688,284 $ 683,119 $ 678,511 $ 665,211 $ 652,170
=======================================================================================================================
Financial Ratios:
Return on average assets 1.07 % 1.05 % 0.99 % 1.02 % 1.01 %
Return on average equity 16.00 15.25 15.61 16.25 16.56
Net interest margin 4.51 4.38 4.28 4.36 4.37
=======================================================================================================================
</TABLE>
(1) The third quarter of 1993 included a non-recurring, noncash adjustment of
$910,000 for the write down of an intangible asset.
(2) As reported by NASDAQ
9
<PAGE>
COMMERCE BANK
Form F-4
June 30,1994
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the results of operations and financial condition of Commerce Bank
("Commerce"). The following should be read in conjunction with Commerce's 1993
Annual Report on Form F-2 and the March 31, 1994 report on Form F-4.
Performance Summary
- - - -------------------
Net income for the second quarter of 1994 was $1.84 million and represented
a 11.7% increase over second quarter earnings for 1993 of $1.65 million.
Primary earnings per share were $.66 compared with $.60, and fully diluted
earnings per share were $.63 compared with $.57 for the second quarter of 1994
compared with 1993. Net income for the first six months of 1994 was $3.60
million or 14.4% above comparable 1993 net income of $3.15 million. Primary
earnings per share were $1.29 compared with $1.15, and fully diluted earnings
per share were $1.23 compared with $1.11 for the second half of 1993. The
increase in net income for the second quarter and first half of 1993 was due to
a higher net interest income, increased noninterest income and a lower provision
for loan losses. Net income for the second quarter of 1994 was 4.54%, or
$80,000 above the $1.76 million reported for the first quarter of 1994.
The return on annualized average assets was 1.07% for the second quarter of
1994 compared with 1.01% for the same period in 1993. The annualized return of
average equity was 16.00% for the second quarter of 1994. In comparison, ROE
was 16.56% for the same period of 1993. ROA for the first half of 1994 was
1.06% while ROE was 15.62% compared with .99% and 16.21% for the first half of
1993, respectively.
Total assets at June 30, 1994 were $692.1 million while total deposits were
$636.4 million and represented a 3.9% and 3.3% growth rate over the prior year
levels, respectively. Average earning assets increased 5.6% to $635.9 million
during the second quarter of 1994 when compared with 1993.
10
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
The following table presents an analysis of Commerce's return on average
assets and equity.
<TABLE>
<CAPTION>
June 30, March 31,
Three Months Ended 1994 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
As a percent of average earning assets:
Net Interest Income 4.51 % 4.42 % 4.38 %
Provision for Loan Losses (0.38) (0.49) (0.39)
Noninterest Income 1.49 1.47 1.50
Noninterest Expenses (3.95) (3.73) (3.83)
Securities Gains 0.01 - 0.04
Applicable Income Taxes (0.51) (0.57) 0.57
---------- ---------- ----------
Return on Average Earning Assets 1.16 % 1.10 % 1.13 %
Multiplied by
Average Earning Assets to Average Total Assets 92.40 92.38 92.51
---------- ---------- ----------
Return on Average Assets 1.07 % 1.01 % 1.05 %
Multiplied by
Ratio of Average Assets to Average Equity 14.95 16.40 14.52
---------- ---------- ----------
Return on Average Total Equity 16.00 % 16.56 % 15.25 %
- - - ---------------------------------------------------------------------------------------------
</TABLE>
EARNINGS ANALYSIS
Net Interest Income
- - - -------------------
Net interest income, the principal source of Commerce's earnings, is the
amount of income generated by interest-earning assets (primarily loans and
investment securities) reduced by the total interest cost of the funds (chiefly
deposits) incurred to carry them.
Net interest income for the second quarter of 1994 was $7.15 million, a
8.9% increase over comparative 1993. Net interest income for the first half of
1994 was $14.0 million or 9.3% above comparative 1993. Net interest margin for
the second quarter and first half of 1994 was 4.51% and 4.44%, respectively, and
represented an improvement from 4.37% and 4.35% for the comparative periods of
1993. The increase in net interest income for 1994 benefitted from growth in
average earning assets, including 18% loan growth for both periods, and
favorable interest rate spreads due to a reduced cost of funds. Net interest
spread for the second quarter of 1994 was 3.94% versus 3.81% for the second
quarter of 1993
11
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
and 3.83% for the first quarter of 1994. Net interest spread for the first half
of 1994 improved 8 basis points, to 3.88% from 3.80% for the first half of 1993.
Average earning assets increased $33.4 million, or 5.6%, rising from $602.5
million for the second quarter of 1993 to $635.9 million in 1994. Average
earning assets for the first half of 1994 were $633.9 million, or 7.1% above
$592.0 million for comparative 1993. Average earning assets increased 6.4%
during the second quarter of 1994 when compared with the first quarter of 1994
while the mix reflected continued growth in loans.
The annualized yield on earning assets decreased 22 basis points, from
7.90% for the second quarter of 1993 to 7.68% for comparative 1994.
The annualized cost of interest bearing liabilities decreased 35 basis
points, from 4.09% for the second quarter of 1993 to 3.74% for the second
quarter of 1994. The decrease in annualized cost of interest bearing
liabilities is due to the deposit mix to a greater proportion of rate sensitive
products, increased noninterest bearing deposits, and lower rates of interest.
(See Deposits). The cost of interest bearing liabilities decreased 16 basis
points, from 3.71% for the first quarter of 1994 to 3.74% for the second quarter
of 1994.
Substantially, the same factors impacted net interest income when comparing
the first half of 1994 with 1993 as were discussed above for the three months
ended June 30, 1994 and 1993.
12
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
The following tables provide Commerce's average balance sheet, interest
earned or paid and the related yields and rates on major categories.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended June 30, / Three Months Ended June 30,
----------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield/Rate Change due to (3)
--------------------- --------------------- --------------- Increase ----------------------
Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume
---------- ---------- --------- --------- ------- ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income & deferred fees
(1)(2) $ 400,133 $ 339,361 $ 8,659 $ 7,625 8.68 % 9.01 % $ 1,034 $ (270) $ 1,304
Investment securities(2) 221,782 246,729 3,344 4,075 6.05 6.62 (731) (336) (395)
Temporary investments 14,030 16,409 178 164 5.12 4.01 15 40 (26)
---------- ---------- --------- --------- ---------- --------- ----------
Total earning assets 635,945 602,499 12,181 11,864 7.68 7.90 318 (566) 883
Allowance for loan losses (6,723) (6,313)
Nonearning assets 59,062 55,984
---------- ----------
Total assets $ 688,284 $ 652,170
========== ==========
Liabilities &
Shareholders' Equity:
Interest bearing deposits $ 532,136 $ 511,875 $ 4,865 $ 5,133 3.67 % 4.02 % $ (268) $ (464) $ 196
Short-term borrowings 77 859 - 7 2.59 3.27 (7) (1) (6)
Long-term debt 6,799 6,878 167 159 9.85 9.27 8 10 (2)
---------- ---------- --------- --------- ---------- --------- ----------
Total interest bearing
liabilities 539,012 519,612 5,032 5,299 3.74 4.09 (267) (455) 188
Noninterest bearing
liabilities 103,127 92,636
Shareholders' equity 46,145 39,922
---------- ----------
Total liabilities &
equity $ 688,284 $ 652,170
========== ========== --------- --------- ---------- --------- ----------
Net interest income $ 7,149 $ 6,565 $ 585 $ (111) $ 695
========= ========= ========== ========= ==========
Net interest spread 3.94 % 3.81 %
Net interest margin 4.51 % 4.37 %
- - - ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended June 30, / Three Months Ended March 31,
---------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield/Rate Change due to (3)
--------------------- --------------------- --------------- Increase ----------------------
Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume
---------- ---------- --------- --------- ------- ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income & deferred fees
(1)(2) $ 400,133 $ 384,233 $ 8,659 $ 8,045 8.68 % 8.49 % $ 614 $ 214 $ 400
Investment securities(2) 221,782 234,876 3,344 3,541 6.05 6.11 (197) (29) (168)
Temporary investments 14,030 12,821 178 164 5.12 5.19 14 (2) 16
---------- ---------- --------- --------- ---------- --------- ----------
Total earning assets 635,945 631,930 12,181 11,750 7.68 7.54 431 183 248
Allowance for loan losses (6,723) (6,723)
Nonearning assets 59,062 57,912
---------- ----------
Total assets $ 688,284 $ 683,119
========== ==========
Liabilities &
Shareholders' Equity:
Interest bearing deposits $ 532,136 $ 528,279 $ 4,865 $ 4,737 3.67 % 3.64 % $ 128 $ 67 $ 61
Short-term borrowings 77 3,623 - 29 2.59 2.50 (29) (5) (24)
Long-term debt 6,799 6,818 166 165 9.79 9.81 1 0 1
---------- ---------- --------- --------- ---------- --------- ----------
Total interest bearing
liabilities 539,012 538,720 5,031 4,931 3.74 3.71 100 62 38
Noninterest bearing
liabilities 103,127 97,571
Shareholders' equity 46,145 46,828
---------- ----------
Total liabilities &
equity $ 688,284 $ 683,119
========== ========== ---------- ---------- ---------- --------- ----------
Net interest income $ 7,150 $ 6,819 $ 331 $ 121 $ 210
========== ========== ========== ========= ==========
Net interest spread 3.94 % 3.83 %
Net interest margin 4.51 % 4.38 %
- - - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
<TABLE>
<CAPTION>
Three Months Ended June 30, / Three Months Ended June 30,
----------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield/Rate Change due to (3)
--------------------- --------------------- --------------- Increase ----------------------
Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume
---------- ---------- --------- --------- ------- ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income & deferred fees
(1)(2) $ 392,227 $ 333,154 $ 16,704 $ 15,002 8.59 % 9.14 % $ 1,702 $ (925) $ 2,627
Investment securities(2) 228,293 243,380 6,885 8,077 6.08 6.69 (1,192) (710) (482)
Temporary investments 13,429 15,523 343 323 5.15 4.19 20 68 (48)
---------- ---------- --------- --------- ---------- --------- ----------
Total earning assets 633,949 592,057 23,932 23,402 7.61 7.97 530 (1,567) 2,097
Allowance for loan losses (6,818) (6,101)
Nonearning assets 58,585 54,985
---------- ----------
Total assets $ 685,716 $ 640,941
========== ==========
Liabilities &
Shareholders' Equity:
Interest bearing deposits $ 530,218 $ 506,784 $ 9,602 $ 10,311 3.65 % 4.10 % $ (709) $ (1,170) $ 461
Short-term borrowings 1,840 646 30 9 3.29 2.81 21 1 20
Long-term debt 6,808 6,450 331 304 9.80 9.50 27 9 18
---------- ---------- --------- --------- ---------- --------- ----------
Total interest bearing
liabilities 538,866 513,880 9,963 10,624 3.73 4.17 (661) (1,160) 499
Noninterest bearing
liabilities 100,366 87,903
Shareholders' equity 46,484 39,158
---------- ----------
Total liabilities &
equity $ 685,716 $ 640,941
========== ========== ---------- --------- ----------
Net interest income $ 13,969 $ 12,778 $ 1,191 $ (407) $ 1,598
========= ========= ========== ========= ==========
Net interest spread 3.88 % 3.80 %
Net interest margin 4.44 % 4.35 %
- - - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes nonaccrual loans, and income on such loans is recognized on a
cash basis.
(2) Interest and yields are presented on a book basis, as tax-equivalent
adjustments are not significant.
(3) The changes for each category of income and expenses are divided between
the portion of change attributable to the variances in average levels and
yields or rates for that category, with the amount of change that cannot
be separated being allocated to each variance proportionately.
Noninterest Income
- - - ------------------
Total noninterest income was $2.37 million for the second quarter of 1994,
representing a 8.1% increase over the same period of 1993. Total noninterest
income, exclusive of securities gains, for the first half of 1994 was $4.69
million, or 9.7% above the $4.28 million earned in comparative 1993. Commerce
recorded $69,000 in securities gains during the first half of 1994 compared with
$86,000 for the same period of 1993. Noninterest income, exclusive of
securities gains, for the second quarter of 1994 was $23,000 or 1.0% above the
first quarter of 1994.
The increase in noninterest income, exclusive of securities gains and
mortgage brokerage income, for the second quarter and first half of 1994
benefitted from growth in all categories of income. The decrease in mortgage
brokerage income reflects a decline in refinancing activity due to increased
interest rates.
14
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
The following tables provide an analysis of noninterest income.
(Dollars in thousands)
<TABLE>
<CAPTION>
Increase(Decrease)
----------------------------------------------------------------------------------------------------
Three Months Ended June 30, /
------------------------------------------------ ----------------------------------------------
Three Months Ended June 30, Three Months Ended March 31,
------------------------------------------------ ----------------------------------------------
1994 over 1993 1994 over 1994
---------------------- ----------------------
1994 1993 Amount Percent 1994 1994 Amount Percent
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $ 1,021 $ 825 $ 196 23.8 % $ 1,021 $ 939 $ 82 8.7 %
Mortgage brokerage income 391 622 (231) (37.1) 391 590 (199) (33.7)
Credit card merchant fees 275 234 41 17.5 275 196 79 40.3
Trust income 172 165 7 4.2 172 170 2 1.2
Other income 499 344 155 45.1 499 440 59 13.4
-------- -------- -------- -------- -------- --------
2,358 2,190 168 7.7 2,358 2,335 23 1.0
Securities gains 10 - 10 n/m 10 59 (49) (83.1)
-------- -------- -------- -------- -------- --------
Total noninterest
income $ 2,368 $ 2,190 $ 178 8.1 % $ 2,368 $ 2,394 $ (26) (1.1) %
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------
1994 over 1993
----------------------------
1994 1993 Amount Percent
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,960 $ 1,595 $ 365 22.9 %
Mortgage brokerage income 981 1,368 (387) (28.3)
Credit card merchant fees 471 402 69 17.2
Trust income 342 315 27 8.6
Other income 939 597 342 57.3
-------- -------- ------------
4,693 4,277 419 9.7
Securities gains 69 86 (17) (19.8)
-------- -------- ------------
Total noninterest income $ 4,762 $ 4,363 $ 399 9.1 %
======== ======== ============
n/m -- not meaningful
</TABLE>
Noninterest Expense
- - - -------------------
Total noninterest expense for the second quarter and first half of 1994 was
$6.26 million and $12.2 million, respectively, which represented a 13.0% and
12.4% increase over the comparative periods of 1993. The increase in
noninterest expense is primarily due to servicing a larger customer base in
1994.
15
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
Salaries and benefits expense was $2.82 million for the second quarter of
1994, up 6.1% from comparative 1993. Salaries and benefits for the first six
months of 1994 were $5.69 million or 9.2% above comparative 1993. The higher
expense reflected regular merit and promotional increases along with an increase
in the number of employees to service growth in the customer base. The number
of full-time-equivalent employees was 344 at June 30, 1994 compared with 304 for
June 30, 1993.
Occupancy of bank premises expense increased 15.2% or $179,000, during the
first half of 1994 when compared with 1993 due to scheduled rent increases and
increased lease space for branch locations and operations. Furniture and
equipment expense increased 8.4% or $68,000 during the first half of 1994 over
comparative 1993 as a result of expenses associated with maintenance and
depreciation charges from equipment upgrades. FDIC insurance premiums increased
7.7%, or $50,000, during the first half of 1994 when compared with 1993 due to
growth in the deposit base.
Other expenses increased 18.7%, or $567,000 for the first half of 1994 when
compared with 1993. The increase was primarily due to the added expenses of
supporting customer services.
Noninterest expense for the second quarter of 1994 increased $298,000 or
5.0% when compared with the first quarter of 1994.
16
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
The following tables provide an analysis of noninterest expense.
<TABLE>
<CAPTION>
(Dollars in thousands)
Increase(Decrease)
-------------------------------------------------------------------------------------
Three Months Ended June 30,
-------------------------------------- --------------------------------------
Three Months Ended June 30,/ Three Months Ended March 31,
-------------------------------------- --------------------------------------
1994 over 1993 1994 over 1994
---------------- ----------------
1994 1993 Amount Percent 1994 1994 Amount Percent
------- ------- ------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 2,818 $ 2,656 $ 162 6.1 % $ 2,818 $ 2,875 $ (57) (2.0)%
Occupancy of bank premises 688 591 97 16.4 688 665 23 3.5
Furniture and equipment 465 387 78 20.2 465 414 51 12.3
FDIC insurance premiums 351 326 25 7.7 351 351 - -
Other expenses 1,940 1,582 358 22.6 1,940 1,659 281 16.9
------- ------- ------ ------- ------- ------
Total noninterest expenses $ 6,262 $ 5,542 $ 720 13.0 % $ 6,262 $ 5,964 $ 298 5.0 %
======= ======= ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,/
---------------------------------------
1994 over 1993
-----------------
1994 1993 Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Salaries and benefits $ 5,693 $ 5,211 $ 482 9.2 %
Occupancy of bank premises 1,353 1,174 179 15.2
Furniture and equipment 879 811 68 8.4
FDIC insurance premiums 702 652 50 7.7
Other expenses 3,599 3,032 567 18.7
------- ------- -------
Total noninterest expenses $12,226 $10,880 $1,346 12.4 %
======= ======= =======
</TABLE>
Provision for Income Taxes
- - - --------------------------
Commerce reported a provision for income taxes of $815,000 and $840,000 for
the second quarter of 1994 and 1993, respectively, for an effective tax rate of
30.7% and 33.8%. The provision for income taxes for the first half of 1994 was
$1.70 million, or 7.2% above the 1993 level and was due to increased earnings.
BALANCE SHEET ANALYSIS
Temporary Investments
- - - ---------------------
Temporary investments were $12.6 million at June 30, 1994 and consisted of
interest bearing deposits with other banks in the amount of $1.0 million,
mortgages held for sale of $1.6 million, and federal funds sold of $10.0
million. Temporary investments are used for daily cash management purposes,
manage-
17
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
ment of short-term interest rate opportunities and interest rate risk, and
as a result daily balances vary. The average balance of temporary investments
during the second quarter of 1994 was $14.0 million and represented 2.2% of
total earning assets compared with $16.4 million or 2.7% for 1993. The average
balance of temporary investments for the first half of 1994 was $13.4 million,
or 2.1% of total average earning assets, compared with $15.5 million, or 2.62%
for comparative 1993.
Securities
- - - ----------
As further discussed under Financial Statements Note 4, Commerce adopted
SFAS No. 115 effective January 1, 1994. Total securities were $217.7 million on
June 30, 1994, representing a 14.4% decrease from comparative 1993.
Loans and Asset Quality
- - - -----------------------
During the first six months of 1994, average loans, net of unearned income
and deferred fees, increased 17.7% to $392.2 million and were 61.9% of total
earning assets compared with 56.2% for 1993. Loans, net of unearned income were
$408.4 million at June 30, 1994, or 17.7% and $61.4 million above the $347.1
million reported at June 30, 1993.
Nonperforming assets at June 30, 1994 were $5.27 million as compared with
$4.88 million a year earlier and $4.0 million at the end of 1993.
Net loan charge-offs were $221,000 for the second quarter of 1994, compared
with $291,000 for the same period of 1993. Net loan charge-offs for the first
half of 1994 declined 2.2% to $539,000 from $551,000 for comparative 1993. The
provision for loan losses for the second quarter of 1994 was $600,000, compared
with the $725,000 provision for comparative 1993. The provision for loan losses
for the first half of 1994 was $1.2 million, or 21.3% and $325,000 lower than
the $1.53 million reported for comparative 1993. The decline in the provision
for loan losses during 1994 correlates with a lower level of net loan charge-
offs and improvement in other asset quality indicators.
The allowance for loan losses at June 30, 1994 was $7.19 million, which was
equivalent to 1.76% of period end loans, compared with 1.91% for the second
quarter of 1993.
18
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
The following table summarizes activity in the allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Six Months Ended
------------------------------- ------------------
June 30, June 30, March 31, June 30,
Allowance for Loan Losses 1994 1993 1994 1994 1993
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 6,809 $ 6,211 $ 6,527 $ 6,527 $ 5,671
Provision charged to earnings 600 725 600 1,200 1,525
Loan charge-offs (314) (402) (411) (725) (774)
Loan recoveries 93 111 93 186 223
-------- -------- --------- -------- --------
Net charge-offs (221) (291) (318) (539) (551)
-------- -------- --------- -------- --------
Balance, end of period $ 7,188 $ 6,645 $ 6,809 $ 7,188 $ 6,645
======== ======== ========= ======== ========
</TABLE>
The following table shows the level of nonperforming assets and related
information for the periods indicated.
<TABLE>
<CAPTION>
(In thousands)
June 30, June 30, March 31,
Nonperforming assets: 1994 1993 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Nonperforming loans $ 2,403 $ 444 $ 1,494
Foreclosed property 2,870 4,433 2,733
-------------- ------------- --------------
Total nonperforming assets 5,273 4,877 4,227
============== ============= ==============
Loans past due 90 days accruing interest $ 1,647 $ 339 $ 1,010
- - - -------------------------------------------------------------------------------------------------------
Asset Quality Ratios
Allowance for loan losses to nonperforming loans 2.99 X 14.97 X 4.56 X
Allowance for loan losses to period end loans 1.76 % 1.91 % 1.74 %
Nonperforming assets to period end loans 1.29 1.41 0.61
Nonperforming assets to period end assets 0.76 0.73 1.08
Net charge-offs to average loans (annualized) 0.28 0.33 0.33
- - - -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
Deposits
- - - --------
Total deposits at June 30, 1994 were $636.4 million, representing an
increase of 3.3% or $20.2 million over comparative 1993. Total average deposits
increased 6.1% during the first six months of 1994 to $626.8 million when
compared with the first half of 1993.
The cost of interest bearing deposits was 3.67% for the second quarter of
1994 compared with 4.02% for the second quarter of 1993 and 3.64% for the first
quarter of 1994. The cost of interest bearing deposits for the first half of
1994 was 3.65%, or 45 basis points lower than the 4.10% cost for the first half
of 1993. The lower cost in 1994 reflects the continued lowering of market rates
of interest.
Average noninterest bearing demand deposits as a percentage of average
total deposits were 15.41% and 14.24% during the first half of 1994 and 1993,
respectively. Average noninterest bearing demand deposits were 15.8% and 14.8%
of average total deposits for the second quarter of 1994 and 1993, respectively.
The following table sets forth a summary of Commerce's various deposits
categories and their respective cost rates.
<TABLE>
<CAPTION>
(In thousands)
Average Balance/Cost Rate
- - - --------------------------------------------------------------------------------------------------------------------------
June 30, June 30, March 31,
Three months ended, 1994 1993 1994
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand $ 73,140 2.21 % $ 60,280 2.52 % $ 69,688 2.21 %
Money market savings 243,938 3.31 249,506 3.62 237,718 3.14
Certificates:Less than $100,000 152,235 4.82 150,989 5.17 158,305 4.85
Greater than $100,000 31,200 5.26 24,527 5.89 33,985 5.17
Regular savings 31,623 2.71 26,573 2.97 28,583 2.74
----------- ----------- -----------
Total interest bearing 532,136 3.67 511,875 4.02 528,279 3.64
Noninterest bearing 100,058 89,012 93,081
----------- ----------- -----------
Total $ 632,194 3.17 % $ 600,887 3.43 % $ 621,360 3.09 %
=========== =========== ===========
</TABLE>
20
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
<TABLE>
<CAPTION>
(In thousands)
Average Balance/Cost Rate
- - - ---------------------------------------------------------------------------------------------
June 30, June 30,
Six months ended, 1994 Mix 1993 Mix
-------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand $ 71,423 2.21 % 13.47 $ 60,086 2.62 % 11.86
Money market savings 240,845 3.23 45.42 247,833 3.97 48.90
Certificates:Less than $100,000 154,805 4.85 29.20 151,027 5.23 29.80
Greater than $100,000 32,585 5.23 6.15 23,233 5.89 4.58
Regular savings 30,560 2.70 5.76 24,605 2.96 4.86
-------- ------ -------- ------
Total interest bearing 530,218 3.65 100.00 506,784 4.10 100.00
Noninterest bearing 96,589 84,177
-------- --------
Total $626,807 3.21 % $590,961 3.62 %
-------- --------
</TABLE>
Short-Term Borrowings and Long-Term Debt
- - - ----------------------------------------
Commerce had no short-term borrowings at June 30, 1994, however, the
average balance during the first half of 1994 was $1.8 million. Long-term debt
was $6.79 million at June 30, 1994 and consisted of $5.0 million, 10%
convertible subordinated capital notes issued September 1, 1990 and capital
lease obligations of $1.79 million.
Common Stock and Dividends
- - - --------------------------
Commerce's Board of Directors declared a $.15 cash dividend during the
second quarter of 1994 representing a 25% increase over the $.12 declared in
1993.
The high and low prices for Commerce's common stock are set forth with
other selected quarterly financial data on page 9.
Liquidity and Capital Structure
- - - -------------------------------
Commerce continued to experience a high degree of liquidity during the
second quarter of 1994, as reflected in its liquid asset ratio of 37.5% at June
30, 1994. Average loans to average deposits were 62.6% for the first half of
1994 in comparison with 56.0% for 1993.
Shareholders' equity was $46.6 million at June 30, 1994, representing a
21
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
15.6% increase over the prior year.
The following table provides information on the risk-based capital
position of Commerce.
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993 1993
----------- ---------- --------------
<S> <C> <C> <C>
Tier I Capital:
Shareholders' equity $ 47,187 $ 40,322 $ 43,589
Less: intangible assets 888 2,077 1,024
----------- ----------- --------------
Total Tier I 46,299 38,245 42,565
Tier II Capital:
Qualifying allowance for loan losses (1) 5,655 4,947 5,460
Mandatory convertible debt instruments 4,995 4,995 4,995
----------- ---------- --------------
Total Tier II 10,650 9,942 10,455
----------- ---------- --------------
Total Risk Based Capital $ 56,949 $ 48,187 $ 53,020
=========== =========== ==============
Total Assets $692,067 $666,397 $689,630
Total Risk Weighted Assets 450,871 394,039 436,800
Risk Weighted Assets to Total Assets 65.15% 59.13% 63.34%
Risk Based Capital Ratios:
Tier I (4% minimum requirement) 10.27% 9.71% 9.74%
Total (8% minimum requirement) 12.63% 12.23% 12.14%
Tier I Leverage Ratio (3% minimum requirement) 6.67% 5.99% 6.49%
</TABLE>
- - - --------------------------------------------------------------------------------
(1) Limited to 1.25% of risk weighted assets
22
<PAGE>
COMMERCE BANK
Form F-4
June 30, 1994
Signatures
Under the requirements of the Securities Exchange Act of 1934, the Bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
COMMERCE BANK
Date: August 10, 1994 /s/ Gerald T. McDonald
--------------- ----------------------------
Gerald T. McDonald
Executive Vice President/CFO
(804) 456-1006
Date: August 10, 1994 /s/ Clyde E. McFarland
--------------- ----------------------------
Clyde E. McFarland
Vice President/Controller
(804) 456-1093
23
<PAGE>
EXHIBIT 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C. 20429
FORM F-4
QUARTERLY REPORT
UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1994
COMMERCE BANK
-------------
(Exact name of bank as specified in charter)
54-1027360 22584
-------------------------------------------------------
(I.R.S. Identification No.) (FDIC Insurance Cert. No.)
-------------------------------------------------------
VIRGINIA
--------
(State of Incorporation)
3450 Pacific Avenue
Virginia Beach, Virginia 23451
(804) 456-1093
---------------
(Address of principal office and telephone number)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date.
2,702,538 shares of common stock ($2.50 par value) were outstanding as of
March 31, 1994.
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
COMMERCE BANK
BALANCE SHEET
(Unaudited)
(In thousands, except common stock data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993 1993
--------- -------- --------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 29,503 $ 23,807 $ 25,800
Temporary investments 22,416 25,988 13,431
Securities:
Held to maturity (Market value March 31: 1994 -
$87,090, 1993 - $248,200, December 31, 1993 -
$251,596) 88,588 240,076 247,175
Available for sale 137,047 - -
--------- -------- --------
Total Securities 225,633 240,078 247,175
Loans:
Commercial 177,888 140,516 165,409
Consumer 104,208 90,370 102,611
Real estate mortgage 91,259 82,926 88,850
Real estate construction & development 12,954 15,477 17,074
Tax-exempt 6,419 6,174 6,477
Less: Unearned income and deferred fees (1,741) (3,646) (2,163)
--------- -------- --------
Loans, net of unearned income and deferred fees 390,987 331,817 378,258
Less: Allowance for loan losses (6,809) (6,211) (6,527)
--------- -------- --------
Loans, net 384,178 325,606 371,731
Bank premises and equipment net 18,892 16,568 18,384
Foreclosed property 2,733 5,035 3,080
Other assets 10,160 11,877 10,029
--------- -------- --------
Total assets $ 693,515 $ 648,959 $ 689,630
- - - --------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest bearing demand $ 97,089 $ 89,695 $ 103,197
Interest bearing demand 77,843 59,464 72,221
Money market savings 242,129 251,184 227,751
Regular savings 30,238 23,912 28,389
Certificates of deposit less than $100,000 152,706 150,130 164,122
Certificates of deposit greater than $100,000 35,860 24,486 38,461
--------- -------- --------
Total deposits 635,865 598,871 634,141
Short-term borrowings - 175 1,400
Long-term debt 6,809 6,890 6,828
Other liabilities 4,659 4,240 3,672
--------- -------- --------
Total liabilities 647,333 610,176 646,041
--------- -------- --------
Shareholders' Equity
Common stock, $2.50 par: 5,000,000 shares authorized:
2,702,538, 2,522,667 and 2,686,792 issued and outstanding 6,756 6,307 6,717
Capital surplus 29,359 25,556 29,062
Retained earnings 9,155 6,950 7,810
Unrealized loss on marketable equity securities - (30) 0
Net unrealized gains on securities available for sale 912 - -
--------- -------- --------
Total shareholders' equity 46,182 38,783 43,589
--------- -------- --------
Total liabilities and shareholders' equity $ 693,515 $ 648,959 $ 689,630
- - - --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
COMMERCE BANK
STATEMENT OF INCOME
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, March 31, December 31,
Three Months Ended, 1994 1993 1993
------------- ------------- --------------
<S> <C> <C> <C>
Interest Income
Loans, including fees $ 8,045 $ 7,376 $ 7,702
Securities held to maturity and
available for sale 3,541 4,002 3,772
Temporary investments 164 160 414
--------- --------- ---------
Total interest income 11,750 11,538 11,888
Interest Expense
Deposits 4,737 5,178 4,992
Short-term borrowings 29 2 10
Long-term debt 165 145 165
--------- --------- ---------
Total interest expense 4,931 5,325 5,167
--------- --------- ---------
Net Interest Income 6,819 6,213 6,721
Provision for loan losses 600 800 600
--------- --------- ---------
Net Interest Income After
Provision For Loan Losses 6,219 5,413 6,121
Noninterest Income
Service charges on deposit accounts 939 770 943
Mortgage brokerage income 590 746 668
Credit card merchant fees 196 168 254
Securities gains 59 86 52
Trust income 170 150 155
Other income 440 253 326
--------- --------- ---------
Total noninterest income 2,394 2,173 2,398
Noninterest Expenses
Salaries and benefits 2,875 2,555 2,793
Occupancy of bank premises 665 583 637
Furniture and equipment 414 424 396
Other expenses 2,010 1,776 2,168
--------- --------- ---------
Total noninterest expenses 5,964 5,338 5,994
--------- --------- ---------
Income Before Income Taxes 2,649 2,248 2,525
Provision for income taxes 888 748 834
--------- --------- ---------
Net Income $ 1,761 $ 1,500 $ 1,691
- - - -----------------------------------------------------------------------------------------------------
Net Income Per Share
Primary $ 0.63 $ 0.55 $ 0.61
Fully diluted 0.60 0.53 0.58
Weighted Average Shares Outstanding
Primary 2,789 2,719 2,773
Fully diluted 3,054 2,989 3,037
- - - -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
COMMERCE BANK
STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended March 31, 1994 1993
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,761 $ 1,500
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 600 800
Depreciation and amortization of premises and equipment 425 381
Net amortization of premiums and accretion of discounts 213 165
Amortization of intangible assets 68 80
Gain on sale of securities available for sale (59) -
Gain on sale of securities held to maturity - (86)
(Increase) decrease in deferred income tax benefits (90) 6
(Decrease) increase in interest receivable 165 (711)
Decrease in interest payable (173) (66)
Increase in other liabilities 1,138 979
Decrease in other assets 73 49
--------- ---------
Net cash provided by operating activities 4,121 3,097
--------- ---------
Cash Flows From Investing Activities:
Securities held to maturity:
Proceeds from maturities, calls and prepayments - 4,859
Proceeds from sales - 5,062
Purchases (9,358) (11,398)
Securities available for sale:
Proceeds from maturities, calls and prepayments 12,603 -
Proceeds from sales 19,045 -
Net increase in temporary investments (8,985) (10,299)
Purchases of premises and equipment (933) (205)
Net sale (repurchase) of loan participations (450) 29
Net (increase) decrease in loans (12,597) 4,018
--------- ---------
Net cash used in investing activities (675) (7,934)
--------- ---------
Cash Flows From Financing Activities:
Net increases in deposit accounts 1,724 887
Proceeds from issuance of common stock 336 125
Net decrease in short-term borrowings (1,400) (388)
Principal payments on capital lease obligations (19) (21)
Cash dividends paid (384) (191)
--------- ---------
Net cash provided by financing activities 257 412
--------- ---------
Net increase in cash and due from banks 3,703 (4,425)
Cash and due from banks at beginning of period 25,800 28,232
--------- ---------
Cash and due from banks at end of period $ 28,767 $ 23,807
- - - -------------------------------------------------------------------------------------------
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for interest $ 5,104 $ 5,392
Noncash financing and investing activities:
Capital lease obligation - 1,285
- - - -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
COMMERCE BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Marketable
----------------------- Capital Retained Equity
Shares Amount Surplus Earnings Security Total
---------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 1993
Balance at January 1, 1993 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413
Net income - - - 1,500 - 1,500
Issuance of common stock 11 29 96 - - 125
Cash dividends declared - - - (255) - (255)
---------- ------------ ------------ ------------ ------------- ------------
Balance at March 31, 1993 2,522 $ 6,307 $ 25,556 $ 6,950 $ (30) $ 38,783
---------- ------------ ------------ ------------ ------------- ------------
Three months ended March 31, 1994
Balance at January 1, 1994 2,687 $ 6,717 $ 29,062 $ 7,810 $ - $ 43,589
Adjustment to beginning balance
for change in accounting method
for net unrealized gain on
securities available for sale,
net of tax of $1,253,000 - - 2,327 - 2,327
Net income - - - 1,761 - 1,761
Issuance of common stock 16 39 297 - - 336
Change in net unrealized gains on
securities available for sale, net
of tax benefit of $763,000 - - (1,417) - (1,417)
Cash dividends declared - - - (414) - (414)
---------- ------------ ------------ ------------ ------------- ------------
Balance at March 31, 1994 2,703 $ 6,756 $ 29,359 $ 9,155 $ 912 $ 46,182
- - - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Notes to Financial Statements
- - - -----------------------------
Note 1. General
-------
The financial statements in this report have not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial position and results of operations for the interim periods have been
made. All such adjustments are of a normal recurring nature. These statements
should be read in conjunction with the 1993 annual report on Form F-2. Results
of operations for the three months ended March 31, 1994 are not necessarily
indicative of the results of operations for the full year or any other interim
periods.
Note 2. Preferred Stock Arrangement with BB&T Financial Corporation
-----------------------------------------------------------
Subsequent to March 31, 1994, Commerce entered into an arrangement with
BB&T Financial Corporation, Wilson, North Carolina under which BB&T has agreed
to purchase up to $12 million of a newly created class of Commerce preferred
stock.
The preferred stock arrangement with BB&T calls for BB&T to purchase
initially 30,000 shares of a new series of Commerce Bank preferred stock for
$3.0 million, with a commitment through December 31, 2000 by BB&T to purchase an
additional 90,000 shares for $9.0 million upon demand by Commerce. The
preferred stock is intended to qualify as Tier 1 capital for bank regulatory
purposes.
The initial annual dividend rate on the preferred stock is 6.75% through
1996. Thereafter, the rate will float to 275 basis points over the interest
rate on the 3-year U.S. Treasury note, subject to a ceiling of 11.0% and a floor
of 5.0%. The preferred stock is nonvoting and will have a liquidation value of
$100 per share.
The preferred stock may be redeemed by Commerce Bank, subject to the
receipt of required bank regulatory approvals. Any redemption is subject to the
payment of the applicable redemption premium, including a special redemption
premium of 10% of the aggregate liquidation value of the outstanding shares of
preferred stock in the case of redemption upon a change in control of Commerce.
If the preferred stock is not first redeemed, it may be converted at the
option of BB&T into Commerce common stock in the limited circumstances where
5
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Commerce's leverage capital ratio falls below a designated minimum level or if a
change in control with respect to Commerce occurs. The conversion price will
equal the closing market price of Commerce common stock on the date of initial
issuance of the preferred stock. Based on Commerce's closing price of $25.00 on
Wednesday, April 20th, each share of preferred stock would be convertible in the
limited circumstances described above into four shares of Commerce common stock,
and the conversion of the initial 30,000 shares of preferred stock would
represent on a pro forma basis 4.2% of Commerce's then outstanding common
shares.
While it is anticipated that the initial sale of $3.0 million of preferred
stock will close by the end of April, there are no definite plans at this time
for sale to BB&T of any of the remaining 90,000 shares of preferred stock
covered by the commitment.
The sale of the Commerce preferred stock to BB&T is subject to receipt of
confirmation from the FDIC that the preferred stock qualifies as Tier 1 capital
and from the Federal Reserve on certain other regulatory matters.
Note 3. Commitments
-----------
At March 31, 1994, the amount of off-balance sheet commitments to extend
credit were $31.4 million and standby letters of credit and financial guarantees
were $5.7 million.
Note 4. Accounting Change
-----------------
Effective January 1, 1994, Commerce adopted Statement of Financial
Accounting Standard No. 115 ("SFAS 115") "Accounting for Certain Investments in
Debt and Equity Securities". In accordance with SFAS 115, prior period
financial statements have not been restated to reflect the change in accounting
principle. SFAS 115 requires that certain securities be classified into one of
three categories: held to maturity, available for sale, or trading based on
management's ability and intent at time of purchase. Securities classified as
held to maturity are carried at their amortized cost; securities classified as
available for sale are carried at their fair values with the amount of
unrealized gains or losses, net of income taxes, reported as a separate
component of shareholders' equity; and securities classified as trading are
carried at their fair value with the unrealized gains or losses
6
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
included in earnings.
As a result of the adoption of SFAS 115, on January 1, 1994, Commerce
classified securities with a fair value of approximately $155 million as
securities available for sale. The opening balance of shareholders equity was
increased by $2.32 million relating to net unrealized gain on securities
available for sale of $3.58 million, less applicable income taxes of $1.25
million. Prior to the adoption of SFAS 115, securities deemed available for
sale were carried at the lower of aggregate amortized cost or market value.
Note 5. Earnings Per Share
------------------
Primary earnings per share are calculated on the basis of the weighted
average number of shares outstanding during the period after giving retroactive
effect to the 5% stock dividends declared in 1993 and 1992. Dilutive stock
options have been converted to common stock equivalents for the calculation of
weighted average shares outstanding based upon the average market price of
Commerce's common stock. Fully diluted earnings per share assumes the
conversion of outstanding convertible subordinated capital notes and elimination
of interest paid thereon, after tax effect, and the exercise of dilutive stock
options, as of the beginning of each period. The dilutive effect of outstanding
options and convertible subordinated debt is computed using the greater of the
closing price or the average market price of Commerce's stock. The computation
of earnings per share is provided on the following page.
7
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Earnings per share were determined as follows:
<TABLE>
<CAPTION>
(In thousands except per share)
Three months ended March 31, 1994 1993
----- -----
<S> <C> <C>
Primary
Average common shares outstanding 2,695 2,645
Dilutive common stock options assumed exercised 94 74
- - - ------------------------------------------------------------------
Average primary shares outstanding 2,789 2,719
- - - ------------------------------------------------------------------
Net Income 1,761 1,500
Per Share Amount .63 .55
- - - ------------------------------------------------------------------
Fully diluted
Average common shares outstanding 2,695 2,645
Dilutive common stock options 96 81
Dilutive convertible subordinated capital
notes assumed converted 263 263
- - - ------------------------------------------------------------------
Average fully diluted shares outstanding 3,054 2,989
- - - ------------------------------------------------------------------
Net Income 1,761 1,500
Add interest on convertible subordinated
capital notes, after taxes 81 81
- - - ------------------------------------------------------------------
Adjusted net income 1,842 1,581
- - - ------------------------------------------------------------------
Per share amount .60 .53
- - - ------------------------------------------------------------------
</TABLE>
8
<PAGE>
COMMERCE BANK FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993 Increase
----------- ---------- ------------
<S> <C> <C> <C>
Earnings:
Net interest income $ 6,819 $ 6,213 9.8 %
Net income 1,761 1,500 17.4
- - - -------------------------------------------------------------------------------
Per Share Data:
Net income :
Primary $ 0.63 $ 0.55 14.5 %
Fully diluted 0.60 0.53 13.2
Book value at period end 17.09 15.37 11.2
Cash dividends 0.15 0.10 50.0
- - - -------------------------------------------------------------------------------
Selected Financial Ratios:
Return on average assets 1.05 % 0.97 %
Return on average equity 15.25 15.85
Net interest spread 3.83 3.80
Net interest margin 4.38 4.33
Net overhead ratio 2.33 2.27
Average loans / average deposits 61.84 57.10
- - - -------------------------------------------------------------------------------
Daily Averages:
Assets $ 683,119 $ 629,588 8.5 %
Earning assets 631,930 581,498 8.7
Loans, net of unearned income 384,233 326,879 17.5
Investment securities 234,876 239,994 (2.1)
Deposits 621,360 580,925 7.0
Shareholders' equity 46,828 38,386 22.0
Primary shares outstanding 2,789 2,719 2.6
Fully diluted shares outstanding 3,054 2,989 2.2
- - - -------------------------------------------------------------------------------
At Period End:
Assets $ 693,515 $ 648,959 6.9 %
Earning assets 639,035 597,883 6.9
Loans, net of unearned income 390,987 331,817 17.8
Investment securities 225,633 240,078 (6.0)
Deposits 635,865 598,871 6.2
Shareholders' equity 46,182 38,783 19.1
Allowance for loan losses 6,809 6,211 9.6
Nonperforming assets 4,227 6,855 (38.3)
- - - -------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier I 10.47 % 9.69 %
Total 12.88 12.27
Tier I leverage 6.63 5.84
Total risk weighted assets $ 432,010 $ 377,791
- - - -------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
COMMERCE BANK
Selected Quarterly Financial Data
(Dollars in thousands, except
per share data)
<TABLE>
<CAPTION>
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
1994 1993 1993 1993 1993
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of operations:
Interest income $ 11,750 $ 11,888 $ 11,957 $ 11,864 $ 11,538
Interest expense 4,931 5,167 5,192 5,299 5,325
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,819 6,721 6,765 6,565 6,213
Provision for loan losses 600 600 700 725 800
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,219 6,121 6,065 5,840 5,413
Noninterest income 2,335 2,346 2,625 2,190 2,087
Securities gains 59 53 1,268 - 86
Noninterest expense (1) 5,964 5,995 6,831 5,542 5,338
- - - ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,649 2,525 3,127 2,488 2,248
Provision for income taxes 888 834 1,415 840 748
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,761 $ 1,691 $ 1,712 $ 1,648 $ 1,500
====================================================================================================================================
Per Share Data:
Net income :
Primary $ 0.63 $ 0.61 $ 0.62 $ 0.60 $ 0.55
Fully diluted 0.60 0.58 0.60 0.57 0.53
Book value at period end 17.09 16.22 16.48 15.91 15.37
Cash dividends 0.15 0.15 0.14 0.12 0.10
Common stock price: (2)
High 27.50 25.50 25.50 24.75 24.50
Low 25.50 23.00 22.75 21.00 19.12
Close 26.50 24.00 23.75 24.25 24.50
====================================================================================================================================
Average Balance Sheet Data
Assets:
Loans, net of unearned income $ 384,233 $ 369,323 $ 354,239 $ 339,361 $ 326,879
Investment securities 234,876 245,039 240,369 246,729 239,994
Temporary Investments 12,821 12,356 20,941 16,409 14,625
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 631,930 626,718 615,549 602,499 581,498
Allowance for loan losses (6,809) (6,844) (6,713) (6,313) (5,885)
Other Assets 57,998 58,637 56,375 55,984 53,975
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 683,119 $ 678,511 $ 665,211 $ 652,170 $ 629,588
====================================================================================================================================
Liabilities and Shareholders'
Equity:
Interest bearing deposits $ 528,279 $ 529,081 $ 516,719 $ 511,875 $ 501,638
Short-term borrowings 3,623 1,337 818 859 429
Long-term borrowings 6,818 6,837 6,856 6,878 6,018
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 538,720 537,255 524,393 519,612 508,085
Non interest bearing liabilities 93,081 98,291 99,022 92,636 83,117
Equity 46,828 42,965 41,796 39,922 38,386
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 683,119 $ 678,511 $ 665,211 $ 652,170 $ 629,588
====================================================================================================================================
Financial Ratios:
Return on average assets 1.05 % 0.99 % 1.02% 1.01% 0.97%
Return on average equity 15.25 15.61 16.25 16.56 15.85
Net interest margin 4.38 4.28 4.36 4.37 4.33
====================================================================================================================================
</TABLE>
(1) The third quarter of 1993 included a non-recurring, noncash adjustment of
$910,000 for the write down of an intangible asset.
(2) As reported by NASDAQ
10
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the results of operations and financial condition of Commerce Bank
("Commerce"). The following should be read in conjunction with Commerce's 1993
Annual Report on Form F-2.
Performance Summary
- - - -------------------
Net income for the first quarter of 1994 was $1.8 million and represented a
17.4% increase over first quarter earnings for 1993 of $1.5 million. Fully
diluted earnings per share were $.60 for the first quarter of 1994 compared with
$.53 for the first quarter of 1993.
The return on annualized average assets was 1.05% for the first quarter of
1994 compared with .97% for the same period in 1993. The annualized return of
average equity was 15.25% for the first quarter of 1994 compared with 15.85% for
the same period of 1993. ROA of 1.05% for the first quarter of 1994 was up from
the fourth quarter 1993 ROA of .99% while ROE decreased from 15.61% for the
fourth quarter of 1993 to 15.25% for the first quarter of 1994.
Total assets at March 31, 1994 were $693.5 million while total deposits
were $635.9 million which represented a 6.9% and 6.2% growth rate over the prior
year levels, respectively. Average earning assets increased 8.7% to $631.9
million during the first quarter of 1994 when compared with 1993.
11
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
The following table presents an analysis of Commerce's return on average
assets and equity.
<TABLE>
<CAPTION>
Analysis of Return on Average Assets and Equity
March 31, December 31,
Three Months Ended 1994 1993 1993
-------- -------- ------------
<S> <C> <C> <C>
As a percent of average earning assets:
Net Interest Income 4.38 % 4.33 % 4.25 %
Provision for Loan Losses (0.39) (0.56) (0.38)
Noninterest Income 1.50 1.46 1.49
Noninterest Expenses (3.83) (3.72) (3.79)
Securities Gains 0.04 0.06 0.03
Applicable Income Taxes (0.57) (0.52) (0.53)
-------- ------- ------------
Return on Average Earning Assets 1.13 % 1.05 % 1.07 %
Multiplied by
Average Earning Assets to Average Total Assets 92.51 92.36 92.37
-------- ------- ------------
Return on Average Assets 1.05 % 0.97 % 0.99 %
Multiplied by
Ratio of Average Assets to Average Equity 14.52 16.34 15.77
-------- ------- ------------
Return on Average Total Equity 15.25 % 15.85 % 15.61 %
- - - ---------------------------------------------------------------------------------
</TABLE>
EARNINGS ANALYSIS
Net Interest Income
- - - -------------------
Net interest income, the principal source of Commerce's earnings, is the
amount of income generated by interest-earning assets (primarily loans and
investment securities) reduced by the total interest cost of the funds (chiefly
deposits) incurred to carry them.
Net interest income for the first quarter of 1994 was $6.8 million, a 9.8%
increase over comparative 1993. Average earning assets increased $50.4 million,
or 8.7%, rising from $581.5 million for the first quarter of 1993 to $631.9
million in 1994.
12
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Net interest margin was 4.38% for the first quarter of 1994, reflecting a 5
basis point improvement over comparative 1993. Net interest margin for 1994 was
favorably impacted by a 18% increase in average loans which was partially offset
by a 66 basis point decrease in yield. The annualized yield on earning assets
decreased 51 basis points from 8.05% for the first quarter of 1994 to 7.54% for
comparative 1994. The decline was principally due to a lower rate environment.
The annualized cost of interest bearing liabilities decreased 54 basis
points, from 4.25% for the first quarter of 1993 to 3.71% for the first quarter
of 1994. The decrease was due to a lower rate environment as the yield on
interest bearing deposits decreased 55 basis points, from 4.19% for the first
quarter of 1993 to 3.64% for compartive 1994. See "Deposits" for further
information on Commerce's deposit structure and cost rates.
Net interest margin improved 13 basis points when comparing the fourth
quarter of 1993 with the first quarter of 1994. Net interest spread improved 12
basis points reflecting a 10 basis point decrease on the cost of interest
bearing deposits. Net interest income was $6.8 million for the first quarter of
1994, representing a 15% increase.
The tables on the following page present Commerce's average balance sheet,
interest earned or paid and the related yields and rates on major categories for
the first quarter of 1994 and 1993, and the fourth quarter of 1993.
13
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended March 31, 1994 / Three Months Ended March 31, 1993
---------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield/Rate Change due to (3)
--------------------- --------------------- --------------- Increase -----------------------
Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume
--------- --------- --------- --------- ------- ------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income & deferred fees
(1)(2) $ 384,233 $ 326,879 $ 8,045 $ 7,376 8.49 % 9.15 % $ 669 $ (559) $ 1,228
Investment securities(2) 234,876 239,994 3,541 4,002 6.11 6.61 (461) (360) (101)
Temporary investments 12,821 14,625 164 160 5.19 4.44 4 25 (21)
--------- --------- --------- --------- --------- --------- ---------
Total earning assets 631,930 581,498 11,750 11,538 7.54 8.05 212 (894) 1,106
Allowance for loan losses (6,723) (5,885)
Nonearning assets 57,912 53,975
--------- ---------
Total assets $ 683,119 $ 629,588
========= =========
Liabilities &
Shareholders' Equity:
Interest bearing deposits $ 528,279 $ 501,638 $ 4,737 $ 5,179 3.64 % 4.19 % $ (442) $ (706) $ 264
Short-term borrowings 3,623 430 29 2 2.50 1.89 27 2 25
Long-term debt 6,818 6,017 165 144 9.81 9.71 21 1 20
--------- --------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 538,720 508,085 4,931 5,325 3.71 4.25 (394) (703) 309
Noninterest bearing
liabilities 97,571 83,117
Shareholders' equity 46,828 38,386
--------- ---------
Total liabilities &
equity $ 683,119 $ 629,588
========= ========= --------- --------- --------- --------- ---------
Net interest income $ 6,819 $ 6,213 $ 606 $ (191) $ 797
========= ========= ========= ========= =========
Net interest spread 3.83 % 3.80 %
Net interest margin 4.38 % 4.33 %
- - - --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31, 1994 / Three Months Ended December 31, 1993
---------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield/Rate Change due to (3)
--------------------- --------------------- --------------- Increase -----------------------
Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume
--------- --------- --------- --------- ------- ------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned
income & deferred fees
(1)(2) $ 384,233 $ 369,323 $ 8,045 $ 7,974 8.49 % 8.57 % $ 71 $ (105) $ 176
Investment securities(2) 234,876 245,039 3,541 3,772 6.11 6.11 (231) 0 (231)
Temporary investments 12,821 12,356 164 140 5.19 4.50 24 (36) 60
--------- --------- --------- --------- --------- --------- ---------
Total earning assets 631,930 626,718 11,750 11,886 7.54 7.52 (136) (141) 5
Allowance for loan losses (6,723) (6,527)
Nonearning assets 57,912 58,320
--------- ---------
Total assets $ 683,119 $ 678,511
========= =========
Liabilities &
Shareholders' Equity:
Interest bearing deposits $ 528,279 $ 529,081 $ 4,737 $ 4,992 3.64 % 3.74 % $ (255) $ (242) $ (13)
Short-term borrowings 3,623 1,337 29 10 3.25 2.97 19 1 18
Long-term debt 6,818 6,837 165 166 9.81 9.63 (1) (1) 0
--------- --------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 538,720 537,255 4,931 5,168 3.71 3.82 (237) (242) 5
Noninterest bearing
liabilities 97,571 98,291
Shareholders' equity 46,828 42,965
--------- ---------
Total liabilities & equity $ 683,119 $ 678,511
========= ========= --------- --------- --------- --------- ---------
Net interest income $ 6,819 $ 6,718 $ 101 $ 101 $ 0
========= ========= ========= ========= =========
Net interest spread 3.83 % 3.71 %
Net interest margin 4.38 % 4.25 %
- - - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes nonaccrual loans, and income on such loans is recognized on a
cash basis.
(2) Interest and yields are presented on a book basis, as tax-equivalent
adjustments are not significant.
(3) The changes for each category of income and expenses are divided between
the portion of change attributable to the variances in average levels and
yields or rates for that category, with the amount of change that cannot
be separated being allocated to each variance proportionately.
14
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Noninterest Income
- - - ------------------
Total noninterest income, exclusive of securities gains, was $2.3 million
for the first quarter of 1994, representing a 11.9% increase over the same
period of 1993. Service charges on deposit accounts increased $169,000 or 21.9%
during the first quarter of 1994 when compared with 1993 and were due to the
implementation of various fee charges and account and activity growth. Mortgage
brokerage income decreased $156,000 or 20.9% when comparing the first quarter of
1994 with 1993 reflecting a decrease in refinancing loan origination volume.
Other income increased 73.9% or $187,000 for the first quarter of 1994 over 1993
and was due to a higher volume of fee-based customer services. Commerce
recorded $59,000 in securities gains during the first quarter of 1994 compared
with $86,000 for the same period of 1993.
Noninterest income, exclusive of securities gains, for the first quarter of
1994 decreased $11,000 or .5% when compared with the fourth quarter of 1993.
The following table provides an analysis of noninterest income.
<TABLE>
<CAPTION>
(Dollars in thousands)
Increase(Decrease)
--------------------------------------------------------------------------------------
Three Months Ended March 31, /
------------------------------------------ ----------------------------------------
Three Months Ended March 31, Three Months Ended December 31, /
------------------------------------------ ----------------------------------------
1994 over 1993 1994 over 1993
------------------ ------------------
1994 1993 Amount Percent 1994 1993 Amount Percent
------ ------ ------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $ 939 $ 770 $ 169 21.9 % $ 939 $ 943 $ (4) (0.4)%
Mortgage brokerage income 590 746 (156) (20.9) 590 668 (78) (11.7)
Credit card merchant fees 196 168 28 16.7 196 254 (58) (22.8)
Trust income 170 150 20 13.3 170 155 15 9.7
Other income 440 253 187 73.9 440 326 114 35.0
------ ------ ------ ------ ------ ------
2,335 2,087 248 11.9 2,335 2,346 (11) (.5)
Securities gains 59 86 27 (31.4) 59 52 7 (13.5)
------ ------ ------ ------ ------ ------
Total noninterest income $2,394 $2,173 $ 221 10.2 % $2,394 $2,398 $ (4) (.2)%
====== ====== ====== ====== ====== ======
</TABLE>
n/m -- not meaningful
15
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Noninterest Expense
- - - -------------------
Total noninterest expense for the first quarter of 1994 was $6.0 million,
representing a 11.7% increase over the comparative period of 1993.
Salaries and benefits expense was $2.9 million for the first quarter of
1994, up 12.5% from comparative 1993. The higher expense reflected an increase
in the number of employees to service growth in the customer base. The number
of full-time-equivalent employees was 340 at March 31, 1994 compared with 294
for March 31, 1993.
Occupancy of bank premises expense increased 14.1% or $82,000, during the
first quarter of 1994 when compared with 1993 due to scheduled rent increases
and increased lease space for branch locations and operations.
FDIC insurance premiums increased 7.7%, or $25,000, during the first
quarter of 1994 when compared with 1993 due to growth in the deposit base.
Other expenses increased 14.4%, or $209,000 for the first quarter of 1994
when compared with 1993. The increase was primarily due to the added expenses
of servicing a larger customer base.
Noninterest expense for the first quarter of 1994 decreased $30,000 or .5%
when compared with the fourth quarter of 1993.
The following table provides an analysis of noninterest expense.
<TABLE>
<CAPTION>
(Dollars in thousands)
Increase(Decrease)
--------------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------ ----------------------------------------
Three Months Ended March 31, Three Months Ended December 31,
------------------------------------------ ----------------------------------------
1994 over 1993 1994 over 1993
------------------ ------------------
1994 1993 Amount Percent 1994 1993 Amount Percent
------ ------ ------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $2,875 $2,555 $ 320 12.5 % $2,875 $2,793 $ 82 2.9 %
Occupancy of bank premises 665 583 82 14.1 665 637 28 4.4
Furniture and equipment 414 424 (10) (2.4) 414 396 18 4.5
FDIC insurance premiums 351 326 25 7.7 351 338 13 3.8
Other expenses 1,659 1,450 209 14.4 1,659 1,830 (171) (9.3)
------ ------ ------ ------ ------ ------
Total noninterest expenses $5,964 $5,338 $ 626 11.7 % $5,964 $5,994 $ (30) (0.5)%
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Provision for Income Taxes
- - - --------------------------
Commerce reported income taxes of $888,000 and $748,000 for the first
quarter of 1994 and 1993, respectively. The effective tax rate was 33.5% and
33.3%, respectively.
BALANCE SHEET ANALYSIS
Temporary Investments
- - - ---------------------
Temporary investments were $22.4 million at March 31, 1994 and consisted of
interest bearing deposits with other banks in the amount of $1 million, federal
funds sold of $2.0 million, and mortgage loans held for sale of $6.4 million.
Temporary investments are used for daily cash management purposes, management of
short-term interest rate opportunities and interest rate risk, and as a result
daily balances vary. The average balance of temporary investments during the
first quarter of 1994 was $12.8 million and represented 2.0% of total earning
assets compared with 2.5% for 1993.
Securities
- - - ----------
As further discussed under Financial Statements Note 4, Commerce adopted
SFAS No. 115. Total securities were $225.6 million on March 31, 1994,
representing a 6% decrease from comparative 1993.
Loans and Asset Quality
- - - -----------------------
During the first quarter of 1994, average loans, net of unearned income and
deferred fees, increased 17.5% to $384.2 million and were 60.8% of total earning
assets compared with 56.2% for 1993. Loans, net of unearned income and deferred
fees, at March 31, 1994 were $391.0 million, representing a $59.2 million or
17.8% increase over comparative 1993. Commercial loans increased $37.4 million,
or 26.6% while consumer loans increased 15%, or $13.8 million when comparing
March 31, 1994 with March 31, 1993.
Nonperforming assets at March 31, 1994 were $4.2 million as compared with
$6.9 million a year earlier and $4.0 million at December 31, 1993.
17
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Net loan charge-offs were $318,000 for the first quarter of 1994, compared
with $260,000 for the same respective period of 1993. The provision for loan
losses for the first quarter of 1994 was $600,000, compared with the $800,000
provision for comparative 1993.
The allowance for loan losses at March 31, 1994 was $6.8 million, which was
equivalent to 1.74% of period end loans, compared with 1.87% at March 31, 1993
and 1.73% at December 31, 1993.
The following tables summarize activity in the allowance for loan losses
and provide information on nonperforming assets and asset quality ratios.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31, December 31, March 31,
Allowance for Loan Losses 1994 1993 1993
---------- ------------ ----------
<S> <C> <C> <C>
Balance, beginning of period $ 6,527 $ 6,985 $ 5,671
Provision charged to earnings 600 600 800
Loan charge-offs (411) (1,109) (372)
Loan recoveries 93 51 112
--------- --------- ---------
Net charge-offs (318) (1,058) (260)
--------- --------- ---------
Balance, end of period $ 6,809 $ 6,527 $ 6,211
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, December 31, March 31,
Nonperforming assets: 1994 1993 1993
---------- ------------ ----------
<S> <C> <C> <C>
Nonperforming loans $ 1,494 $ 918 $ 1,820
Foreclosed property 2,733 3,080 5,035
--------- --------- ---------
Total nonperforming assets 4,227 3,998 6,855
========= ========= =========
Loans past due 90 days
accruing interest $ 1,010 $ 404 $ 558
- - - --------------------------------------------------------------------------------------------
Asset Quality Ratios
Allowance for loan losses
to nonperforming loans 4.56 X 7.11 X 3.41 X
Allowance for loan losses
to period end loans 1.74 % 1.73 % 1.87 %
Nonperforming assets to
period end assets 0.61 0.58 1.06
Nonperforming assets to
period end loans 1.08 1.06 2.07
Net charge-offs to average
loans (annualized) 0.33 0.57 0.32
- - - --------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Deposits
- - - --------
Total deposits at March 31, 1994 were $635.9 million, representing an
increase of 6.2% or $37 million over comparative 1993. The growth in deposits
was attributable to market share gains in the existing branch locations.
The cost of interest bearing deposits was 4.19%, 3.74% and 3.64% for the
first and fourth quarters of 1993, and first quarter of 1994 respectively, and
reflected the continued lowering of market rates of interest.
Average noninterest bearing deposits increased 17.4% during the first
quarter of 1994 when compared with the first quarter of 1993. Average
noninterest bearing demand deposits as a percentage of average total deposits
were 15.0% during the first quarter of 1994 compared with 13.6% for 1993.
The following table sets forth a summary of Commerce's various deposits
categories and their respective cost rates.
Average Balance/Cost Rate
-------------------------
<TABLE>
<CAPTION>
March 31, March 31, December 31,
Three months ended, 1994 1993 1993
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand $ 69,688 2.21 % $ 59,890 2.72 % $ 68,595 2.27 %
Money market savings 237,718 3.14 246,142 3.84 226,774 3.21
Certificates:Less than $100,000 158,305 4.85 151,910 5.26 171,861 4.89
Greater than $100,000 33,985 5.17 21,925 5.85 33,224 5.31
Regular savings 28,583 2.74 21,771 3.00 28,627 2.77
-------- -------- --------
Total interest bearing 528,279 3.64 501,638 4.19 529,081 3.74
Noninterest bearing 93,081 79,287 94,760
-------- -------- --------
Total $621,360 3.09 % $580,925 3.62 % $623,841 3.17 %
======== ======== ========
</TABLE>
19
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Short-Term Borrowings and Long-Term Debt
- - - ----------------------------------------
Commerce had no short-term borrowings at March 31, 1994, however, the
average balance during the first quarter of 1994 was $3.6 million. Long-term
debt was $6.8 million at March 31, 1994 and consisted of $5 million, 10%
convertible subordinated capital notes issued September 1, 1990 and capital
lease obligations of $1.8 million.
Common Stock and Dividends
- - - --------------------------
Commerce's Board of Directors declared a $.15 cash dividend during the
first quarter of 1994 representing a 50% increase over the $.10 declared for
1993.
The high and low prices for Commerce's common stock are set forth with
other selected quarterly financial data on page 10.
Liquidity and Capital Structure
- - - -------------------------------
Commerce continued to experience a high degree of liquidity during the
first quarter of 1994 as reflected in its liquid asset ratio of 40.0% at March
31, 1994. Average loans to average deposits were 61.8% for the first quarter of
1994 in comparison with 56.3% for 1993.
Subsequent to March 31, 1994, Commerce entered into an arrangement with
BB&T Financial Corporation, under which BB&T has agreed to purchase up to $12
million of a newly created class of Commerce preferred stock. Financial
Statement Note 2 provides a summary of the arrangement.
Shareholders' equity at March 31, 1994 was $46.2 million, or 19.1% above
comparative 1993. As further discussed under Financial Statements Note 4,
Commerce adopted SFAS No. 115 effective January 1, 1994. As a result, net
unrealized gains of $912,000 were recorded as a separate component of
shareholders' equity.
20
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
The following table provides information on the risk-based capital position of
Commerce.
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1994 1993 1993
---------- --------- ------------
<S> <C> <C> <C>
Tier I Capital:
Shareholders' equity $ 46,183 $ 38,783 $ 43,589
Less: intangible assets 956 2,158 1,024
-------- -------- --------
Total Tier I 45,227 36,625 42,565
Tier II Capital:
Qualifying allowance for loan losses (1) 5,418 4,724 5,460
Mandatory convertible debt instruments 4,995 4,995 4,995
-------- -------- --------
Total Tier II 10,413 9,719 10,455
-------- -------- --------
Total Risk Based Capital $ 55,640 $ 46,344 $ 53,020
======== ======== ========
Total Assets $693,515 $648,959 $689,630
Total Risk Weighted Assets 432,010 377,791 436,800
Risk Weighted Assets to Total Assets 62.29% 58.21% 63.34%
Risk Based Capital Ratios:
Tier I (4% minimum requirement) 10.47% 9.69% 9.74%
Total (8% miminum requirement) 12.88% 12.27% 12.14%
Tier I Leverage Ratio (3% minimum 6.63% 5.84% 6.49%
requirement)
- - - --------------------------------------------------------------------------------
</TABLE>
(1) Limited to 1.25% of risk weighted assets
21
<PAGE>
COMMERCE BANK
Form F-4
March 31, 1994
Signatures
Under the requirements of the Securities Exchange Act of 1934, the Bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
COMMERCE BANK
Date: May 12, 1994 /s/ Gerald T. McDonald
------------------------- ------------------------------
Gerald T. McDonald
Executive Vice President
and Chief Financial Officer
(804) 456-1007
Date: May 12, 1994 /s/ Clyde McFarland
------------------------- ------------------------------
Clyde McFarland
Vice President/Controller
(804) 456-1093
22
<PAGE>
Exhibit 99.3
[LOGO OF COMMERCE BANK APPEARS HERE]
BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands, except common stock data)
- - - -----------------------------------------------------------------------------------------------
December 31, 1993 1992
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks (Note 2) $ 25,800 $ 28,232
Temporary investments (Note 3) 13,431 25,548
Investment securities:
(Market Value: 1993 - $251,596, 1992 - $242,323) (Note 4) 247,175 238,680
Loans: (Notes 5 & 7)
Commercial 165,409 129,565
Consumer 102,611 97,572
Real estate mortgage 88,850 82,199
Real estate construction & development 17,074 14,921
Tax-exempt 6,477 6,217
Less: Unearned income and deferred fees (2,163) (4,209)
- - - -----------------------------------------------------------------------------------------------
Loans, net of unearned income and deferred fees 378,258 326,265
Less: Allowance for loan losses (Note 6) (6,527) (5,671)
- - - -----------------------------------------------------------------------------------------------
Loans, net 371,731 320,594
Bank premises and equipment, net (Note 8) 18,384 15,459
Foreclosed property 3,080 5,808
Other assets (Notes 9 & 14) 10,029 10,528
- - - -----------------------------------------------------------------------------------------------
Total assets $ 689,630 $ 644,849
===============================================================================================
Liabilities
Deposits:
Noninterest bearing demand $ 103,197 $ 94,229
Interest bearing demand 72,221 62,962
Money market savings 227,751 248,001
Regular savings 28,389 19,794
Certificates of deposit less than $100,000 164,122 149,370
Certificates of deposit greater than $100,000 38,461 23,628
- - - -----------------------------------------------------------------------------------------------
Total deposits 634,141 597,984
Short-term borrowings (Note 10) 1,400 563
Long-term debt (Note 11) 6,828 5,626
Other liabilities 3,672 3,263
- - - -----------------------------------------------------------------------------------------------
Total liabilities 646,041 607,436
- - - -----------------------------------------------------------------------------------------------
Contingent Liabilities (Notes 8, 17 & 18)
Shareholders' Equity (Notes 12)
Common stock, $2.50 par value: 5,000,000 shares authorized:
2,686,792 shares in 1993 and 2,511,327 shares in 1992
issued and outstanding 6,717 6,278
Capital surplus 29,062 25,460
Retained earnings 7,810 5,705
Unrealized loss on marketable equity securities -- (30)
- - - -----------------------------------------------------------------------------------------------
Total shareholders' equity 43,589 37,413
- - - -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 689,630 $ 644,849
===============================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
STATEMENT OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share data)
- - - ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993 1992 1991
- - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans, including fees:
Taxable $ 30,370 $ 29,780 $ 31,391
Tax-exempt 491 395 334
Temporary investments:
Interest bearing deposits in other financial institutions 60 115 246
Federal funds sold 261 526 577
Mortgages held for sale 376 434 204
Investment securities:
Taxable 15,649 13,608 8,178
Tax-exempt 40 81 97
- - - ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 47,247 44,939 41,027
Interest Expense
Deposits 20,322 21,845 23,796
Short-term borrowings 26 19 94
Long-term debt 635 550 568
- - - ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,983 22,414 24,458
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 26,264 22,525 16,569
Provision for loan losses (Note 6) 2,825 4,225 2,925
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision For Loan Losses 23,439 18,300 13,644
Noninterest Income
Service charges on deposit accounts 3,428 3,006 2,341
Mortgage brokerage income 2,895 1,838 950
Credit card merchant fees 907 679 586
Securities gains 1,407 1,098 900
Trust income 633 508 390
Other income 1,385 1,081 593
- - - ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 10,655 8,210 5,760
Noninterest Expense
Salaries and benefits 10,721 8,926 7,403
Occupancy of bank premises 2,443 2,268 2,068
Furniture and equipment 1,691 1,462 1,261
Other expense (Notes 9 & 13) 8,851 6,435 4,852
- - - ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 23,706 19,091 15,584
Income Before Income Taxes 10,388 7,419 3,820
Provision for income taxes (Note 14) 3,837 2,477 1,221
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,551 $ 4,942 $ 2,599
=================================================================================================================================
Net Income Per Share (Note 15)
Primary $ 2.38 $ 2.05 $ 1.36
Fully diluted 2.28 1.97 1.35
Weighted Average Shares Outstanding
Primary 2,748 2,413 1,913
Fully diluted 3,013 2,676 2,176
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
- - - ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1993 1992 1991
- - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 6,551 $ 4,942 $ 2,599
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 2,825 4,225 2,925
Depreciation and amortization of premises and equipment 1,655 1,479 1,318
Net amortization of premiums and accretion of discounts (747) 429 98
Amortization of intangible assets (Note 9) 1,214 381 328
(Gain) loss on sale of property and equipment (80) -- 2
Gain on sale of investment securities (1,407) (1,098) (900)
(Increase) decrease in deferred income tax benefits (452) (648) 294
Increase in interest receivable (137) (705) (1,221)
(Decrease) increase in interest payable 211 (1,100) (342)
(Decrease) increase in other liabilities 63 (60) 622
Decrease (increase) in other assets 2,602 580 (545)
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,298 8,425 5,178
- - - ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from maturities, calls and prepayments of securities 32,024 31,722 12,590
Proceeds from sales of securities 51,433 35,853 42,585
Purchases of securities (89,799) (181,889) (106,157)
Net (increase) decrease in temporary investments 12,118 (7,271) 9,520
Purchases of premises and equipment (3,215) (1,720) (867)
Net sale (repurchase) of loan participations (615) 1,224 (2,947)
Net increase in loans (53,347) (36,383) (27,755)
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (51,401) (158,464) (73,031)
- - - ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increases in deposit accounts 36,157 87,673 17,975
Net cash received from acquired deposits -- 65,087 51,995
Proceeds from issuance of common stock 892 9,327 143
Net increase (decrease) in short-term borrowings 837 22 (726)
Principal payments on capital lease obligation (83) (45) (26)
Cash dividends paid (1,132) (487) --
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 36,671 161,577 69,361
- - - ---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (2,432) 11,538 1,508
Cash and due from banks at beginning of year 28,232 16,694 15,186
- - - ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 25,800 $ 28,232 $ 16,694
- - - ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 20,772 $ 22,701 $ 24,675
Income taxes 3,837 3,114 1,054
Noncash financing and investing activities:
Transfer of loans to foreclosed property -- 2,007 2,730
Capital lease obligation 1,285 -- --
=================================================================================================================================
</TABLE>
Cash and equivalents are defined as cash and noninterest bearing accounts due
from banks. The accompanying notes are an integral part of the financial
statements.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------------
Unrealized
Loss On
Common Stock Marketable
---------------- Capital Retained Equity
(In thousands) Shares Amount Surplus Earnings Securities Total
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 1,650 $ 4,126 $ 14,749 $ 2,236 $ (6) $ 21,105
Net income for 1991 -- -- -- 2,599 -- 2,599
Proceeds from issuance of common stock 12 29 114 -- -- 143
5% stock dividend 83 206 825 (1,031) -- --
Cash dividends declared ($.05 per share) -- -- -- (83) -- (83)
Change in valuation allowance for marketable
equity securities -- -- -- -- 6 6
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 1,745 $ 4,361 $ 15,688 $ 3,721 -- $ 23,770
Net income for 1992 -- -- -- 4,942 -- 4,942
Proceeds from issuance of common stock 646 1,617 7,710 -- -- 9,327
5% stock dividend 120 300 2,062 (2,362) -- --
Cash dividends declared ($.26 per share) -- -- -- (596) -- (596)
Change in valuation allowance for marketable
equity securities -- -- -- -- (30) (30)
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413
Net income for 1993 -- -- -- 6,551 -- 6,551
Proceeds from issuance of common stock 49 121 771 -- -- 892
5% stock dividend 127 318 2,831 (3,149) --
Cash dividends declared ($.51 per share) -- -- -- (1,297) -- (1,297)
Change in valuation allowance for marketable
equity securities -- -- -- -- 30 30
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,687 $ 6,717 $ 29,062 $ 7,810 $ -- $ 43,589
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Accounting Policies
The accounting and reporting policies of Commerce Bank ("Commerce")
conform to generally accepted accounting principles and general practices within
the financial services industry. The following is a summary of the more
significant policies.
Temporary Investments
Temporary investments are carried at the lower of aggregate cost or
market value.
Investment Securities
Marketable debt securities are stated at cost adjusted for discount
accreted and premium amortized based on management's intention to hold these
assets on a long-term basis and Commerce's ability to hold them to maturity or
the foreseeable future. In making this determination, management considers
significant known liquidity requirements and capital planning; however,
investment securities may be sold as part of prudent asset/liability management.
Marketable equity securities are carried at the lower of aggregate cost or
market value, and unrealized losses are reflected as a reduction of
shareholders' equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 12. Gains and losses on the sale of securities are
determined by the specific identification method and are classified as
securities gains or losses in the accompanying statement of income. As described
in Note 4, Commerce will adopt SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" beginning in 1994.
Loans
Loans are carried at the principal amount outstanding, net of unearned
income and deferred loan fees, net of costs. Interest on loans and amortization
of unearned income, deferred fees and origination costs are computed by methods
which generally result in level rates of return on principal amounts
outstanding.
Commerce discontinues the accrual of interest on loans based on
delinquency status, an evaluation of the related collateral and the financial
strength of the borrower. Loans generally are placed in nonaccrual status when
the collection of principal or interest is 90 days or more past due, or earlier
if collection is uncertain based upon an evaluation of the net realizable value
of the collateral and the financial strength of the borrower. Income recognized
on consumer loans is generally discontinued after a delinquent status period of
120 days, unless conditions warrant otherwise. Management may elect to continue
the accrual of interest if the loan is well collateralized and in the process of
collection. Income is recognized on the cash basis for nonaccrual loans unless
there is doubt as to collectibility of principal, in which case interest
payments are applied to reduce principal. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. When loans are placed on nonaccural, uncollected
interest credited to income in the current year is reversed and uncollected
interest accrued in prior years is charged to the allowance for loan losses.
As described in Note 6, Commerce will be required to adopt SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" beginning in 1995.
Allowance for Loan Losses
The allowance for loan losses is established by management based on an
evaluation of the potential loss exposure in the loan portfolio. The level of
the allowance for loan losses is based upon the quality of the loan portfolio as
determined by management after a detailed specific review of problem loans,
consideration of current and historical loan loss experience, diversification as
to the type of loans in the portfolio, the amount of collateralized and
uncollateralized loans, banking industry standards and averages, and general
economic conditions. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowance for
loan losses and additional write-downs in the valuation of real estate owned may
be necessary based on changes in economic conditions.
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization charges are computed by the
straight-line method. Premises and equipment are depreciated over the estimated
useful lives of the assets, except for leasehold improvements which are
amortized over the terms of the respective leases or the estimated useful lives
of the improvements, whichever is shorter. Generally, estimated lives of the
principal items of premise and equipment are buildings and improvements--15 to
40 years, furniture, fixtures and equipment--3 to 20 years, and capital leases
over lease terms. The costs of major renovations are capitalized, while the
costs of ordinary maintenance and repairs are expensed as incurred. Gains and
losses on dispositions are reflected in operations.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Foreclosed Property
Foreclosed property consists of properties acquired through foreclosure,
acceptance in lieu of foreclosure, or insubstance foreclosures. In-substance
foreclosures are properties in which the borrower has little or no equity in the
collateral, where repayment of the loan is expected only from the operation or
sale of the collateral, and the borrower either effectively abandons control of
the property or the borrower has retained control of the property but his
ability to rebuild equity based on current financial conditions is considered
doubtful. These properties are carried at the lower of cost or estimated fair
value. Losses from the acquisition of property in full or partial satisfaction
of debt are charged against the allowance for loan losses at transfer from loans
into foreclosed property. Estimated fair value is reviewed periodically by
management on a specific property basis, and an allowance for loss is
established for any declines in value. Net operating expenses are charged to
noninterest expense.
Income Taxes
Effective January 1, 1993, Commerce changed its method of accounting
for income taxes from the deferred method under Accounting Principles Board
Opinion No. 11 to the liability method required by SFAS No. 109, "Accounting for
Income Taxes" (see Note 14 "Income Taxes"). For years prior to 1993, Commerce
deferred the past tax effects of timing differences between financial reporting
and taxable income. Under the asset and liability method, deferred tax assets
and liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities
(i.e., temporary differences) and are measured at the enacted rates that will be
in effect when these differences reverse. As permitted under SFAS No. 109, prior
years' financial statements have not been restated.
The adoption of SFAS 109 did not have a material effect on Commerce's
financial position or results of operations for 1993.
Earnings Per Share
Primary earnings per share are calculated on the basis of the weighted
average number of shares outstanding during the year after giving retroactive
effect to the 5% stock dividends declared in 1993, 1992 and 1991. Dilutive stock
options have been converted to common stock equivalents for the calculation of
weighted average shares outstanding based upon the average market price of
Commerce's common stock. Fully diluted earnings per share assumes the conversion
of outstanding convertible subordinated capital notes and elimination of
interest paid thereon, after tax effect, and the exercise of dilutive stock
options, as of the beginning of each year. The dilutive effect of outstanding
options and convertible subordinated debt is computed using the greater of the
closing price or the average market price of Commerce's common stock.
Trust Assets and Income
Assets held in an agency or fiduciary capacity are not assets of
Commerce and are not included in the accompanying financial statements. Trust
service income is recognized on the accrual basis.
Other
Certain reclassifications have been made to amounts previously reported
in 1992 and 1991 to conform with the 1993 presentation.
Note 2 -- Restrictions on Cash
and Due from Banks
Commerce is required to maintain average reserve balances on
transactional deposit accounts with the Federal Reserve Bank under Regulation
D. The daily average amounts of these reserve balances for the years ended
December 31, 1993 and 1992 were $4.9 million and $4.6 million, respectively.
On December 31, 1993 and 1992, these reserve balances were $5.2 million and
$5.4 million, respectively.
Note 3 -- Temporary Investments
Temporary investments consist of the following:
<TABLE>
<CAPTION>
(In thousands)
- - - ----------------------------------------------------------
December 31, 1993 1992
- - - ----------------------------------------------------------
<S> <C> <C>
Federal funds sold $ -- $ 7,000
Interest earning
deposits with other banks 1,000 500
Securities purchased
under resale agreements -- 5,000
Mortgages held for sale 12,431 13,048
- - - ----------------------------------------------------------
$13,431 $25,548
==========================================================
</TABLE>
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Note 4 -- Investment Securities
The amortized cost and approximate market value at December 31, 1993
and 1992 were:
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- - - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
- - - ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 80,203 $ 2,867 $ -- $ 83,070
U.S. Government agencies & corporations 69,067 1,145 (257) 69,955
Mortgage-backed securities of
U.S. Government agencies 93,564 1,211 (578) 94,197
State and municipal 1,001 28 (1) 1,028
Other securities 3,340 15 (9) 3,346
- - - ------------------------------------------------------------------------------------------------------------------------------
$ 247,175 $ 5,266 $ (845) $ 251,596
==============================================================================================================================
1992
U.S. Treasury $ 74,355 $ 1,872 $ (164) $ 76,063
U.S. Government agencies & corporations 88,079 1,705 (661) 89,123
Mortgage-backed securities of
U.S. Government agencies 65,700 1,232 (519) 66,413
State and municipal 849 32 -- 881
Other securities 9,697 146 -- 9,843
- - - ------------------------------------------------------------------------------------------------------------------------------
$ 238,680 $ 4,987 $ (1,344) $ 242,323
==============================================================================================================================
</TABLE>
The amortized cost and approximate market value of investment securities
at December 31, 1993, by contractual maturity, are show 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>
Approximate
Amortized Market
(in thousands) Cost Value
- - - ----------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 16,540 $ 16,755
Due after one year through
five years 97,917 100,993
Due after five years
through ten years 38,690 39,185
Due after ten years 464 466
Mortgage-backed
securities 93,564 94,197
- - - ----------------------------------------------------------------------
Total investment
securities $ 247,175 $ 251,596
======================================================================
</TABLE>
During 1993, Commerce purchased $89.8 million in investment securities
and had sales of $51.4 million that resulted in gains of $1.42 million and
losses of $20,000. During 1992, Commerce purchased $181.9 million in
investment securities and had sales of $35.8 million that resulted in gains
of $1.1 million and losses of $20,000. Securities with carrying values of
approximately $18.6 million and $13.5 million on December 31, 1993 and 1992,
respectively, were pledged to provide collateral for public deposits and for
other purposes required or permitted by law.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires investments in equity securities that have readily determinable fair
values and all investments in debt securities to be divided into three separate
categories: held-to-maturity, trading, and available-for-sale. The new standard
will be effective for 1994 reporting. Retroactive application is prohibited.
Under SFAS No. 115, securities are classified as held-to-maturity when
management has the ability and intent to hold them to maturity, and are
stated at cost adjusted for discount accreted and premium amortized. Trading
securities that are bought and held principally for the purpose of selling
them in the near term are reported at fair value, with unrealized gains and
losses included in earnings. Commerce does not anticipate establishment of a
trading account upon adoption of SFAS 115 or any effect on the results of
operations. Available-for-sale securities that management intends to hold
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
for an indefinite period of time but not necessarily to maturity, are reported
at fair value, with unrealized gains and losses, net of deferred tax, included
as a separate component of shareholders' equity.
SFAS 115 is effective for fiscal years beginning after December 15,
1993. Commerce plans to adopt the standard as required during the first
quarter of 1994 and anticipates classification of the investment portfolio at
January 1, 1994 as follows:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------
Carrying Approximate
(In thousands) Value Market Value
- - - ---------------------------------------------------------------------
<S> <C> <C>
Held-to-maturity $ 29,068 $ 30,192
Available-for-sale 218,107 221,404
- - - ---------------------------------------------------------------------
$ 247,175 $ 251,596
=====================================================================
</TABLE>
Note 5 -- Loans, Net of Unearned Interest and Deferred Fees
Excluding loans in nonaccrual status, loans net of unearned interest
and deferred fees on December 31, 1993 and 1992, with fixed and floating
rates of interest were $377.3 million and $325.8 million, respectively. Loans
on which the accrual of interest has been discontinued amounted to $918,000
and $490,000 on December 31, 1993 and 1992, respectively. Interest income
would have increased $86,000 and $267,000 for 1993 and 1992, respectively, if
interest had been accrued on average outstanding nonperforming loans. There
were no material commitments to lend additional funds to customers whose
loans were classified as nonperforming on December 31, 1993.
In May 1993, the Financial Accounting Standards Board issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which is effective
for fiscal years beginning after December 15, 1994 with earlier application
permitted. SFAS No. 114 requires that loans within its scope be measured on
either the present value of expected cash flows discounted at the loan's
effective interest rate or, if more practical, at the loan's observable
market price or the fair value of the collateral when the loan is collateral
dependent. SFAS No. 114 amends SFAS No. 5, "Accounting for Contingencies," to
clarify that a creditor should evaluate the collectibility of both
contractual interest and contractual principal of all receivables in
assessing the need for a loss accrual. The statement also amends SFAS No. 15,
"Accounting by Debtors and Creditors of Troubled Debt Restructuring," to
require a creditor to measure all restructured loans from troubled debt
restructurings that involve a modification of terms in accordance with this
statement.
Commerce is currently evaluating the impact of the new statement and
anticipates adoption during the first quarter of 1995, without restatement of
prior years. Commerce, however, does not believe the adoption of SFAS 114
will have a material adverse effect on its financial condition or results of
operations.
Note 6 -- Allowance for Loan Losses
A summary of the transactions in the allowance for loan losses follows:
<TABLE>
<CAPTION>
(In thousands)
- - - ------------------------------------------------------------------
December 31, 1993 1992 1991
- - - ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year $5,671 $3,717 $3,387
Provision charged
to earnings 2,825 4,225 2,925
Losses charged
to allowance (2,309) (2,669) (2,766)
Recoveries of amounts
charged-off 340 398 171
- - - ------------------------------------------------------------------
Net charge-offs (1,969) (2,271) (2,595)
- - - ------------------------------------------------------------------
Balance at end of year $6,527 $5,671 $3,717
==================================================================
</TABLE>
Note 7 -- Related Party Transactions
During 1993 and 1992, certain executive officers and directors of
Commerce, including their immediate families and companies with which they
are associated, were loan customers of Commerce. Total loans outstanding to
these persons on December 31, 1993, and 1992 amounted to $20.3 million and
$15.9 million, respectively. During 1991 an internally classified loan to a
former director was resolved by a charge to the allowance for loan losses in
the amount of $1.1 million.
In the ordinary course of its business, Commerce has engaged in certain
transactions with certain of its directors and/or corporations and other
entities in which they are significantly interested. Commerce has engaged
legal services and has purchased equipment from directors. Except for the
lease agreement described in the next paragraph, no transactions amounted to
more than $60,000 for any one interested director for the three years ended
December 31, 1993. Also, during 1993, on behalf of Commerce, a director
provided appraisal services to customers of Commerce, which management used
in credit decisions. Customers reimburse Commerce for these services and the
director does not participate further on these credit transactions.
Commerce leases office space from an entity in which a director of
Commerce holds approximately a 33% interest. Lease expense for this location
was $246,000, $224,000, and $213,000 for 1993, 1992 and 1991, respectively.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Note 8 -- Bank Premises and Equipment
Included in the accompanying balance sheets are the following
components of premises and equipment:
<TABLE>
<CAPTION>
(In thousands)
- - - ---------------------------------------------------------------------
December 31, 1993 1992
- - - ---------------------------------------------------------------------
<S> <C> <C>
Land $ 3,194 $ 2,423
Building and improvements 6,722 5,837
Furniture, fixtures and
equipment 11,216 10,154
Leasehold improvements 2,283 1,887
Capital leases: Building 1,455 728
- - - ---------------------------------------------------------------------
24,870 21,029
Less: Accumulated
depreciation and
amortization (7,915) (6,367)
- - - ---------------------------------------------------------------------
16,955 14,662
Construction in progress 1,429 797
- - - ---------------------------------------------------------------------
Total premises and
equipment $ 18,384 $ 15,459
=====================================================================
</TABLE>
Commerce has entered into lease agreements for premises and equipment
which contain renewal options and escalation clauses. These leases provide
that Commerce pay taxes, maintenance, insurance and other operating expenses
applicable to the leased property. The future minimum lease payments under
noncancellable operating leases and capital leases with remaining terms in
excess of one year on December 31, 1993, are as follows:
<TABLE>
<CAPTION>
(In thousands)
- - - ----------------------------------------------------------------------
Operating Capital
Leases Leases
- - - ----------------------------------------------------------------------
<S> <C> <C>
1994 $ 1,415 $ 228
1995 1,415 667
1996 1,205 141
1997 491 141
1998 296 141
Thereafter 2,731 1,977
- - - ----------------------------------------------------------------------
Total minimum lease
payments $ 7,553 $ 3,295
-------
Imputed interest (1,462)
Present value of net
minimum lease payments
(included in long-term debt) $ 1,833
======================================================================
</TABLE>
Total lease expense for buildings and equipment was $1.3 million in
1993, $1.3 million in 1992, and $1.2 million in 1991.
Note 9 -- Intangible Assets
As of December 31, 1993, Commerce had unamortized intangible assets of
$1.0 million. This included the excess of cost over the fair value of net
tangible and identified intangible assets of acquired branches and deposit
based intangibles. During the third quarter of 1993 Commerce recorded a
special nonrecurring, noncash adjustment of $910,000 for the writedown of an
intangible asset of deposits acquired on September 15, 1990. The adjustment
better aligns management's estimate of the asset's value, given changes in
market and economic conditions. The remaining intangible asset is amortized
over a weighted average life of six years.
Note 10 -- Short-Term Borrowings
Short-term borrowings consist of federal funds purchased in the amount of
$1.4 million on December 31, 1993, and securities sold under agreement to
repurchase in the amount of $563,000 on December 31, 1992. These borrowings
generally mature within 1 to 21 days or are due upon demand. The following
amounts and rates applied during 1993 and 1992:
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------
(Dollars in thousands) 1993 1992
- - - --------------------------------------------------------------------
<S> <C> <C>
Amount outstanding on
December 31, $ 1,400 $ 563
Rate of interest on
December 31, 3.06% 2.50%
Highest amount outstanding
during the year $ 12,175 $ 563
Average amount outstanding
during the year $ 864 $ 411
Average rate of interest paid 3.01% 3.72%
====================================================================
</TABLE>
Securities with carrying values of approximately $994,000 on December
31, 1992, were pledged as collateral for securities under agreements to
repurchase. On December 31, 1993, Commerce had unused federal funds lines of
credit of $18.6 million.
Note 11 -- Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- - - -----------------------------------------------------------------------
December 31, 1993 1992
- - - -----------------------------------------------------------------------
<S> <C> <C>
10% Convertible subordinated
capital notes due 2002 $ 4,995 $ 5,000
Obligations under capital
leases (6% -9.25%) 1,833 626
- - - -----------------------------------------------------------------------
Total $ 6,828 $ 5,626
=======================================================================
</TABLE>
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
The subordinated capital notes were issued by Commerce under terms of
an indenture dated September 1, 1990, and are convertible into Commerce's
common stock on or before August 31, 2002, unless previously redeemed at a
conversion price of $19.00 per share, subject to adjustment in certain
events. The notes are redeemable, in whole or in part, at Commerce's option
subject to regulatory approval, beginning September 1, 1995 at 105% of the
principal amount plus accrued and unpaid interest, and at reducing premiums
thereafter. The notes bear interest at 10% per annum with interest payable
quarterly. The notes are subordinated to the claims of depositors and certain
other creditors of Commerce, and are considered equity contract notes, which
are included in Tier 2 risk-based capital for bank regulatory purposes.
Note 12 -- Shareholders' Equity and Stock Option Plan
Commerce is authorized to issue 5 million shares of common stock, par
value $2.50 per share. A summary of shares of common stock reserved for
issuance as of December 31, 1993 follows:
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------
Shares Reserved
- - - -------------------------------------------------------------------------
<S> <C>
Subordinated capital notes
(See Note 11) 262,895
Dividend Reinvestment and
Stock Purchase Plan 234,547
1985 and 1993 Stock Option
and Incentive Stock Plan 367,137
- - - -------------------------------------------------------------------------
Total 864,579
=========================================================================
</TABLE>
Commerce is authorized to issue 1 million shares of preferred stock,
par value $5.00 per share. At December 31, 1993, no shares of preferred stock
were issued. The rights of common shareholders are subordinated to the rights
of preferred shareholders.
Commerce issued 625,000 additional shares of common stock during May,
1992, through an underwritten offering resulting in net proceeds of $9.0
million. During 1993, $5,000 of convertible subordinated capital notes were
converted to 250 shares of common stock. Prior to 1993, no amounts were
converted.
Under Commerce's Dividend Reinvestment and Stock Purchase Plan, common
shareholders of record may reinvest quarterly common stock dividends in
shares of common stock at prices 5% below current average market prices,
without payment of service charges or brokerage commissions. Optional cash
purchases of common stock may be made by common shareholders at the current
average market price. Optional cash payments may not be less than $100 per
payment and the total of all such payments may not exceed $5,000 in any
calendar quarter.
The 1985 Stock Option Plan provides for the granting of incentive stock
options and nonqualified options to key management employees of Commerce. The
option price is the fair market value of the stock at the date of grant. All
options shall expire not more than 10 years from the date of grant, if not
previously exercised.
In 1993, the Board of Directors adopted and the shareholders approved
the 1993 Incentive Stock Plan which provides for the granting of awards in
the form of stock options, stock appreciation rights and restricted stock to
key management employees of Commerce. The option price is the fair market
value of the stock at the date of grant. No options are exercisable until at
least six months after grant or after ten years from grant.
All stock option amounts have been adjusted to reflect stock dividends and
stock splits since the inception of the plan. Federal income tax effects
relating to exercised shares are credited to capital surplus. A summary of
activity in the 1985 Stock Option Plan and 1993 Incentive Stock Plan follows:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------
Year ended December 31, 1993 1992 1991
- - - ---------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 227,131 234,131 251,025
Options granted 62,918 72,319 --
Options exercised (20,007) (7,000) --
Options canceled/
expired -- (72,319) (16,894)
- - - ---------------------------------------------------------------------
Options outstanding
at December 31 270,042 227,131 234,131
Options available
for grant at
December 31 97,095 2,516 2,516
- - - ---------------------------------------------------------------------
Total reserved shares 367,137 229,647 236,647
- - - ---------------------------------------------------------------------
Options exercisable
at December 31 202,672 221,269 226,585
- - - ---------------------------------------------------------------------
Option prices per share:
Granted $ 24.00 $ 18.00 --
Exercised $ 9.41/ $ 10.37/ --
12.34 12.96
Canceled -- $ 12.96 --
Outstanding $ 9.41/$ 9.88/ $ 14.69/
22.86 17.41 17.41
=====================================================================
</TABLE>
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
In 1993, 1992 and 1991, Commerce declared 5% stock dividends which were
recorded at fair market value with cash being paid in lieu of fractional shares.
In 1993, 1992, and 1991, Commerce declared $.51, $.26 and $.05 per share in cash
dividends, respectively. Total cash dividends declared in 1993, 1992 and 1991
were $1.30 million, $596,000, and $83,000, respectively.
State law imposes restrictions on the ability of all banks chartered
under Virginia law to pay dividends. Among other requirements that must be
satisfied, a Virginia bank must maintain a surplus fund amounting to 20% of
its capital stock, and no dividends may be paid that would reduce the surplus
fund below this mandatory amount. On December 31, 1993, Commerce had a
surplus fund in excess of Virginia law. Commerce is also required to maintain
minimum amounts of capital to total risk-weighted assets, as defined by the
banking regulators. At December 31, 1993, Commerce was required to have
minimum Tier 1 and total capital ratios of 4.00% and 8.00%, respectively.
Commerce's actual ratios at that date were 9.74% and 12.14%, respectively.
Commerce's Tier 1 leverage ratio at December 31, 1993, was 6.49%.
Note 13 -- Other Expenses
The components of other expenses are as follows:
<TABLE>
<CAPTION>
(In thousands)
- - - --------------------------------------------------------------------------------
December 31, 1993 1992 1991
- - - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and marketing $ 957 $ 556 $ 309
Directors' fees 256 209 189
Stationery and supplies 662 531 477
Credit card merchant 710 526 448
Telephone, postage and
courier 813 695 606
FDIC and other insurance 1,666 1,347 1,036
State franchise tax and
assessments 231 143 136
Professional fees 396 299 234
Dues and subscriptions 119 76 62
Travel, education and
meetings 110 91 60
Outside processing 346 258 218
Intangibles amortization 1,214 381 328
Automatic teller machine 153 159 125
Contributions 158 203 48
Loan 478 212 189
Foreclosed property 195 231 45
Miscellaneous 387 518 342
- - - --------------------------------------------------------------------------------
Total other expenses $ 8,851 $ 6,435 $ 4,852
================================================================================
</TABLE>
Note 14 -- Income Taxes
As discussed in Note 1, Commerce adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," for 1993.
Applying the provisions of SFAS No. 109 had no material effect on Commerce's
financial statements. Prior years' financial statements were not restated,
therefore, the amounts shown for fiscal years 1992 and 1991 were determined
in accordance with the provisions of the Accounting Principles Board Opinion
No. 11.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Commerce's deferred tax liabilities and assets at December 31,
1993 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 921
Other 67
- - - ----------------------------------------------------------------------------
Total deferred tax liabilities 988
- - - ----------------------------------------------------------------------------
Deferred tax assets:
Loan loss 1,945
Deferred compensation 228
Loan origination fees 232
Other 3
- - - ----------------------------------------------------------------------------
Total deferred tax assets 2,408
- - - ----------------------------------------------------------------------------
Net deferred tax assets $ 1,420
============================================================================
The provision for income taxes is summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
- - - ----------------------------------------------------------------------------
December 31, 1993 1992 1991
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes current $ 4,298 $ 3,189 $ 1,168
Deferred (461) (712) 53
- - - ----------------------------------------------------------------------------
Provision for income taxes $ 3,837 $ 2,477 $ 1,221
============================================================================
</TABLE>
The components of the provision for deferred income taxes for the
years ended December 31, 1993, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------
(In thousands) 1993 1992 1991
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred (benefit):
Provision for loan losses $ (375) $ (705) $ (112)
Loan origination fees and costs (20) (7) 56
Depreciation 44 12 129
Deferred compensation (53) (33) (23)
Other (57) 21 3
- - - ----------------------------------------------------------------------------
Provision for deferred
income taxes $ (461) $ (712) $ 53
============================================================================
</TABLE>
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Commerce's income tax returns through 1991 have been examined or are no
longer subject to examination by the Internal Revenue Service. In addition to
federal income taxes, Commerce incurred Virginia bank franchise taxes of
$149,000 in 1993, $83,000 in 1992, and $77,000 in 1991. This tax is imposed upon
banks in Virginia in lieu of income and personal property taxes. Commerce remits
80% of the tax to the Virginia municipalities in which it does business and the
remaining 20% to the State.
The applicable federal income tax effect of investment security gains was
$481,000 in 1993, $374,000 in 1992, and $306,000 in 1991.
Differences between the provision for income taxes at the statutory rate
and that shown in the statement of income are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
- - - ----------------------------------------------------------------------------
December 31, 1993 1992 1991
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at
statutory rate $ 3,553 $ 2,522 $ 1,299
Increase (reduction)
in taxes resulting
from:
Tax-exempt interest (196) (146) (127)
Goodwill 363 88 40
Other 117 13 9
- - - ----------------------------------------------------------------------------
Provision for income
taxes $ 3,837 $ 2,477 $ 1,221
============================================================================
</TABLE>
Note 15 -- Earnings Per Share
Earnings per share were determined as follows:
<TABLE>
<CAPTION>
(In thousands, except per share)
- - - ----------------------------------------------------------------------------
Year ended December 31, 1993 1992 1991
- - - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Primary
Average common
shares outstanding 2,660 2,351 1,913
Dilutive common
stock options
assumed exercised 88 62 *
- - - ----------------------------------------------------------------------------
Average primary
shares outstanding 2,748 2,413 1,913
- - - ----------------------------------------------------------------------------
Net Income $ 6,551 $ 4,942 $ 2,599
Per Share Amount $ 2.38 $ 2.05 $ 1.36
- - - ----------------------------------------------------------------------------
Fully Diluted
Average common
shares outstanding 2,660 2,351 1,913
Dilutive common
stock options 90 62 --
Dilutive convertible
subordinated capital
notes assumed
converted 263 263 263
- - - ----------------------------------------------------------------------------
Average fully diluted
shares outstanding 3,013 2,676 2,176
- - - ----------------------------------------------------------------------------
Net Income $ 6,551 $ 4,942 $ 2,599
Add interest on
convertible
subordinated
capital notes,
after taxes 324 336 336
- - - ----------------------------------------------------------------------------
Adjusted net income $ 6,875 $ 5,278 $ 2,935
- - - ----------------------------------------------------------------------------
Per share amount $ 2.28 $ 1.97 $ 1.35
============================================================================
</TABLE>
* Anti-dilutive, therefore not considered in the calculation.
Note 16 -- Acquisitions of Deposits
Commerce acquired deposits from the Resolution Trust Corporation, as
receiver of the failed Trustbank, F.S.B., and Atlantic Permanent Savings Bank,
F.S.B., on March 20, 1992 and July 12, 1991, respectively. These acquisitions
were accounted for as purchases. The results of operations related to these
transactions are included in the financial statements since the date of such
acquisitions.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
The following table summarizes the acquisitions:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------
(In thousands) 1992 1991
- - - ----------------------------------------------------------------------------
<S> <C> <C>
Cash received $ 65,087 $ 51,995
Loans -- net 239 646
Other assets 622 330
Bank premises and
equipment -- --
Deposits (65,136) (52,834)
Other liabilities (812) (137)
============================================================================
</TABLE>
Note 17 -- Contingent Liabilities
Commerce is subject to claims and lawsuits which arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing Commerce in connection with such claims
and lawsuits, it is the opinion of management that the disposition or ultimate
determination of such claims and lawsuits will not have a material adverse
effect on the financial position of Commerce.
Note 18 -- Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, in order to meet the financing needs of
its customers, Commerce is a party to financial instruments with off-balance
sheet risk. These include commitments to extend credit and standby letters of
credit. These instruments involve, to various degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial position. Management conducts regular reviews of these instruments on
an individual customer basis, and the results are considered in assessing the
adequacy of Commerce's allowance for loan losses. Management does not anticipate
any material losses as a result of these transactions.
Commerce's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. Commerce uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Commerce evaluates each customer's credit-
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Commerce upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies, but may include accounts
receivable, inventory, property, plant, and equipment, income-producing
properties and balances left on deposit.
Standby letters of credit are conditional commitments issued by Commerce
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The following table indicates the amount of off-balance sheet
transactions:
<TABLE>
<CAPTION>
(In thousands)
- - - ----------------------------------------------------------------------------
December 31, 1993 1992
- - - ----------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $61,644 $41,355
Standby letters of credit and
financial guarantees $ 5,223 $ 3,908
============================================================================
</TABLE>
Note 19 -- Risk Factors
Commerce's operations are affected by various risk factors, including
interest rate risk, credit risk and risk from geographic concentration of
lending activities. Management attempts to manage interest rate risk through
various asset/liability management techniques designed to match maturities of
assets and liabilities. Loan policies and administration are designed to provide
a well diversified loan portfolio and assurance that loans will only be granted
to credit-worthy borrowers. Commerce considers the allowance for loan losses of
$6.53 million to be a reasonable estimate of potential loss exposure in the loan
portfolio on December 31, 1993; however, subjective factors and factors beyond
the control of Commerce could impact this estimate on an on-going basis. In
addition, Commerce is a community bank and, as such, is mandated by the
Community Reinvestment Act and other regulations to conduct most of its lending
activities within the Hampton Roads, Virginia market. As a result, Commerce and
its borrowers may be vulnerable to the consequences of change in the local
economy.
Note 20 -- Retirement Plan
Commerce has a 401(K) Retirement, Thrift and Profit Sharing Plan. The Plan
is a defined contribution plan covering all employees who have completed at
least 1,000 hours of service during the twelve-month period beginning
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
on the first day of employment. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974. Commerce contributes an amount equal to
at least 50% of participant's payroll savings contribution up to 6% of a
participant's annual compensation. Additionally, a profit sharing contribution
may be made at the discretion of the Board of Directors. Each participant is
required to contribute at least 1% of their compensation but may contribute up
to the lesser of 15% of their compensation or $8,994. Bank contributions were
$304,000, $232,000, and $118,000 for 1993, 1992 and 1991, respectively.
Note 21 - Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires Commerce to disclose estimated fair value for each class of financial
instrument. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These valuations,
where applicable, do not reflect any premium or discount that could result from
offering for sale at one time Commerce's entire holdings of a particular
financial instrument. In addition, no market exists for a significant portion of
Commerce's financial instruments. Fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement, and changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on - and off - balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. SFAS 107 specifically excludes certain items that do not
meet the definition of a financial instrument. These items include such things
as Commerce's mortgage brokerage operation that contributes net fee income
annually, the trust department, deferred tax assets, property, plant, and
equipment and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses may have a significant effect on
fair value and have not been considered in the estimates. Accordingly, the fair
value information presented does not purport to represent any underlying "market
value" of Commerce taken as a whole.
The following methods and assumptions were used to estimate the fair value
of Commerce's financial instruments.
Cash and Due from Banks
Cash and due from banks consist of currency and coin, cash items in
process of collection and demand account balances, and their carrying amounts
approximate fair value.
Temporary Investments
Temporary investments consist of interest bearing deposits with other
banks, and mortgages held for sale, and their carrying amounts approximate fair
value.
Investment Securities
Fair value for investment securities are based on quoted market prices
where available. Otherwise, fair values are based on bid quotations received
from independent securities dealers or are estimated utilizing independent
pricing services based on available market data. In addition, fair values are
calculated based on the value of one unit without regard to any premium or
discount that may result from concentrations of ownership of a financial
instrument, possible tax ramifications or estimated transactions costs. See Note
4 for related fair value information.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate,
installment and tax-exempt. Each loan category is further segmented into fixed
and adjustable rate interest terms and by performing and nonperforming
categories.
The fair values of performing loans (loans that are on accrual status) are
calculated by discounting estimated cash flows using estimated market rates that
reflect the credit and interest rate risk and prepayments inherent in the loan.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting expected cash flows at a rate commensurate with the risk associated
with the estimated cash flows, or recent appraisals of the underlying
collateral.
Deposit Liabilities
The recorded amounts of deposits with no stated maturity, such as
noninterest bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, by definition approximate fair value.
The fair value of deposits with contractual maturities is based on the
discounted value of expected cash flows. The discount rates used are those
currently offered for deposits with similar remaining maturities.
Short-term Borrowings
Short-term borrowings consist of securities sold under agreement to
repurchase and represent overnight transactions, and the carrying values
approximate fair value.
<PAGE>
[LOGO OF COMMERCE BANK APPEARS HERE]
NOTES TO FINANCIAL STATEMENTS
Long-term Debt
The fair value of the capital notes is calculated by discounting the
contractual cash flows using an incremental rate of borrowing that would be
currently available to Commerce for new debt of similar remaining maturity and
terms.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties which approximates carrying
value.
The fair value of financial instruments not presented in other portions of
the footnotes follows:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------
At December 31, 1993
-------------------------------
Carrying Estimated
(In thousands) Amount Fair Value
- - - ----------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 25,800 $ 25,800
Temporary investments 13,431 13,431
Loans 378,258 380,499
Deposit liabilities 634,141 639,456
Short-term borrowings 1,400 1,400
Long-term debt 6,828 7,677
============================================================================
</TABLE>
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of Commerce Bank:
We have audited the accompanying balance sheet of Commerce Bank as of
December 31, 1993 and the related statement of income, changes in shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of Commerce's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Commerce Bank for the years ended December 31, 1992, and 1991 were
audited by other auditors, whose report, dated January 15, 1993, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1993 financial statements referred to above present
fairly, in all material respects, the financial position of Commerce Bank as of
December 31, 1993 and the results of its operations and its cash flows for the
year ended December 31, 1993, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young
Virginia Beach, Virginia
January 21, 1994
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of Commerce Bank:
We have audited the accompanying balance sheets of Commerce Bank as of December
31, 1992 and 1991 and the related statements of income, changes in shareholders'
equity and cash flows for the years ended December 31, 1992, 1991 and 1990.
These financial statements are the responsibility of Commerce's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Commerce Bank as of December
31, 1992 and 1991, and the results of its operations and its cash flows for the
years ended December 31, 1992, 1991 and 1990 in conformity with generally
accepted accounting principles.
Norfolk, Virginia /s/ COOPERS & LYBRAND
January 15, 1993
