Item 1. Business --------
Commerce National Corporation, a Florida corporation (the "Company" or "CNC"), was incorporated under the laws of the State of Florida on February 21, 1985, for the purpose of purchasing 100% of the capital stock of the National Bank of Commerce (the "Bank") in order to adequately capitalize the Bank and for the purpose of organizing and acting as a bank holding company.
CNC was organized as a bank holding company to enhance the Bank's ability to serve its customers' requirements for financial services. Currently, the Company engages in only the management of the Bank; however, CNC's structure is intended to provide flexibility for the provision of additional banking-related services which a traditional commercial bank may not provide under present laws.
The Company was authorized by the Board of Governors of the Federal Reserve System (the "FRB") to invest up to $1,500,000 of its capital to purchase loans from the Bank which were in excess of authorized lending limits of the Bank. As of March 1, 2000, the Company was participating in an aggregate of $359,351 on three (3) different loans with the Bank which were in excess of the authorized lending limits of the Bank.
The Bank
The Bank has been in operation since August 4, 1986, the date it was granted the requisite charter from the United States Office of the Comptroller of the Currency (the "OCC"). The Bank conducts a general, commercial and retail banking business emphasizing in its marketing efforts its local management and ownership. The Bank presently offers a full range of accounts with a variety of features which management believes are compatible with the Bank's plan of business. Management will continue to assess the needs of its customers and to structure its types of accounts and services to meet their needs.
The Bank has been marketing its services to depositors on the basis of the convenience of the Bank's four locations; of its status as an institution managed locally; of its emphasis on personal attention to its customers and its full range of services. Thus far, the Bank has utilized traditional advertising media, as well as an active and community-involved management and board of directors to promote the Bank.
The Bank makes a variety of loans to persons and businesses as the principal source of its revenue. The three main categories of loans at the Bank are commercial, real estate (both residential and commercial), and consumer loans.
The commercial loans made by the Bank usually are secured but may be made on an unsecured basis. The loans are either demand or term in nature. These loans are made to business entities for equipment purchases and other capital improvements, inventory acquisition and general working capital. Dependent upon the size and perceived risk for a particular loan, the loans usually are secured and often are guaranteed by the principals of the business. Because of the vagaries in
the economy, commercial loans typically are viewed as some of the most risky loans. The Bank attempts to address this issue by careful monitoring of the credit quality of these loans and by having a preexisting relationship with these loan customers.
The second major category of loans, real estate, is divided into residential loans and commercial loans, which includes agricultural loans. The majority of loans in the real estate area are commercial real estate loans. These loans typically are made on a loan-to-value basis of 80% or less. Because these loans are almost always secured by first mortgages on commercial property, they are seen as some of the least risky loans made by the Bank. The term for the loans is usually 15-20 years with rate review every 3-5 years. The Bank has developed a niche in the market place by originating and holding these loans.
The final loan category is consumer loans, which includes all loans to individuals not captured in one of the categories above. Types of loans in this category include auto loans and other personal loans. While some of these loans are demand type loans, most are term loans with terms of between three to five years. Most of the loans are secured by the asset acquired by the loan or some other asset, although it is not unusual to have personal loans that are not secured. These loans may be viewed as more risky than real estate loans and, therefore, the interest rate that the Bank can charge for such loans is higher than real estate loans. The Bank originates, processes and holds almost all of these loans.
In addition to depository and credit services, the Bank offers as part of its normal bank operations a variety of customer services, including notary services, photocopying, and signature guarantees. Additionally, safe deposit boxes, custodial services and account reconciliations are available. It is perceived that these services complement the depository and credit services offered by the Bank. The Bank joined the Federal Home Loan Bank of Atlanta in October of 1992. One of the purposes for joining this organization was to make single-family residential loans.
The primary correspondent institutions of the Bank are NationsBank, N.A., Jacksonville and Independent Bankers' Bank of Florida, Inc., Orlando. NationsBank, N.A. acts as the primary clearing agent in the collection of checks received in the normal course of business by the Bank. In addition to the daily handling of checks, M&I Data Services Inc. serves as data processor for the Bank's loan and deposit services. Independent Bankers' Bank of Florida, Inc. provides advice and counseling in the area of securities investment and is agent in the Bank's overnight investment of federal funds. Neither NationsBank, N.A. nor Independent Bankers' Bank of Florida has provided trust services, nor have such services been provided by the Bank.
Competition
As of March 1, 2000, there were nineteen (19) commercial banks, four (4) savings banks and several consumer finance companies in the Bank's perceived market area. Although the principal competition for the Bank is thought to come from existing financial institutions within the market area, it should be noted that there are several commercial banks and savings banks located outside but near the perceived market area. Most of the Bank's competitors have greater resources, broader geographic markets and higher lending limits and offer more services than the Bank. The right of banks in Florida to branch statewide and also the elimination of certain restrictions on interstate banking has heightened the competition of the Bank's market area.
As of June 30, 1999, the Bank had approximately 1.77% of the deposits of Orange County, Florida.
Offices affiliated with out-of-state financial institutions have entered Florida to offer financial services, including loans and deposit gathering activities. The State of Florida has adopted a reciprocal interstate regional banking law which permits bank holding companies headquartered outside of Florida to acquire Florida banks, provided Florida bank holding companies may likewise make bank acquisitions in the reciprocal state. Other out-of-state bank holding companies have entered the Florida banking market by acquiring thrift institutions. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"), effective June 1, 1997, subject to legislation by Florida, banks and bank holding companies from any state in the country will be able to acquire a bank based in the State of Florida. Subject to legislation in Florida, banks from outside of Florida will be able to branch de novo into the State of Florida. Competition for deposit and loan opportunities in the Bank's market area is intense because of the accelerating pace of deregulation and geographic expansion noted above.
Changes in the economic, legislative and regulatory areas have substantially increased the competitive environment and brought about changes in the financial services industry.
The Bank is in competition with existing area financial institutions other than commercial banks and savings banks, including insurance companies, consumer finance companies, brokerage houses, credit unions and other business entities which have recently been encroaching upon the traditional banking markets. In certain instances, federal and state regulation of the Bank will make it more difficult to compete with these non-banking institutions. See "Supervision and Regulation," below.
The Bank believes there is a continuing need for locally owned and operated banks in Orange County and competes on the basis of location, service to its customers and interest rates.
Supervision and Regulation
CNC and the Bank operate in a highly regulated environment, and their respective business activities are governed by statute, regulation and administrative policies. The business activities of CNC and the Bank are supervised by a number of federal regulatory agencies, including the Board of Governors of the Federal Reserve Board ("FRB"), the OCC and the Federal Deposit Insurance Corporation ("FDIC"). Additionally, CNC is supervised and regulated by the Securities and Exchange Commission ("SEC").
CNC is regulated by the FRB under the Bank Holding Company Act of 1956, as amended, which required CNC to register as a bank holding company and which subjects CNC to FRB examinations and certain reporting requirements.
Banking regulations allow for an assessment of CNC as the sole stockholder of the Bank to cover any impairment of capital, such assessment to be enforced by sale, to the extent necessary, of the Bank stock held by CNC if CNC fails to pay the assessment. Additionally there are restrictions on the amount of dividends the Bank is allowed to pay. Prior regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus and retained earnings is below certain statutory limits.
Presently, with respect to expansion, the Bank may establish branches within the limits of the State of Florida, with the approval of the OCC. To date, the Bank operates three branches. In addition, the Bank, as a subsidiary of CNC, will be subject to restrictions under federal law in dealing with CNC and other affiliates. These restrictions apply to extensions of credit to an affiliate, investments in the securities of an affiliate, the purchase of assets from an affiliate and the amount of advances to a third party collateralized by securities of an affiliate.
The operations of the Bank are affected by various requirements and restrictions imposed by the laws of the United States and the State of Florida, including requirements to maintain reserves against deposits, limitations on the interest rates that may be charged on certain types of loans, and restrictions on the nature and amount of loans that may be granted and on the types of investments that may be made. The operations of the Bank are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All subsidiary banks of a bank holding company must become and remain insured banks under the Federal Deposit Insurance Act.
The scope of regulation and permissible activities of CNC and the Bank are subject to change by future federal and state legislation.
Capital - -------
The FRB, OCC and FDIC require banks and bank holding companies to maintain minimum capital ratios.
In December 1988, the FRB approved final "risk-adjusted" capital guidelines for bank holding companies. The new guidelines became fully implemented as of December 31, 1992. The FDIC has adopted substantially similar risk-based capital guidelines. These ratios involve a mathematical process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the Company's capital base. The rules set the minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) at eight percent (8%). At least half of the total capital is to be composed of common equity, retained earnings, and a limited amount of perpetual preferred stock less certain goodwill items ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, or a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted leverage capital guidelines for banks and bank holding companies. Under these guidelines, banks and bank holding companies must maintain a minimum ratio of four percent (4%), Tier 1 Capital (as defined for purposes of the year-end 1992 risk-based capital guidelines) to total assets. However, most banking organizations
are expected to maintain capital ratios well in excess of the minimum levels and generally must keep such Tier 1 ratio at or above five percent (5%). The capital ratios for the Company and Bank are discussed below.
Regulatory authorities may increase such minimum requirements for all banks and bank holding companies or for specified banks or bank holding companies. Increases in the minimum required ratios could adversely affect the Bank and the Company, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as required reserves, limitation as to the nature and amount of its loans and investments, regulatory approval of any consolidation, issuance or retirement by the Bank of its own securities, limitations upon the payment of dividends and other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary, the Bank. Generally, a national banking association may not declare a dividend without the approval of the OCC if the total of dividends declared by such bank in a calendar year exceeds the total of its net profits for that year combined with its retained profits of the preceding two years. In addition, national banks are subject to dividend regulation by their primary federal bank regulatory agency in connection with general supervisory authority as it relates to a bank's requirement to maintain adequate capital.
Government Policies and Legislation
The policies of regulatory authorities, including the OCC, FRB, FDIC and the Depository Institutions Deregulation Committee, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. An important function of the Federal Reserve System is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted in 1991. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
The FRB and the FDIC have adopted regulations to implement the prompt corrective action provisions of FDICIA. Among other things, the regulations define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio (total capital to risk-weighted assets) of ten percent (10%) or greater, a Tier 1 risk-based capital ratio (Tier 1 Capital to risk-weighted assets) of six percent (6%) or greater, and a Tier 1 leveraged capital ratio (Tier 1 Capital to total assets) of five percent (5%) or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of eight percent (8%) or greater, a Tier 1 risk-based capital of four percent (4%) or greater, and (generally) a Tier 1 leveraged capital ratio of four percent (4%) or greater, and the institution does not meet the definition of a "well capitalized" institution. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than two percent (2%). "Undercapitalized" banks are subject to growth limitations and are required to submit a capital restoration plan. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on their subordinated debt.
The Bank currently meets the regulatory definition of a "well capitalized" financial institution.
FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and such other standards as the agency deems appropriate.
On September 29, 1994, the Interstate Act, which effectively permits nationwide banking, was signed into law. The Interstate Act provides that one year after enactment, adequately capitalized and adequately managed bank holding companies may acquire banks in any state, even in those jurisdictions that currently bar acquisitions by out-of-state institutions, subject to deposit concentration limits. The deposit concentration limits provide that regulatory approval by the FRB may not be granted for a proposed interstate acquisition if, after the acquisition, the acquirer on a consolidated basis would control more than 10 percent of the total deposits nationwide or would control more than 30 percent of deposits in the state where the acquiring institution is located. The deposit concentration state limit does not apply for initial acquisitions in a state and may be waived by the state regulatory authority. Interstate acquisitions are subject to compliance with the Community Reinvestment Act ("CRA"). States are permitted to impose age requirements not to exceed five years on target banks for interstate acquisitions. States are not allowed to opt-out of interstate banking. National banks are impacted as well since the OCC generally refers to state law to determine appropriate branching provisions for a national bank located in a particular state.
Branching between states may be accomplished either by merging separate banks located in different states into one legal entity, or by establishing de novo branches in another state. Consolidation of banks was not permitted until June 1, 1997, provided that the state did not pass legislation "opting-out" of interstate branching. If a state opted-out prior to June 1, 1997, then banks located in that state may not participate in interstate branching. A state may opt-in to interstate branching by bank consolidation or by de novo branching by passing appropriate legislation earlier than June 1, 1997. Interstate branching is also subject to a 30 percent statewide deposit concentration limit on a consolidated basis, and a 10 percent nationwide deposit concentration limit. The laws of the host state regarding community reinvestment, fair lending, consumer protection (including usury limits) and establishment of branches shall apply to the interstate branches. The State of Florida has elected to participate in interstate branch banking.
De novo branching by an out-of-state bank is not permitted unless the host state expressly permits de novo branching by banks from out-of-state. The establishment of an initial de novo branch in a state is subject to the same conditions as apply to initial acquisition of a bank in the host state other than the deposit concentration limits.
One or more Florida banks may enter into an interstate merger acquisition with one or more out-of-state banks. An out-of-state bank resulting from such a transaction may maintain and operate the branches of a Florida bank that participated in this transaction, provided that all conditions and filing requirements with the State of Florida are met. An interstate merger transaction will not be permitted if, upon consummation of this transaction, the resulting bank, including all insured depository institutions that would be affiliates of the resulting bank, would control 30% or more of the total amount of deposits held by all insured depository institutions in the State of Florida. An interstate merger transaction resulting in the acquisition by an out-of-state bank of a Florida bank shall not be permitted under Florida Code 658.295 unless the Florida bank has been in existence and continuously operating on the date of the acquisition for more than three years.
On September 30, 1996, legislation was signed by the President to combine the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") of the FDIC. The legislation, known as the Deposit Insurance Funds Act of 1996, provided for a special assessment on institutions that pay assessments to the SAIF. The Bank does not pay assessments to the SAIF. The legislation also provides for the payment of interest on bonds issued in connection with the clean up of the savings and loan crisis by both banks and savings associations. Because of the recent adoption of the law, it is not possible to accurately predict what impact, if any, this will have upon the Bank or the Company in the future.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") became public law. The GLB Act is expected to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies and other financial service providers. It allows banking companies of all sizes to expand into other financial services.
Proposed Legislation
There have been proposed a number of legislative and regulatory proposals designed to strengthen the federal deposit insurance system and to improve the overall financial stability of the U.S. banking system. It is impossible to predict whether or in what form these proposals may be adopted in the future, and if adopted, what their effect would be on the Company. There are proposals in the Florida legislature which would amend the Florida Tax Code and subsequently affect the taxes paid by the business community. The passage of these proposals and to what extent these proposals would affect banks domiciled in Florida is unknown at this point.
Employees
The Company and the Bank as of March 1, 2000, had 55 full-time employees and 6 part-time employees. The employees of the Bank are not part of any collective bargaining unit.
Item 2.
Item 2. Properties ----------
Both the Company and the Bank occupy a leasehold in the National Bank of Commerce Building located at 1201 South Orlando Avenue, Winter Park, Florida, which is owned by Gateway Plaza, Ltd., a Florida limited partnership, which entity is owned in part and controlled by certain directors of the Company and the Bank and affiliates thereof. See "Item 13 - -Certain Relationships and Related Transactions". The Bank and the Company jointly occupy approximately 10,030 square feet on the ground floor and 1,800 square feet of the basement of the building. In addition, the Bank leases 947 square feet on the fourth floor for document storage on a month to month basis.
The Bank occupies three branch sites. The Aloma Branch, located at 2200 Aloma Avenue, Winter Park, opened May 15, 1995. The second branch located at 1400 Howell Branch Road, Winter Park, opened October 16, 1995. The above two (2) branches are located in freestanding buildings which were built in 1995 and are owned by the Bank. On January 2, 1996, the Bank moved into its third branch site at 200 E. New England Avenue in downtown Winter Park, Florida. This facility is owned by Rollins College, a private institution located in Winter Park, which has leased part of the first floor, basement, and drive-in facility to the Bank.
The Bank paid rental expenses, in aggregate, of approximately $463,496 for the year ended 1999 which represented $335,344 due under the lease agreement between the Company and Gateway Plaza, Ltd. and $128,152 due under the lease agreement between the Bank and Rollins College.
The initial term of the lease with Gateway Plaza, Ltd. dated June 12, 1985, which commenced on August 4, 1986, was for 10 years with three consecutive options to renew for a period of five years each. The Bank exercised its first renewal option on August 8, 1996. Additionally, the lease provides a first right of refusal to purchase the building on the terms of any acceptable bona fide offer.
The lease with Rollins College was assigned to the Bank on July 10, 1995, with the first payment having been made by the Bank on September 1, 1995. The lease was subsequently amended on August 31, 1995, December 14, 1998 and January 18, 2000 to expand the square footage of the leased premises. The initial term of the lease expired on January 17, 1999; however, the Bank exercised its first renewal option on December 14, 1998, and extended the lease until January 17, 2004. The Bank has four additional consecutive options to renew for a period of five years each.
Item 3.
Item 3. Legal Proceedings -----------------
The Bank is a party to various legal proceedings in the ordinary course of its business including its proceedings to collect loans or enforce security interests. In the opinion of management of the Bank, none of the existing legal proceedings will have a significant adverse impact on the business or the financial condition of the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
The Company did not submit any matter to a vote of its shareholders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder ----------------------------------------------------------------- Matters -------
As of March 1, 2000, there was no formally established trading market for the Company's shares of common stock, par value $0.10 per share (the "Common Stock"), although there have been recent transactions for the Common Stock. On that same date, the Company had approximately 463 shareholders based on the number of record holders. To date there has been little secondary trading in the Common Stock. The trading of the Common Stock between third parties reflected a value of $17.50 per share during the year ended 1999.
On June 21, 1993, the Company adopted a Stock Redemption/Repurchase Policy. As of March 1, 1999, 21,800 shares of the Company's common stock had been redeemed at a total price of $213,640, or $9.80 per share.
The Board of Directors declared a cash dividend of $0.11 per share on the Company's outstanding shares of common stock payable to shareholders of record as of January 1, 1998. The dividend was paid on May 1, 1998.
The Board of Directors declared a cash dividend of $0.12 per share on the Company's outstanding shares of common stock payable to shareholders of record as of December 31, 1999. The dividend was paid on March 25, 1999.
Item 6.
Item 6. Selected Financial Data (Consolidated) -----------------------
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ---------------------
Except for historical information contained herein, the matters discussed in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "may", "intend", "expect" and similar expressions identify certain of such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of the Company and are subject to a number of risks and uncertainties, including, but not limited to, economic, competitive and other factors affecting the Company's operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control.
The accompanying consolidated financial statements of the Company are primarily affected by the operation of the National Bank of Commerce (the "Bank"), its wholly owned subsidiary.
The following discussion and analysis presents a review of the Company's Consolidated Financial Condition and Results of Operation. This review should be read in conjunction with the Consolidated Financial Statements and other financial data presented herein.
Summary
For fiscal 1999, the Company had a profit of $1,532,032 as compared to a profit of $1,439,507 in 1998 and a profit of $538,506 in 1997. Net loans outstanding increased 14% to $139,882,070 from the 1998 year-end figure of $122,929,105. The 1997 year-end figure was $97,317,521. Interest expense on deposits and borrowed money in 1999 grew to $6,037,135, as opposed to $4,918,056 for year-end 1998 and $4,360,146 for year-end 1997. Total assets at year-end 1999 were $180,202,250, a 15% increase over 1998, and a 42% increase over 1997. Stockholders' equity at year-end 1999 was $14,063,911 or 7.8% of year-end assets. This compares to year-end 1998 stockholders' equity of $12,966,729, and year-end 1997 stockholders' equity of $10,403,847. Net income per diluted common share for 1999 was $2.12 per share, compared to $2.03 per share for 1998 and $0.88 per share for 1997.
Two indicators which measure profitability are net income as a percentage of average assets (ROAA) and net income as a percentage of average stockholders' equity (ROAE). A comparison of these ratios for the last three years is as follows:
Financial Position
Total assets and total liabilities have increased $23,294,758 and $22,197,576, respectively, during fiscal 1999. This is primarily due to an increase in loans of $16,952,965, investment securities available for sale of $5,080,309 and an increase in deposits of $17,288,211 and an increase in Federal Home Loan Bank ("FHLB") borrowings of $2,945,050.
Net Interest Income
Net interest income, the difference between interest earned on interest- earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of the Company's earnings. Net interest income is affected by changes in the volumes and rates of interest-earning assets and interest-bearing liabilities and the volume of interest-earning assets funded with interest bearing deposits, non-interest bearing deposits, and stockholders' equity. Net interest income for the last three years is as follows:
Net interest income of $6,952,975 represented an 11% increase over 1998 and a 30% increase over 1997. This is primarily the result of the increase in loan interest income which was $11,732,321, $9,945,556, and $8,488,762 at December 31, 1999, 1998, and 1997, respectively. Investment security income decreased in 1997 to $1,031,804, decreased in 1998 to $865,727, and increased to $980,782 in 1999. Federal funds sold income, typically a lower-yielding investment class, was $231,528, $355,148, and $137,240 at December 31, 1999, 1998, and 1997, respectively. For further information, refer to the Rate/Volume Information chart.
At the same time, interest-bearing deposits increased from $92,644,084 at year-end 1997 to $115,798,941 at year-end 1998 to $132,150,753 at year-end 1999. Interest expense on deposits and borrowed money was $6,037,135, $4,918,056, and $4,360,146, at December 31, 1999, 1998, and 1997, respectively. The major component of the increase was time deposit interest expense of $3,693,882, $3,147,798, and $2,798,560, for December 31, 1999, 1998, and 1997, respectively. For further information, refer to the Rate/Volume Information chart.
The Company's net interest margin was 4.20% for the year ended December 31, 1999, compared to 4.84% for 1998 and 4.79% for 1997.
Changes in net interest income from period to period result from increases or decreases in the average balances of interest-earning assets and interest- bearing liabilities, increases or decreases in the average rates earned and paid on such assets and liabilities, the banks' ability to manage their earning asset portfolios and the availability of particular sources of funds. See the rate/volume analysis that follows for an analysis of the impact of these elements on the change in net interest income for 1999, 1998 and 1997.
Provision and Allowance for Loan Losses
The Company segregates the loan portfolio for loan loss evaluation purposes into the following broad segments such as: commercial real estate; residential real estate; commercial business; and consumer loan. The Company provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national economic conditions; concentrations of credit; and peer group comparisons.
Specific allowances are provided in the event that the specific collateral analysis on each classified loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. The provision for loan loss is debited or credited in order to state the allowance for loan losses to the required level as determined above.
Regulatory examiners may require the Company to recognize additions to the allowance based upon their judgments about the information available to them at the time of their examination. The Company and the Bank continue to be examined by the FRB, the OCC, a private loan review consultant, and a private compliance consultant.
The most recent OCC safety and soundness examination was as of January 1999. The allowance for loan and lease losses was evaluated as part of this review. No change was recommended.
The allowance for loan losses for year-end 1999 was $1,629,823, a 1.15% reserve of total loans outstanding. This compares to a year-end 1998 allowance of $1,323,143, a 1.06% reserve of total loans outstanding, and to a year-end 1997 allowance of $1,013,081, a 1.03% reserve of total loans outstanding.
The charge-offs for 1999 were $102,789 while recoveries totaled $3,199. This compares to charge-offs in 1998 of $186,047 and recoveries of $72,097 and to charge-offs in 1997 of $71,588 and recoveries of $17,866. Non-accruing loans totaled $2,776,419, $782,547, and $1,113,608 at December 31, 1999, 1998, and 1997, respectively.
The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered appropriate by management. The provision for loan losses was $406,270, $424,012 and $179,000 for the years ending December 31, 1999, December 31, 1998, and December 31, 1997, respectively. Management of the Bank believes that the allowance for loan losses was adequate as of December 31, 1999.
Non-Interest Income
Non-interest income increased from $746,721 in 1997 to $959,235 in 1998 and decreased to $931,994 in 1999. The majority of the decline in 1999 was the result of less income collected on credit cards and wire transfer fees. Part of the increases in 1997 and 1998 were the result of increased income on service charges for demand accounts as all branches obtained more checking accounts. In 1997 and 1998, both debit card fee income and check order fee income increased.
Non-Interest Expense
Operating expenses increased $503,771, or 11%, to $5,073,448, for year-end 1999, compared to $4,569,677 for year-end 1998, and $4,862,190 for year-end 1997. The 1997 figure included a one-time expense for a Directors' Stock Option Plan. The Directors' Stock Option expense of $650,000 was to record the expense at the remeasurement date, based on the stock value of $15.00 per share as opposed to the option price of $10.00 per share on 130,000 options.
Personnel expense, consisting of salaries, other compensation and employment benefits, increased $158,401 to $2,374,896 for 1999, compared to $2,216,495 for 1998 and $1,999,237 for 1997. This is the result of additional hirings, annual salary adjustments and cost-of-living benefit increases, which increased salary expense and group insurance costs.
Occupancy expense for year-end 1999 increased 7% to $972,414 compared to $909,041 for year-end 1998 and $847,358 for year-end 1997. Also, equipment expense, which is included under occupancy expense, increased $32,573 during 1998, and $68,269 during 1999. This is a result of increased depreciation expense on both software and hardware on new computer systems, plus the maintenance and repair expense to maintain the computer systems. Conversion activities and testing of the computer systems for the year 2000 were completed in the second quarter of 1999. Expenditures in 1999 for the year 2000 project amounted to $80,000.
Also, data processing expense increased $26,882 to $187,365 during 1997, increased $37,379 to $224,744 during 1998 and increased $32,866 to $257,610 during 1999. The main reason for this increase in expense was that the Bank replaced all computer monitors in the teller areas to become Y2K compliant.
Income Taxes - Federal
The Company files a consolidated federal income tax return on behalf of itself and the Bank and reports their income and expenses under the accrual method of accounting.
Under the applicable provisions of the Internal Revenue Code of 1986 (the "Code"), banks and bank holding companies are generally subject to the same rules concerning federal income taxes as are other corporations. There are, however, special rules applicable to banks. The most significant rule relates to the deduction of bad debts.
The Company uses the reserve method in calculating its bad debt deduction. Under the reserve method, a bank is required to use the experience method in calculating its deduction. Under the experience method, a bank computes the ratio of total bad-debt charge-offs for its most recent six taxable years, including the current taxable year (adjusted for recoveries of bad debts during such period), to the sum of loans outstanding at the close of each such six years. The ratio so computed is applied to loans outstanding at the close of the current taxable year, and the result constitutes the permissible reserve balance.
Depending on the composition of its items of income and expense, a bank may be subject to the alternative minimum tax ("AMT"). For tax years beginning after 1986, a bank must pay an alternative minimum tax equal to the amount (if any) by which 20 percent of alternative minimum taxable income ("AMTI") as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain adjustments and increased by certain tax preferences, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes). AMTI may be reduced only up to 90 percent by AMT net operating loss carryovers. Alternative minimum tax paid can be carried forward indefinitely and credited against regular tax due in later years to reduce regular tax to the amount of alternative minimum tax payable in those years. The alternative minimum tax applicable to tax years after 1986 is significantly broader in scope than the pre-1986 minimum tax and substantially increases the likelihood that banks and savings institutions will have to pay alternative minimum tax.
Income Taxes - State
The State of Florida imposes a corporate franchise tax on banks which subjects the taxable income of such institutions to a 5.5 percent tax (or, if greater, an alternative minimum tax equal to 3.3 percent of alternative minimum taxable income). The Florida franchise tax may be reduced by a credit for intangible taxes paid, but such credit cannot exceed 65 percent of the franchise tax due for the year. The Florida franchise tax is deductible in determining federal taxable income. Florida taxable income is substantially similar to federal taxable income, except that it includes interest income on obligations of any state or political subdivision thereof which is not otherwise exempt under Florida laws and that net operating losses cannot be carried back to prior taxable years.
Liquidity
Like other financial institutions, the Bank must ensure that sufficient funds are available to meet deposit withdrawals, loan commitments, investment needs and expenses. Control of the Bank's cash flow requires, in addition to cash flow from operations, the anticipation of deposit flows and loan payments. The Bank's primary sources of funds are deposit accounts, FHLB advances and principal and interest payments on loans.
The Bank requires funds in the short term to finance ongoing operating expenses, pay liquidating deposits, purchase temporary investments in securities and invest in loans. The Bank funds short-term requirements through advances from the FHLB, the sale of temporary investments, deposit growth and loan principal payments. In addition, management has no plans to significantly change long-term funding requirements. The Bank requires funds in the long-term to invest in loans for its portfolio, purchase fixed assets and provide for the liquidation of deposits maturing in the future. The Bank funds its long-term requirements with proceeds from maturing loans, the sale of loans, the sale of investments in securities and deposits and the sale of real estate.
During the year ended December 31, 1999, the Company increased its cash position by $588,985. The primary sources of this net cash position increase was a result of $17,288,211 in new demand deposits and certificates of deposit. In addition, the Company received $2,945,050 in advances from the FHLB and received proceeds of $245,750 from the sale of real estate. The primary use of funds was a result of increased lending. Net new loans booked during the course of the year were $17,244,741.
It is management's opinion that the Company's liquidity position is adequate.
Capital Resources
On January 27, 1989, the OCC issued an amendment to 12 CFR Part 3 adopting final risk based capital guidelines for national banks. Developed in conjunction with the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System, these guidelines provide an additional measure of a bank's capital adequacy and are intended to reflect the relative degree of credit risk associated with various assets by setting different capital requirements for assets having less credit risk than others. Secondly, banks are required to systematically hold capital against such off-balance sheet activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. Finally, the guidelines strengthen the quality of capital by increasing
the emphasis on common equity and restricting the amount of loss reserves and other forms of equity such as preferred stock that can be counted as capital.
Under the terms of the guidelines, banks must meet minimum capital adequacy based upon both total assets and risk adjusted assets. To the extent that an institution has a favorable risk based capital ratio, it would be more likely be permitted to operate at or near minimum primary capital levels. On December 31, 1992, the guidelines took effect in their final form whereupon all banks are required to maintain a risk based capital ratio of 8.0%. At December 31, 1999, the Bank had a total risk based capital ratio of 10.66% (10.75% for the Company on a consolidated basis). The Bank and the Company are well capitalized.
The Company stands ready to infuse additional capital into the Bank should it be warranted.
Impact of Inflation
The consolidated financial statements and related financial data and notes presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company and the Bank are monetary in nature. As a result, interest rates have a more significant impact on the performance of the Company and the Bank than the effects of general price levels. Although interest rates generally move in the same direction as inflation, the magnitude of such changes varies.
Competition
All areas of the Company's business are highly competitive. The Company faces heavy competition, both from local and national financial institutions and from various other providers of financial services. By industry standards, the Company relies heavily on large deposit customers. In the opinion of management, this factor is a result of its customer base and the local demographics.
For the year ended December 31, 1999, the Company saw an increase in total assets, total stockholders' equity and earnings. These are the result of a number of factors but principally the community acceptance of the branches of the Bank which opened in 1995 and 1996 and which have started to produce the desired results. In addition, improvement in the loan portfolio of the Bank and reallocation of the assets of the Bank into higher income producing loans, as compared to other investments like Federal funds sold, has benefited the Company. Diluted earnings per share increased to $2.12 per share in 1999 from $2.03 per share in 1998 compared to $0.88 per share in 1997.
Statistical Information
CONSOLIDATED DAILY AVERAGE BALANCES, INCOME/EXPENSE AND AVERAGE YIELDS EARNED AND RATES PAID -- 1998 and 1997 (Dollars in thousands, yields on taxable equivalent basis)
(1) Calculations were based on average balances for asset and liability accounts and actual year end income and expense totals, causing some distortion in yield verses rates actually earned on interest earning assets and paid on interest bearing liabilities.
(2) Net interest income divided by total earning assets.
Rate/Volume Information
The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. Information is provided on changes attributable to (i) changes in volume (change in volume multiplied by old rate) and (ii) changes in rates (change in rate multiplied by old volume). For purposes of this table, changes attributable to both volume and rate which cannot be segregated have been allocated proportionately to volume and to rate.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES December 31, 1999 and December 31, 1998 (Dollars in thousands)
* Weighted average yields are calculated on the basis of the carrying value of the security.
LOAN PORTFOLIO BY TYPES OF LOANS (In thousands)
LOAN MATURITY AND INTEREST RATE SENSITIVITY ANALYSIS December 31, 1999 (In thousands)
(1) Based upon scheduled principal payments.
Non-performing Assets and Loans Past Due 90 Days or More
The following table summarizes the Company's non-accrual and past due loans as of December 31 for each year indicated.
If interest due on all non-accrual loans had been accrued at the original contract rates, interest income would have been approximately $83,917 greater for 1997, approximately $42,776 greater for 1998, and approximately $131,247 greater for 1999.
There were twelve (12) non-accruing loans totaling $2,776,419 as of December 31, 1999. This compares with non-accruing loans of $782,547 as of December 31, 1998, and non-accruing loans of $1,113,608 as of December 31, 1997.
There are three (3) loans to one customer totaling $697,325 secured by business assets, which have 75% to 85% guarantees from the Small Business Administration. These three (3) loans are also secured by a cross- collateralization of mortgages on a personal residence of the principals. At the same time, there is a fourth loan to the same principals in the amount of $124,871 secured by common stock, which is traded on NASDAQ. There is a fifth loan in the amount of $102,194 is secured by a first mortgage on a personal residence to the principals of the same corporation. At December 31, 1999, the above five (5) loans were all current.
One (1) non-accrual loan in the amount of $827,448 is secured by a first mortgage on a 61-lot subdivision. A Summary Judgment has been set for the first quarter of 2000. Once the foreclosure process is completed, the Bank will take possession of this subdivision and complete the second phase of the subdivision. There has been interest between local and national builders concerning this subdivision upon the completion and Certificate of Completion from the county. It is anticipated that there will be a minimal loss occurred during the year 2000 on this loan.
There is one (1) non-accrual loan in the amount of $123,617 secured by a commercial helicopter and additional engine components. The loan is on non- accrual because there is a dispute on an insurance claim for engine work on the helicopter. A lawsuit has been filed against all parties involved. The Bank is negotiating with one of the guarantors on the original note who is considering taking over the loan.
One non-accrual loan in the amount of $28,379 is secured by a second mortgage on the principal's residence and a third mortgage on commercial property. It is anticipated that this loan will be paid in full during the second quarter of this year.
Two (2) non-accrual loans to the same corporation totaling $788,012 are secured by first mortgages on commercial buildings. Of this total figure, $292,500 will be paid off during the first month of the year 2000. The $495,512 balance on the second loan is current. It is felt that this loan will continue to be current and, after a 6-month period, will be taken off non-accrual.
There were two (2) non-accrual loans to the same company totaling $84,573 secured by four (4) lots and a partially completed residential structure. This loan has since been paid in full.
The following table, entitled Analysis of the Allowance for Loan Losses, summarizes the Bank's allowance for loan losses as of December 31, 1999.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The Company records impairment in the value of its loans as an addition to the allowance for loan losses. Any changes in the value of impaired loans due to the passage of time or revisions in estimates are reported as adjustments to provision expense in the same manner in which impairment initially was recognized. Chargeoffs by loan type are illustrated in the consolidated financial statements at Footnote (4).
COMPOSITION OF DEPOSITS FOR 1999, 1998 and 1997 (Dollars in thousands)
MATURITY OF CERTIFICATES OF DEPOSIT (CD'S) AND OTHER TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE December 31, 1999 (In thousands)
Year 2000 (Y2K)
During 1999, the Bank worked diligently to bring all systems into year 2000 ("Y2K") compliance. The Board of Directors approved a Y2K budget as prepared by the Y2K committee in the approximate amount of $80,000. The Y2K committee was in-house on January 1, 2000 for a system check and validation of equipment and software. The validations were a success and, at this time, there are no Y2K unresolved issues for the Bank.
The Bank's regulatory agency, the OCC, has frequently visited or telephoned the Bank's committee coordinator for continual oversight of the Bank's progress in the Y2K compliancy. The FRB and the Office of Thrift Supervision review the progress of M&I for assurance that M&I is progressing satisfactorily with M&I's Y2K action plan.
Impact of Recent Accounting Pronouncements
SFAS No. 133 and SFAS No. 137
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedge Activities" (FASB 133). This standard requires all derivatives be measured at fair value and be recognized as assets and liabilities in the statement of financial position. FASB 133 sets forth the accounting for changes in fair value of a derivative depending on the intended use and designation of the derivative. In June 1999, the FASB issued FASB 137, "Accounting for Derivative Instruments and Hedging Activities --Deferral of the Effective Date of FASB No. 133, an Amendment of FASB 133." FASB 133, as amended, is now effective for all fiscal quarters and fiscal years beginning after June 15, 2000. Implementation of FASB 133 is not expected to have a significant impact on the financial position or results of operations of the Company.
SFAS No. 134
In October 1998, the FASB issued Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement requires that, after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage backed security as a trading security. The statement is effective for the first fiscal quarter beginning after December 15, 1998. Adoption of this standard did not have any impact on the Company's consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ----------------------------------------------------------
The business of the Company and the composition of its consolidated balance sheet consists of investments in interest-earning assets (primarily loans and investment securities) which are primarily funded by interest-bearing liabilities (deposits). Such financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk.
Interest Rate Risk Management
Interest rate risk results when the maturity or repricing intervals and interest rate indices of the interest-earning assets and interest-bearing liabilities are different. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. Management's asset/liability committee meets monthly to review the Company's interest rate risk position and profitability, and recommend adjustments for consideration by the Board of Directors. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing net interest margins. The rates, terms and interest rate indices of the Company's interest-earning assets result primarily from the Company's strategy of investing in loans and securities which permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving a positive interest rate spread from the difference between the income earned on interest-earning assets and the cost of interest-bearing liabilities.
One method of measuring interest rate risk is to determine the earnings-at- risk for a given change in interest rates which is done on a quarterly basis. The impact on value (earnings) is significant because reduced earnings will affect capital. The change in interest rates does not necessarily represent an immediate or parallel shift.
Economic Value of Equity
The interest rate risk ("IRR") component is a dollar amount that is deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its economic value of equity ("EVE") to changes in interest rates. An institution's EVE is calculated as the net discounted cash flows from assets, liabilities, and off-balance sheet contracts. An institution's IRR component is measured as the change in the ratio of EVE to the net present value of total assets as a result of a hypothetical 200 basis point change in market interest rates. A resulting decline in this ratio of more than 2% of the estimated present value of an institution's total assets prior to the hypothetical 200 basis point change will require the institution to deduct from its regulatory capital 50% of that excess decline. Based on quarterly calculations, the Bank experienced no such decline.
Although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
The repricing of certain categories of assets and liabilities are subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes. There were no substantial changes in the Company's asset/liability position during fiscal 1999.
Item 8.
Item 8. Consolidated Financial Statements ---------------------------------
The required financial information begins on the following page.
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
KPMG 111 North Orange Avenue, Suite 1600 P.O. Box 3031 Orlando, FL 32802
Independent Auditors' Report
The Board of Directors Commerce National Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Commerce National Corporation and subsidiary as of December 31, 1999 and 1998, the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commerce National Corporation and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 24, 2000, except for Note 20 which is as of March 3, 2000
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets December 31, 1999 and 1998
See accompanying notes to consolidated financial statements.
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations For each of the years in the three-year period ended December 31, 1999
See accompanying notes to consolidated financial statements.
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity and Comprehensive Income For each of the years in the three-year period ended December 31, 1999
See accompanying notes to consolidated financial statements.
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1999
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1999
See accompanying notes to consolidated financial statements.
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Commerce National Corporation and its subsidiary conform to generally accepted accounting principles and prevailing practices within the banking industry.
(a) Reporting Entity
Commerce National Corporation (the "Company") is a bank holding company, which owns National Bank of Commerce (the "Bank"). The Bank's primary market is Central Florida. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation.
(b) Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Commerce National Corporation and its wholly owned subsidiary, National Bank of Commerce. The operations of the Company consist primarily of the operations of the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Cash Equivalents
For purposes of the statement of cash flows, the Company considers cash and due from banks, interest bearing deposits in other banks with original maturities of three months or less and federal funds sold to be cash equivalents.
(d) Investments Securities Available for Sale
Investments to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses are included in shareholders' equity net of the effect of income taxes.
If a security has a decline in fair value below its amortized cost that is other than temporary, then the security will be written down to its new cost basis by recording a loss in the consolidated statements of operations. Realized gains and losses on investment securities available for sale are computed using the specific identification method.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(e) Loans
Loans are reported at their outstanding unpaid principal balance reduced by any charge-offs or specific valuation accounts, net of any deferred fees on originated loans.
Loan origination fees are deferred and recognized in income over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience.
Commitment fees and costs relating to the commitments are recognized over the commitment period on a straight-line basis. If the commitment is exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.
Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal, unless the loan is both well secured and in the process of collection, or when the full timely collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status.
The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When a loan is impaired, the Company may measure impairment based on (a) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (b) the observable market price of the impaired loans, or (c) the fair value of the collateral of a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis, except for collateral-dependent loans for which foreclosure is probable must be measured at the fair value of the collateral. In a troubled debt restructuring involving a restructured loan, the Company measures impairment by discounting the total expected future cash flows at the loan's original effective rate of interest.
(f) Allowance for Loan Losses
The Company follows a consistent procedural discipline and accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is a description of how each portion of the allowance for loan losses is determined.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The Company segregates the loan portfolio for loan loss purposes into the following broad segments such as: commercial real estate; residential real estate; commercial business; and consumer loan. The Company provides for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as; trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national economic conditions; concentrations of credit; and peer group comparisons.
Specific allowances are provided in the event that the specific collateral analysis on each classified loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. The provision for loan losses is debited or credited in order to state the allowance for loan losses to the required level as determined above.
Regulatory examiners may require the Company to recognize additions to the allowance based upon their judgments about the information available to them at the time of their examination. Management believes that the allowance for loan losses is adequate.
(g) Other Real Estate Owned
Real estate acquired in the settlement of loans is initially recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or at fair value less costs to dispose. Costs relating to development and improvement of the property are capitalized, whereas those relating to holding the property are charged to operations.
(h) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation which is computed principally on the straight-line method over the estimated useful lives (3-40 years) of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives (10-20 years) of the improvements or the terms of the related lease.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(i) Comprehensive Income
In June 1997, the Financial Accounting Standards Board established Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. This Statement requires that an enterprise classify items of other comprehensive income by nature in a financial statement, and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a consolidated balance sheet.
The Company adopted this Statement effective January 1, 1998 and restated prior year financial statements to reflect the adoption. The Company's other comprehensive income is the unrealized gain (loss) on investment securities available for sale.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not.
(k) Derivative Instruments
The Company does not purchase, sell or enter into derivative financial instruments or derivative commodity instruments as defined in Statement of Financial Accounting Standards No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments" except for fixed rate loan commitments which the Company believes are at market value at December 31, 1999.
(l) Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement, which is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, requires all derivatives be measured at fair value and be recognized as assets and liabilities in the statement of financial position. This statement sets forth the accounting for changes in fair value of a derivative depending on the intended use and designation of the derivative. Implementation of the statement is not expected to have a significant impact on the financial position or results of operations of the Company.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137 which amended the implementation date of SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000.
(m) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates include the allowances for loan losses and other real estate owned and the valuation for the deferred tax asset. Actual results could differ from these estimates.
(2) Restrictions on Cash
The Company is required to maintain reserve balances in accordance with Federal Reserve Bank requirements. At December 31, 1999 and 1998, these reserve balances were $896,000 and $709,000, respectively.
(3) Investment Securities Available for Sale
The amortized cost and estimated market values of investment securities available for sale at December 31, 1999 and 1998 are as follows:
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The amortized cost and estimated market value of investment securities at December 31, 1999 and 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 1999 and 1998 investment securities with a book value of $499,063 and $503,750 were pledged to collateralize the treasury tax and loan account, respectively.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(4) Loans
Major categories of loans included in the loan portfolio at December 31, 1999 and 1998 are:
Certain principal shareholders, directors and employees and their related interests were indebted to the Bank as summarized below:
All such loans were made in the ordinary course of business. At December 31, 1999 and 1998, principal shareholders, directors and employees of the Company and their related interests had $3,093,583 and $3,359,124, respectively, available in lines of credit and commitments.
At December 31, 1999 and 1998, the recorded investment in impaired loans was $971,219 and $370,958, respectively. The related allowance for loan losses at December 31, 1999 and 1998 was $286,113 and $110,380, respectively. The average recorded investment in impaired loans during 1999, 1998 and 1997 was $671,089, $212,693 and $27,214, respectively. Interest income recognized on impaired loans during 1999, 1998 and 1997 was $-0-.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Changes in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 were as follows:
At December 31, 1999 and 1998, nonaccrual loans were $2,776,419 and $782,547, respectively. If interest due on all nonaccrual loans had been accrued at the original contract rates, estimated interest income would have been increased by $131,247 in 1999, $42,776 in 1998 and $83,917 in 1997.
(5) Premises and Equipment
A summary of premises and equipment at December 31, 1999 and 1998 follows:
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(6) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Cash and Cash Equivalents - The carrying amount of cash and cash equivalents represents fair value.
Investments - The Company's investment securities represent investments in U.S. Government obligations, U.S. Government Agency securities, and state and political subdivisions. The Company's equity investments at year-end represent stock investments in the Federal Home Loan Bank, the Federal Reserve Bank and Independent Bankers' Bank of Florida. The stock is not publicly traded and the carrying amount was used to estimate the fair value. The fair value of the U.S. Government obligations and U.S. Government Agency obligations and state and local political subdivision portfolios was estimated based on quoted market prices.
Loans - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for commercial real estate, commercial and consumer loans other than variable rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at December 31, 1999 and 1998 (that is their carrying amounts). The carrying amounts of variable rate, fixed term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances and Other Borrowings - Fair values of Federal Home Loan Bank advances and other borrowings are estimated using discounted cash flow analysis based on the Company's current borrowing rates for similar types of borrowing arrangements. The carrying amount of the repurchase agreements approximates their fair value.
Commitments - The carrying values and fair values of commitments to extend credit and standby letters of credit are not significant.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The following tables present the carrying amounts and estimated fair values of the Company's financial instruments.
The carrying amounts shown in the tables are included in the consolidated balance sheets under the indicated captions.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(7) Deposits
A detail of deposits at December 31, 1999 and 1998 follows:
Included in interest-bearing deposits are certificates of deposit, which have remaining maturities at December 31, 1999 and 1998 as follows:
A summary of interest expense on deposits and other borrowed money is as follows:
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The Company had deposits from principal shareholders, directors and employees and their related interests of approximately $25,994,346 and $21,345,867 at December 31, 1999 and 1998, respectively. There were no brokered deposits outstanding at year-end.
(8) Federal Home Loan Bank Advances
Federal Home Loan Bank advances at December 31, 1999 and 1998, are summarized as follows:
1999 1998 ---------- ---------
Advances from the Federal Home Loan Bank (weighted average interest rates were 5.49% and 5.66% at December 31, 1999 and 1998, respectively) $7,070,584 4,125,534 ========== =========
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"), advances are secured by first mortgage loans in the amount of $11,972,501 and $8,292,200 at December 31, 1999 and 1998, respectively. Advances at December 31, 1999 have calendar-year maturity dates as follows:
2000 $ 55,000 2001 60,500 2002 108,200 2003 360,600 2004 -- Thereafter 6,486,284 -----------
$ 7,070,584 ===========
In addition, the advances are secured by Federal Home Loan Bank stock valued at $468,100 and $378,600 on December 31, 1999 and 1998, respectively.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(9) Other Borrowed Funds
Other borrowed funds consist of the following:
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Aggregate maturities on the mortgage notes payable at December 31, 1999 are as follows:
2000 $ 32,936 2001 35,726 2002 34,876 2003 16,781 2004 18,173 Thereafter 101,477 ----------
$ 239,969 ==========
The Bank enters into sales of securities under agreements to repurchase. These fixed-coupon agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheet. The dollar amount of securities underlying the agreements remains in the asset accounts.
The repurchase agreements were to repurchase the identical securities as those, which were sold. Retail repurchase agreements averaged $2,716,655 and $3,416,081 during the years ended December 31, 1999 and 1998, respectively. The maximum amount outstanding at any month-end for the corresponding periods was $4,119,264 and $4,888,175, respectively. Total interest expense paid on retail repurchase agreements for the years ending December 31, 1999, 1998 and 1997 was $120,997, $165,219 and $163,261, respectively.
The Bank has available repurchase lines equal to the amount of all unpledged investment securities.
(10) Income Taxes
The provision for income taxes for 1999, 1998 and 1997 consists of the following:
Current Deferred Total ---------- -------- --------
Year ended December 31, 1999: Federal $ 895,362 (125,160) 770,202 State 124,442 (21,425) 103,017 ---------- -------- --------
$1,019,804 (146,585) 873,219 ========== ======== ========
Year ended December 31, 1998: Federal $ 745,351 (35,492) 709,859 State 106,195 (3,788) 102,407 ---------- -------- --------
$ 851,546 (39,280) 812,266 ========== ======== ========
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Current Deferred Total --------- ---------- --------
Year ended December 31, 1997: Federal $ 569,256 (132,890) 436,366 State 76,652 (15,011) 61,641 --------- --------- --------
$ 645,908 (147,901) 498,007 ========= ========= ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below.
The Company has recorded a deferred tax asset of $815,510 and $458,990 as of December 31, 1999 and 1998, respectively. Management believes no valuation allowance as defined by SFAS 109 is required at December 31, 1999 and 1998.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
A reconciliation between the actual tax expense and the "expected" tax expense (computed by applying the U.S. federal corporate tax rate of 34% to earnings before income taxes) is as follows:
(11) Shareholders' Equity
At fiscal years ended December 31, 1999 and 1998, the Bank's balance in retained earnings was $7,150,526 and $5,499,671, respectively. The restrictions on dividend payments are imposed by the Bank's primary regulator, The Office of the Comptroller of the Currency (OCC).
On October 20, 1997, the Company amended the director's stock option plan to extend the expiration date of the options from December 31, 1997 to February 1, 1998, and to include the option for the directors to exercise their options by paying cash of $10 per share or paying with stock valued at $15.50 per share and receive shares valued at $10 per share. The Company has elected to account for the options under Accounting Principles Board ("APB") No. 25 "Accounting for Stock Issued to Employees". According to APB No. 25, renewing or extending the option period establishes a new measurement date as if the right was newly granted. Therefore, the Company recorded compensation expense to the extent of the excess of the value of the stock over the purchase price ($15 less $10), resulting in a $650,000 compensation expense for fiscal year 1997.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(12) Rent
The following is a schedule of future minimum annual rentals under the noncancellable operating leases relating primarily to the Company's main office facility:
Year ended ----------
2000 $ 502,006 2001 514,724 2002 519,490 2003 152,890 2004 7,335 ----------
$1,696,445 ==========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $463,496, $444,386 and $410,803, respectively.
The landlord of the Company's facilities is a partnership, which is owned in part by certain of the Company's directors. This lease expires on January 1, 2003.
(13) Employee Savings Plan
The Company sponsors an employee savings plan, which qualifies as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 20% of their pre-tax compensation. The Company makes contributions on a discretionary basis as approved by the Board of Directors. Participants vest immediately in their own contributions and after one year of service in contributions made by the Company. Employee savings plan expense for the years ended December 31, 1999, 1998 and 1997 was $51,935, $49,992 and $32,509, respectively.
(14) Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets. Management believes, as of December 31, 1999, that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain total risk- based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table. If the holding company were included, amounts would be in excess of these amounts.
* Greater than or equals to.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(15) Stock Option Plans
During the year, the Bank approved incentive stock plans for its directors and employees. In April 1999, the Bank authorized 100,000 common shares for future options for the directors under an incentive stock option and non- statutory stock option plan. The number of options granted to each director shall not exceed 5,000 shares. Each option provides that the underlying option expires no later than December 31, 2008 and vesting occurs at the time of grant. During the year, the Bank granted an initial 6,544 options with an exercise price of $21.00 per share. As of December 31, 1999, there were 6,544 options vested and outstanding. No options were exercised during the year.
Also in April 1999, the shareholders ratified a plan approved by the board of directors in December 1998, which authorized 100,000 common shares for future options for the employees under an incentive stock option and non- statutory stock option plan. Each option provides that the underlying option expires no later than ten years from the date of grant and vesting occurs at the time of grant. During April 1999, the Bank granted an initial 10,000 options with an exercise price of $15.00 per share, which was the estimated market value per share at the time the plan was approved by the board of directors. During November 1999, an additional 7,750 shares were granted with an exercise price of $21.00 per share. As of December 31, 1999, there were 17,750 options vested and outstanding. No options were exercised during the year.
In addition, the Bank currently has a stock appreciation rights plan for the directors. In April 1999, the Bank granted each of the directors an initial 260 phantom shares. For each meeting attended during the year, the director received 24 shares not to exceed a total of 240 shares during any year. The phantom share value is recalculated each year based upon the change in equity per share from the previous year, which is determined by taking the equity of the Company and dividing it by the total number of shares outstanding. Each year, the Company will accrue that amount in a stock appreciation account. At December 31, 1999, the stock appreciation account had a value of $10,078 and the Bank incurred an expense of $10,078 for the year.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock-based compensation plan been determined consistent with FASB Statement No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ---------- --------- -------
Net income: As reported $1,532,032 1,439,507 538,506 Pro forma 1,359,427 1,439,507 538,506
Diluted earnings per share: As reported 2.12 2.03 .88 Pro forma 1.89 2.03 .88
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
The fair value of each option granted was estimated on the date of grant using the minimum value method with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively; dividend yield of .69 percent, .60 percent and -0- percent, respectively; expected volatility of -0- percent for all years; risk-free interest rates of 6.20 percent, -0- percent and 5.36 percent and expected lives of 9.5 years, -0- years and 17 years for the plan options.
A summary of the status of the Bank's stock option plan as of December 31, 1999, 1998, and 1997 and changes during the years ended on those dates is presented below:
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(16) Parent Company Only Financial Statements
Condensed financial statements of Commerce National Corporation (parent company only) follow:
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
No dividends were paid by the Bank subsidiary to Commerce National Corporation for 1999, 1998 or 1997. The Bank is in compliance with banking regulations regarding the payment of dividends.
Condensed Statements of Operations ---------------------------------- Years ended December 31, 1999, 1998 and 1997
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Condensed Statements of Cash Flows ---------------------------------- Years ended December 31, 1999, 1998 and 1997
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(17) Executive Supplemental Income Plan
The Bank implemented an executive supplemental income plan (the "Plan") during 1995 to provide supplemental income to four of its current executives after their retirement. The funding of the Plan involved the purchase of four cash surrender value life insurance policies, which totaled $1,295,000. The Plan is structured such that each participant is scheduled to receive specified levels of income after the retirement age of 65 for fifteen years. In the event a participant leaves the employment of the Bank before retirement, only the benefits vested through that date would be paid to the employee. The Plan also provides for 100% vesting in the event of a change in Bank ownership. The accounting for the Plan is as follows: Monthly, the Company records the mortality cost as a reduction of the asset. Interest for the policies is recorded to the asset and salary continuation expenses are accrued.
The Bank has approximately $278,000 and $211,000 in deferred compensation accrued at December 31, 1999 and 1998, respectively, which is included in accounts payable and other liabilities in the accompanying consolidated balance sheets. The Bank incurred charges of $77,612 and $69,041 in connection with the Plan during 1999 and 1998, respectively.
(18) Credit Commitments
The Bank has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer's credit worthiness is evaluated on a case- by-case basis. A summary of commitments to extend credit and standby letters of credit written at December 31, 1999 and 1998 are as follows:
Because many commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows.
The majority of loan commitments have terms up to one year, and have variable interest rates which range from 9% to 9.5%.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
Loan commitments written have off-balance-sheet credit risk because only original fees are recognized in the statement of financial position until the commitments are fulfilled or expire. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value.
The Bank's policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, real estate and income producing commercial properties.
Standby letters of credit are contractual commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
(19) Concentration of Credit Risk
The Bank originates real estate, consumer and commercial loans primarily in its Central Florida market area. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers' ability to honor their contracts is dependent upon the economy of Central Florida. The Bank does not have a significant exposure to any individual customer or counterparty.
(20) Subsequent Event
On March 3, 2000, the Company entered into a definitive agreement with Wachovia Corporation ("Wachovia"). The agreement provides for a tax-free exchange of common shares of the Company at a ratio of between a minimum of .8421 and a maximum of 1.0526 shares of Wachovia, or a value of $54 per Company share. The transaction is subject to approval by regulatory authorities and Company shareholders.
(Continued)
COMMERCE NATIONAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999
(21) Basic and Diluted Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure None. --------------------
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------
The name, age, affiliation with the Company and date such affiliation commenced of each executive officer and director of the Company is presented in the following chart. Each director listed below was elected by the Company's shareholders and will hold office for the term designated and until his successor is duly elected and qualified. Additional information concerning business experience of each individual is set forth in the narrative section following the chart.
- ------------------------------------------------------------------------------- YEARS REMAINING APPROXIMATE IN TERM HELD OFFICE NAME AGE POSITION ELECTED (1) SINCE - ------------------------------------------------------------------------------- Russell Barkett 60 Director 2 December, 1992 - ------------------------------------------------------------------------------- C. Durham Barnes, M.D. 58 Director 1 February, 1985 - ------------------------------------------------------------------------------- Robert E. Battaglia 53 Director 0(1) February, 1985 - ------------------------------------------------------------------------------- Robert B. Boswell, M.D. 54 Director 2 February, 1985 - ------------------------------------------------------------------------------- Kenneth M. Clayton 51 Director 1 February, 1985 - ------------------------------------------------------------------------------- Guy D. Colado 55 President & 1 February, 1985 Chairman - ------------------------------------------------------------------------------- Ernst R. Janvrin 54 Director 0(1) April, 1996 - ------------------------------------------------------------------------------- Anthony Lombardi, Jr. 52 Director 1 April, 1996 - ------------------------------------------------------------------------------- Jane H. Louttit 54 Director 0(1) April, 1996 - ------------------------------------------------------------------------------- Stephen G. Miller 44 Director 2 April, 1996 - ------------------------------------------------------------------------------- Willie C. Moss 65 Director 2 December, 1992 - ------------------------------------------------------------------------------- Frederick A. Raffa, Ph.D. 56 Director 2 February, 1985 - ------------------------------------------------------------------------------- Alan M. Scarboro 50 Vice President N/A March, 1989 Sec./Treas. - ------------------------------------------------------------------------------- W. Charles Shuffield 55 Director 0(1) February, 1985 - -------------------------------------------------------------------------------
(1) Has been nominated for election for a three year term which nomination will be voted on at the Annual Shareholders' Meeting scheduled for May 30, 2000.
Each individual designated above also is a member of the board of directors for the Bank. The members of the Compensation Committee of the Company for 1998 were W. Charles Shuffield, Ernst R. Janvrin, Willie C. Moss, Kenneth M. Clayton, Guy D. Colado, Marsha J. Wheeler, Russell Barkett and Stephen G. Miller. Mr. Colado, a member of the Committee, is the President, CEO and Chairman of the Company and the Bank and is excused from discussions concerning his compensation. The Bank's officers are appointed by the board of directors of the Bank and hold office at the will of such board. The Bank's executive officers presently are:
NAME POSITION WITH BANK ---- ------------------
Guy D. Colado President, CEO and Chairman Marsha J. Wheeler Sr. Vice President/COO Jerry H. Johns, III Sr. Vice President/Lending John R. Casebier Sr. Vice President
RUSSELL BARKETT is a native of Florida, born in Miami, and a resident of Maitland, Florida. Mr. Barkett is a graduate of the University of Florida and the University of West Florida. He is a Certified Public Accountant and a member of the American and Florida Institutes of Certified Public Accountants and the American Management Association. Mr. Barkett is past Treasurer of the Downtown Kiwanis Club and of the Florida Citrus Sports Association. Mr. Barkett is currently Vice President, Chief Financial Officer and Secretary/Treasurer of all Davgar Restaurants, Inc. entities, and he has been in this position since 1976.
C. DURHAM BARNES, M.D. is a native of Florida and a resident of Winter Park, Florida. Dr. Barnes has been a practicing physician and President of Central Florida Retina Consultants since 1979 and is a member of the Board of Directors of the Orange County Medical Society. In addition, Dr. Barnes has been actively involved in community service and has served on the Board of Directors of the Central Florida Chapter of the American Diabetic Association and Humana Hospital Lucerne Board of Trustees.
ROBERT E. BATTAGLIA is a native of Florida and a resident of Winter Park, Florida. Since October 1976, Mr. Battaglia has been President of Battaglia Fruit Co., Inc., a citrus grower, harvester, and land owner in Central Florida, and is currently a director of Florida Citrus Mutual. In addition to operating the citrus activities, Mr. Battaglia is a member at the First Presbyterian Church of Orlando, a Director of The Orlando Margarita Society (charitable non-profit organization), Vice Chairman of the Central Region Council to Prevent Blindness Florida; and a member of the Citrus Advisory Committee of Florida Citrus Sports Association.
ROBERT B. BOSWELL, M.D. is a resident of Winter Park, Florida. Since 1979, Dr. Boswell has been engaged in the private practice of cardiology in Orlando, Florida. In addition, since 1979, Dr. Boswell has been a Fellow of the American College of Cardiology and a member of the American Heart Association. He is an invasive cardiologist with interest in pacemakers and nuclear cardiology.
KENNETH M. CLAYTON is a native of Florida and a resident of Orlando, Florida. Mr. Clayton has actively practiced law in Orlando, Florida, since May of 1974 in a variety of civil law areas. Since October 1987, Mr. Clayton has been a partner in the law firm of Clayton &
McCulloh. In addition, Mr. Clayton is a past president and founder of the Mid- Florida Chapter of Community Associations Institute. Mr. Clayton is a member of the Orlando Area Chamber of Commerce, American Bar Association, The Florida Bar, the Orange County Bar Association and has served on various committees for such organizations.
GUY D. COLADO is a native Floridian and a lifelong resident of Winter Park, Florida. From June of 1984 to the present, Mr. Colado has been primarily engaged in the organization and operation of the Company and the Bank, which entailed the preparation and filing of the necessary applications with regulatory authorities, activities concerning the site location and day to day operations. Since the Bank's opening in August, 1986, he has served as President and Chief Executive Officer of the Company and the Bank. Effective January 1, 2000, he was also elected as Chairman of the Board. From March of 1982 to May of 1984, Mr. Colado served as Vice President of the Florida National Bank of Orlando. From July of 1980 to February of 1982, Mr. Colado was President of Tropic Bank of Seminole and was involved in all aspects of a small community bank which had two branches. From September of 1977 to July of 1980, Mr. Colado was Vice President and Manager of the Winter Park branch of Sun Bank, National Association, Orlando, and served from May of 1971 to July of 1980 as assistant manager of the real estate loan department for Sun Bank as well as in various other capacities. Mr. Colado is a participant in several professional community and charitable organizations, groups and committees. He is also retired from the U.S. Army Reserves.
ERNST R. JANVRIN has been a resident of Orlando, Florida since 1975. Mr. Janvrin is the senior partner and partner-in-charge of Janvrin & Regan, P.A., a local CPA firm created in 1984 in Winter Park, Florida, which concentrates their practice in small business and individual accounting and tax matters. Mr. Janvrin is past president of the Florida Institute of CPA's (Central Florida Chapter), a member of the American Institute of CPA's and the Florida Institute of CPA's. He is currently serving as chairman of the Special Project Committee of the local chapter of the Florida Institute of CPA's.
ANTHONY LOMBARDI, JR. is a native of Florida and a resident of Windermere, Florida. From 1980 to 1996, Mr. Lombardi served as Vice President of Lombardi's Seafood, Inc., a processor, importer, distributor and retainer of seafood. In 1996, Mr. Lombardi was elected president of Lombardi's. Mr. Lombardi has served on the Board of Directors of the Southeastern Fisheries Association and also The National Fisheries Institute and is a member of the National Shrimp Processors Association. Mr. Lombardi is a member of Holy Family Catholic Church in Orlando, Florida.
JANE H. LOUTTIT has lived in the Orlando area since 1975. Mrs. Louttit has worked for Maitland Family Practice since 1975 and currently serves as Administrator. Mrs. Louttit has been active in the Junior League of Greater Orlando, serving on the Board of Directors as Secretary and Treasurer. She is a member of St. Richard's Episcopal Church and has served on the Vestry, as Secretary of the Executive Committee, and from 1985 to 1996 as Directress of the Altar Guild. From 1990 through 1996, Mrs. Louttit was a Trustee at Trinity Preparatory School, including two years on the Executive Committee as Secretary of the Board. She has served on numerous other church, civic, and school committees both as a member and as Chairperson.
STEPHEN G. MILLER is a native of Florida and a resident of Winter Park, Florida. Since 1983, Mr. Miller has been the treasurer of Miller Hardware, Inc., a well-known establishment in Winter Park, Florida. Before entering the family business, Mr. Miller was a practicing CPA with KPMG Peat Marwick and Coopers & Lybrand CPA's. From 1981 - 1984, Mr. Miller served as Corporate Controller and Vice President of Finance of Applied Devices Corporation, a publicly-held defense contractor. In addition, Mr. Miller has been actively involved in community service and has served on the Winter Park Public Library Board of Trustees, and the Winter Park Chamber of Commerce Board of Directors and Executive Committee. Mr. Miller is currently a member of the Florida Institute of CPA's.
WILLIE C. MOSS has been a resident of Orlando, Florida since 1968. Mr. Moss is currently and has been since 1968, President and owner of Data Dimensions, Inc., a computer software company that supplies software to savings and loan, savings banks and banks nationwide. Prior to 1968, Mr. Moss was a Vice President at Florida National Bank in Jacksonville, Florida, with primary responsibility for their data processing operations.
FREDERICK A. RAFFA, Ph.D. is a resident of Maitland, Florida. From 1969 until 1998, Dr. Raffa was a member of the faculty of the University of Central Florida's Department of Economics, including service as Chairman of the Department of Economics from 1976 through 1998. In May 1998, Dr. Raffa became Professor Emeritus and began a five year phased retirement period. Dr. Raffa was the founding editor of the Business Barometer of Central Florida. Since 1971, ------------------------------------- Dr. Raffa has been self-employed as a consulting economist. He currently serves as President of Raffa Consulting Economists, Inc. From 1976 to 1989, Dr. Raffa served as the NCAA representative and is currently an associate board member of the Florida Citrus Sports Association.
ALAN M. SCARBORO is a native of Florida and a resident of Orlando, Florida. Since March 1989, Mr. Scarboro has served as Vice President of the Company and supervised the National Bank of Commerce Building, which is owned by Gateway Plaza, Ltd. On March 15, 1993, Mr. Scarboro was elected Secretary/Treasurer of the Company. Prior to 1989, Mr. Scarboro was employed in the Central Florida area and Alabama by other financial institutions. During this period, Mr. Scarboro also managed the operations of his family-owned business in Orlando.
W. CHARLES SHUFFIELD is a resident of Orlando, Florida. Since January, 1984, Mr. Shuffield has been a principal in the law firm of Zimmerman, Shuffield, Kiser & Sutcliffe, P.A. Mr. Shuffield has been a practicing attorney in Orlando, Florida, since 1969. Mr. Shuffield is a member of The Florida Bar, the Orange County Bar Association and Tennessee Bar Association and has been active on several committees concerned with Corporation, Banking, Taxation and Real Property for The Florida Bar and the Orange County Bar Association. Mr. Shuffield is involved in various community affairs and currently serves or has served in the following positions: Member of the Board of Directors of Orlando Regional Healthcare Foundation, Inc. (1982 to 1993); Member of Rotary Club of Orlando (1981 to present), including serving on Board of Directors; Member of the Committee of 100; Member of the Junior Achievement Endowment Committee; Heart of the City Foundation Board of Directors (1986-1990); Member of Country Club of Orlando; Chairman and member of various committees of the Greater Orlando Chamber of Commerce (1978 to present); Member of the Board of Directors of Orlando Union Rescue Mission.
Item 11.
Item 11. Executive Compensation/Board Compensation -----------------------------------------
The executive officers for the Company and the Bank received salaries, in aggregate, equal to approximately $429,000, received the benefit of automobile allowances for an aggregate $20,400 and the payment of various club fees and insurance in the amount of approximately $14,462. There were no other executive officers other than the President with salaries in excess of $100,000 per year.
SUMMARY COMPENSATION TABLE --------------------------
(1) Includes a $6,000 car allowance, $8,821 medical insurance premium, $3,600.00 life insurance premium and $4,876.00 membership dues in country clubs.
(2) Includes a $6,000 car allowance, $8,509 medical insurance premium, $3,600.00 life insurance premium and $2,540.00 membership dues in country clubs.
(3) Includes a $6,000 car allowance, $8,704 medical insurance premium, $3,600.00 life insurance premium and $2,540.00 membership dues in country clubs.
(4) Reflects a $4,800 car allowance.
The Bank implemented an executive supplemental income plan (the "Plan") during 1995 to provide supplemental income to four of its current executives after their retirement. Those executives are as follows:
Name Position with Bank ---- ------------------
Guy D. Colado President, CEO and Chairman Marsha J. Wheeler Sr. Vice President/COO Jerry H. Johns, III Sr. Vice President/Lending John R. Casebier Sr. Vice President
Funding for the Plan involved the purchase of cash surrender value life insurance policies, one for each executive, which totaled $1,195,000. The Plan is structured so that each participant is scheduled to receive specified levels of income for 15 years after the retirement age of 65. In the event a participant leaves the employment of the Bank before retirement, only the benefits vested through that date would be paid to the employee. The Plan also calls for 100% vesting upon a change of control of the Bank.
The following table sets forth, as of December 31, 1999, the stock options and stock appreciation rights that have been granted to each of the Company's executive officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR --------------------------------------
(1) Mr. Colado was also granted an option to acquire 500 shares in his capacity as a director.
The 1999 Commerce National Corporation Directors' Stock Option Plan (the "1999 Directors Stock Plan") and the form of a Stock Appreciation Rights Agreement (the "1999 Stock Appreciation Rights Agreement") were adopted by the Company's Board of Directors on November 15, 1999. A copy of the 1999 Directors Stock Plan, a sample of the 1999 Directors' Stock Option Agreement, and a sample 1999 Stock Appreciation Rights Agreement are attached as exhibits hereto.
Under the 1999 Directors Stock Plan, each director received a non-qualified stock option for 260 shares and an additional grant of 24 shares for each Board meeting attended by the director up to a maximum of 240 shares for meeting attendance each year. A total of 6,544 options were granted in 1999 to the Company's directors.
A 1999 Stock Appreciation Rights Agreement was entered into with each of the Company's directors effective January 1, 1999. Pursuant to each agreement, a director was granted phantom shares of the Company's common stock and the right to annually receive in cash the amount of appreciation in value of said director's phantom shares. Each agreement is for a 10-year term unless earlier terminated in the event a director ceases to serve as a director of the Company. During 1999, a total of $10,078 was paid to the Company's directors under the 1999 Stock Appreciation Rights Agreements.
In addition, directors' fees in the amount of $3,000 per year are paid to each non-employee director for an aggregate amount of directors' fees paid for 1999 of $39,000 plus $9,000 in committee fees. Committee fees are paid to each director on the basis of number of meetings each director attended with the fee per meeting set at $100.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------------------------------
Guy D. Colado, President of the Company, has sole voting and dispositive power over 32,118 shares of the Company's common stock. Mr. Colado's wife has sole voting and dispositive power over 8,000 shares of common stock for which beneficial ownership is not disclaimed. Mr. Colado's children have sole voting and dispositive power over 2,304 shares of common stock, for which beneficial ownership is not disclaimed. Such 42,422 shares of common stock represent approximately 5.88% of the total outstanding shares of common stock of the Company. Accordingly, pursuant to Rule 13d-3 promulgated by the SEC, Mr. Colado is the beneficial owner of such 42,422 shares of Common Stock. In addition, Mr. Colado has been granted the option to acquire an additional 3,500 shares of the Company's common stock pursuant to the 1998 Commerce National Corporation Employees' Stock Option Plan and additional 500 shares of the Company's common stock pursuant to the 1999 Commerce National Corporation Directors' Stock Plan.
Each founding director of the Company, including Mr. Colado, received a non-qualified stock option under the Amended and Restated 1985 Commerce National Corporation Directors' Stock Plan (the "1985 Directors' Stock Plan") for 10,000 shares of Common Stock for his services in lieu of director's fees for his initial term of office. Mr. Barkett and Mr. Moss, who joined the Board on December 21, 1992, received options of 5,000 shares each. During 1997, options to acquire 4,000 shares which were previously granted but not exercised under the 1985 Directors' Stock Plan were distributed equally among the five new directors who were elected to the Board on April 15, 1996. Mr. Cahill, Mr. Janvrin, Mr. Lombardi, Mrs. Louttit and Mr. Miller were each granted an option to acquire 800 shares of the Company' s common stock.
On October 20, 1997, the Directors' Stock Plan was amended to extend the exercise period to February 1, 1998, and to permit optionees under the Directors' Stock Plan to pay the exercise price with existing stock of the Company. All of the options granted under the Directors' Stock Plan, including the options described in the foregoing paragraph, representing an aggregate of 130,000 shares of the Company's common stock, were exercised by February 1, 1998.
The 1998 Commerce National Corporation Employees' Stock Option Plan was adopted by the Company's Board of Directors on December 21, 1998 and by the Company's shareholders at their annual meeting on April 19, 1999. The Plan permits the Company to grant employees options to purchase up to 100,000 shares of the common stock of the Company at fair market value per share, but in no case shall the purchase price be less than $15.00 per share, which was fair market value at the date of adoption. Pursuant to the Plan, immediately exercisable options to purchase 10,000 shares were granted in 1998, and immediately exercisable options to purchase 7,750 shares were granted in 1999. The exercise price for the options granted in 1998 is $15.00, and the exercise price for the options granted in 1999 is $21.00. None of these options have been exercised.
The following table sets forth, as of March 1, 2000, the beneficial ownership interest in the Company's Common Stock held by each of the Company's directors, and by all officers and directors as a group. With the exception of Guy D. Colado, no shareholder is known by the Company to beneficially own more than the five percent (5%) of the Company's outstanding Common Stock. Each person listed has sole voting and investment power with respect to the shares listed as beneficially owned by him, unless otherwise indicated in the footnotes.
(1) As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, and/or to dispose of, or to direct the disposition of, the Common Stock. Unless otherwise indicated, the shares are held with sole power to vote and sole power to dispose.
(2) The percentages have been rounded to the nearest hundredth. In calculating this percent, it is assumed that all options are exercised and therefore the 17,750 option shares granted under the 1998 Employees' Stock Option Plan and the 6,236 option shares granted under the 1999 Directors Stock Plan have been added to the number of shares outstanding.
(3) "Option Shares" represent those shares which the indicated individual has a right to acquire pursuant to an immediately exercisable option with an exercise price of $21.00 per share.
(4) Includes 2,500 shares held jointly with a family member with shared voting and shared investment powers and 7,500 shares owned by Central Florida Retina Consultants Cash Deferred Plan FBO Dr. Barnes for which beneficial ownership is not disclaimed.
(5) Includes 6,500 shares owned by Robert B. Boswell, M.D. FACCPA Defined Contribution Pension Plans, 500 shares as custodian for a family member and 2,200 shares held by a family member for which beneficial ownership is not disclaimed.
(6) Includes 300 shares held in trust for family members for which beneficial ownership is not disclaimed and 2,000 shares held in trust for a third party.
(7) Includes 10,304 shares held by family members for which beneficial ownership is not disclaimed. Mr. Colado is both an employee and a director. He has an immediately exercisable right to acquire 3,500 shares pursuant to the 1998 Commerce National Corporation Employees' Stock Option Plan, and an immediately exercisable right to acquire 500 shares pursuant to the 1999 Directors Stock Plan.
(8) Includes 300 shares held by a Florida corporation in which he has an interest and for which beneficial ownership is not disclaimed.
(9) Includes 13,059 shares held in trust for Mr. Moss and 5,000 shares held in trust for a family member, over which Mr. Moss exercises shared voting and investment powers.
(10) Includes 17,029 shares held jointly with a family member with shared voting and shared investment power, 7,400 shares held in pension/profit sharing plans for Mr. Raffa's benefit, and 1,000 shares held by family members for which beneficial ownership is not disclaimed.
(11) Includes 3,220 shares held jointly with a family member with shared voting and shared investment power and 1,500 shares held by Scarboro Central, Inc. for which beneficial ownership is not disclaimed.
(12) Mr. Scarboro is an employee and not a director. He has an immediately exercisable right to acquire shares pursuant to the 1998 Commerce National Corporation Employees' Stock Option Plan. The exercise price is based on fair market value but in no case less than $15.00 per share, which was fair market value at the date of adoption.
(13) Includes 10,000 shares held jointly with a family member with shared voting and shared investment power. Does not include 4,000 shares held by Zimmerman, Shuffield, Kiser & Sutcliffe, P.A. Profit Sharing Plan & Trust in which Mr. Shuffield has approximately a 22.7% interest but over which he does not exercise control.
Item 13.
Item 13. Certain Relationships and Related Transactions ----------------------------------------------
The real estate and the building constructed thereon, which houses the corporate offices of CNC and the facilities of the Bank, are owned by Gateway Plaza, Ltd., a Florida limited partnership ("Gateway"). The Directors or certain of their affiliates, except for Mrs. Louttit and Messrs. Barkett, Cahill, Janvrin, Lombardi, Miller, Moss, and Raffa are limited partners of Gateway and they or their affiliates beneficially own, in aggregate, 4,809 of the 11,562 presently issued and outstanding limited partnership interests of Gateway, or approximately 42% thereof. Additionally, the general partner of Gateway is NBOC, Inc., a Florida corporation, which is owned and controlled by Guy D. Colado (President and Chairman of both the Bank and CNC) and G. Winston Lovelace (a former director of both the Bank and CNC and shareholder of CNC). As general partner, NBOC, Inc. has a 1% interest in the taxable income, gains, losses and credits realized by Gateway. While it is believed that the leasing arrangements for CNC, as lessee, and Gateway, as lessor, are fair, such arrangements have not been arrived at as a result of arms-length negotiations due to the commonality of control found in both entities. The Bank made payments under the lease to Gateway in the aggregate amount of approximately $335,344 for fiscal 1999.
The law firm of Zimmerman, Shuffield, Kiser & Sutcliffe, P.A. ("ZSKS"), in which W. Charles Shuffield is a principal, has provided and will continue to provide certain legal services to CNC and the Bank and has received and will continue to receive fees for the services rendered. The amount of fees paid to ZSKS by the Company and/or Bank did not exceed five percent of ZSKS' gross revenues. Mr. Shuffield is a director and shareholder of CNC, a director of the Bank and a limited partner of Gateway. The law firm of Clayton and McCulloh has provided and will continue to provide legal services to the Bank and CNC. The amount of fees paid to Clayton and McCulloh by the Company and/or Bank did not exceed five percent of Clayton and McCulloh's gross revenues. Mr. Clayton is a director and shareholder of CNC, a director of the Bank and a limited partner in Gateway.
At December 31, 1999, the Bank had approximately $4,232,399 loaned to certain CNC/Bank directors and to certain affiliates of certain CNC/Bank directors. Such loan transactions were made in the ordinary course of business; on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other persons; and did not involve more than the normal risk of collectibility or present other unfavorable features.
The SEC maintains a web site at http://www.sec.gov which contains reports, proxy and information statements and other information pertaining to registrants that file electronically with the SEC including the Company.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ----------------------------------------------------------------
a. 1. Financial Statements --------------------
The following consolidated financial statements of the Company are included in Part II, Item 8:
- Consolidated Balance Sheets - December 31, 1999 and 1998.
- Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997.
- Consolidated Statements of Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997.
- Consolidated Statement of Cash Flows - Years ended December 31, 1999, 1998 and 1997.
a. 2. Financial Statement Schedules -----------------------------
The Company has not included any financial schedules because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in notes thereto.
a. 3. Exhibits --------
b. Reports on Form 8-K -------------------
No reports on Form 8-K were filed by the Company for the fiscal quarter ended December 31, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMERCE NATIONAL CORPORATION (Registrant)
Date: March 30, 2000 By: /s/ Guy D. Colado ----------------------------------------------- GUY D. COLADO, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title Date - ------------------- ----
By: /s/ Guy Colado March 30, 2000 ------------------------------- Guy D. Colado President and Director/Chairman (Principal Executive Officer)
By: /s/ Alan M. Scarboro March 30, 2000 ------------------------------- Alan M. Scarboro Secretary/Treasurer
By: /s/ Russell Barkett March 30, 2000 ------------------------------- Russell Barkett Director
By: /s/ C. Durham Barnes March 30, 2000 ------------------------------- C. Durham Barnes, M.D. Director
Signature and Title Date - ------------------- ----
By: /s/ Robert E. Battaglia March 30, 2000 ------------------------------- Robert E. Battaglia Director
By: March 30, 2000 ------------------------------- Robert B. Boswell, M.D. Director
By: March 30, 2000 ------------------------------- Kenneth M. Clayton Director
By: /s/ Ernst R. Janvrin March 30, 2000 ------------------------------- Ernst R. Janvrin Director
By: /s/ Tony Lombardi, Jr. March 30, 2000 ------------------------------- Tony Lombardi, Jr. Director
By: /s/ Jane H. Louttit March 30, 2000 ------------------------------- Jane H. Louttit Director
By: /s/ Stephen G. Miller March 30, 2000 ------------------------------- Stephen G. Miller Director
By: /s/ Willie C. Moss March 30, 2000 ------------------------------- Willie C. Moss Director
Signature and Title Date - ------------------- ----
By: /s/ Frederick A. Raffa March 30, 2000 ------------------------------- Frederick A. Raffa Director
By: /s/ W. Charles Shuffield March 30, 2000 ------------------------------- W. Charles Shuffield Director
Supplemental Information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.
Neither the Registrant's annual report for the 1999 fiscal year, nor any proxy statement, form of proxy or other proxy soliciting material with respect to its Annual Meeting of Shareholders to be held on May 30, 2000, has been sent to security holders as of the date hereof. However, such report, proxy statement and form of proxy will be furnished to security holders subsequent to the filing of the annual report on this Form and will subsequently be furnished to the Securities and Exchange Commission.
EXHIBIT INDEX