<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-91906
FIRST COMMERCE BANKS OF FLORIDA, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2405633
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
141 CENTRAL AVENUE EAST, WINTER HAVEN, FLORIDA 33880
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 299-6072
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
As of July 31, 1996, there were outstanding 1,585,737 shares of the
Registrant's Common Stock.
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FIRST COMMERCE BANKS OF FLORIDA, INC.
FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
a) Consolidated Statements of Financial Condition -
June 30, 1996 (Unaudited) and December 31, 1995 ....................... 3
b) Unaudited Consolidated Income Statements - Six
Months Ended June 30, 1996 and 1995 ................................... 4
c) Unaudited Consolidated Income Statements - Three
Months Ended June 30, 1996 and 1995 ................................... 5
d) Unaudited Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 ............................... 6
e) Notes to Unaudited Consolidated
Financial Statements................................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 11
PART II. OTHER INFORMATION
Item 4. Shareholder Vote.......................................................... 37
Item 6. Exhibits and Reports on Form 8-K.......................................... 37
SIGNATURES......................................................................... 38
</TABLE>
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<PAGE> 3
PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS
FIRST COMMERCE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ------------
ASSETS (In thousands)
<S> <C> <C>
Cash and due from banks......................................................... $ 4,482 $ 4,807
Federal funds sold.............................................................. 5,378 5,562
Investment securities available-for-sale........................................ 24,256 24,584
Investment securities held-to-maturity (fair value of
$1,521,000 and $3,560,000).................................................... 1,553 3,559
Loans receivable, net of allowance for credit
losses of $1,733,000 and $1,195,000........................................... 68,857 70,265
Property and equipment, net..................................................... 1,353 1,304
Cash surrender value of officers' life insurance................................ 1,106 1,079
Accrued interest receivable..................................................... 850 1,013
Other real estate owned......................................................... 154 301
Other assets.................................................................... 641 609
-------- --------
TOTAL ASSETS.................................................................... $108,630 $113,083
======== ========
LIABILITIES
Deposits:
Demand deposits.............................................................. $ 17,168 $ 17,056
NOW accounts................................................................. 13,536 15,045
Money market accounts........................................................ 6,343 4,698
Savings deposits............................................................. 8,129 7,735
Time deposits under $100,000................................................. 46,096 48,864
Time deposits $100,000 and over.............................................. 6,226 8,543
-------- --------
Total deposits............................................................ 97,498 101,941
Other liabilities............................................................... 643 592
-------- --------
TOTAL LIABILITIES............................................................... 98,141 102,533
-------- --------
Minority interest............................................................... 19 29
-------- --------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock $.01 par - 3,000,000
shares authorized and none outstanding....................................... --- ---
Common stock $.01 par - 10,000,000 shares
authorized and 1,585,737 shares outstanding.................................. 16 16
Additional paid-in capital...................................................... 6,738 6,738
Retained earnings............................................................... 3,841 3,754
Unrealized securities gains (losses), net of income
taxes (benefit) of $(76,000) and $8,000....................................... (125) 13
-------- --------
TOTAL STOCKHOLDERS' EQUITY...................................................... 10,470 10,521
-------- --------
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY................... $108,630 $113,083
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE> 4
FIRST COMMERCE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
---- ----
INTEREST AND FEE INCOME: (In thousands, except per share amounts)
<S> <C> <C>
Loans receivable................................................... $3,716 $3,827
Investment securities - taxable.................................... 666 787
Investment securities - tax free................................... 33 35
Federal funds sold................................................. 150 373
------ -----
Total interest and fee income................................... 4,565 5,022
------ -----
INTEREST EXPENSE ON DEPOSITS:
NOW accounts....................................................... 162 172
Money market accounts.............................................. 96 106
Savings deposits................................................... 90 111
Time deposits under $100,000....................................... 1,289 1,326
Time deposits $100,000 and over.................................... 209 329
------ -----
Total interest expense on deposits.............................. 1,846 2,044
------ -----
NET INTEREST INCOME................................................ 2,719 2,978
PROVISION FOR CREDIT LOSSES........................................ 456 150
------ -----
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.............. 2,263 2,828
------ -----
NON-INTEREST INCOME:
Service charges and fees........................................... 407 472
Loss on investment securities sales................................ -- (110)
Gain on sale of subsidiary......................................... -- 564
Other ............................................................. 59 17
------ -----
Total non-interest income....................................... 466 943
------ -----
NON-INTEREST EXPENSES:
Compensation and benefits.......................................... 1,265 1,103
Occupancy and equipment............................................ 379 367
Professional fees.................................................. 248 183
Data processing.................................................... 165 143
Stationery and supplies............................................ 86 51
Advertising and promotion.......................................... 79 84
Postage and freight................................................ 56 55
Other real estate owned............................................ 45 40
FDIC insurance premiums............................................ 18 117
Other ............................................................. 280 342
------ -----
Total non-interest expenses..................................... 2,621 2,485
------ -----
INCOME BEFORE TAXES ON INCOME AND MINORITY INTEREST................ 108 1,286
Taxes on income.................................................... 30 513
Minority interest.................................................. (9) 3
------ -----
NET INCOME......................................................... $87 $ 770
====== =====
NET INCOME PER SHARE............................................... $ .05 $ .46
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING......................... 1,678 1,668
====== =====
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE> 5
FIRST COMMERCE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------
1996 1995
---- ----
INTEREST AND FEE INCOME: (In thousands, except per share amounts)
<S> <C> <C>
Loans receivable................................................. $ 1,842 $1,875
Investment securities - taxable.................................. 320 414
Investment securities - tax free................................. 17 17
Federal funds sold............................................... 66 197
------- ------
Total interest and fee income................................ 2,245 2,503
------- ------
INTEREST EXPENSE ON DEPOSITS:
NOW accounts..................................................... 85 92
Money market accounts............................................ 48 56
Savings deposits................................................. 45 50
Time deposits under $100,000..................................... 630 704
Time deposits $100,000 and over.................................. 93 176
------- ------
Total interest expense on deposits............................ 901 1,078
------- ------
NET INTEREST INCOME.............................................. 1,344 1,425
PROVISION FOR CREDIT LOSSES...................................... 364 83
------- ------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............ 980 1,342
------- ------
NON-INTEREST INCOME:
Service charges and fees......................................... 199 221
Loss on investment securities sales.............................. --- (110)
Gain on sale of subsidiary....................................... --- 564
Other ........................................................... 28 3
------- ------
Total non-interest income..................................... 227 678
------- ------
NON-INTEREST EXPENSES:
Compensation and benefits........................................ 679 523
Occupancy and equipment.......................................... 182 182
Professional fees................................................ 188 89
Data processing.................................................. 106 70
Stationery and supplies.......................................... 48 28
Advertising and promotion........................................ 47 31
Postage and freight.............................................. 31 26
Other real estate owned.......................................... 31 15
FDIC insurance premiums.......................................... 9 56
Other ........................................................... 117 170
------- ------
Total non-interest expenses .................................. 1,438 1,190
------- ------
INCOME (LOSS) BEFORE TAXES ON INCOME AND MINORITY INTEREST (231) 830
Taxes on income (Income tax benefit)............................ (76) 314
Minority interest................................................ --- 3
------- ------
NET INCOME (LOSS)................................................ $ (155) $ 513
======= ======
NET INCOME (LOSS) PER SHARE...................................... $ (.10) $ .31
======= ======
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING....................... 1,586 1,668
======= ======
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE> 6
FIRST COMMERCE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
<S> <C> <C>
Net income....................................................... $ 87 $ 770
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for credit losses................................... 456 150
Net amortization of premiums
on investment securities and loans......................... 58 122
Depreciation and amortization................................. 98 75
Provision for deferred income taxes.......................... (55) (108)
Gain on sale of subsidiary.................................... --- (564)
Loss on sale of other real estate owned....................... 14 8
Asset and liability changes net of effects of subsidiary sale:
Decrease (Increase) in:
Accrued interest receivable............................. 163 (67)
Cash surrender value of officers' life insurance........ (27) (32)
Other assets............................................ 107 (113)
Minority interest......................................... (10) (3)
Increase (Decrease) in other liabilities.................. 51 (1,224)
------- -------
Net cash provided by (used for) operating activities 942 (986)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable,
net of effects of subsidiary sale.............................. 970 (2,317)
Purchases of investment securities available-for-sale............ (5,508) (5,577)
Maturities of investment securities available-for-sale........... 5,482 3,719
Maturities of investment securities held-to-maturity............. 2,000 1,000
Sales of investment securities available-for-sale................ --- 1,650
Sales of investment securities held-to-maturity.................. --- 151
Proceeds from sales of other real estate owned................... 195 94
Cash sold in sale of subsidiary, net of proceeds................. --- (4,755)
Purchases of property and equipment.............................. (147) (49)
------- -------
Net cash provided by (used for) investing activities............. 2,992 (6,084)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease), net of effects of subsidiary sale, in:
Demand deposits............................................... 112 174
NOW accounts.................................................. (1,509) 438
Money market accounts......................................... 1,645 (262)
Savings deposits.............................................. 394 7
Time deposits................................................. (5,085) 9,358
------- -------
Net cash provided by (used for) financing activities............. (4,443) 9,715
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (509) 2,645
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 10,369 13,950
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 9,860 $16,595
======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid in cash......................................... $ 1,876 $ 1,964
======= =======
Income taxes paid in cash..................................... $ 221 $ 257
======= =======
NON-CASH INVESTING ACTIVITIES:
Transfers from loans to other real estate owned............... $ 62 $ 48
======= =======
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of these financial statements.
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<PAGE> 7
FIRST COMMERCE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Commerce Banks of Florida, Inc. ("FCB") is a commercial bank
holding company which, as of June 30, 1996, owned 99.77% of First Commerce Bank
of Polk County ("First Commerce/Polk County") in Winter Haven, Florida, and,
prior to May 1, 1995, 80.00% of First Sterling Bank of Osceola County
("FSB/Osceola") in Kissimmee, Florida (collectively, the "Company"). The
consolidated financial statements include the accounts of FCB, First
Commerce/Polk County and, prior to May 1, 1995, FSB/Osceola. The minority
interest represented a .23% ownership interest in the common stock of First
Commerce/Polk County and a 20.00% ownership interest in FSB/Osceola common
stock held by third parties. All material intercompany accounts and
transactions were eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
the Company, the consolidated financial statements reflect all adjustments
which are of a normal recurring nature and which are necessary to present
fairly the consolidated financial position of the Company as of June 30, 1996
and December 31, 1995, the results of its operations for the six and three
months ended June 30, 1996 and 1995, and its cash flows for the six months
ended June 30, 1996 and 1995. The results of operations for the six and three
months ended June 30, 1996 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
Net income per share of FCB's common stock was computed by dividing net
income for the respective period by the weighted average number of shares of
common stock outstanding, including common stock equivalents using the treasury
stock method. Warrants and stock options issued to officers and directors are
considered common stock equivalents. Because of the net loss during the three
months ended June 30, 1996, warrants and stock options were not assumed to be
exercised. Because there is no established public trading of FCB's common
stock, the treasury stock method assumes that FCB purchased common stock at
FCB's average book value during the respective periods. Fully-diluted and
primary earnings per share are not materially different. For the six and three
months ended June 30, 1996 and 1995, weighted average number of shares of
common stock and common stock equivalents outstanding was computed as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
SIX THREE SIX THREE
--------- --------- ------ ----------
(Unaudited)
<S> <C> <C> <C> <C>
Weighted average shares of common
stock outstanding ...................................... 1,585,737 1,585,737 1,585,853 1,585,853
Common shares assumed outstanding
to reflect the dilutive effect of warrants
to purchase common stock ............................... 53,361 --- 49,502 49,502
Common shares assumed outstanding to
reflect the dilutive effect of stock options
to purchase common stock ............................... 38,668 --- 33,000 33,000
--------- --------- --------- ---------
Weighted average number of shares of
common stock and common stock
equivalents outstanding ............................... 1,677,766 1,585,737 1,668,355 1,668,355
========= ========= ========= =========
</TABLE>
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("FAS 114"), "Accounting by Creditors for Impairment of a
Loan," and Statement of Financial Accounting Standards No. 118
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<PAGE> 8
("FAS 118"), "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." These two Statements address the accounting by
creditors for impairment of certain loans and generally require the Company to
identify loans for which the Company probably will not receive full repayment
of principal and interest, as impaired loans. These two Statements require
that impaired loans be valued at either (i) the present value of expected
future cash flows, discounted at the loan's effective interest rate, or (ii) at
the observable market price of the loan, or (iii) the fair value of the
underlying collateral if the loan is collateral dependent. The Company
implemented these two statements by modifying its quarterly review of the
adequacy of the allowance for credit losses to also identify and value impaired
loans in accordance with the guidance in these two Statements. The adoption of
these two Statements did not have any material effect on the results of
operations for the six and three months ended June 30, 1996 and 1995.
The Company considers a variety of factors in determining whether a loan
is impaired, including (i) any notice from the borrower that the borrower will
be unable to repay all principal and interest amounts contractually due under
the loan agreement, (ii) any delinquency in the principal and interest payments
(other than minimum delays or shortfalls in payments), and (iii) other
information known by the Company which would indicate that full repayment of
the principal and interest is not probable. In evaluating loans for
impairment, the Company generally considers delinquencies of 60 days or less to
be minimum delays, accordingly does not consider such delinquent loans to be
impaired in the absence of other indications of impairment.
The Company evaluates smaller balance, homogeneous loans for impairment
and adequacy of allowance for credit losses collectively, and evaluates other
loans for impairment individually, on a loan-by-loan basis. For this purpose,
the Company considers its portfolio of commercial, commercial real estate and
residential real estate loans less than $500,000 and its consumer and other
loans to be smaller balance, homogeneous loans. The Bank evaluates each of
these loan portfolios for impairment on an aggregate basis, and utilizes its
own historical charge-off experience, as well as the charge-off experience of
its peer group and industry statistics to evaluate the adequacy of the
allowance for credit losses. For all other loans, the Company evaluates loans
for impairment on a loan-by-loan basis.
The Company evaluates all non-accrual loans as well as any accruing loans
exhibiting collateral or other credit deficiencies for impairment. With
respect to impaired, collateral-dependent loans, any portion of the recorded
investment in the loan that exceeds the fair value of the collateral is
charged-off.
For impairment recognized in accordance with these two Statements, the
entire change in the present value of expected cash flows, or the entire change
in estimated fair value of collateral for collateral dependent loans is
reported as a provision for credit losses in the same manner in which
impairment initially was recognized or as a reduction in the amount of the
provision that otherwise would be reported.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122 ("FAS 122"), "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65," which requires mortgage banking
enterprises that acquire mortgage servicing (through either the purchase or
origination of mortgage loans) and sell or securitize those loans with
servicing retained to allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans based on their relative fair values.
Mortgage banking enterprises include commercial banks that conduct operations
substantially similar to the primary operations of a mortgage banking
enterprise. The implementation of FAS 122 did not have a material impact on
the Company's financial statements.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation" which
requires certain disclosures about stock-based employee compensation
arrangements, regardless of the method used to account for them, and defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, FAS
123 also allows an entity to continue to measure compensation cost for
stock-based compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to continue using the accounting method in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting defined in FAS 123 had been applied. Under the
fair
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<PAGE> 9
value method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Because the Company elected to continue using the accounting method in
APB Opinion No. 25, the implementation of FAS 123 did not have a material
impact on the Company's financial statements. The disclosure requirements of
FAS 123 need not be applied in an interim report unless a complete set of
financial statements is presented for that period.
NOTE 2 - BUSINESS COMBINATIONS
On August 31, 1995, Commerce Bank Corporation ("CBC") merged with and into
First Sterling Bancshares, Inc. ("FSB")(the "FSB/CBC Merger") and FSB changed
its name to First Commerce Banks of Florida, Inc. In the FSB/CBC Merger, the
outstanding shares of CBC common stock were converted into an aggregate of
746,704 shares of FSB common stock and $1,000 of cash in lieu of fractional
shares. Upon consummation of the FSB/CBC Merger, Commerce Bank of Central
Florida (a subsidiary of CBC), merged with and into First Sterling Bank (a
subsidiary of FSB), which changed its name to First Commerce Bank of Polk
County. The FSB/CBC Merger was accounted for as a pooling of interests and,
accordingly, amounts presented herein have been combined to include financial
information for both FSB and CBC.
NOTE 3 - SALE OF SUBSIDIARY
On May 1, 1995, FCB sold its stock in FSB/Osceola to an unaffiliated third
party for $1,845,000. The agreement provided that FCB purchase any other real
estate owned at book value from FSB/Osceola on May 1, 1995 and that First
Commerce/Polk County purchase the existing loan portfolio (including any
allowance for credit losses) from FSB/Osceola by May 1, 1996 at the then
current book value. The Company fulfilled this commitment by March 31, 1996
with the purchase of $6,495,000 of assets from FSB/Osceola. Due to applicable
banking laws, First Commerce/Polk County could not acquire any of the $719,000
of classified loans and assets of FSB/Osceola included in the $6,495,000 of
assets purchased by the Company; accordingly, FCB purchased these loans and
assets.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
First Commerce/Polk County is a party to financial instruments with
off-balance sheet risk in the normal course of its business in order to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include loan
commitments and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
First Commerce/Polk County's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for loan
commitments and standby letters of credit is represented by the contractual
amount of those instruments. First Commerce/Polk County uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Standby letters of credit are conditional commitments issued by First
Commerce/Polk County to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The
collateral varies for those commitments, but may include a certificate of
deposit held by First Commerce/Polk County if collateral is deemed necessary.
As of June 30, 1996 (unaudited) and December 31, 1995, loan commitments
totaled $7,481,000 and $6,284,000, respectively, and standby letters of credit
totaled $1,471,000 and $1,259,000, respectively. Since many of these
commitments may expire without being drawn upon, the total commitment amount
does not necessarily represent
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<PAGE> 10
future cash requirements.
The Company is party to litigation and claims arising in the normal course
of business. Management, after consultation with legal counsel, does not
believe that there are any pending or threatened proceedings against the
Company which, if determined adversely, would have a material adverse effect on
the Company's financial position, liquidity or results of operations.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
For the six months ended June 30, 1996 and 1995, the activity in the
allowance for credit losses was as follows:
<TABLE>
<CAPTION>
1996 1995
------ -----
(Unaudited)
(In thousands)
<S> <C> <C>
Balance at beginning of period.................. $1,195 $ 830
Allowance related to loans purchased
from FSB/Osceola............................. 25 35
Allowance related to the FSB/Osceola sale....... --- (119)
Provision for credit losses..................... 456 150
Net loans charged-off (recovered)............... (57) (6)
------ -----
Balance at end of period........................ $1,733 $ 902
====== =====
</TABLE>
As of June 30, 1996 (unaudited) and December 31, 1995, non-accrual loans
totaled $2,933,000 and $1,607,000, respectively. For the six and three months
ended June 30, 1996 and 1995, interest income that would have been recorded
under the original terms of non-accrual loans and the interest income actually
recognized were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
SIX THREE SIX THREE
---- ----- --- -----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Interest income under the original terms..... $186 $ 103 $28 $ 11
Interest income actually recognized.......... 165 86 18 11
---- ----- --- -----
Interest income foregone..................... $ 21 $ 17 $10 $ --
==== ===== === =====
</TABLE>
As a result of the Company's review, impaired loans totaled approximately
$3,727,000 and $1,182,000 and the allowance for credit losses related to these
loans totaled $900,000 and $156,000 as of June 30, 1996 (unaudited) and
December 31, 1995, respectively. For the six months ended June 30, 1996 and
1995 (unaudited), the amount of interest income recognized on impaired loans
was $198,000 and $64,000, respectively, while the amount of interest income
received on impaired loans was $200,000 and $61,000, respectively. For the
three months ended June 30, 1996 and 1995 (unaudited), the amount of interest
income recognized on impaired loans was $102,000 and $32,000, respectively,
while the amount of interest income received on impaired loans was $103,000 and
$30,000, respectively. The average balance of impaired loans amounted to
$2,385,000 and $1,438,000 during the six months ended June 30, 1996 and 1995
(unaudited), respectively. The average balance of impaired loans amounted to
$3,231,000 and $1,400,000 during the three months ended June 30, 1996 and 1995
(unaudited), respectively. Impaired loans increased primarily due to the
increase in non-performing loans. For a discussion of this increase, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Classification of Assets."
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<PAGE> 11
NOTE 6 - TERMINATION OF PROPOSED BUSINESS COMBINATIONS
Proposed Business Combination with First Mercantile National Bank
On January 3, 1996, FCB entered into a Plan of Merger and Merger Agreement
with First Mercantile National Bank ("First Mercantile"), a national banking
association located in Longwood, Florida, and First Mercantile Successor Bank
("FMSB"), an interim state banking corporation to be organized as a
wholly-owned subsidiary of FCB. The agreement provided for a combination of the
FCB and First Mercantile organizations through the merger of First Mercantile
with and into FMSB (the "First Mercantile Merger"). As a result of the First
Mercantile Merger, First Mercantile would have become a wholly-owned subsidiary
of FCB and shareholders of First Mercantile at the time of the closing of the
First Mercantile Merger would have become shareholders of FCB. On April 24,
1996, the agreement was amended to increase the exchange ratio. As a result of
this amendment each outstanding share of First Mercantile common stock, other
than shares held by First Mercantile shareholders who would have had perfected
dissenters' rights, would have been converted in the First Mercantile Merger
into the right to receive 2.23 shares of FCB common stock. (Prior to the
amendment, the exchange ratio was 2.00.) The First Mercantile Merger received
the requisite approvals from all applicable regulatory authorities. However,
in July 1996, before the First Mercantile Merger was voted upon by First
Mercantile's shareholders, FCB and First Mercantile mutually determined that it
was not in the best interests of their respective shareholders to continue to
pursue the First Mercantile Merger. Accordingly, the parties negotiated a
Termination Agreement which was executed on August 1, 1996. The decision to
terminate the First Mercantile Merger primarily resulted from an increase in
the Company's non-performing assets and a decrease in the Company's earnings
during the six and three months ended June 30, 1996.
Proposed Business Combination with Prime Bank of Central Florida
On January 3, 1996, FCB entered into a Plan of Merger and Merger Agreement
with Prime Bank of Central Florida ("Prime Bank"), a state banking corporation
located in Titusville, Florida, and Prime Successor Bank ("PSB"), an interim
state banking corporation to be organized as a wholly-owned subsidiary of FCB.
The agreement provided for a combination of the FCB and Prime Bank
organizations through the merger of Prime Bank with and into PSB (the "Prime
Bank Merger"). As a result of the Prime Bank Merger, Prime Bank would have
become a wholly-owned subsidiary of FCB and shareholders of Prime Bank at the
time of the closing of the Prime Bank Merger would have become shareholders of
FCB. On April 24, 1996, the agreement was amended to increase the exchange
ratio. As a result of this amendment each outstanding share of Prime Bank
common stock, other than shares held by Prime Bank shareholders who would have
perfected dissenters' rights, would have been converted in the Prime Bank
Merger into the right to receive 1.94 shares of FCB common stock. (Prior to
the amendment, the exchange ratio was 1.70.) The Prime Bank Merger received
the requisite approvals from all applicable regulatory authorities. However,
in July 1996, before the Prime Bank Merger was voted upon by Prime Bank's
shareholders, FCB and Prime Bank mutually determined that it was not in the
best interests of their respective shareholders to continue to pursue the Prime
Bank Merger. Accordingly, the parties negotiated a Termination Agreement which
was executed on August 1, 1996. The decision to terminate the Prime Bank
Merger primarily resulted from an increase in the Company's non-performing
assets and a decrease in the Company's earnings during the six and three months
ended June 30, 1996.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Sale of FSB/Osceola
On May 1, 1995, First Commerce Banks of Florida, Inc. ("FCB") sold the
240,000 shares of common stock of First Sterling Bank of Osceola County
("FSB/Osceola") (which constituted 80% of the outstanding shares of FSB/Osceola
stock) owned by FCB to certain unaffiliated individuals for $1.8 million in
cash. See "--Sale of
-11-
<PAGE> 12
FSB/Osceola." Accordingly, FSB/Osceola's results of operations for the four
months ended April 30, 1995 are included in FCB's 1995 consolidated financial
statements and amounts presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FSB/CBC Merger
On August 31, 1995, Commerce Bank Corporation (CBC") merged with and into
First Sterling Bancshares, Inc. ("FSB") (the"FSB/CBC Merger") and FSB changed
its name to First Commerce Banks of Florida, Inc. In the FSB/CBC Merger, the
outstanding shares of CBC common stock were converted into an aggregate of
746,704 shares of FSB common stock and $1,000 of cash in lieu of fractional
shares. Upon consummation of the FSB/CBC Merger, Commerce Bank of Central
Florida (a subsidiary of CBC) merged with and into First Sterling Bank (a
subsidiary of FSB), which changed its name to First Commerce Bank of Polk
County ("First Commerce/Polk County"). FCB's principal asset is its ownership
of 99.77% of the voting shares of First Commerce/Polk County. The FSB/CBC
Merger has been accounted for as a pooling of interests and, accordingly,
amounts presented in Management's Discussion and Analysis of Financial
Condition and Results of Operations have been combined to include financial
information for both FSB and CBC. The consolidated financial statements
include the accounts of FCB, First Commerce/Polk County and, prior to May 1,
1995, FSB/Osceola (collectively, the "Company").
Termination of Proposed Business Combination with First Mercantile National
Bank
On January 3, 1996, FCB entered into a Plan of Merger and Merger Agreement
with First Mercantile National Bank ("First Mercantile"), a national banking
association located in Longwood, Florida, and First Mercantile Successor Bank
("FMSB"), an interim state banking corporation to be organized as a
wholly-owned subsidiary of FCB. The agreement provided for a combination of
the FCB and First Mercantile organizations through the merger of First
Mercantile with and into FMSB (the "First Mercantile Merger"). As described in
Note 6 of Notes to Unaudited Consolidated Financial Statements, in July 1996
FCB and First Mercantile mutually determined to terminate the First Mercantile
Merger.
Termination of Proposed Business Combination with Prime Bank of Central Florida
On January 3, 1996, FCB entered into a Plan of Merger and Merger Agreement
with Prime Bank of Central Florida ("Prime Bank"), a state banking corporation
located in Titusville, Florida, and Prime Successor Bank ("PSB"), an interim
state banking corporation to be organized as a wholly-owned subsidiary of FCB.
The agreement provided for a combination of the FCB and Prime Bank
organizations through the merger of Prime Bank with and into PSB (the "Prime
Bank Merger"). As described in Note 6 of Notes to Unaudited Consolidated
Financial Statements, in July 1996 FCB and Prime Bank mutually determined
to terminate the Prime Bank Merger.
Increases in Non-Performing Assets and Provisions for Credit Losses
During the six and three months ended June 30, 1996, the Company
experienced a significant increase in non-performing assets and provisions for
credit losses. As of June 30, 1996, total non-performing loans were $3.0
million (or 4.22% of total loans), compared to $1.8 million (or 2.52% of total
loans) as of December 31, 1995, and $577,000 (or .85% of total loans) as of
June 30, 1995. Total non-performing assets were $3.2 million (or 2.90% of
total assets), compared to $2.1 million (or 1.86% of total assets) as of
December 31, 1995, and $1.0 million (or .91% of total assets) as of June 30,
1995. During the six and three months ended June 30, 1996, the provision for
credit losses was $456,000 and $364,000, respectively, compared to $150,000 and
$83,000 during the six and three months ended June 30, 1995, or respective
increases of 203.85% and 340.83%. As of June 30, 1996 and December 31, 1995,
the allowance for credit losses was 2.45% and 1.67%, respectively, of total
loans receivable, and was 57.98% and 66.17%, respectively, of non-performing
loans. See "-- Financial Condition -- Classification of Assets."
Increases in Non-Interest Expenses
During the six and three months ended June 30, 1996, the Company also
experienced increases in non-interest
-12-
<PAGE> 13
expenses. See "-- Results of Operations -- Non-Interest Expenses."
Change in Business Strategy
The Company previously announced that it intends to assess opportunities
for possible growth through additional business combinations with other
community banks or thrifts located in Florida, particularly in the Central
Florida area. As a result of the increase in the Company's non-performing
assets and provisions for credit losses and the decrease in earnings during the
recent periods, and the termination of the First Mercantile Merger and the
Prime Bank Merger, the Company does not expect to pursue growth through
additional business combinations at the present time.
Changes in Executive Officers
Charles E. Harris resigned as a director and Chairman of the Board and
Chief Executive Officer of FCB effective July 15, 1996. David Carleton Hall
will be leaving his position as Senior Vice President and Chief Financial
Officer of FCB effective August 31, 1996. Messrs. Harris and Hall both joined
FCB to assist in implementing its business strategy of combining with other
community banks in Florida, and their departure is primarily related to the
termination of the First Mercantile Merger and the Prime Bank Merger and the
change in the Company's business strategy described above. On July 15, 1996,
Robert W. Stickler, who also serves as Vice Chairman of FCB, was elected Chief
Executive Officer of FCB. The Board of Directors of FCB has begun discussing
the election of a Chairman of the Board and intends to hold an election by
September 30, 1996.
GENERAL
The Company's results of operations are primarily dependent upon the
results of operations of First Commerce/Polk County. First Commerce/Polk
County conducts commercial banking business consisting of attracting deposits
from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). First Commerce/Polk County's profitability
depends primarily on net interest income, which is the excess of interest
income generated from interest-earning assets (i.e., loans, investments and
federal funds sold) over interest expense incurred on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest income
is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities, and the interest rate earned and paid on these
balances. Net interest income is dependent upon First Commerce/Polk County's
interest-rate spread which is the excess of average yield earned on its
interest-earning assets over the average rate paid on its interest-bearing
liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest-rate spread is impacted by interest rates
and the amounts of deposits and loans. Additionally, First Commerce/Polk
County's profitability is affected by such factors as the level of non-interest
income and expenses, the provision for credit losses, and the effective tax
rate. Non-interest income consists primarily of service fees on deposit
accounts and income from the sale of loans and investment securities.
Non-interest expense consists primarily of compensation and employee benefits,
occupancy and equipment expenses, professional fees, data processing costs,
deposit insurance premiums paid to the FDIC, and other operating expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the financial
condition of the Company at June 30, 1996 and December 31, 1995, and the
results of operations of the Company for the six and three months ended June
30, 1996 and 1995. This discussion should be read in conjunction with the
unaudited consolidated financial statements and related unaudited footnotes of
the Company presented elsewhere herein.
-13-
<PAGE> 14
LIQUIDITY
FCB
FCB is a legal business entity separate and distinct from First
Commerce/Polk County. FCB's principal source of cash flow during 1996 and 1995
was the sale of the FSB/Osceola stock on May 1, 1995 for $1.8 million in cash
and interest income on its portfolio of loans purchased from FSB/Osceola and
cash on deposit ($1.6 million and $2.0 million as of June 30, 1996 and December
31, 1995, respectively) with First Commerce/Polk County, which totaled $60,000
during the six months ended June 30, 1996. Possible future sources of cash
flow for FCB include dividends or management fees from First Commerce/Polk
County. However, there are various statutory limitations on the ability of
First Commerce/Polk County to pay dividends, extend credit, or otherwise supply
funds to FCB. The FDIC and the Florida Department of Banking and Finance
("Florida Department") also have the general authority to limit the dividends
paid by insured banks and bank holding companies. FCB has not paid any cash
dividends to its shareholders.
During the six months ended June 30, 1996, the Company's cash and cash
equivalents decreased $509,000, to $9.9 million as of June 30, 1996 from $10.4
million as of December 31, 1995. During the six months ended June 30, 1996,
investing activities provided $3.0 million of cash, and financing activities
used $4.4 million of cash. The Company's total assets decreased $4.5 million
from December 31, 1995 to June 30, 1996. This decrease was primarily
attributable to the $2.5 million decrease in the investment portfolio, the $1.4
million decrease in loans and the $5.1 million decrease in First Commerce/Polk
County's time deposits. Since the FSB/CBC Merger, First Commerce/Polk County
has reduced the interest rates it offers on time deposits resulting in a
decrease in time deposits. First Commerce/Polk County has primarily used the
proceeds from maturing investment securities to fund these deposit outflows.
First Commerce/Polk County
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw
their funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. In the ordinary course of business,
First Commerce/Polk County's cash flows are generated from interest and fee
income, as well as from loan repayments and the maturity of investment
securities held-to-maturity. In addition to cash and due from banks, First
Commerce/Polk County considers all investment securities available-for-sale and
federal funds sold as primary sources of asset liquidity. Many factors affect
the ability to accomplish these liquidity objectives successfully, including
the economic environment and the asset/liability mix within the balance sheet.
As of June 30, 1996 and December 31, 1995, First Commerce/Polk County had
commitments to originate loans totaling $9.0 million and $7.5 million,
respectively. In addition, scheduled maturities of certificates of deposit
during the year following June 30, 1996 and December 31, 1995 totaled $28.6
million and $35.1 million, respectively. Management believes that First
Commerce/Polk County has adequate resources to fund all its commitments, and,
if so desired, that First Commerce/Polk County can adjust the interest rates
and terms on certificates of deposit and other deposit accounts to retain
deposits in a changing interest rate environment.
A state-chartered commercial bank is required to maintain a liquidity
reserve of at least 15% of its transaction deposit accounts and 8% of its
non-transaction deposit accounts. The liquidity reserve may consist of cash on
hand, cash on demand deposit with other correspondent banks, and other
investments and short-term marketable investment securities as determined by
the rules of the Florida Department, such as federal funds sold and United
States securities or obligations guaranteed by the United States. As of June
30, 1996 and December 31, 1995, First Commerce/Polk County had a liquidity
ratio of 34.60% and 31.35%, respectively.
CAPITAL RESOURCES
FCB's total stockholders' equity was $10.47 million and $10.52 million as
of June 30, 1996 and December 31, 1995, respectively, or a decrease of $51,000.
This decrease was the result primarily of net income during the six
-14-
<PAGE> 15
months ended June 30, 1996 of $87,000 less the $138,000 change in the
unrealized securities gains (losses) from December 31, 1995 to June 30, 1996.
FCB's total stockholders' equity was 9.64% and 9.30% of total assets as of June
30, 1996 and December 31, 1995, respectively. First Commerce/Polk County's
total stockholders' equity was $8.46 million and $8.45 million as of June 30,
1996 and December 31, 1995, respectively, or an increase of $10,000. This
increase was the result primarily of First Commerce/Polk County's net income
during the six months ended June 30, 1996 of $149,000 less the $139,000 change
in the unrealized securities gains (losses) from December 31, 1995 to June 30,
1996.
The federal banking regulatory authorities have adopted certain "prompt
corrective action" rules with respect to depository institutions. The rules
establish five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The various federal banking regulatory agencies have
adopted regulations to implement the capital rules by, among other things,
defining the relevant capital measures for the five capital categories. An
institution is deemed to be "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement, or directive to meet and maintain a specific
capital level. As of June 30, 1996 and December 31, 1995, First Commerce/Polk
County met the capital ratios of a "well capitalized" financial institution
with a total risk-based capital ratio of 12.60% and 11.39%, a Tier 1 risk-based
capital ratio of 10.52% and 10.17%, and a Tier 1 leverage ratio of 7.73% and
7.44%, respectively. Depository institutions which fall below the "adequately
capitalized" category generally are prohibited from making any capital
distribution, are subject to growth limitations, and are required to submit a
capital restoration plan. There are a number of requirements and restrictions
that may be imposed on institutions treated as "significantly undercapitalized"
and, if the institution is "critically undercapitalized," the banking
regulatory agencies have the right to appoint a receiver or conservator.
The current Federal bank regulatory guidelines require all bank holding
companies and federally-regulated banks to maintain a risk-based total capital
ratio equal to 8.00%, of which at least 4.00% must be Tier 1 capital. As of
June 30, 1996 and December 31, 1995, FCB's Tier 1 capital ratio was 12.91% and
12.72%, respectively, and total capital ratio was 15.03% and 13.94%,
respectively.
In accordance with risk capital guidelines issued by the FDIC, First
Commerce/Polk County is required to maintain a minimum standard of total
capital to risk-weighted assets of 8%. Additionally, the FDIC requires banks
to maintain a minimum leverage-capital ratio of Tier 1 capital (as defined) to
total assets. The leverage-capital ratio ranges from 3% to 5% based on the
bank's rating under the regulatory rating system. The required
leverage-capital ratio for First Commerce/Polk County at June 30, 1996 and
December 31, 1995 was 4%. The following table summarizes the regulatory
capital levels and ratios for First Commerce/Polk County:
<TABLE>
<CAPTION>
ACTUAL REGULATORY
RATIOS REQUIREMENT
------ -----------
<S> <C> <C>
AT JUNE 30, 1996:
Total capital to risk-weighted assets.................... 12.60% 8.00%
Tier I capital to risk-weighted assets................... 10.52% 4.00%
Tier I capital to total assets - leverage ratio.......... 7.73% 4.00%
AT DECEMBER 31, 1995:
Total capital to risk-weighted assets.................... 11.39% 8.00%
Tier I capital to risk-weighted assets................... 10.17% 4.00%
Tier I capital to total assets - leverage ratio 7.44% 4.00%
</TABLE>
-15-
<PAGE> 16
RESULTS OF OPERATIONS
General
The Company's net income was $87,000, or $.05 per share, for the six
months ended June 30, 1996, as compared to $770,000, or $.46 per share, for the
six months ended June 30, 1995, or a decrease of $683,000 or 88.70%. The
Company's income before taxes on income and minority interest was $108,000 for
the six months ended June 30, 1996, as compared to $1,286,000 for the six
months ended June 30, 1995, or a decrease of $1,178,000 or 91.57%. For the six
months ended June 30, 1996 and 1995, certain of the significant transactions
affecting income before taxes on income and minority interest were as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TO 1996
FROM
1996 1995 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Provision for credit losses excluding
FSB/Osceola's provision for credit losses......... $456 $124 $ 332
==== ==== =====
Gain on sale of stock in FSB/Osceola.............. $--- $564 $(564)
==== ==== =====
</TABLE>
The Company's net loss was $155,000, or $(.10) per share, for the three
months ended June 30, 1996, as compared to net income of $513,000, or $.31 per
share, for the three months ended June 30, 1995, or a decrease of $668,000 or
130.11%. The Company's loss before taxes on income and minority interest was
$231,000 for the three months ended June 30, 1996, as compared to income before
taxes on income and minority interest of $830,000 for the three months ended
June 30, 1995, or a decrease of $1,061,000 or 127.89%. For the three months
ended June 30, 1996 and 1995, certain of the significant transactions affecting
income before taxes on income and minority interest were as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TO 1996
FROM
1996 1995 1995
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Provision for credit losses excluding
FSB/Osceola's provision for credit losses......... $364 $ 69 $ 295
==== ==== =====
Gain on sale of stock in FSB/Osceola.............. $--- $564 $(564)
==== ==== =====
</TABLE>
The Company's earnings have been adversely affected by the increase of
non-performing assets to $3.2 million as of June 30, 1996 from $2.1 million as
of December 31, 1995, resulting in an increase in the provision for credit
losses, legal expenses, other real estate owned expenses and an increase in
interest income foregone. For a discussion of the increase in the provision
for credit losses, see "--Provision for Credit Losses," "--Financial
Condition--Classification of Assets," and "--Financial Condition--Allowance for
Credit Losses." As of June 30, 1996 and December 31, 1995, non-accrual loans
totaled $2.9 million and $1.6 million, respectively. For the six and three
months ended June 30, 1996 and 1995, interest income that would have been
recorded under the original terms of non-accrual loans and the interest income
actually recognized were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
SIX THREE SIX THREE
---- ----- --- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income under the original terms............... $186 $ 103 $28 $ $11
Interest income actually recognized.................... 165 86 18 11
---- ----- --- -----
Interest income foregone............................... $ 21 $ 17 $10 $ --
==== ===== === =====
</TABLE>
-16-
<PAGE> 17
For a discussion of the sale of FSB/Osceola, see "--Recent Developments"
and "--Sale of FSB/Osceola." During the four months ended April 30, 1995,
FSB/Osceola had a net loss of $56,000 including a realized $110,000 loss on the
sale of investment securities sold in conjunction with the sale of FSB/Osceola.
During the six and three months ended June 30, 1996, FCB had the use of the
$1.8 million proceeds from the sale of FSB/Osceola stock. Assuming that the
interest income earned on these proceeds was at FCB's weighted average yield on
federal funds sold, interest income was benefited by approximately $48,000 and
$24,000, respectively. In addition, during the year ended March 31, 1996, the
Company purchased from FSB/Osceola $6.5 million of loans. Assuming that the
interest yield on these loans during the six and three months ended June 30,
1996 was equal to their actual yield during the first four months of 1995 and
that the Company used to purchase these loans federal funds sold at their
weighted average yield, interest income was benefited by approximately $120,000
and $60,000, respectively. These amounts are not reflected in the above
tables.
During the six and three months ended June 30, 1996, the Company charged
to expense $84,000 and $65,000, respectively, of costs related to the FSB/CBC
Merger, First Mercantile Merger and Prime Bank Merger, as compared to $125,000
and $73,000 during the six and three months ended June 30, 1995. See "--Other
Expenses."
For the six and three months ended June 30, 1996 and 1995, selected ratios
were as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
SIX THREE SIX THREE
----- ----- --- -----
<S> <C> <C> <C> <C>
Average equity as a percentage
of average assets................................... 9.53% 9.63% 8.23% 8.65%
Return (Loss) on average assets....................... .16% (.56%) 1.27% 1.75%
Return (Loss) on average equity ...................... 1.64% (5.79%) 15.44% 20.26%
Non-interest expense to average assets................ 4.71% 5.18% 4.10% 3.99%
</TABLE>
-17-
<PAGE> 18
For the six months ended June 30, 1996 and 1995, the Company's (i) interest
income from interest-earning assets and the resultant average yield; (ii)
interest expense on interest-bearing liabilities and the resultant average
cost; (iii) net interest income; (iv) net interest spread; and (v) net interest
margin were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- --------
ASSETS: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Commercial........................... $ 19,591 $1,063 10.91% $ 24,537 $1,310 10.68%
Real estate-construction............. 2,768 133 9.67 3,193 177 11.07
Real estate-mortgage(2).............. 43,834 2,272 10.43 37,951 2,001 10.54
Consumer and other................... 4,676 248 10.66 6,565 339 10.35
-------- ----- ----- -------- ------ -----
Total loans, net of unearned income...... 70,869 3,716 10.54 72,246 3,827 10.59
Investments - taxable.................... 26,152 666 5.09 26,125 787 6.03
Investments - tax free(3)................ 1,056 53 10.03 1,170 57 9.61
Federal funds sold....................... 5,850 150 5.17 12,344 373 6.04
-------- ----- ----- -------- ------ -----
Total interest-earning assets........ 103,927 4,585 8.87 111,885 5,044 9.02
----- ----- ------ -----
Cash and due from banks..................... 4,543 5,280
Allowance for credit losses................. (1,280) (913)
Other non-earning assets.................... 4,169 4,874
-------- --------
Total assets............................... $111,359 $121,126
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts............................. $ 14,300 162 2.27 $ 15,113 172 2.28
Money market............................. 6,314 96 3.06 7,240 106 2.94
Savings.................................. 8,004 90 2.25 9,254 111 2.40
Time deposits under $100,000............. 47,028 1,289 5.51 49,226 1,326 5.39
Time deposits $100,000 and over.......... 7,284 209 5.78 12,126 329 5.42
--------- ------ ----- ------- ------ -----
Total interest-bearing liabilities....... 82,930 1,846 4.48 92,959 2,044 4.40
------ ----- ------ -----
Demand deposits............................. 17,309 17,234
Other liabilities and minority interest 509 960
Stockholders' equity........................ 10,611 9,973
-------- -------
Total liabilities and stockholders' equity.. $111,359 $121,126
======== ========
SPREAD AND INTEREST DIFFERENTIAL:
Net interest income......................... $2,739 $3,000
===== ======
Interest-rate spread(4)..................... 4.39% 4.62%
==== =====
Net interest margin(5)...................... 5.30% 5.36%
==== =====
Excess of total interest-earning assets
over total interest-bearing liabilities.. $ 20,997 $ 18,926
======== ========
</TABLE>
- - ---------------------------
(1) Includes loans on non-accrual status.
(2) Interest income on mortgage loans included loan fees recognized as
income of $149,000 and $107,000 during the six months ended June 30,
1996 and 1995, respectively.
(3) Yields on tax-free investments are computed on a tax equivalent basis
using a 37.3% effective income tax rate.
(4) Interest-rate spread represents the excess of the average yield on
interest-earning assets over the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
-18-
<PAGE> 19
For the three months ended June 30, 1996 and 1995, the Company's (i)
interest income from interest-earning assets and the resultant average yield;
(ii) interest expense on interest-bearing liabilities and the resultant average
cost; (iii) net interest income; (iv) net interest spread; and (v) net interest
margin were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- ------- -------- --------
ASSETS: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Commercial...................... $ 18,755 $ 438 9.39% $ 24,096 $ 649 10.77%
Real estate-construction........ 3,004 72 9.67 3,208 96 11.99
Real estate-mortgage(2)......... 44,293 1,198 10.87 36,795 977 10.62
Consumer and other.............. 4,880 134 11.07 5,760 153 10.63
-------- ------ ----- -------- ------- -----
Total loans, net of unearned income. 70,932 1,842 10.44 69,859 1,875 10.74
Investments - taxable............... 26,372 320 4.85 26,613 414 6.22
Investments - tax free(3)
................ 1,055 26 10.00 1,118 27 9.59
Federal funds sold.................. 5,126 66 5.20 12,559 197 6.29
-------- ------ ----- -------- ------- -----
Total interest-earning assets... 103,485 2,254 8.76 110,149 2,513 9.13
------ ----- ------- -----
Cash and due from banks................ 4,534 5,479
Allowance for credit losses............ (1,330) (950)
Other non-earning assets............... 4,293 4,677
-------- --------
Total assets...........................
$110,982 $119,355
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts........................ $ 14,435 85 2.37 $ 14,926 92 2.46
Money market........................ 6,316 48 3.07 6,837 56 3.29
Savings............................. 8,006 45 2.25 8,424 50 2.36
Time deposits under $100,000........ 46,465 630 5.45 49,234 704 5.72
Time deposits $100,000 and over..... 6,613 93 5.63 12,250 176 5.77
-------- ------ ----- -------- ------- -----
Total interest-bearing liabilities.. 81,835 901 4.43 91,671 1,078 4.70
------ ----- ------- -----
Demand deposits........................ 17,942 16,584
Other liabilities and minority interest 519 775
Stockholders' equity................... 10,686 10,325
-------- --------
Total liabilities and stockholders' equity $110,982 $119,355
======== ========
SPREAD AND INTEREST DIFFERENTIAL:
Net interest income................... $1,353 $ 1,435
====== =======
Interest-rate spread(4)................ 4.33% 4.43%
===== =====
Net interest margin(5)................. 5.26% 5.21%
===== =====
Excess of total interest-earning assets
over total interest-bearing liabilities
$ 21,650 $ 18,478
======== ========
</TABLE>
- - ---------------------------
(1) Includes loans on non-accrual status.
(2) Interest income on mortgage loans included loan fees recognized as
income of $87,000 and $69,000 during the three months ended June 30,
1996 and 1995, respectively.
(3) Yields on tax-free investments are computed on a tax equivalent basis
using a 37.3% effective income tax rate.
(4) Interest-rate spread represents the excess of the average yield on
interest-earning assets over the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
-19-
<PAGE> 20
Net interest income
Net interest income, which constitutes the principal source of income for
the Company, represents the excess of interest income on interest-earning
assets over interest expense on interest-bearing liabilities. The principal
interest-earning assets are federal funds sold, investment securities and loans
receivable. Interest-bearing liabilities primarily consist of time deposits,
interest-bearing checking accounts ("NOW accounts"), savings deposits and money
market accounts. Funds attracted by these interest-bearing liabilities are
invested in interest-earning assets. Accordingly, net interest income depends
upon the volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or paid on them.
The following table sets forth certain information regarding changes in the
Company's interest income and interest expense during the six months ended June
30, 1996 as compared to the six months ended June 30, 1995. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in interest rate (change in
rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
INCREASE (DECREASE) DUE TO
-----------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
INTEREST-EARNING ASSETS:
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans receivable:
Commercial.................................... $ 28 $(263) $(12) $(247)
Real estate construction...................... (22) (23) 1 (44)
Real estate mortgage.......................... (22) 308 (15) 271
Consumer and other............................ 10 (97) ( 4) (91)
----- ----- ---- -----
Total loans receivable........................ (6) (75) (30) (111)
Investments - taxable............................ (123) 1 1 (121)
Investments - tax free(1)........................ 2 (5) (1) (4)
Federal funds sold............................... (53) (195) 25 (223)
----- ----- ---- -----
Total interest-earning assets.................... (180) (274) ( 5) (459)
----- ----- ---- -----
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts.................................. --- (9) (1) (10)
Money market.................................. 4 (14) --- (10)
Savings....................................... (7) (15) 1 (21)
Time deposits under $100,000.................. 31 (59) (9) (37)
Time deposits $100,000 and over............... 21 (130) (11) (120)
----- ----- ---- -----
Total interest-bearing liabilities............... 49 (227) (20) (198)
----- ----- ---- -----
NET CHANGE IN NET INTEREST INCOME ............... $(229) $ (47) $ 15 $(261)
===== ===== ==== =====
</TABLE>
- - --------------------------------
(1) Yields on tax-free investments are computed on a tax equivalent basis
using a 37.3% effective income tax rate.
The Company's net interest income was $2.7 million for the six months ended
June 30, 1996 compared with $3.0 million for the six months ended June 30,
1995, or a decrease of $259,000 or 8.70%. This decline in net interest income
resulted primarily from a decrease in the net interest margin, which reduced
net interest income by $229,000, and a decrease in interest-earning assets and
interest-bearing liabilities, which reduced net interest income by $47,000.
The 1.95% volume decrease during the six months ended June 30, 1996 from the
six months ended June 30, 1995 in loan interest income was primarily
attributable to the 1.91% decrease in average loans outstanding, and the 16.42%
volume decrease in the total of interest income for investment securities and
federal funds sold was primarily attributable to the 16.60% decrease in average
investment securities and federal funds sold. For a discussion of the purchase
of loans from FSB/Osceola, see "--Recent Developments" and "Sale of
FSB/Osceola." The yield on the
-20-
<PAGE> 21
total of investments and federal funds sold decreased 85 basis points,
primarily reflecting the 94 basis point decrease in the yield on the taxable
investment securities and the 87 basis point decrease in federal funds interest
rates during the six months ended June 30, 1996 from the six months ended June
30, 1995. Prepayment speeds on mortgage-backed securities tend to increase as
interest rates decrease and tend to decrease as interest rates increase. In
addition, the changes in prepayment speeds tend to lag behind the changes in
interest rates. An increase in prepayment speeds accelerates the amortization
of premiums on mortgage-backed securities which reduces the effective yield on
these investments. During the first three months of 1996, interest rates
generally decreased and during the second quarter of 1996, interest rates
generally increased. This resulted in an increase in prepayment speeds during
the first quarter of 1996 which extended into the second quarter; however, near
the end of the second quarter, the prepayment speeds slowed down. During the
six months ended June 30, 1996, net premium amortization on investment
securities was $138,000, with $51,000 being amortized in the first quarter of
1996 and $87,000 being amortized in the second quarter of 1996. The 11.11%
volume decrease in interest expense during the six months ended June 30, 1996
from the six months ended June 30, 1995 in was primarily attributable to the
10.79% decrease in average interest-bearing liabilities. The interest rates
paid on interest-bearing liabilities increased 8 basis points as First
Commerce/Polk County paid higher interest rates primarily on time deposits
subsequent to March 31, 1995. Since the FSB/CBC Merger, First Commerce/Polk
County has reduced the interest rates it offers on time deposits. The overall
result was a decrease in the net interest margin to 5.30% during the six months
ended June 30, 1996 from 5.36% during the six months ended June 30, 1995.
The following table sets forth certain information regarding changes in the
Company's interest income and interest expense during the three months ended
June 30, 1996 as compared to the three months ended June 30, 1995. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in interest rate
(change in rate multiplied by prior volume), (2) changes in volume (change in
volume multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
INCREASE (DECREASE) DUE TO
-------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(Dollars in thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C>
Loans receivable:
Commercial................................ $(83) $(143) $15 $(211)
Real estate construction.................. (19) (6) 1 (24)
Real estate mortgage...................... 24 198 (1) 221
Consumer and other........................ 6 (23) ( 2) (19)
---- ---- ---- ----
Total loans receivable.................... (72) 26 13 (33)
Investments - taxable........................ (91) (4) 1 (94)
Investments - tax free(1).................... 2 (2) (1) (1)
Federal funds sold........................... (34) (116) 19 (131)
---- ---- ---- ----
Total interest-earning assets................ (195) (96) 32 (259)
---- ---- ---- ----
INTEREST-BEARING LIABILITIES:
Deposits:
NOW accounts.............................. (4) (3) --- (7)
Money market.............................. (4) (4) --- (8)
Savings................................... (2) (3) --- (5)
Time deposits under $100,000.............. (32) (39) (3) (74)
Time deposits $100,000 and over........... (4) (81) 2 (83)
---- ---- ---- ----
Total interest-bearing liabilities........... (46) (130) ( 1) (177)
---- ---- ---- ----
NET CHANGE IN NET INTEREST INCOME ........... $(149) $ 34 $33 $(82)
===== ===== ===== =====
</TABLE>
- - --------------------------------
(1) Yields on tax-free investments are computed on a tax equivalent basis
using a 37.3% effective income tax rate.
-21-
<PAGE> 22
The Company's net interest income was $1.3 million for the three months
ended June 30, 1996 compared with $1.4 million for the three months ended June
30, 1995, or a decrease of $81,000 or 5.68%. This decline in net interest
income resulted primarily from interest rate changes, which reduced net
interest income by $149,000, partially offset with an increase in the excess of
average interest-earning assets over interest-bearing liabilities, which
increased net interest income by $34,000. The 1.36% volume increase during the
three months ended June 30, 1996 from the three months ended June 30, 1995 in
loan interest income was primarily attributable to the 1.54% increase in
average loans outstanding, and the 19.03% volume decrease in the total of
interest income for investment securities and federal funds sold was primarily
attributable to the 19.20% decrease in average investment securities and
federal funds sold. For a discussion of the purchase of loans from
FSB/Osceola, see "--Recent Developments" and "Sale of FSB/Osceola." The yield
on the total of investments and federal funds sold decreased 124 basis points,
primarily reflecting the 137 basis point decrease in the yield on the taxable
investment securities and the 108 basis point decrease in federal funds
interest rates during the three months ended June 30, 1996 from the three
months ended June 30, 1995. As noted in the above discussion on prepayment
speeds of mortgage-backed securities, during the three months ended June 30,
1996, net premium amortization on investment securities was $87,000. The
12.05% volume decrease during the three months ended June 30, 1996 from the
three months ended June 30, 1995 in interest expense was primarily attributable
to the 10.73% decrease in average interest-bearing liabilities. The interest
rates paid on interest-bearing liabilities decreased 28 basis points as First
Commerce/Polk County reduced the interest rates it offers on time deposits
after the FSB/CBC Merger. The overall result was an increase in the net
interest margin to 5.26% during the three months ended June 30, 1996 from 5.21%
during the three months ended June 30, 1995.
Provision for Credit Losses
The provision for credit losses is charged to earnings to bring the
allowance for credit losses to a level deemed appropriate by management and is
based upon historical experience, the volume and type of lending conducted by
the Company, the amounts of non-performing loans, collateral, general economic
conditions, particularly as they relate to the Company's market area, and other
factors related to the collectibility of the Company's loan portfolio. During
the six and three months ended June 30, 1996, the provision for credit losses
was $456,000 and $364,000, respectively, as compared to $150,000 and $83,000
during the six and three months ended June 30, 1995, or respective increases of
$306,000 or 203.85%and $281,000 or 340.83%. These increased provisions for
credit losses were primarily in recognition of an increase in non-performing
loans to $3.0 million as of June 30, 1996 from $1.8 million as of December 31,
1995. As of June 30, 1996 and December 31, 1995, the allowance for credit
losses was 2.45% and 1.67%, respectively, of total loans receivable, and was
57.98% and 66.17%, respectively, of non-performing loans. The decrease in the
ratio of the allowance for credit losses to non-performing loans from December
31, 1995 to June 30, 1996 resulted from the $1.2 million increase in
non-performing loans while the allowance for credit losses increased $538,000.
For a discussion of the non-performing loans as of June 30, 1996, see
"--Financial Condition--Classification of Assets." For a discussion of the
allocation of the allowance for credit losses and net loan recoveries, see
"--Financial Condition -- Allowance for Credit Losses."
Non-Interest Income
Non-interest income is primarily composed of gains on sales of assets and
service charges and fees. During the six and three months ended June 30, 1996,
non-interest income was $466,000 and $227,000, respectively, as compared to
$943,000 and $678,000 during the six and three months ended June 30, 1995, or
respective decreases of $477,000 or 50.62% and $451,000 or 66.55%.
The following two items were included in the 1995 non-interest income
amounts presented in the prior paragraph. On May 1, 1995, FCB sold its stock
ownership in FSB/Osceola and recognized a gain on sale of $564,000. The
Company incurred a loss on sale of investments of $110,000 during the three
months ended June 30, 1995 which resulted primarily from securities sold by
FSB/Osceola.
During the six and three months ended June 30, 1996, service charges and
fees were $407,000 and $199,000, respectively, as compared to $472,000 and
$221,000 during the six and three months ended June 30, 1995, or respective
decreases of $65,000 or 13.88% and $22,000 or 10.09%. These decreases were
primarily attributable to
-22-
<PAGE> 23
the May 1, 1995 sale of FSB/Osceola (which contributed $60,000 and $7,000 of
service charges and fees to consolidated non-interest income during the six and
three months ended June 30, 1995, respectively).
Non-Interest Expenses
During the six and three months ended June 30, 1996, non-interest expenses
were $2.6 million and $1.4 million, respectively, as compared to $2.5 million
and $1.2 million during the six and three months ended June 30, 1995, or
respective increases of $135,000 or 5.43% and $248,000 or 20.85%. The
following sets forth additional information on certain other expense categories
which had significant changes.
Compensation and benefits increased $162,000 or 14.71% to $1.3 million
during the six months ended June 30, 1996, from $1.1 million during the six
months ended June 30, 1995, and increased $156,000 or 29.79% to $679,000 during
the three months ended June 30, 1996 from $523,000 during the three months
ended June 30, 1995. This increase was primarily due to an increase in the
number of employees at First Commerce/Polk County and annual compensation and
benefit increases for existing employees, offset by the decrease due to the May
1, 1995 sale of FSB/Osceola (which had compensation and benefits expense of
$126,000 and $31,000 during the six and three months ended June 30, 1995,
respectively). Excluding FSB/Osceola, the Company's compensation and benefits
increased $288,000 or 29.46% to $1.3 million during the six months ended June
30, 1996, from $977,000 during the six months ended June 30, 1995, and
increased $187,000 or 38.03% to $679,000 during the three months ended June 30,
1996, from $492,000 during the three months ended June 30, 1995. These
increases were due to approximately $201,000 and $125,000 of additional
compensation and benefits for existing employees during the six and three
months ended June 30, 1996, respectively, and $87,000 and $62,000 for new
employees during the six and three months ended June 30, 1996, respectively.
Professional fees increased $65,000 or 35.14% to $248,000 during the six
months ended June 30, 1996, from $183,000 during the six months ended June 30,
1995, and increased $99,000 or 112.99% to $188,000 during the three months
ended June 30, 1996, from $89,000 during the three months ended June 30, 1995.
The $65,000 increase during the six months ended June 30, 1996 resulted
primarily from a $48,000 increase in accounting costs, a $46,000 increase in
legal expenses and a $12,000 increase in consulting expenses, partially offset
with a $41,000 decrease in merger costs related to the FSB/CBC Merger, First
Mercantile Merger and Prime Bank Merger. The $99,000 increase during the three
months ended June 30, 1996 resulted primarily from a $56,000 increase in
accounting costs, a $42,000 increase in legal expenses and a $9,000 increase in
consulting expenses, partially offset with a $8,000 decrease in merger costs
related to the FSB/CBC Merger, First Mercantile Merger and Prime Bank Merger.
Data processing expense increased $22,000 or 15.49% to $165,000 during the
six months ended June 30, 1996, from $143,000 during the six months ended June
30, 1995, and increased $36,000 or 51.05% to $106,000 during the three months
ended June 30, 1996, from $70,000 during the three months ended June 30, 1995.
These increases were primarily attributable to the increased charges from the
data processing service bureau.
Stationery and supplies expense increased $35,000 or 69.68% to $86,000
during the six months ended June 30, 1996, from $51,000 during the six months
ended June 30, 1995, and increased $20,000 or 66.64% to $48,000 during the
three months ended June 30, 1996, from $28,000 during the three months ended
June 30, 1995. These increases resulted primarily from the increase in
stationery purchases. Anticipating the FSB/CBC Merger, during the six months
ended June 30, 1995, FSB and CBC reduced stationery purchases in an endeavor to
use up existing supplies before the FSB/CBC Merger.
FDIC insurance expense was $18,000 and $9,000 during the six and three
months ended June 30, 1996, respectively, as compared to $117,000 and $56,000
during the six and three months ended June 30, 1995, or respective decreases of
$99,000 or 84.65% and $47,000 or 83.80%. These decreases resulted primarily
from the FDIC's reduction in insurance premiums and the inclusion in the six
and three months ended June 30, 1995 of $12,000 and $3,000, respectively, of
FSB/Osceola's FDIC insurance premiums while none was included in the same
periods during 1996. The FDIC insurance premiums during 1996 resulted
primarily from FDIC insurance on First Commerce/Polk County's Oakar deposits.
-23-
<PAGE> 24
Other expenses were $280,000 and $117,000 during the six and three months
ended June 30, 1996, respectively, as compared to $342,000 and $170,000 during
the six and three months ended June 30, 1995, or respective decreases of
$62,000 or 18.03% and $53,000 or 31.46%. These decreases were primarily
attributable to the May 1, 1995 sale of FSB/Osceola (which contributed $42,000
and $14,000 of other expenses to consolidated other expenses during the six and
three months ended June 30, 1995, respectively). Excluding FSB/Osceola, First
Commerce/Polk County's other expenses were $280,000 and $117,000 during the six
and three months ended June 30, 1996, respectively, as compared to $300,000 and
$156,000 during the six and three months ended June 30, 1995, or respective
decreases of $20,000 or 6.70% and $39,000 or 25.26%. These decreases resulted
primarily from decreased intangible tax expense and blanket bond insurance
expense.
Taxes on Income
During the six and three months ended June 30, 1996, the Company recorded
taxes (tax benefit) on income of $30,000 and $(76,000), respectively,
reflecting effective income tax rates of 27.92% and 33.10%, as compared to
$513,000 and $314,000 during the six and three months ended June 30, 1995,
respectively, reflecting effective income tax rates of 39.93% and 37.84%.
These decreases in the effective income tax rates were primarily due to: (i)
the decrease in merger costs which are not tax deductible; (ii) the increase in
the credit against Florida income taxes for prior year's Florida intangible
taxes; and (iii) the increase in income on the cash surrender value of
officers' life insurance which is tax free. In addition, the effective income
tax rate was reduced by the benefit of tax-free interest income on certain
investment securities. During the six and three months ended June 30, 1996,
the effective income tax rate was below statutory tax rates primarily due to
the credit against Florida income taxes for prior year's Florida intangible
taxes, the tax-free income on the cash surrender value of officers' life
insurance and the tax-free interest income on certain investment securities.
During the six and three months ended June 30, 1995, the effective income tax
rate was above statutory tax rates primarily due to the merger costs.
SALE OF FSB/OSCEOLA
On May 1, 1995, FCB sold its 80% ownership interest in FSB/Osceola to
certain unaffiliated individuals for $1.8 million in cash As of April 30,
1995, FSB/Osceola had total assets of $16.4 million, total liabilities of $14.8
million, and stockholders' equity of $1.6 million and were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
ASSETS
<S> <C>
Cash and federal funds sold...................... $ 6,600
Investment security.............................. 94
Loans receivable, net of allowance
for credit losses of $119..................... 8,712
Accrued interest receivable...................... 49
Other real estate owned.......................... 86
Property and equipment, net...................... 806
Other assets..................................... 99
-------
Total assets..................................... $16,446
=======
LIABILITIES
Deposits:
Demand deposits............................... $ 2,716
NOW accounts.................................. 1,115
Money market accounts......................... 1,268
Savings deposits.............................. 2,462
Time deposits................................. 6,847
-------
Total deposits................................ 14,408
Other liabilities................................ 437
STOCKHOLDERS' EQUITY (including minority interest) 1,601
-------
Total liabilities and stockholders' equity....... $16,446
=======
</TABLE>
-24-
<PAGE> 25
FCB and First Commerce/Polk County agreed to purchase the FSB/Osceola loan
portfolio for the remaining unpaid principal balance of the loans less any
related allowance for credit losses, during the 12-month period following the
sale of FSB/Osceola. Of the $8.7 million loan portfolio owned by FSB/Osceola
at April 30, 1995, $4.6 million was purchased during 1995 ($4.4 million by
First Commerce/Polk County and $269,000 by FCB) and $1.9 million was purchased
during January 1996 ($1.4 million by First Commerce/Polk County and $450,000 by
FCB). Due to applicable banking laws, First Commerce/Polk County could not
acquire any of the $719,000 of classified loans and assets of FSB/Osceola;
accordingly, FCB purchased these loans and assets. As of June 30, 1996 and
December 31, 1995, the Company's loans receivable included the following loans
purchased from FSB/Osceola:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Commercial................................... $ 274 $ 171
Real estate construction..................... 102 42
Commercial real estate....................... 771 1,092
Residential mortgage......................... 2,580 2,393
Consumer and other........................... 838 319
------ ------
Total loans receivable....................... 4,565 4,017
Less: Allowance for credit losses............ (144) (119)
---- ------
Loans receivable, net........................ $4,421 $3,898
====== ======
</TABLE>
ASSET/LIABILITY MANAGEMENT
A principal objective of the Company's asset/liability management strategy
is to minimize its exposure to changes in interest rates by matching the
maturity and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is overseen in part through the direction of First
Commerce/Polk County's Asset and Liability Committee (the "ALCO Committee")
which establishes policies and monitors results to control interest rate
sensitivity.
Management evaluates interest rate risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk which are determined by the
ALCO Committee. The ALCO Committee uses computer models prepared by a third
party to measure the First Commerce/Polk County's interest-rate sensitivity.
The data used in these computer models is obtained from the First Commerce/Polk
County's loan and deposit trial balances and detail of the investment
portfolio. This data includes totals of major loan, investment and deposit
categories segregated by fixed- and variable-interest rate products, by
weighted-average interest rate and by maturity. These computer models prepare
reports detailing expected future net interest income and the expected impact
on future net interest income given various interest-rate scenarios assuming
certain correlations between the weighted-average interest rates of each major
loan and deposit categories and assumed market interest rates, as well as
yields on the reinvestment of maturing loans and investments and the cost of
rolled over deposits. From these reports, the ALCO Committee reviews the
estimated net interest income effect of various interest-rate scenarios. As of
June 30, 1996, the computer model used three base interest-rate scenarios. The
first scenario assumed that interest rates remained constant, the second
scenario assumed that interest rates would increase based on a 200 basis point
increase in the prime interest rate for loans, and the third scenario assumed
that interest rates would decrease based on a 200 basis point decrease in the
prime interest rate for loans. The amount of increases and decreases in
interest rate changes in the second and third scenarios were assumed to be the
same. The yield on one year U. S. Treasury securities was assumed to change
214 basis points, the yield on federal funds sold was assumed to change 221
basis points, the cost of new time deposits was assumed to change 125 basis
points, and the cost of NOW, money market and savings accounts was assumed to
change 125 basis points. With these assumptions, First Commerce/Polk County's
net interest income under the second interest rate scenario as compared to the
first interest rate scenario was projected to increase by 10.78% for the year
ended June 30, 1997, and under the third interest rate scenario as compared to
the first interest rate scenario was projected to decrease 11.83% for the year
ended June 30, 1997.
As a part of the Company's interest-rate risk management policy, the ALCO
Committee examines the extent to
-25-
<PAGE> 26
which its assets and liabilities are "interest-rate sensitive" and monitors the
First Commerce/Polk County's interest- rate sensitivity "gap." An asset or
liability is considered to be interest-rate sensitive if it will reprice or
mature within the time period analyzed, usually one year or less. The
interest-rate sensitivity gap is the difference between interest-earning assets
and interest-bearing liabilities scheduled to mature or reprice within such
time period. A gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities. A
gap is considered negative when the amount of interest-rate sensitive
liabilities exceeds interest-rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to adversely affect net interest income. In addition, any
premiums on mortgage-backed securities are amortized to interest income based
on the estimated remaining life of the related securities. Management
periodically reviews the remaining estimated life of mortgage-backed
securities, and adjusts the amortization of the premiums accordingly, in light
of changes in market interest rates and other factors affecting prepayment
rates on the underlying mortgages. Acceleration of the amortization of
premiums on mortgage-backed securities reduces the effective yield on these
investments and, accordingly, adversely affects net interest income. As of
June 30, 1996 and December 31, 1995, the remaining unamortized premiums on
mortgage-backed securities totaled $441,000 and $571,000, respectively. See
"-- Financial Condition--Investment Securities."
The ALCO Committee's policy is to maintain a cumulative one-year gap which
falls in the range of (20%) to 20% of total assets. As of June 30, 1996 and
December 31, 1995, the Company's cumulative one-year gap was a positive 10.91%
and 10.47%, respectively, of total assets, Management attempts to conform to
this policy by managing the maturity distribution of its investment portfolio
and emphasizing originations and purchase of adjustable-interest rate loans,
and by managing the product mix and maturity of its deposit accounts.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or period
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition,
certain assets, such as adjustable-interest rate mortgage loans, have features
(generally referred to as "interest rate caps") which limit changes in interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, prepayments (on loans and mortgage-backed securities)
and early withdrawal (of deposit accounts) levels also could deviate
significantly from those assumed in calculating the interest rate gap. The
ability of many borrowers to service their debts also may decrease in the event
of an interest rate increase.
Management's strategy is to maintain a relatively balanced interest-rate
risk position to protect its net interest margin from market fluctuations. To
this end, the ALCO Committee reviews, on a quarterly basis, the maturity and
repricing of assets and liabilities.
Management believes that the type and amount of First Commerce/Polk County's
interest rate sensitive liabilities may reduce the potential impact that a rise
in interest rates might have on First Commerce/Polk County's net interest
income. First Commerce/Polk County seeks to maintain a core deposit base by
providing quality services to its customers without significantly increasing
its cost of funds or operating expenses. First Commerce/Polk County's
non-interest bearing demand deposits, NOW accounts, money market, and savings
accounts were 46.34% and 43.69% of total deposits at June 30, 1996 and December
31, 1995, respectively. Management anticipates that these accounts will
continue to comprise a significant portion of First Commerce/Polk County's
total deposit base. First Commerce/Polk County also maintains a relatively
large portfolio of liquid assets in order to reduce its overall exposure to
changes in market interest rates. At June 30, 1996 and December 31, 1995,
First Commerce/Polk County's liquidity ratios were 34.60% and 31.35%,
respectively. The Company also maintains a "floor," or
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<PAGE> 27
minimum rate, on certain of its floating or prime based loans. These floors
allow the Company to continue to earn a higher rate when the floating rate
falls below the established floor rate.
FINANCIAL CONDITION
Lending Activities
A significant source of the Company's income is the interest earned on its
loan portfolio. At June 30, 1996, the Company's total assets were $108.6
million and its loans receivable, net were $68.9 million or 63.39% of total
assets. At December 31, 1995, FCB's total assets were $113.1 million and its
loans receivable, net were $70.3 million or 62.14% of total assets. The
decrease in total loans receivable to June 30, 1996 from December 31, 1995 was
$874,000 or 1.22%. For the six months ended June 30, 1996 and 1995, the net
change in total loans receivable was approximately as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Balance at beginning of period................. $71,684 $73,841
Loan originations.............................. 18,128 15,601
Loan repayments................................ (20,675) (14,801)
Sale of FSB/Osceola loans...................... --- (8,850)
Purchase of FSB/Osceola loans.................. 1,851 2,331
Loans charged-off.............................. (116) (34)
Transfers to other real estate owned........... (62) (48)
-------- -------
Balance at end of period....................... $70,810 $68,040
======= =======
</TABLE>
Although loan originations increased to $18.1 million during the six months
ended June 30, 1996 from $15.6 million during the six months ended June 30,
1995, loan originations during the six months ended December 31, 1995 were
$22.9 million. The decrease in loan originations during the six months ended
June 30, 1996 as compared to the last six months of 1995 was primarily due to
the emphasis placed by First Commerce/Polk County's management on completing
the proposed First Mercantile Merger and Prime Bank Merger and managing the
increase in non-performing assets rather than soliciting new loans. Loan
repayments increased to $20.7 million during the six months ended June 30, 1996
from $14.8 million during the six months ended June 30, 1995 and decreased
slightly from $21.2 million during the six months ended December 31, 1995.
This increase to the six months ended June 30, 1996 from the six months ended
June 30, 1995 was primarily due to an increase in customers paying-off their
loans or paying down their lines of credit. For additional information on the
FSB/Osceola loans, see "-- Sale of FSB/Osceola."
As of June 30, 1996 and December 31, 1995, the composition of the Company's
loan portfolio was as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial ............................. $14,454 20.41% $19,888 27.74%
Real estate construction................ 2,179 3.08 4,163 5.81
Commercial real estate ................. 31,890 45.04 24,633 34.36
Residential mortgage.................... 15,757 22.25 14,788 20.63
Consumer and other...................... 6,530 9.22 8,212 11.46
------- ------ ------- ------
Total loans receivable.................. 70,810 100.00% 71,684 100.00%
====== ======
Less:
Unearned income and fees................ (220) (224)
Allowance for credit losses............. (1,733) 2.45% (1,195) 1.67%
------- ====== ------- ======
Loans receivable, net................... $68,857 $70,265
======= =======
</TABLE>
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<PAGE> 28
Asset Quality
Management seeks to maintain quality assets through sound underwriting and
sound lending practices. The largest category of loans in the Company's loan
portfolio is collateralized by commercial real estate mortgages. As of June
30, 1996 and December 31, 1995, 45.04%, and 34.36%, respectively, of the total
loan portfolio were collateralized by this type of property. The level of
delinquent loans and other real estate owned also is relevant to the credit
quality of a loan portfolio. As of June 30, 1996, total non-performing assets
were $3.2 million or 2.90% of total assets, compared to $2.1 million or 1.86%
as of December 31, 1995.
Commercial loans typically are underwritten on the basis of the borrower's
ability to make repayment from the cash flow of his business and generally are
collateralized by business assets, such as accounts receivable, equipment and
inventory. Commercial loans generally are made in amounts up to 75% of the
lower of cost or value of the assets collateralizing the loan and are made
where the cash flow from the business exceeds 150% of the business' debt
service. As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself, which is subject to adverse conditions in the economy. Commercial
loans also entail certain additional risks since they usually involve large
loan balances to single borrowers or a related group of borrowers, resulting in
a more concentrated loan portfolio. Further, the collateral underlying the
loans may depreciate over time, cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
First Commerce/Polk County originates residential construction loans
primarily to borrower-owned or selected local builders with whom management is
familiar to build single-family dwellings in First Commerce/Polk County's
primary market areas on both a pre-sold and speculative basis. Advances are
generally made in amounts up to 80% of the lower of the contract amount or the
appraised value. Loans for the construction of borrower-owned, single-family
dwellings are usually originated in connection with the permanent loan on the
property and have construction terms of up to nine months
("construction-permanent loans"). The permanent loan could either be a
take-out commitment from another financial institution or permanent financing
with First Commerce/Polk County. Speculative loans to builders are primarily
originated with no committed end-buyer for the single-family residential
property being constructed. The term of this type of loan is generally one
year with interest-only payments due during such time, after which the loan
should be converted to an amortizing loan. First Commerce/Polk County does not
have a policy with respect to the number of speculative loans it will extend to
one builder. Instead, First Commerce/Polk County reviews the historical
relationship with such builder and present market conditions. Advances to
individuals and builders are made on a percentage of completion basis
consisting of as many as five draws. Prior to making a commitment to fund a
construction loan, an appraisal of the property by a state certified appraiser
must be obtained along with a feasibility study of the proposed project. A
loan officer specifically designated for such purpose or an outside
professional inspector also reviews and inspects each project at the
commencement of construction and prior to every disbursement of funds during
the term of the construction loan. Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number
of factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, First Commerce/Polk County may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value proves to be inaccurate,
First Commerce/Polk County may be confronted, at or prior to the maturity of
the loan, with a project having a value which is insufficient to assure full
repayment.
The commercial real estate mortgage loans in the Company's portfolio consist
of fixed- and adjustable-interest rate loans which were originated at
prevailing market interest rates. First Commerce/Polk County's policy has been
to originate commercial real estate mortgage loans predominantly in its primary
market area, except for those loans purchased from FSB/Osceola. Commercial
real estate mortgage loans are generally made in amounts up to 75% of the
appraised value of the property collateralizing the loan and entail significant
additional risks compared to residential mortgage loans. In making commercial
real estate loans, First Commerce/Polk County primarily considers the net
operating income generated by the real estate to support the debt service, the
financial resources and income
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<PAGE> 29
level and managerial expertise of the borrower, the marketability of the
collateral and First Commerce/Polk County's lending experience with the
borrower.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from his employment and other income and are
collateralized by real property whose value tends to be more readily
ascertainable. Residential mortgage loans are generally made in amounts up to
80% of the appraised value of the property collateralizing the loan.
Consumer loans generally are made on the basis of the borrower's ability to
make repayments from his employment and other income and are collateralized by
automobiles, trucks and recreational equipment/vehicles whose value tends to
depreciate over time. Consumer loans are generally made in amounts up to 80%
of the lower of the purchase price or the value of the asset collateralizing
the loan and for terms up to 60 months.
From time to time, First Commerce/Polk County will originate loans on an
unsecured basis. As of June 30, 1996 and December 31, 1995, unsecured loans
totaled $4.4 million and $5.3 million, respectively.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted
by economic or other conditions. First Commerce/Polk County, on a routine
basis, monitors these concentrations in order to consider adjustments in its
lending practices to reflect economic conditions, loan to deposit ratios, and
industry trends. As of June 30, 1996 and December 31, 1995, no concentration
of loans within any portfolio category to any group of borrowers engaged in
similar activities or in a similar business exceeded 10% of total loans, except
that as of such dates loans collateralized with mortgages on real estate
represented 70.37% and 60.80%, respectively, of the loan portfolio and were to
borrowers in varying activities and businesses.
Classification of Assets
Generally, interest on loans accrues and is credited to income based upon
the principal balance outstanding. It is management's policy to discontinue
the accrual of interest income and classify a loan on non-accrual status when
principal or interest is past due 90 days or more unless, in the determination
of management, the principal and interest on the loan are well collateralized
and in the process of collection, or when in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the obligation. Consumer installment loans are generally charged-off after 90
days of delinquency unless adequately collateralized and in the process of
collection. Loans are not returned to accrual status until principal and
interest payments are brought current and future payments appear reasonably
certain. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed in
lieu of foreclosure is classified as other real estate owned ("OREO"). OREO
properties are recorded at the lower of cost or fair value less estimated
selling costs, and the estimated loss, if any, is charged to the allowance for
credit losses at the time it is transferred to OREO. Further write-downs in
OREO are recorded at the time management believes additional deterioration in
value has occurred and are charged to non-interest expense.
-29-
<PAGE> 30
As of June 30, 1996 and December 31, 1995, loans on non-accrual status
and other real estate owned, the ratio of such loans and real estate owned to
total assets, and certain other related information was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
LOANS ON NON-ACCRUAL STATUS:
Commercial . . . . . . . . . . . . . . . . . . . . . $1,315 1.86% $ 416 .58%
Real estate construction . . . . . . . . . . . . . . -- . -- -- .--
Commercial real estate . . . . . . . . . . . . . . . 1,320 1.86 832 1.16
Residential mortgage . . . . . . . . . . . . . . . . 276 .39 302 .42
Consumer and other . . . . . . . . . . . . . . . . . 22 .03 57 .08
------ ---- ------ ----
Total loans on non-accrual status . . . . . . . . . . 2,933 4.14 1,607 2.24
ACCRUING LOANS OVER 90 DAYS DELINQUENT:
Residential mortgage . . . . . . . . . . . . . . . . 56 .08 199 .28
TROUBLED DEBT RESTRUCTURINGS . . . . . . . . . . . . --- .-- --- .--
------ ---- ------ ----
Total non-performing loans . . . . . . . . . . . . . $2,989 4.22% $1,806 2.52%
====== ==== ====== ====
REPOSSESSED ASSETS:
Other real estate owned . . . . . . . . . . . . . . . $ 154 $ 301
Other repossessions . . . . . . . . . . . . . . . . . 7 ---
------ ------
Total repossessed assets . . . . . . . . . . . . . . $ 161 $ 301
====== ======
Total non-performing assets . . . . . . . . . . . . . $3,150 $2,107
====== ======
LOANS PAST-DUE:
30 to 59 days delinquent . . . . . . . . . . . . . . $ 657 .93% $1,352 1.89%
60 to 89 days delinquent . . . . . . . . . . . . . . 33 .05 286 .40
------ ---- ------ ----
Total loans past-due 30 to 89 days . . . . . . . . . $ 690 .98% $1,638 2.29%
====== ==== ====== ====
TOTAL NON-PERFORMING LOANS AND LOANS
PAST-DUE 30 TO 89 DAYS . . . . . . . . . . . . . . . $3,679 5.20% $3,444 4.81%
====== ==== ====== ====
AS A PERCENTAGE OF TOTAL ASSETS:
Total non-performing loans . . . . . . . . . . . . . 2.75% 1.60%
====== ======
Total non-performing assets . . . . . . . . . . . . . 2.90% 1.86%
====== ======
ALLOWANCE FOR CREDIT LOSSES AS A PERCENTAGE OF:
Total loans . . . . . . . . . . . . . . . . . . . . . 2.45% 1.67%
====== ======
Non-performing loans . . . . . . . . . . . . . . . . 57.98% 66.17%
====== ======
</TABLE>
As of June 30, 1996, loans on non-accrual status totaled $2.9 million
(of which $1.9 million or 65.44% were originated by CBC) and consisted
primarily of four customer relationships totaling $2.7 million or 91.20% of
total non-accruing loans. The first customer relationship consisted of three
loans totaling $915,000. The first loan was a $729,000 commercial real estate
mortgage collateralized with a first mortgage on a 35 acre recreational vehicle
park and fish camp. In September 1993, the land only was appraised at $775,000
and the project "as if" developed was
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<PAGE> 31
appraised at $2.0 million. As of June 30, 1996, this loan was current;
however, the Company maintained it on non-accrual status because the project
appears to have experienced cash flow difficulties. The other two loans
totaled $186,000 and were to the principal owner of the project. These two
loans were comprised of first and second mortgage loans collateralized with
approximately 20 acres of land with citrus groves valued at approximately
$100,000. An appraisal has been ordered. On May 3, 1996, the principal owner
filed for bankruptcy protection. As of June 30, 1996, these two loans were 30
to 59 days delinquent. The Company has begun legal proceedings against the
principal owner.
The second customer relationship consisted of four loans which totaled
$812,000 and which were to four siblings. Each loan was in the amount of
$203,000. The siblings used the loans' proceeds for a capital contribution to
a company of which they owned 66.67% and pledged their stock in the company as
collateral for the loans. On June 24, 1996, the company filed for bankruptcy
protection. Although each loan was current as of June 30, 1996, First
Commerce/Polk County placed the loans on non-accrual status and established a
reserve for loan losses of $406,000 for this customer relationship.
The third customer relationship consisted of four loans totaling
$555,000. Two of the four loans totaled $436,000 and were collateralized with
first and second mortgage loans on property comprised of an office, warehouse
and petroleum bulk plant. The real estate collateralizing these two loans was
appraised at $1.0 million in March 1988. The other two loans totaled $119,000
and were collateralized with first and second mortgage loans on residential
land appraised at $505,000 in January 1992. As of June 30, 1996, three of
these loans totaling $462,000 were over 90 days delinquent and the fourth loan
totaling $93,000 was under 30 days delinquent. The borrower has represented to
First Commerce/Polk County that he is marketing the collateral for sale. First
Commerce/Polk County has begun legal proceedings against the borrower,
including possible foreclosure of the collateral.
The fourth customer relationship consisted of a $376,000 commercial
loan collateralized with an assignment of the proceeds of certain fruit sales
from two citrus growers' associations. During 1995, these two citrus growers'
associations acknowledged the assignment and agreed to disburse the proceeds of
the citrus sales jointly to the borrower and First Commerce/Polk County.
However, these two citrus growers' associations disbursed the funds directly to
the borrower. The borrower did not make the payments called for under the
terms of the loan and declared bankruptcy during the third quarter of 1995. As
of June 30, 1996, this loan was over 90 days delinquent and First Commerce/Polk
County had begun legal proceedings against the borrower and the two citrus
growers' associations.
As of June 30, 1996, accruing loans over 90 days delinquent consisted
of a $56,000 first mortgage residential loan. During July 1996, the borrower
brought the loan current. This loan was originated by CBC.
As of June 30, 1996, loans 30 to 89 days delinquent totaled $690,000
(of which $524,000 or 75.92% were originated by CBC) and consisted primarily of
two customer relationships totaling $461,000 or 66.83% of total loans 30 to 89
days delinquent. The remaining $229,000 of loans 30 to 89 days delinquent
consisted of ten loans none of which were over $100,000.
The first customer relationship consisted of a $345,000 second
mortgage loan collateralized with commercial real estate appraised at $1.5
million in August 1993. The first mortgage loan with another financial
institution was in the amount of $1.16 million. During July 1996, this loan
was brought current. The second customer relationship consisted of a $116,000
first mortgage loan collateralized with residential property appraised at
$240,000 in January 1992. First Commerce/Polk County has begun legal
proceedings against the borrower, including possible foreclosure of the
collateral.
As a result of the increase in the Company's classified loans,
management during the fourth quarter of 1995 completed a special review of the
Company's loan portfolio and instituted a number of steps intended to improve
the identification, evaluation, and resolution of the Company's problem assets.
As a result of these actions, the senior management and loan staff of First
Commerce/Polk County meet weekly to review all past due and non-performing
loans and to discuss collection activities. The Board of Directors of First
Commerce/Polk County also reviews problem assets on a monthly basis. In
addition, First Commerce/Polk County hired a loan workout officer and has
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<PAGE> 32
retained an independent firm to conduct periodic loan reviews and make
recommendations for improvement. Management has also instituted steps to
improve underwriting practices. These actions include establishing a bank
credit department separate from the loan origination function and changing loan
origination authorities. Although management believes that the foregoing steps
should contribute to an improvement in the Company's asset quality over the
longer term, no estimate can be made at present as to future levels of problem
assets or as to the impact of those assets and related expenses on the
financial condition and results of operations of the Company.
Allowance for Credit Losses
In originating loans, the Company recognizes that credit losses will
be experienced and that the risk of loss will vary with, among other things,
the type of loan being made, the credit worthiness of the borrower over the
term of the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. As a matter of
policy, the Company maintains an allowance for credit losses. The amount
provided for credit losses during any period is based on an evaluation by
management of the amount needed to maintain the allowance at a level sufficient
to cover anticipated losses and the inherent risk of losses in the loan
portfolio. In determining the amount of the allowance, management considers
the dollar amount of loans outstanding, its assessment of known or potential
problem loans, current economic conditions, the risk characteristics of the
various classifications of loans, credit record of its borrowers, the fair
market value of underlying collateral and other factors. Specific allowances
are provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans which
are contractually past due and considering the fair value of the underlying
collateral for each loan. See "-- Results of Operations -- Provision for
Credit Losses."
Management continues to actively monitor the Company's asset quality
and to charge-off loans against the allowance for credit losses when
appropriate or to provide specific loss allowances when necessary. Although
management believes that it uses the best information available at the time to
make determinations with respect to allowance for credit losses, subsequent
adjustments to the allowance for credit losses may be necessary if future
economic conditions or other facts differ from the assumptions used in making
the initial determinations or if regulatory policies change.
As of June 30, 1996 and December 31, 1995, the allocation of the
allowance for credit losses was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
% OF % OF
LOANS TO LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial . . . . . . . . . . . . . . . . . . . . $ 792 20.41% $ 348 27.74%
Real estate construction . . . . . . . . . . . . . 22 3.08 42 5.81
Commercial real estate . . . . . . . . . . . . . . 632 45.04 465 34.36
Residential mortgage . . . . . . . . . . . . . . . 183 22.25 213 20.63
Consumer and other . . . . . . . . . . . . . . . . 104 9.22 127 11.46
------ ------ ------ ------
Total allowance for credit losses . . . . . . . . . $1,733 100.00% $1,195 100.00%
====== ====== ====== ======
</TABLE>
During the six and three months ended June 30, 1996, the provision for
credit losses was $456,000 and $364,000, respectively, as compared to $150,000
and $83,000 during the six and three months ended June 30, 1995, or respective
increases of $306,000 or 203.85% and $281,000 or 340.83%. These increased
provisions for credit losses was primarily in recognition of an increase in
non-performing loans to $3.0 million as of June 30, 1996 from $1.8 million as
of December 31, 1995. See "--Financial Condition--Classification of Assets,"
and "--Results of Operations- -Provision for Credit Losses."
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<PAGE> 33
During the six months ended June 30, 1996 and 1995, the activity in
the Company's allowance for credit losses was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period . . . . . . . . . . . $ 1,195 $ 830
Loans charged-off:
Commercial . . . . . . . . . . . . . . . . . . . . . 74 15
Real estate construction . . . . . . . . . . . . . . --- ---
Commercial real estate . . . . . . . . . . . . . . . --- ---
Residential mortgage . . . . . . . . . . . . . . . . --- 18
Consumer and other . . . . . . . . . . . . . . . . . 42 1
------- -------
Total loans charged-off . . . . . . . . . . . . . . . 116 34
------- -------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . . . . . 169 37
Real estate construction . . . . . . . . . . . . . . --- ---
Commercial real estate . . . . . . . . . . . . . . . 1 1
Residential mortgage . . . . . . . . . . . . . . . . --- ---
Consumer and other . . . . . . . . . . . . . . . . . 3 2
------- -------
173 40
------- -------
Net loans charged-off (recovered) . . . . . . . . . . . (57) (6)
------- -------
FSB/Osceola allowance sold . . . . . . . . . . . . . . --- (119)
------- -------
Allowance related to loans
purchased from FSB/Osceola . . . . . . . . . . . . . 25 35
------- -------
Provision for credit losses . . . . . . . . . . . . . . 456 150
------- -------
Allowance at end of period . . . . . . . . . . . . . . $ 1,733 $ 902
======= =======
Net charge-offs (recoveries) as a
percentage of average loans outstanding . . . . . . . (.16)% (.01)%
======= =======
Allowance for credit losses as a percentage
of period-end total loans receivable . . . . . . . . 2.45% 1.33%
======= =======
Allowance for credit losses as a percentage
of non-performing loans . . . . . . . . . . . . . . . 57.98% 156.33%
======= =======
Average loans outstanding . . . . . . . . . . . . . . . $70,869 $72,246
======= =======
Period-end total loans receivable . . . . . . . . . . . $70,810 $68,040
======= =======
</TABLE>
Investment Securities
The total investment portfolio decreased $2.5 million or 7.47% to
$31.2 million as of June 30, 1996, from $33.7 million as of December 31, 1995.
This decrease, along with loan repayments, was primarily used to fund the $4.4
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<PAGE> 34
million decrease in deposits. See "--Deposit Activities." During the six
months ended June 30, 1996 and 1995, the Company did not engage in derivative
activities.
As of June 30, 1996 and December 31, 1995, the carrying balances of
the Company's investment portfolio was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . $ 2,013 $ 2,000
U.S. Government agency obligations . . . . . . . . . . . . . . 4,428 1,001
FHLMC mortgage-backed securities . . . . . . . . . . . . . . . 15,971 19,430
FNMA mortgage-backed securities . . . . . . . . . . . . . . . . 918 1,177
Collateralized mortgage obligations:
FHLMC obligations . . . . . . . . . . . . . . . . . . . . . --- 24
FNMA obligations . . . . . . . . . . . . . . . . . . . . . . 926 952
------- -------
Total investment securities available-for-sale . . . . . . . . $24,256 $24,584
======= =======
INVESTMENT SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . $ --- $ 2,000
U.S. Government agency obligations . . . . . . . . . . . . . . 500 500
State, county and municipal securities . . . . . . . . . . . . 1,053 1,059
------- -------
Total investment securities held-to-maturity . . . . . . . . . $ 1,553 $ 3,559
======= =======
Total investment securities . . . . . . . . . . . . . . . . . . $25,809 $28,143
======= =======
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . $ 5,378 $ 5,562
------- -------
Total investment portfolio . . . . . . . . . . . . . . . . . . $31,187 $33,705
======= =======
</TABLE>
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115"), the Company classifies its investment securities, including mortgage-
backed securities, as either held-to-maturity, available-for-sale, or trading
securities. Securities classified as held-to-maturity are carried at
amortized cost. Securities classified as available-for-sale are reported at
fair value, with unrealized gains and losses, net of tax effect, reported as a
separate component of stockholders' equity. Securities classified as trading
securities are recorded at fair value, with unrealized gains and losses
included in earnings. As of June 30, 1996 and December 31, 1995, all
mortgage-backed securities were classified as available-for-sale. As a result
of the adoption of FAS 115, under which the Company expects to continue to hold
certain of its mortgage-backed securities classified as available-for-sale,
changes in the underlying market values of such securities could have a
material adverse effect on the Company's capital position. Typically, an
increase in interest rates results in a decrease in underlying market value and
an increase in the level of principal repayments on mortgage-backed securities.
As a result of a general increase in interest rates during the six months ended
June 30, 1996, decreases in the market value of investment securities
available-for-sale, including mortgage-backed securities, resulted in a
decrease in stockholders' equity of $138,000 (net of tax) to June 30, 1996 from
December 31, 1995. Such decrease represented the impact of changes in interest
rates on the value and maturity of these investments.
-34-
<PAGE> 35
As of June 30, 1996 and December 31, 1995, the maturity distribution
and certain other information pertaining to investment securities were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ -------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE YIELD COST VALUE YIELD
----------- -------- ------- ------------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities:
Due within one year . . . . . . . . . . . . . . $ 2,015 $ 2,013 5.66% $ 2,000 $ 2,000 4.56%
------- ------- ---- ------- ------- ----
U.S. Government agency obligations:
Due within one year . . . . . . . . . . . . . . 1,999 1,995 5.61 --- --- .--
Due one to five years . . . . . . . . . . . . . 2,489 2,433 6.00 997 1,001 5.38
------- ------- ---- ------- ------- ----
Total U.S. Government agency
obligations . . . . . . . . . . . . . . . . . 4,488 4,428 5.82 997 1,001 5.38
------- ------- ---- ------- ------- ----
FHLMC mortgage-backed securities:(1)
Due within one year . . . . . . . . . . . . . . --- --- .-- 525 530 7.82
Due one to five years . . . . . . . . . . . . . 835 810 6.28 881 883 6.16
Due five to ten years . . . . . . . . . . . . . 930 904 6.10 994 992 6.34
Due over ten years(3) . . . . . . . . . . . . . 14,280 14,257 5.22 16,970 17,025 6.30
------- ------- ---- ------- ------- ----
Total FHLMC mortgage-
backed securities . . . . . . . . . . . . . 16,045 15,971 5.32 19,370 19,430 6.34
------- ------- ---- ------- ------- ----
FNMA mortgage-backed securities:(1)
Due within one year . . . . . . . . . . . . . . 76 78 8.48 97 100 8.47
Due one to five years . . . . . . . . . . . . . 49 50 8.47 61 63 8.50
Due over ten years . . . . . . . . . . . . . . . 784 790 1.39 1,014 1,014 6.15
------- ------- ---- ------- ------- ----
Total FNMA mortgage-
backed securities . . . . . . . . . . . . . 909 918 2.37 1,172 1,177 6.46
------- ------- ---- ------- ------- ----
Collateralized mortgage obligations:
FHLMC mortgage-backed securities:
Due within one years(1) . . . . . . . . . . --- --- .-- 24 24 8.00
------- ------- ---- ------- ------- ----
FNMA mortgage-backed securities:
Due over ten years(1) . . . . . . . . . . . 1,000 926 5.86 1,000 952 6.37
------- ------- ---- ------- ------- ----
Total investment securities
available-for-sale . . . . . . . . . . . . . . . $24,457 $24,256 5.36% $24,563 $24,584 6.16%
======= ======= ==== ======= ======= ====
INVESTMENT SECURITIES HELD-TO-MATURITY:
U.S. Treasury securities:
Due within one year . . . . . . . . . . . . . . $ --- $ --- .--% $ 2,000 $ 1,993 4.30%
------- ------- ---- ------- ------- ----
U.S. Government agency obligations:
Due one to five years . . . . . . . . . . . . . 500 492 5.52 500 499 5.52
------- ------- ---- ------- ------- ----
State, county and municipal obligations:(2)
Due five to ten years . . . . . . . . . . . . . 300 293 4.62 300 300 4.62
Due over ten years . . . . . . . . . . . . . . . 753 736 8.82 759 768 8.83
------- ------- ---- ------- ------- ----
Total . . . . . . . . . . . . . . . . . . . . . 1,053 1,029 7.63 1,059 1,068 7.64
------- ------- ---- ------- ------- ----
Total investment securities
held-to-maturity . . . . . . . . . . . . . . . . $ 1,553 $ 1,521 6.95% $ 3,559 $ 3,560 5.46%
======= ======= ==== ======= ======= ====
</TABLE>
- - -------------------------
(1) The mortgage-backed securities and collateralized mortgage obligations
were purchased with an expected average life of approximately three
years.
(2) Yields on state, county and municipal obligations are not computed on
a tax equivalent basis.
(3) These mortgage-backed securities are collateralized with
adjustable-rate mortgages ("ARMs").
-35-
<PAGE> 36
In conjunction with the sale of FSB/Osceola in 1995, FSB/Osceola sold
an investment security that was previously classified as held to maturity. The
investment security had an amortized cost of $151,000 and generated a loss of
$4,000.
Premiums on mortgage-backed securities are amortized to interest
income based on the estimated remaining life of the related securities.
Management periodically reviews the remaining estimated life of mortgage-backed
securities, and adjusts the amortization of the premiums accordingly, in light
of changes in market interest rates and other factors affecting prepayment
rates on the underlying mortgages. Acceleration of the amortization of
premiums on mortgage-backed securities reduces the effective yield on these
investments and, accordingly, adversely affects net interest income. As of
June 30, 1996 and December 31, 1995, the remaining unamortized premiums on
mortgage-backed securities totaled $441,000 and $571,000, respectively.
The Company invests in mortgage-backed securities that are guaranteed
as to principal and interest by the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), or the Federal
National Mortgage Association ("FNMA"). Although mortgage-backed securities
generally have a lower yield than loans, mortgage-backed securities increase
the quality of the Company's assets by virtue of the guarantees that back them,
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Company. Due to repayment and
prepayments of the underlying loans, the actual maturities of mortgage-backed
securities are substantially less than the scheduled maturities. The Company's
portfolio of mortgage-backed securities was purchased with an anticipated
average life of approximately three years. Changes in interest and prepayment
rates may also affect the average life, yield to maturity, and related market
value of the Company's mortgage-backed securities. Changes in the market
values of the Company's mortgage-backed securities may result in volatility in
capital based on how the Company classifies the securities.
Deposit Activities
Deposits are the major source of First Commerce/Polk County's funds
for lending and other investment purposes. Deposits are attracted principally
from within First Commerce/Polk County's primary market area through the
offering of a broad variety of deposit instruments including checking accounts,
money market accounts, regular savings accounts, term certificate accounts
(including "jumbo" certificates in denominations of $100,000 or more) and
retirement savings plans. As of June 30, 1996 and December 31, 1995, the
distribution by type of the Company's deposit accounts was as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
% OF % OF
AMOUNT DEPOSIT AMOUNT DEPOSITS
------ ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits . . . . . . . . . . . . . . . . . . . . $17,168 17.61% $ 17,056 16.73%
NOW deposits . . . . . . . . . . . . . . . . . . . . . 13,536 13.88 15,045 14.76
Money market . . . . . . . . . . . . . . . . . . . . . 6,343 6.51 4,698 4.61
Savings accounts . . . . . . . . . . . . . . . . . . . 8,129 8.34 7,735 7.59
Time deposits under $100,000 . . . . . . . . . . . . . 46,096 47.28 48,864 47.93
Time deposits $100,000 and over . . . . . . . . . . . . 6,226 6.38 8,543 8.38
------- ------ -------- ------
Total deposits . . . . . . . . . . . . . . . . . . . . $97,498 100.00% $101,941 100.00%
======= ====== ======== ======
</TABLE>
Time deposits included individual retirement accounts ("IRAs")
totaling $6.3 million and $6.0 million as of June 30, 1996 and December 31,
1995, respectively, all of which are in the form of certificates of deposit.
The Company's deposits decreased $4.4 million or 4.36% to $97.5
million as of June 30, 1996, from $101.9 million as of December 31, 1995. This
decrease was primarily attributable to First Commerce/Polk County reducing the
interest rates it offers on time deposits, resulting in a decrease in time
deposits. First Commerce/Polk County has primarily used the proceeds from
maturing investment securities and loan repayments to fund these deposit
outflows.
-36-
<PAGE> 37
As of June 30, 1996 and December 31, 1995, time deposits of $100,000
and over mature as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Due in three months or less . . . . . . . . . . . . . . . . . . $ 860 $2,130
Due from three months to six months . . . . . . . . . . . . . . 1,217 1,564
Due from six months to one year . . . . . . . . . . . . . . . . 2,239 1,568
Due over one year . . . . . . . . . . . . . . . . . . . . . . . 1,910 3,281
------ ------
Total time deposits $100,000 and over . . . . . . . . . . . . . $6,226 $8,543
====== ======
</TABLE>
PART II. - OTHER INFORMATION
Item 4. Shareholder Vote
On April 15, 1996, the Annual Meeting of the Shareholders of FCB was held. The
shareholders voted on the election of directors and the approval of the 1995
Stock Option Plan (the "Plan"). The directors were elected with a vote of
950,984 shares for the directors and 609 shares against the directors. The
Plan was approved with a vote of 920,450 shares for the Plan, 16,877 shares
against the Plan and 14,266 shares abstaining from voting.
Item 6. Exhibits and Reports on Form 8-K
During the three months ended June 30, 1996, no reports on Form 8-K were filed
with the Securities and Exchange Commission.
Exhibits:
2.1 Termination Agreement, dated as of August 1, 1996, by and between
First Commerce Banks of Florida, Inc., First Mercantile National Bank
and Prime Bank of Central Florida.
27 Financial Data Schedule (for SEC use only).
-37-
<PAGE> 38
S I G N A T U R E S
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.
FIRST COMMERCE BANKS OF FLORIDA, INC.
Date: August 6, 1996 By: /s/ Robert W. Stickler, Jr.
-------------- -----------------------------------------
Robert W. Stickler, Jr.,
Vice Chairman and Chief Executive Officer
Date: August 6, 1996 By: /s/ J. Jeffrey Seale
-------------- ----------------------------------------
J. Jeffrey Seale, Vice President
and Controller
(Principal Accounting Officer)
Date: August 6, 1996 By: /s/ David Carleton Hall
-------------- -----------------------------------------
David Carleton Hall, Senior Vice
President and Chief Financial Officer
(Principal Financial Officer)
-38-
<PAGE> 39
First Commerce Banks of Florida, Inc.
Form 10-QSB
For the Quarterly Period Ended June 30, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- - ----------- ------------------------------------------------------------------- --------
<S> <C>
2.1 Termination Agreement, dated as of August 1, 1996, by and
between First Commerce Banks of Florida, Inc., First Mercantile
National Bank and Prime Bank of Central Florida.
27 Financial Data Schedule (for SEC use only).
</TABLE>
-39-
<PAGE> 1
First Commerce Banks of Florida, Inc.
Form 10-QSB
Exhibit 2.1
-40-
<PAGE> 2
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT ("Agreement"), is dated as of August 1,
1996, by and between First Commerce Banks of Florida, Inc., a Florida
corporation ("FCB"), First Mercantile National Bank, a national banking
association ("First Mercantile"), and Prime Bank of Central Florida, a Florida
banking corporation ("Prime Bank"). FCB, First Mercantile and Prime Bank are
referred to collectively herein as the "Parties."
W I T N E S S E T H:
WHEREAS, FCB and First Mercantile entered into a Plan of Merger and
Merger Agreement dated January 3, 1996, as amended by Amendment No. 1 thereto
dated April 24, 1996 (the "First Mercantile Merger Agreement") which
contemplated the merger of First Mercantile with and into a successor bank to
be organized as a wholly-owned subsidiary of FCB; and
WHEREAS, FCB and Prime Bank entered into a Plan of Merger and Merger
Agreement dated January 3, 1996, as amended by Amendment No. 1 thereto dated
April 24, 1996 (the "Prime Bank Merger Agreement") which contemplated the
merger of Prime Bank with and into a successor bank to be organized as a
wholly-owned subsidiary of FCB; and
WHEREAS, the First Mercantile Merger Agreement and the Prime Bank
Merger Agreement provide that each may be terminated by the mutual written
consent of the Parties thereto; and
WHEREAS, the Parties desire to terminate the First Mercantile Merger
Agreement and the Prime Bank Merger Agreement upon the terms and conditions set
forth herein and as of the date first above written (the "Termination Date").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Parties intending to be legally
bound agree as follows:
1. Termination of Merger Agreements. The Parties agree that the
First Mercantile Merger Agreement and the Prime Bank Merger Agreement shall be
terminated and of no further force or effect as of the Termination Date.
2. Defined Terms. Terms used in this Agreement which are defined
in the First Mercantile Merger Agreement and the Prime Bank Merger Agreement
shall have the meanings specified therein, unless specifically defined herein.
3. Expenses. Each of the Parties hereto shall bear and pay its
own expenses incurred in connection with the First Mercantile Merger Agreement
and the Prime Bank Merger Agreement, the transactions contemplated thereby, and
this Agreement; provided, however, that FCB shall pay one-half (1/2), First
Mercantile shall pay one-fourth (1/4) and Prime Bank shall pay one-fourth
(1/4) of the following incurred prior to the Termination Date: (i) all filing
fees relating to all applications and supplements thereto filed by FCB, First
Mercantile, and Prime Bank with federal and state banking authorities for prior
approval of the mergers contemplated by the First Mercantile Merger Agreement
and the Prime Bank Merger Agreement, and (ii) all fees and expenses of Smith,
Mackinnon, Greeley, Bowdoin & Edwards, P.A.
-41-
<PAGE> 3
4. Confidential Information. All Evaluation Material, as such
term is defined in the Agreement dated October 11, 1995 between FCB and First
Mercantile and the Agreement dated October 11, 1995 between FCB and Prime
Bank, shall remain subject to the terms and conditions of such Agreements;
provided, however, this shall not apply to any Evaluation Material obtained by
a Party (i) which, at the time of disclosure, is available publicly, (ii)
which, after disclosure, becomes available publicly through no fault of the
Party, or (iii) which such Party knew or to which such Party had access prior
to disclosure.
5. Mutual Release.
(a) Each of the Parties hereto does hereby remise, release,
and forever discharge the other Parties hereto (and their respective present
and former officers, directors, employees, agents, representatives, successors
and assigns), of and from any and all causes, causes of action, claims,
obligations, demands, attorneys' fees, costs, and suits, in law or in equity,
which such Party has or had, or claims to have or to have had, or which it may
in the future have or claim to have, by reason of or relating to the First
Mercantile Merger Agreement and the Prime Bank Merger Agreement, the
transactions contemplated thereby, and this Agreement.
(b) If at any time after the date of this Agreement any
person who is a releasor under Section 5(a), or anyone claiming by, through or
under such person, institutes a lawsuit of any kind or asserts a claim in any
lawsuit which is based in whole or in part on a claim or right which Section
5(a) purports to release and discharge on behalf of such person (referred to
hereinafter as "Releasor Claimant") as to any of the persons against whom such
lawsuit or claim is instituted or asserted, then and in that event (i) this
Agreement and specifically the releases set forth in Section 5(a) may be
asserted as a complete defense and bar, and shall constitute a complete defense
and bar to any such lawsuit or claim; (ii) any person who has given a release
in Section 5(a) shall be free to institute any litigation against any such
Releasor Claimant(s) which would otherwise have been barred by Section 5(a),
and (iii) all such Releasor Claimants shall be jointly and severally liable, if
they do not prevail (for whatever reason) on such released claim or right, for
all of the damage, loss, injury and expense caused by such lawsuit or claim in
such lawsuit to any releasee under Section 5(a) (and not just the releasee or
releasees against whom such lawsuit or claim is brought or asserted), including
without limitation all attorneys' fees and other legal expenses so caused.
(c) Each of the Parties expressly assumes the risk that
omissions, matters, acts, events, occurrences, causes, things or other facts
may have occurred in connection with the transactions which are the subject
matter of the First Mercantile Merger Agreement and the Prime Bank Merger
Agreement, the transactions contemplated thereby, and this Agreement and were
not suspected to exist by one or more of them and waives the terms and
provisions of any statute, rule or doctrine of common law which either narrowly
construes releases purporting by their terms to release claims in whole or in
part arising from, or relating to such omissions, matters, acts, events,
occurrences, causes, things or other facts, or which restricts or prohibits the
releasing of such claims.
6. Hall Agreement. On January 18, 1996, the Parties entered into
an agreement with respect to the employment of Mr. David C. Hall ("Hall") which
provided for the payment to Hall of certain salary, benefits, temporary living
and relocation expenses, and severance in his capacity as an employee of FCB
(the "Hall Agreement"). The Parties desire to amend the Hall Agreement to
provide for the following terms:
(a) The temporary living and relocation expenses of Hall
shall be paid as follows: (i) $6,557.14 by First Mercantile, (ii) $4,336.02
by Prime Bank, and (iii) the balance by FCB.
(b) The salary, benefits, business expense reimbursements,
workers' compensation coverage, and the employer's portion of all FICA and
other employment taxes incurred by FCB from February 20, 1996 to and including
July 15, 1996 (the aggregate of which amounts is $44,568.72) shall be paid as
follows: (i) $5,851.87 by First Mercantile, (ii) $3,061.87 by Prime Bank, and
(iii) $35,654.98 by FCB.
(c) The salary, benefits, business expense reimbursements,
workers' compensation coverage, and the employer's portion all FICA and other
employment taxes incurred by FCB from July 16, 1996 to and including August 31,
1996, shall be borne solely by FCB.
-42-
<PAGE> 4
(d) The salary, benefits, severance, business expense
reimbursements, workers' compensation coverage, and the employer's portion of
FICA and other employment taxes to be paid by FCB to Hall in accordance with
the terms of the Hall Agreement from September 1, 1996 to and including January
15, 1997 (the aggregate of which amounts shall not exceed $33,426.54) shall be
paid (i) 34.4% by First Mercantile, (ii) 18% by Prime Bank, and (iii) 47.6% by
FCB. FCB shall submit an invoice to First Mercantile and Prime Bank after the
end of each calendar month following the date of this Agreement for amounts
incurred by FCB pursuant to this Section 6(d), which invoice shall be paid by
First Mercantile and Prime Bank within 10 days after receipt.
Contemporaneously with signing this Agreement, First Mercantile has
delivered to FCB a check in the amount of $12,409.01 payable to FCB in full
payment of the amounts owed by First Mercantile to FCB pursuant to Sections
6(a) and (b) above, the receipt and sufficiency of which are hereby
acknowledged by FCB.
7. No Publicity. No Party shall issue any press release or
announcement relating to the subject matter of this Agreement without the prior
written approval of the other Parties; provided, however, that any Party may
make any (i) public disclosure it believes in good faith is required by law or
regulation (including, but not limited to, any disclosure to its shareholders),
and (ii) other disclosure to any federal or state regulatory authority having
jurisdiction over such Party.
8. Valid Agreement. Each of the Parties hereto represents and
warrants to the others that (i) the execution and delivery of this Agreement by
such Party has been duly authorized by all necessary corporate action on the
part of such Party, including the approval of this Agreement by a vote of a
majority of the board of directors of such Party, and (ii) this Agreement is a
valid and binding obligation of such Party enforceable in accordance with its
terms.
9. Entire Agreement. This Agreement sets forth the entire
agreement between the Parties hereto and fully supersedes any and all prior
agreements or understandings of the Parties hereto pertaining to the subject
matter hereof, including without limitation, the Merger Agreement.
10. Binding Effect. This Agreement shall be binding upon, and
enure to the benefit of, the Parties hereto and their respective successors and
assigns.
11. Counterparts. This Agreement may be executed by signatures on
more than one counterpart and, if so executed, the various counterparts shall
be and constitute one instrument for all purposes.
12. Governing Law. This Agreement shall be governed by the laws
of the State of Florida.
-43-
<PAGE> 5
IN WITNESS WHEREOF, each of the Parties have hereunto signed this
Termination Agreement, effective as of the Termination Date.
FIRST COMMERCE BANKS OF FLORIDA, INC.
By: /s/ Robert W. Stickler, Jr.
------------------------------------------
Robert W. Stickler, Jr.
Vice Chairman
FIRST MERCANTILE NATIONAL BANK
By: /s/ G. Geoffrey Longstaff
----------------------------------------
G. Geoffrey Longstaff
President and Chief Executive Officer
PRIME BANK OF CENTRAL FLORIDA
By: /s/ Joseph V. Marto, Jr.
----------------------------------------
Joseph V. Marto, Jr.
Chairman, President and Chief Executive
Officer
-44-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST COMMERCE BANK OF FLORIDA, INC. FOR THE SIX MONTHS
ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1,000
<CASH> 4,482
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,378
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,256
<INVESTMENTS-CARRYING> 1,553
<INVESTMENTS-MARKET> 1,521
<LOANS> 68,857
<ALLOWANCE> 1,733
<TOTAL-ASSETS> 108,630
<DEPOSITS> 97,498
<SHORT-TERM> 0
<LIABILITIES-OTHER> 643
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 10,454
<TOTAL-LIABILITIES-AND-EQUITY> 108,630
<INTEREST-LOAN> 3,716
<INTEREST-INVEST> 699
<INTEREST-OTHER> 150
<INTEREST-TOTAL> 4,565
<INTEREST-DEPOSIT> 1,846
<INTEREST-EXPENSE> 1,846
<INTEREST-INCOME-NET> 2,719
<LOAN-LOSSES> 456
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,621
<INCOME-PRETAX> 108
<INCOME-PRE-EXTRAORDINARY> 87
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<YIELD-ACTUAL> 8.87
<LOANS-NON> 2,933
<LOANS-PAST> 56
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,195
<CHARGE-OFFS> 116
<RECOVERIES> 173
<ALLOWANCE-CLOSE> 1,733
<ALLOWANCE-DOMESTIC> 1,733
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
