-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FtnpG/advQNkRX9n8XKxyfUux9qUt4gSPl8Yq2/1j+pasCLAFz7NDDX1dZKCE+8Y jBpmasf4JHz6rMcst6E+TA== 0000950109-94-002057.txt : 19941117 0000950109-94-002057.hdr.sgml : 19941117 ACCESSION NUMBER: 0000950109-94-002057 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19941114 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10853 FILM NUMBER: 94559000 BUSINESS ADDRESS: STREET 1: 500 N CHESTNUT ST CITY: LUMBERTON STATE: NC ZIP: 28358 BUSINESS PHONE: 9196712000 MAIL ADDRESS: STREET 1: 500 NORTH CHESTNUT STREET CITY: LUMBERTON STATE: NC ZIP: 28358 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) November 14, 1994 ----------------- Southern National Corporation ---------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 1-10853 56-0939887 ------------------------------ --------------- -------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 500 North Chestnut Street, Lumberton, North Carolina 28358 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (910) 773-7500 ---------------------- Item 5. Other Events The purpose of this Current Report on Form 8-K is to file as Exhibits 99.1, 99.2 and 99.3 hereto the following documents providing financial information about Commerce Bank. These exhibits were prepared by Commerce Bank, were not prepared by Registrant, and are not to be considered as being filed as part of the Registrant's disclosure obligations under the Securities Exchange Act of 1934: (1) Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended June 30, 1994; (2) Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended March 31, 1994; and (3) The following financial statements and auditors' reports from the Form F-2 Annual Report of Commerce Bank for the year ended December 31, 1993 (as amended by Amendment No. 1 to Form F-2) (A) Balance Sheet at December 31, 1993 and 1992; (B) Income Statement for the Three years ended December 31, 1993; (C) Statement of Cash Flows for the three years ended December 31, 1993; (D) Statement of Changes in Shareholders' Equity for the three years ended December 31, 1993; (E) Notes to Financial Statements; (F) Report of Ernst & Young LLP, Independent Auditors, dated January 21, 1994; and (G) Report of Coopers & Lybrand, Independent Accountants, dated January 15, 1993 Such documents will be incorporated by reference into the Registration Statement on Form S-4 the Registrant intends to file in connection with its merger with BB&T Financial Corporation. Item 7. Financial Statements and Exhibits. (c) Exhibits. 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants 99.1 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended June 30, 1994 99.2 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended March 31, 1994 99.3 Financial Statements and Auditors' Reports from the Form F-2 Annual Report of Commerce Bank for the year ended December 31, 1993 (as amended by Amendment No. 1 to Form F-2) -2- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN NATIONAL CORPORATION (Registrant) Date: November 14, 1994 By: ----------------------------- Name: --------------------------- Title: -------------------------- -3- EXHIBIT INDEX Exhibit Number and Description - - - ------------------------------ 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Coopers & Lybrand L.L.P., Independent Accountants 99.1 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended June 30, 1994 99.2 Form F-4 Quarterly Report of Commerce Bank for the Quarter Ended March 31, 1994 99.3 Financial Statements and Auditor's Report from the Form F-2 Annual Report of Commerce Bank for the year ended December 31, 1993 (as amended by Amendment No. 1 to Form F-2), including: (A) Balance Sheet at December 31, 1993 and 1992; (B) Income Statement for the Three years ended December 31, 1993; (C) Statement of Cash Flows for the three years ended December 31, 1993; (D) Statement of Changes in Shareholders' Equity for the three years ended December 31, 1993; (E) Notes to Financial Statements; (F) Report of Ernst & Young LLP, Independent Auditors, dated January 21, 1994; and (G) Report of Coopers & Lybrand, Independent Accountants, dated January 15, 1993 -4- EX-23.1 2 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the inclusion herein of our report dated January 21, 1994, with respect to the 1993 financial statements and schedule of Commerce Bank for the year ended December 31, 1993, filed with the Securities and Exchange Commission as Exhibit 99.3 to this Current Report on Form 8-K of Southern National Corporation. Richmond, Virginia Ernst & Young LLP November 11, 1994 EX-23.2 3 CONSENT OF COOPER & LYBRAND Exhibit 23.2 Consent of Independent Accountants ---------------------------------- We consent to the inclusion in the current report of Southern National Corporation on Form 8-K of our report dated January 15, 1993 filed with the Securities and Exchange Commission as Exhibit 99.3 on our audits of the financial statements of Commerce Bank as of December 31, 1992 and 1991 and for each of the two years in the period ended December 31, 1992. Norfolk, Virginia /s/ COOPERS & LYBRAND L.L.P. November 11, 1994 EX-99.1 4 COMMERCE F-4 (JUNE 30) EXHIBIT 99.1 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D. C. 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1994 COMMERCE BANK ------------- (Exact name of bank as specified in charter) 54-1027360 22584 ------------------------------------------------------------ (I.R.S. Identification No.) (FDIC Insurance Cert. No.) ------------------------------------------------------------ VIRGINIA -------- (State of Incorporation) 3450 Pacific Avenue Virginia Beach, Virginia 23451 (804) 456-1093 --------------- (Address of principal office and telephone number) Indicate by check mark whether the Bank (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the Bank's classes of common stock, as of the latest practicable date. 2,725,163 shares of common stock ($2.50 par value) were outstanding as of June 30, 1994. ITEM 1: FINANCIAL STATEMENTS COMMERCE BANK BALANCE SHEET (Unaudited) (In thousands, except common stock data)
June 30, December 31, 1994 1993 1993 ---------------- ---------------- ---------------- Assets Cash and due from banks $ 28,303 $ 22,680 $ 25,800 Temporary investments 12,613 17,115 13,431 Securities: Held to maturity (Market value June 30, 1994 - $88,230 1993 - $262,085, December 31, 1993 - $251,596) 90,494 254,224 247,175 Available for sale 127,203 - - ----------- ----------- ----------- Total Securities 217,697 254,224 247,175 Loans: Commercial 183,013 149,698 165,409 Consumer 109,634 92,582 102,611 Real estate mortgage 96,327 86,545 88,850 Real estate construction & development 14,871 14,906 17,074 Tax-exempt 6,354 6,443 6,477 Less: Unearned income and deferred fees (1,766) (3,090) (2,163) ----------- ----------- ----------- Loans, net of unearned income and deferred fees 408,433 347,084 378,258 Less: Allowance for loan losses (7,188) (6,645) (6,527) ----------- ----------- ----------- Loans, net 401,245 340,439 371,731 Bank premises and equipment, net 19,229 16,830 18,384 Foreclosed property 2,870 4,433 3,080 Other assets 10,110 10,676 10,029 ----------- ----------- ----------- Total assets $ 692,067 $ 666,397 $ 689,630 - - - ------------------------------------------------------------------------------------------------------------------------------ Liabilities Deposits: Noninterest bearing demand $ 101,268 $ 102,179 $ 103,197 Interest bearing demand 74,792 58,397 72,221 Money market savings 247,108 249,957 227,751 Regular savings 31,198 27,191 28,389 Certificates of deposit less than $100,000 146,027 150,280 164,122 Certificates of deposit greater than $100,000 35,999 28,182 38,461 ----------- ----------- ----------- Total deposits 636,392 616,186 634,141 Short-term borrowings - 175 1,400 Long-term debt 6,790 6,866 6,828 Other liabilities 2,292 2,848 3,672 ----------- ----------- ----------- Total liabilities 645,474 626,075 646,041 ----------- ----------- ----------- Shareholders' Equity Common stock, $2.50 par: 10,000,000 shares authorized: 2,725,163, 2,533,914, and 2,686,792 issued and outstanding 6,813 6,335 6,717 Capital surplus 29,787 25,721 29,062 Retained earnings 10,587 8,296 7,810 Unrealized loss on marketable equity securities - (30) - Net unrealized loss on securities available for sale (594) - - ----------- ----------- ----------- Total shareholders' equity 46,593 40,322 43,589 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 692,067 $ 666,397 $ 689,630 - - - ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 1 COMMERCE BANK STATEMENT OF INCOME (Unaudited) (In thousands, except share data)
Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 ------------ ------------ ------------ ------------ Interest Income Loans, including fees $ 8,659 $ 7,625 $ 16,704 $ 15,002 Securities held to maturity and available for sale 3,344 4,075 6,885 8,077 Temporary investments 179 164 343 323 ------------ ------------ ------------ ------------ Total interest income 12,182 11,864 23,932 23,402 Interest Expense Deposits 4,865 5,133 9,602 10,311 Short-term borrowings - 7 30 9 Long-term debt 167 159 331 304 ------------ ------------ ------------ ------------ Total interest expense 5,032 5,299 9,963 10,624 ------------ ------------ ------------ ------------ Net Interest Income 7,150 6,565 13,969 12,778 Provision for loan losses 600 725 1,200 1,525 ------------ ------------ ------------ ------------ Net Interest Income After Provision For Loan Losses 6,550 5,840 12,769 11,253 Noninterest Income Service charges on deposit accounts 1,021 825 1,960 1,595 Mortgage brokerage income 391 622 981 1,368 Credit card merchant fees 275 234 471 402 Securities gains 10 - 69 86 Trust income 172 165 342 315 Other income 499 344 939 597 ------------ ------------ ------------ ------------ Total noninterest income 2,368 2,190 4,762 4,363 Noninterest Expenses Salaries and benefits 2,818 2,656 5,693 5,211 Occupancy of bank premises 688 591 1,353 1,174 Furniture and equipment 465 387 879 811 Other expenses 2,291 1,908 4,301 3,684 ------------ ------------ ------------ ------------ Total noninterest expenses 6,262 5,542 12,226 10,880 ------------ ------------ ------------ ------------ Income Before Income Taxes 2,656 2,488 5,305 4,736 Provision for income taxes 815 840 1,703 1,588 ------------ ------------ ------------ ------------ Net Income $ 1,841 $ 1,648 $ 3,602 $ 3,148 - - - --------------------------------------------------------------------------------------------------------------------- Net Income Per Share Primary $ 0.66 $ 0.60 $ 1.29 $ 1.15 Fully diluted 0.63 0.57 1.23 1.11 Weighted Average Shares Outstanding Primary 2,789 2,748 2,802 2,726 Fully diluted 3,050 3,018 3,068 2,993 - - - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 2 COMMERCE BANK STATEMENT OF CASH FLOWS (Unaudited) (In thousands)
Six months ended June 30, 1994 1993 ------------- ------------- Cash Flows From Operating Activities: Net income $ 3,602 $ 3,148 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 1,200 1,525 Depreciation and amortization of premises and equipment 913 774 Net amortization of premiums and accretion of discounts 361 337 Amortization of intangible assets 136 161 Gain on sale of securities available for sale (69) - Gain on sale of securities held to maturity - (86) (Increase) decrease in deferred income tax benefits (90) 6 (Decrease) increase in interest receivable 17 (43) Decrease in interest payable (273) (66) Decrease in other liabilities (1,133) (462) Decrease in other assets 66 1,103 ------------- ------------- Net cash provided by operating activities 4,730 6,397 ------------- ------------- Cash Flows From Investing Activities: Securities held to maturity: Proceeds from maturities, calls and prepayments - 12,651 Proceeds from sales - 5,062 Purchases (23,483) (33,508) Securities available for sale: Proceeds from maturities, calls and prepayments 29,016 - Proceeds from sales 23,653 - Net decrease (increase) in temporary investments 818 6,800 Purchases of premises and equipment (1,758) (860) Net sale (repurchase) of loan participations 232 (512) Net increase in loans (30,946) (19,225) ------------- ------------- Net cash used in investing activities (2,468) (29,592) ------------- ------------- Cash Flows From Financing Activities: Net increases in deposit accounts 2,251 18,202 Proceeds from issuance of common stock 218 318 Net decrease in short-term borrowing (1,400) (388) Principal payments on capital lease obligations (38) (45) Cash dividends paid (790) (444) ------------- ------------- Net cash provided by financing activities 241 17,643 ------------- ------------- Net (decrease) increase in cash and due from banks 2,503 (5,552) Cash and due from banks at beginning of period 25,800 28,232 ------------- ------------- Cash and due from banks at end of period $ 28,303 $ 22,680 - - - ---------------------------------------------------------------------------------------------------------- Supplemental Disclosures Of Cash Flow Information: Cash paid during the period: Interest $ 10,236 $ 10,690 Income taxes 2,149 1,887 Noncash financing and investing activities: Capital lease obligation - 1,285 - - - ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 3 COMMERCE BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited) (In thousands) Unrealized Loss on Marketable Common Stock Capital Retained Equity -------------------- Shares Amount Surplus Earnings Security Total -------- -------- --------- ---------- ---------- -------- Six months ended June 30, 1993 Balance at January 1, 1993 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413 Net income - - - 3,148 - 3,148 Issuance of common stock 23 57 261 - - 318 Cash dividends declared - - - (557) - (557) -------- -------- --------- ---------- ---------- -------- Balance at June 30, 1993 2,534 $ 6,335 $ 25,721 $ 8,296 $ (30) $ 40,322 -------- -------- --------- ---------- ---------- -------- Six months ended June 30, 1994 Balance at January 1, 1994 2,687 $ 6,717 $ 29,062 $ 7,810 $ - $ 43,589 Adjustment to beginning balance for change in accounting method for net unrealized gain on securities available for sale, net of tax of $1,253,000 - - 2,327 - 2,327 Net income - - - 3,602 - 3,602 Issuance of common stock 38 96 725 - - 821 Change in net unrealized loss on securities available for sale, net of tax effect - - - (2,921) - (2,921) Cash dividends declared - - - (825) - (825) -------- -------- --------- ---------- ---------- --------- Balance at June 30, 1994 2,725 $ 6,813 $ 29,787 $ 9,993 $ - $ 46,593 - - - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 4 COMMERCE BANK Form F-4 June 30, 1994 Notes to Financial Statements - - - ----------------------------- Note 1. General ------- The financial statements in this report have not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. These statements should be read in conjunction with the 1993 annual report on Form F-2 and the March 31, 1994 report on Form F-4. Results of operations for the six months ended June 30, 1994 are not necessarily indicative of the results of operations for the full year or any other interim periods. Note 2. Merger with BB&T Financial Corporation -------------------------------------- Commerce Bank ("Commerce") entered into an Agreement and Plan of Reorganization, dated as of June 24, 1994 (the "Agreement"), with BB&T Financial Corporation, a bank holding company headquartered in Wilson, North Carolina ("BB&T"). The Agreement provides for the merger of Commerce with and into a subsidiary of BB&T. As an inducement for BB&T to enter into the Agreement, Commerce entered into a Stock Option Agreement, dated as of June 24, 1994 (the "Option Agreement"), whereby it granted BB&T an irrevocable option (the "Option") to purchase up to that number of shares of Commerce's common stock (the "Option Shares") as would equal 19.9% of the aggregate shares of Commerce common stock that would be outstanding immediately after the issuance of the Option Shares upon full exercise of the Option, at a price of $31.50 per Option Share. The Option is exercisable, in whole or in part, at any time and from time to time for a designated period of time following the occurrence of a "Purchase Event" (as defined in the Option Agreement). Note 3. Commitments ----------- At June 30, 1994, the amount of off-balance sheet commitments to extend credit were $69.0 million and standby letters of credit and financial guarantees were $5.25 million. 5 COMMERCE BANK Form F-4 June 30, 1994 Note 4. Accounting Change ----------------- Effective January 1, 1994, Commerce adopted Statement of Financial Accounting Standard No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. SFAS 115 requires that certain securities be classified into one of three categories: held to maturity, available for sale, or trading based on management's ability and intent at time of purchase. Securities classified as held to maturity are carried at their amortized cost; securities classified as available for sale are carried at their fair values with the amount of unrealized gains or losses, net of income taxes, reported as a separate component of shareholders' equity; and securities classified as trading are carried at their fair value with the unrealized gains or losses included in earnings. As a result of the adoption of SFAS 115, on January 1, 1994, Commerce classified securities with a fair value of approximately $155 million as securities available for sale. The opening balance of shareholders' equity was increased by $2.32 million relating to net unrealized gain on securities available for sale of $3.58 million, less applicable income taxes of $1.25 million. Prior to the adoption of SFAS 115, securities deemed available for sale were carried at the lower of aggregate amortized cost or market value. Note 5. Earnings Per Share ------------------ Primary earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period after giving retroactive effect to the 5% stock dividends declared in 1993 and 1992. Dilutive stock options have been converted to common stock equivalents for the calculation of weighted average shares outstanding based upon the average market price of Commerce's common stock. Fully diluted earnings per share assumes the conversion of outstanding convertible subordinated capital notes and elimination of interest paid thereon, after tax effect, and the exercise of dilutive stock options, as of the beginning of each period. The dilutive effect of outstanding options and convertible subordinated debt is computed using the greater of the closing price or the average market price of Commerce's stock. The computation of earnings per share is provided on the following page. 6 COMMERCE BANK Form F-4 June 30,1994 Earnings per share were determined as follows: (In thousands, except per share)
Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 ------ ------ ------ ------ Primary Average common shares outstanding 2,695 2,674 2,705 2,649 Dilutive common stock options assumed exercised 94 74 97 77 ---------------------------------------------------------------------------------------------------- Average primary shares outstanding 2,789 2,748 2,802 2,726 ---------------------------------------------------------------------------------------------------- Net Income $1,841 $1,648 $3,602 $3,148 Per Share Amount .66 .60 1.29 1.15 ---------------------------------------------------------------------------------------------------- Fully diluted Average common shares outstanding 2,695 2,674 2,705 2,649 Dilutive common stock options 92 81 100 81 Dilutive convertible subordinated capital notes assumed converted 263 263 263 263 ---------------------------------------------------------------------------------------------------- Average fully diluted shares outstanding 3,050 3,018 3,068 2,993 ---------------------------------------------------------------------------------------------------- Net Income $1,841 $1,648 $3,602 $3,148 Add interest on convertible subordinated capital notes, after taxes 81 81 162 162 ---------------------------------------------------------------------------------------------------- Adjusted net income $1,922 $1,729 $3,764 $3,310 ---------------------------------------------------------------------------------------------------- Per share amount $.63 $.57 $1.23 $ 1.11 ----------------------------------------------------------------------------------------------------
7 COMMERCE BANK FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, Increase Increase 1994 1993 (Decrease) 1994 1993 (Decrease) ------------ ------------ ----------- ------------ ------------ ------------ Earnings: Net interest income $ 7,150 $ 6,565 8.9 % $ 13,969 $ 12,778 9.3 % Net income 1,841 1,648 11.7 3,602 3,148 14.4 - - - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Data: Net income : Primary $ 0.66 $ 0.60 10.0 % $ 1.29 $ 1.15 12.2 % Fully diluted 0.63 0.57 10.5 1.23 1.11 10.8 Book value at period end - - 17.10 15.91 7.5 Cash dividends 0.15 0.12 25.0 0.30 0.22 36.4 - - - ------------------------------------------------------------------------------------------------------------------------------------ Selected Financial Ratios: Return on average assets 1.07 % 1.01 % 1.06 % 0.99 % Return on average equity 16.00 16.56 15.62 16.21 Net interest spread 3.94 3.81 3.88 3.80 Net interest margin 4.51 4.37 4.44 4.35 Net overhead ratio 2.46 2.23 2.40 2.25 Average loans / average deposits 63.29 56.48 62.58 56.00 - - - ------------------------------------------------------------------------------------------------------------------------------------ Daily Averages: Assets $ 688,284 $ 652,170 5.5 % $ 685,716 $ 640,941 7.0 % Earning assets 635,945 602,499 5.6 633,949 592,057 7.1 Loans, net of unearned income 400,133 339,361 17.9 392,227 333,154 17.7 Investment securities 221,782 246,729 (10.1) 228,293 243,380 (6.2) Deposits 632,194 600,887 5.2 626,807 590,961 6.1 Shareholders' equity 46,145 39,922 15.6 46,484 39,158 18.7 Primary shares outstanding 2,789 2,748 1.5 2,802 2,726 2.8 Fully diluted shares outstanding 3,050 3,018 1.1 3,068 2,993 2.5 - - - ------------------------------------------------------------------------------------------------------------------------------------ At Period End: Assets $ 692,067 $ 666,397 3.9 % Earning assets 638,743 619,422 3.1 Loans, net of unearned income 408,433 347,084 17.7 Investment securities 217,697 254,224 (14.4) Deposits 636,392 616,186 3.3 Shareholders' equity 46,593 40,322 15.6 Allowance for loan losses 7,188 6,645 8.2 Nonperforming assets 5,273 4,877 8.1 - - - ------------------------------------------------------------------------------------------------------------------------------------ Risk-Based Capital Ratios: Tier I 10.27 % 9.71 % Total 12.63 12.23 Tier I leverage 6.67 5.99 Total risk weighted assets $ 450,871 $ 394,039 - - - ------------------------------------------------------------------------------------------------------------------------------------
8 COMMERCE BANK Selected Quarterly Financial Data (Dollars in thousands, except per share data)
Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter 1994 1994 1993 1993 1993 - - - ----------------------------------------------------------------------------------------------------------------------- Results of operations: Interest income $ 12,182 $ 11,750 $ 11,888 $ 11,957 $ 11,864 Interest expense 5,032 4,931 5,167 5,192 5,299 - - - ----------------------------------------------------------------------------------------------------------------------- Net interest income 7,150 6,819 6,721 6,765 6,565 Provision for loan losses 600 600 600 700 725 - - - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,550 6,219 6,121 6,065 5,840 Noninterest income 2,358 2,335 2,346 2,625 2,190 Securities gains 10 59 53 1,268 - Noninterest expense (1) 6,262 5,964 5,995 6,831 5,542 - - - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,656 2,649 2,525 3,127 2,488 Provision for income taxes 815 888 834 1,415 840 - - - ----------------------------------------------------------------------------------------------------------------------- Net income $ 1,841 $ 1,761 $ 1,691 $ 1,712 $ 1,648 ======================================================================================================================= Per Share Data: Net income : Primary $ 0.66 $ 0.63 $ 0.61 $ 0.62 $ 0.60 Fully diluted 0.63 0.60 0.58 0.60 0.57 Book value at period end 17.10 17.09 16.22 16.48 15.91 Cash dividends 0.15 0.15 0.15 0.14 0.12 Common stock price: (2) High 39.00 27.50 25.50 25.50 25.50 Low 24.50 25.50 23.00 22.75 22.50 Close 39.00 26.50 24.00 23.75 25.50 ======================================================================================================================= Average Balance Sheet Data Assets: Loans, net of unearned income $ 400,133 $ 384,233 $ 369,323 $ 354,239 $ 339,361 Investment securities 221,782 234,876 245,039 240,369 246,729 Temporary Investments 14,030 12,821 12,356 20,941 16,409 - - - ----------------------------------------------------------------------------------------------------------------------- Total earning assets 635,945 631,930 626,718 615,549 602,499 Allowance for loan losses (6,912) (6,809) (6,844) (6,713) (6,313) Other Assets 59,251 57,998 58,637 56,375 55,984 Total Assets $ 688,284 $ 683,119 $ 678,511 $ 665,211 $ 652,170 ======================================================================================================================= Liabilities and Shareholders' Equity: Interest bearing deposits $ 532,136 $ 528,279 $ 529,081 $ 516,719 $ 511,875 Short-term borrowings 77 3,623 1,337 818 859 Long-term borrowings 6,799 6,818 6,837 6,856 6,878 - - - ----------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 539,012 538,720 537,255 524,393 519,612 Non interest bearing liabilities 103,127 93,081 98,291 99,022 92,636 Equity 46,145 46,828 42,965 41,796 39,922 - - - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 688,284 $ 683,119 $ 678,511 $ 665,211 $ 652,170 ======================================================================================================================= Financial Ratios: Return on average assets 1.07 % 1.05 % 0.99 % 1.02 % 1.01 % Return on average equity 16.00 15.25 15.61 16.25 16.56 Net interest margin 4.51 4.38 4.28 4.36 4.37 =======================================================================================================================
(1) The third quarter of 1993 included a non-recurring, noncash adjustment of $910,000 for the write down of an intangible asset. (2) As reported by NASDAQ 9 COMMERCE BANK Form F-4 June 30,1994 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist readers in understanding and evaluating the results of operations and financial condition of Commerce Bank ("Commerce"). The following should be read in conjunction with Commerce's 1993 Annual Report on Form F-2 and the March 31, 1994 report on Form F-4. Performance Summary - - - ------------------- Net income for the second quarter of 1994 was $1.84 million and represented a 11.7% increase over second quarter earnings for 1993 of $1.65 million. Primary earnings per share were $.66 compared with $.60, and fully diluted earnings per share were $.63 compared with $.57 for the second quarter of 1994 compared with 1993. Net income for the first six months of 1994 was $3.60 million or 14.4% above comparable 1993 net income of $3.15 million. Primary earnings per share were $1.29 compared with $1.15, and fully diluted earnings per share were $1.23 compared with $1.11 for the second half of 1993. The increase in net income for the second quarter and first half of 1993 was due to a higher net interest income, increased noninterest income and a lower provision for loan losses. Net income for the second quarter of 1994 was 4.54%, or $80,000 above the $1.76 million reported for the first quarter of 1994. The return on annualized average assets was 1.07% for the second quarter of 1994 compared with 1.01% for the same period in 1993. The annualized return of average equity was 16.00% for the second quarter of 1994. In comparison, ROE was 16.56% for the same period of 1993. ROA for the first half of 1994 was 1.06% while ROE was 15.62% compared with .99% and 16.21% for the first half of 1993, respectively. Total assets at June 30, 1994 were $692.1 million while total deposits were $636.4 million and represented a 3.9% and 3.3% growth rate over the prior year levels, respectively. Average earning assets increased 5.6% to $635.9 million during the second quarter of 1994 when compared with 1993. 10 COMMERCE BANK Form F-4 June 30, 1994 The following table presents an analysis of Commerce's return on average assets and equity.
June 30, March 31, Three Months Ended 1994 1993 1994 ---------- ---------- ---------- As a percent of average earning assets: Net Interest Income 4.51 % 4.42 % 4.38 % Provision for Loan Losses (0.38) (0.49) (0.39) Noninterest Income 1.49 1.47 1.50 Noninterest Expenses (3.95) (3.73) (3.83) Securities Gains 0.01 - 0.04 Applicable Income Taxes (0.51) (0.57) 0.57 ---------- ---------- ---------- Return on Average Earning Assets 1.16 % 1.10 % 1.13 % Multiplied by Average Earning Assets to Average Total Assets 92.40 92.38 92.51 ---------- ---------- ---------- Return on Average Assets 1.07 % 1.01 % 1.05 % Multiplied by Ratio of Average Assets to Average Equity 14.95 16.40 14.52 ---------- ---------- ---------- Return on Average Total Equity 16.00 % 16.56 % 15.25 % - - - ---------------------------------------------------------------------------------------------
EARNINGS ANALYSIS Net Interest Income - - - ------------------- Net interest income, the principal source of Commerce's earnings, is the amount of income generated by interest-earning assets (primarily loans and investment securities) reduced by the total interest cost of the funds (chiefly deposits) incurred to carry them. Net interest income for the second quarter of 1994 was $7.15 million, a 8.9% increase over comparative 1993. Net interest income for the first half of 1994 was $14.0 million or 9.3% above comparative 1993. Net interest margin for the second quarter and first half of 1994 was 4.51% and 4.44%, respectively, and represented an improvement from 4.37% and 4.35% for the comparative periods of 1993. The increase in net interest income for 1994 benefitted from growth in average earning assets, including 18% loan growth for both periods, and favorable interest rate spreads due to a reduced cost of funds. Net interest spread for the second quarter of 1994 was 3.94% versus 3.81% for the second quarter of 1993 11 COMMERCE BANK Form F-4 June 30, 1994 and 3.83% for the first quarter of 1994. Net interest spread for the first half of 1994 improved 8 basis points, to 3.88% from 3.80% for the first half of 1993. Average earning assets increased $33.4 million, or 5.6%, rising from $602.5 million for the second quarter of 1993 to $635.9 million in 1994. Average earning assets for the first half of 1994 were $633.9 million, or 7.1% above $592.0 million for comparative 1993. Average earning assets increased 6.4% during the second quarter of 1994 when compared with the first quarter of 1994 while the mix reflected continued growth in loans. The annualized yield on earning assets decreased 22 basis points, from 7.90% for the second quarter of 1993 to 7.68% for comparative 1994. The annualized cost of interest bearing liabilities decreased 35 basis points, from 4.09% for the second quarter of 1993 to 3.74% for the second quarter of 1994. The decrease in annualized cost of interest bearing liabilities is due to the deposit mix to a greater proportion of rate sensitive products, increased noninterest bearing deposits, and lower rates of interest. (See Deposits). The cost of interest bearing liabilities decreased 16 basis points, from 3.71% for the first quarter of 1994 to 3.74% for the second quarter of 1994. Substantially, the same factors impacted net interest income when comparing the first half of 1994 with 1993 as were discussed above for the three months ended June 30, 1994 and 1993. 12 COMMERCE BANK Form F-4 June 30, 1994 The following tables provide Commerce's average balance sheet, interest earned or paid and the related yields and rates on major categories.
(Dollars in thousands) Three Months Ended June 30, / Three Months Ended June 30, ---------------------------------------------------------------------------------------------------- Average Balance Income/Expense Yield/Rate Change due to (3) --------------------- --------------------- --------------- Increase ---------------------- Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume ---------- ---------- --------- --------- ------- ------ ---------- --------- ---------- Loans, net of unearned income & deferred fees (1)(2) $ 400,133 $ 339,361 $ 8,659 $ 7,625 8.68 % 9.01 % $ 1,034 $ (270) $ 1,304 Investment securities(2) 221,782 246,729 3,344 4,075 6.05 6.62 (731) (336) (395) Temporary investments 14,030 16,409 178 164 5.12 4.01 15 40 (26) ---------- ---------- --------- --------- ---------- --------- ---------- Total earning assets 635,945 602,499 12,181 11,864 7.68 7.90 318 (566) 883 Allowance for loan losses (6,723) (6,313) Nonearning assets 59,062 55,984 ---------- ---------- Total assets $ 688,284 $ 652,170 ========== ========== Liabilities & Shareholders' Equity: Interest bearing deposits $ 532,136 $ 511,875 $ 4,865 $ 5,133 3.67 % 4.02 % $ (268) $ (464) $ 196 Short-term borrowings 77 859 - 7 2.59 3.27 (7) (1) (6) Long-term debt 6,799 6,878 167 159 9.85 9.27 8 10 (2) ---------- ---------- --------- --------- ---------- --------- ---------- Total interest bearing liabilities 539,012 519,612 5,032 5,299 3.74 4.09 (267) (455) 188 Noninterest bearing liabilities 103,127 92,636 Shareholders' equity 46,145 39,922 ---------- ---------- Total liabilities & equity $ 688,284 $ 652,170 ========== ========== --------- --------- ---------- --------- ---------- Net interest income $ 7,149 $ 6,565 $ 585 $ (111) $ 695 ========= ========= ========== ========= ========== Net interest spread 3.94 % 3.81 % Net interest margin 4.51 % 4.37 % - - - ---------------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, / Three Months Ended March 31, --------------------------------------------------------------------------------------------------- Average Balance Income/Expense Yield/Rate Change due to (3) --------------------- --------------------- --------------- Increase ---------------------- Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume ---------- ---------- --------- --------- ------- ------ ---------- --------- ---------- Loans, net of unearned income & deferred fees (1)(2) $ 400,133 $ 384,233 $ 8,659 $ 8,045 8.68 % 8.49 % $ 614 $ 214 $ 400 Investment securities(2) 221,782 234,876 3,344 3,541 6.05 6.11 (197) (29) (168) Temporary investments 14,030 12,821 178 164 5.12 5.19 14 (2) 16 ---------- ---------- --------- --------- ---------- --------- ---------- Total earning assets 635,945 631,930 12,181 11,750 7.68 7.54 431 183 248 Allowance for loan losses (6,723) (6,723) Nonearning assets 59,062 57,912 ---------- ---------- Total assets $ 688,284 $ 683,119 ========== ========== Liabilities & Shareholders' Equity: Interest bearing deposits $ 532,136 $ 528,279 $ 4,865 $ 4,737 3.67 % 3.64 % $ 128 $ 67 $ 61 Short-term borrowings 77 3,623 - 29 2.59 2.50 (29) (5) (24) Long-term debt 6,799 6,818 166 165 9.79 9.81 1 0 1 ---------- ---------- --------- --------- ---------- --------- ---------- Total interest bearing liabilities 539,012 538,720 5,031 4,931 3.74 3.71 100 62 38 Noninterest bearing liabilities 103,127 97,571 Shareholders' equity 46,145 46,828 ---------- ---------- Total liabilities & equity $ 688,284 $ 683,119 ========== ========== ---------- ---------- ---------- --------- ---------- Net interest income $ 7,150 $ 6,819 $ 331 $ 121 $ 210 ========== ========== ========== ========= ========== Net interest spread 3.94 % 3.83 % Net interest margin 4.51 % 4.38 % - - - ----------------------------------------------------------------------------------------------------------------------------------
13 COMMERCE BANK Form F-4 June 30, 1994
Three Months Ended June 30, / Three Months Ended June 30, ---------------------------------------------------------------------------------------------------- Average Balance Income/Expense Yield/Rate Change due to (3) --------------------- --------------------- --------------- Increase ---------------------- Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume ---------- ---------- --------- --------- ------- ------ ---------- --------- ---------- Loans, net of unearned income & deferred fees (1)(2) $ 392,227 $ 333,154 $ 16,704 $ 15,002 8.59 % 9.14 % $ 1,702 $ (925) $ 2,627 Investment securities(2) 228,293 243,380 6,885 8,077 6.08 6.69 (1,192) (710) (482) Temporary investments 13,429 15,523 343 323 5.15 4.19 20 68 (48) ---------- ---------- --------- --------- ---------- --------- ---------- Total earning assets 633,949 592,057 23,932 23,402 7.61 7.97 530 (1,567) 2,097 Allowance for loan losses (6,818) (6,101) Nonearning assets 58,585 54,985 ---------- ---------- Total assets $ 685,716 $ 640,941 ========== ========== Liabilities & Shareholders' Equity: Interest bearing deposits $ 530,218 $ 506,784 $ 9,602 $ 10,311 3.65 % 4.10 % $ (709) $ (1,170) $ 461 Short-term borrowings 1,840 646 30 9 3.29 2.81 21 1 20 Long-term debt 6,808 6,450 331 304 9.80 9.50 27 9 18 ---------- ---------- --------- --------- ---------- --------- ---------- Total interest bearing liabilities 538,866 513,880 9,963 10,624 3.73 4.17 (661) (1,160) 499 Noninterest bearing liabilities 100,366 87,903 Shareholders' equity 46,484 39,158 ---------- ---------- Total liabilities & equity $ 685,716 $ 640,941 ========== ========== ---------- --------- ---------- Net interest income $ 13,969 $ 12,778 $ 1,191 $ (407) $ 1,598 ========= ========= ========== ========= ========== Net interest spread 3.88 % 3.80 % Net interest margin 4.44 % 4.35 % - - - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans, and income on such loans is recognized on a cash basis. (2) Interest and yields are presented on a book basis, as tax-equivalent adjustments are not significant. (3) The changes for each category of income and expenses are divided between the portion of change attributable to the variances in average levels and yields or rates for that category, with the amount of change that cannot be separated being allocated to each variance proportionately. Noninterest Income - - - ------------------ Total noninterest income was $2.37 million for the second quarter of 1994, representing a 8.1% increase over the same period of 1993. Total noninterest income, exclusive of securities gains, for the first half of 1994 was $4.69 million, or 9.7% above the $4.28 million earned in comparative 1993. Commerce recorded $69,000 in securities gains during the first half of 1994 compared with $86,000 for the same period of 1993. Noninterest income, exclusive of securities gains, for the second quarter of 1994 was $23,000 or 1.0% above the first quarter of 1994. The increase in noninterest income, exclusive of securities gains and mortgage brokerage income, for the second quarter and first half of 1994 benefitted from growth in all categories of income. The decrease in mortgage brokerage income reflects a decline in refinancing activity due to increased interest rates. 14 COMMERCE BANK Form F-4 June 30, 1994 The following tables provide an analysis of noninterest income. (Dollars in thousands)
Increase(Decrease) ---------------------------------------------------------------------------------------------------- Three Months Ended June 30, / ------------------------------------------------ ---------------------------------------------- Three Months Ended June 30, Three Months Ended March 31, ------------------------------------------------ ---------------------------------------------- 1994 over 1993 1994 over 1994 ---------------------- ---------------------- 1994 1993 Amount Percent 1994 1994 Amount Percent -------- -------- -------- --------- -------- -------- -------- --------- Service charges on deposit accounts $ 1,021 $ 825 $ 196 23.8 % $ 1,021 $ 939 $ 82 8.7 % Mortgage brokerage income 391 622 (231) (37.1) 391 590 (199) (33.7) Credit card merchant fees 275 234 41 17.5 275 196 79 40.3 Trust income 172 165 7 4.2 172 170 2 1.2 Other income 499 344 155 45.1 499 440 59 13.4 -------- -------- -------- -------- -------- -------- 2,358 2,190 168 7.7 2,358 2,335 23 1.0 Securities gains 10 - 10 n/m 10 59 (49) (83.1) -------- -------- -------- -------- -------- -------- Total noninterest income $ 2,368 $ 2,190 $ 178 8.1 % $ 2,368 $ 2,394 $ (26) (1.1) % ======== ======== ======== ======== ======== ========
Six Months Ended June 30, ---------------------------------------------------- 1994 over 1993 ---------------------------- 1994 1993 Amount Percent -------- -------- ------------ ------------ Service charges on deposit accounts $ 1,960 $ 1,595 $ 365 22.9 % Mortgage brokerage income 981 1,368 (387) (28.3) Credit card merchant fees 471 402 69 17.2 Trust income 342 315 27 8.6 Other income 939 597 342 57.3 -------- -------- ------------ 4,693 4,277 419 9.7 Securities gains 69 86 (17) (19.8) -------- -------- ------------ Total noninterest income $ 4,762 $ 4,363 $ 399 9.1 % ======== ======== ============ n/m -- not meaningful
Noninterest Expense - - - ------------------- Total noninterest expense for the second quarter and first half of 1994 was $6.26 million and $12.2 million, respectively, which represented a 13.0% and 12.4% increase over the comparative periods of 1993. The increase in noninterest expense is primarily due to servicing a larger customer base in 1994. 15 COMMERCE BANK Form F-4 June 30, 1994 Salaries and benefits expense was $2.82 million for the second quarter of 1994, up 6.1% from comparative 1993. Salaries and benefits for the first six months of 1994 were $5.69 million or 9.2% above comparative 1993. The higher expense reflected regular merit and promotional increases along with an increase in the number of employees to service growth in the customer base. The number of full-time-equivalent employees was 344 at June 30, 1994 compared with 304 for June 30, 1993. Occupancy of bank premises expense increased 15.2% or $179,000, during the first half of 1994 when compared with 1993 due to scheduled rent increases and increased lease space for branch locations and operations. Furniture and equipment expense increased 8.4% or $68,000 during the first half of 1994 over comparative 1993 as a result of expenses associated with maintenance and depreciation charges from equipment upgrades. FDIC insurance premiums increased 7.7%, or $50,000, during the first half of 1994 when compared with 1993 due to growth in the deposit base. Other expenses increased 18.7%, or $567,000 for the first half of 1994 when compared with 1993. The increase was primarily due to the added expenses of supporting customer services. Noninterest expense for the second quarter of 1994 increased $298,000 or 5.0% when compared with the first quarter of 1994. 16 COMMERCE BANK Form F-4 June 30, 1994 The following tables provide an analysis of noninterest expense.
(Dollars in thousands) Increase(Decrease) ------------------------------------------------------------------------------------- Three Months Ended June 30, -------------------------------------- -------------------------------------- Three Months Ended June 30,/ Three Months Ended March 31, -------------------------------------- -------------------------------------- 1994 over 1993 1994 over 1994 ---------------- ---------------- 1994 1993 Amount Percent 1994 1994 Amount Percent ------- ------- ------ ------- ------- ------- ------ ------- Salaries and benefits $ 2,818 $ 2,656 $ 162 6.1 % $ 2,818 $ 2,875 $ (57) (2.0)% Occupancy of bank premises 688 591 97 16.4 688 665 23 3.5 Furniture and equipment 465 387 78 20.2 465 414 51 12.3 FDIC insurance premiums 351 326 25 7.7 351 351 - - Other expenses 1,940 1,582 358 22.6 1,940 1,659 281 16.9 ------- ------- ------ ------- ------- ------ Total noninterest expenses $ 6,262 $ 5,542 $ 720 13.0 % $ 6,262 $ 5,964 $ 298 5.0 % ======= ======= ====== ======= ======= ======
Six Months Ended June 30,/ --------------------------------------- 1994 over 1993 ----------------- 1994 1993 Amount Percent ------- ------- ------- ------- Salaries and benefits $ 5,693 $ 5,211 $ 482 9.2 % Occupancy of bank premises 1,353 1,174 179 15.2 Furniture and equipment 879 811 68 8.4 FDIC insurance premiums 702 652 50 7.7 Other expenses 3,599 3,032 567 18.7 ------- ------- ------- Total noninterest expenses $12,226 $10,880 $1,346 12.4 % ======= ======= =======
Provision for Income Taxes - - - -------------------------- Commerce reported a provision for income taxes of $815,000 and $840,000 for the second quarter of 1994 and 1993, respectively, for an effective tax rate of 30.7% and 33.8%. The provision for income taxes for the first half of 1994 was $1.70 million, or 7.2% above the 1993 level and was due to increased earnings. BALANCE SHEET ANALYSIS Temporary Investments - - - --------------------- Temporary investments were $12.6 million at June 30, 1994 and consisted of interest bearing deposits with other banks in the amount of $1.0 million, mortgages held for sale of $1.6 million, and federal funds sold of $10.0 million. Temporary investments are used for daily cash management purposes, manage- 17 COMMERCE BANK Form F-4 June 30, 1994 ment of short-term interest rate opportunities and interest rate risk, and as a result daily balances vary. The average balance of temporary investments during the second quarter of 1994 was $14.0 million and represented 2.2% of total earning assets compared with $16.4 million or 2.7% for 1993. The average balance of temporary investments for the first half of 1994 was $13.4 million, or 2.1% of total average earning assets, compared with $15.5 million, or 2.62% for comparative 1993. Securities - - - ---------- As further discussed under Financial Statements Note 4, Commerce adopted SFAS No. 115 effective January 1, 1994. Total securities were $217.7 million on June 30, 1994, representing a 14.4% decrease from comparative 1993. Loans and Asset Quality - - - ----------------------- During the first six months of 1994, average loans, net of unearned income and deferred fees, increased 17.7% to $392.2 million and were 61.9% of total earning assets compared with 56.2% for 1993. Loans, net of unearned income were $408.4 million at June 30, 1994, or 17.7% and $61.4 million above the $347.1 million reported at June 30, 1993. Nonperforming assets at June 30, 1994 were $5.27 million as compared with $4.88 million a year earlier and $4.0 million at the end of 1993. Net loan charge-offs were $221,000 for the second quarter of 1994, compared with $291,000 for the same period of 1993. Net loan charge-offs for the first half of 1994 declined 2.2% to $539,000 from $551,000 for comparative 1993. The provision for loan losses for the second quarter of 1994 was $600,000, compared with the $725,000 provision for comparative 1993. The provision for loan losses for the first half of 1994 was $1.2 million, or 21.3% and $325,000 lower than the $1.53 million reported for comparative 1993. The decline in the provision for loan losses during 1994 correlates with a lower level of net loan charge- offs and improvement in other asset quality indicators. The allowance for loan losses at June 30, 1994 was $7.19 million, which was equivalent to 1.76% of period end loans, compared with 1.91% for the second quarter of 1993. 18 COMMERCE BANK Form F-4 June 30, 1994 The following table summarizes activity in the allowance for loan losses for the periods indicated.
(In thousands) Three Months Ended Six Months Ended ------------------------------- ------------------ June 30, June 30, March 31, June 30, Allowance for Loan Losses 1994 1993 1994 1994 1993 -------- -------- --------- -------- -------- Balance, beginning of period $ 6,809 $ 6,211 $ 6,527 $ 6,527 $ 5,671 Provision charged to earnings 600 725 600 1,200 1,525 Loan charge-offs (314) (402) (411) (725) (774) Loan recoveries 93 111 93 186 223 -------- -------- --------- -------- -------- Net charge-offs (221) (291) (318) (539) (551) -------- -------- --------- -------- -------- Balance, end of period $ 7,188 $ 6,645 $ 6,809 $ 7,188 $ 6,645 ======== ======== ========= ======== ========
The following table shows the level of nonperforming assets and related information for the periods indicated.
(In thousands) June 30, June 30, March 31, Nonperforming assets: 1994 1993 1994 -------------- ------------- -------------- Nonperforming loans $ 2,403 $ 444 $ 1,494 Foreclosed property 2,870 4,433 2,733 -------------- ------------- -------------- Total nonperforming assets 5,273 4,877 4,227 ============== ============= ============== Loans past due 90 days accruing interest $ 1,647 $ 339 $ 1,010 - - - ------------------------------------------------------------------------------------------------------- Asset Quality Ratios Allowance for loan losses to nonperforming loans 2.99 X 14.97 X 4.56 X Allowance for loan losses to period end loans 1.76 % 1.91 % 1.74 % Nonperforming assets to period end loans 1.29 1.41 0.61 Nonperforming assets to period end assets 0.76 0.73 1.08 Net charge-offs to average loans (annualized) 0.28 0.33 0.33 - - - -------------------------------------------------------------------------------------------------------
19 COMMERCE BANK Form F-4 June 30, 1994 Deposits - - - -------- Total deposits at June 30, 1994 were $636.4 million, representing an increase of 3.3% or $20.2 million over comparative 1993. Total average deposits increased 6.1% during the first six months of 1994 to $626.8 million when compared with the first half of 1993. The cost of interest bearing deposits was 3.67% for the second quarter of 1994 compared with 4.02% for the second quarter of 1993 and 3.64% for the first quarter of 1994. The cost of interest bearing deposits for the first half of 1994 was 3.65%, or 45 basis points lower than the 4.10% cost for the first half of 1993. The lower cost in 1994 reflects the continued lowering of market rates of interest. Average noninterest bearing demand deposits as a percentage of average total deposits were 15.41% and 14.24% during the first half of 1994 and 1993, respectively. Average noninterest bearing demand deposits were 15.8% and 14.8% of average total deposits for the second quarter of 1994 and 1993, respectively. The following table sets forth a summary of Commerce's various deposits categories and their respective cost rates.
(In thousands) Average Balance/Cost Rate - - - -------------------------------------------------------------------------------------------------------------------------- June 30, June 30, March 31, Three months ended, 1994 1993 1994 ----------- ----------- ----------- Interest bearing demand $ 73,140 2.21 % $ 60,280 2.52 % $ 69,688 2.21 % Money market savings 243,938 3.31 249,506 3.62 237,718 3.14 Certificates:Less than $100,000 152,235 4.82 150,989 5.17 158,305 4.85 Greater than $100,000 31,200 5.26 24,527 5.89 33,985 5.17 Regular savings 31,623 2.71 26,573 2.97 28,583 2.74 ----------- ----------- ----------- Total interest bearing 532,136 3.67 511,875 4.02 528,279 3.64 Noninterest bearing 100,058 89,012 93,081 ----------- ----------- ----------- Total $ 632,194 3.17 % $ 600,887 3.43 % $ 621,360 3.09 % =========== =========== ===========
20 COMMERCE BANK Form F-4 June 30, 1994
(In thousands) Average Balance/Cost Rate - - - --------------------------------------------------------------------------------------------- June 30, June 30, Six months ended, 1994 Mix 1993 Mix -------- ------ -------- ------ Interest bearing demand $ 71,423 2.21 % 13.47 $ 60,086 2.62 % 11.86 Money market savings 240,845 3.23 45.42 247,833 3.97 48.90 Certificates:Less than $100,000 154,805 4.85 29.20 151,027 5.23 29.80 Greater than $100,000 32,585 5.23 6.15 23,233 5.89 4.58 Regular savings 30,560 2.70 5.76 24,605 2.96 4.86 -------- ------ -------- ------ Total interest bearing 530,218 3.65 100.00 506,784 4.10 100.00 Noninterest bearing 96,589 84,177 -------- -------- Total $626,807 3.21 % $590,961 3.62 % -------- --------
Short-Term Borrowings and Long-Term Debt - - - ---------------------------------------- Commerce had no short-term borrowings at June 30, 1994, however, the average balance during the first half of 1994 was $1.8 million. Long-term debt was $6.79 million at June 30, 1994 and consisted of $5.0 million, 10% convertible subordinated capital notes issued September 1, 1990 and capital lease obligations of $1.79 million. Common Stock and Dividends - - - -------------------------- Commerce's Board of Directors declared a $.15 cash dividend during the second quarter of 1994 representing a 25% increase over the $.12 declared in 1993. The high and low prices for Commerce's common stock are set forth with other selected quarterly financial data on page 9. Liquidity and Capital Structure - - - ------------------------------- Commerce continued to experience a high degree of liquidity during the second quarter of 1994, as reflected in its liquid asset ratio of 37.5% at June 30, 1994. Average loans to average deposits were 62.6% for the first half of 1994 in comparison with 56.0% for 1993. Shareholders' equity was $46.6 million at June 30, 1994, representing a 21 COMMERCE BANK Form F-4 June 30, 1994 15.6% increase over the prior year. The following table provides information on the risk-based capital position of Commerce.
June 30, December 31, 1994 1993 1993 ----------- ---------- -------------- Tier I Capital: Shareholders' equity $ 47,187 $ 40,322 $ 43,589 Less: intangible assets 888 2,077 1,024 ----------- ----------- -------------- Total Tier I 46,299 38,245 42,565 Tier II Capital: Qualifying allowance for loan losses (1) 5,655 4,947 5,460 Mandatory convertible debt instruments 4,995 4,995 4,995 ----------- ---------- -------------- Total Tier II 10,650 9,942 10,455 ----------- ---------- -------------- Total Risk Based Capital $ 56,949 $ 48,187 $ 53,020 =========== =========== ============== Total Assets $692,067 $666,397 $689,630 Total Risk Weighted Assets 450,871 394,039 436,800 Risk Weighted Assets to Total Assets 65.15% 59.13% 63.34% Risk Based Capital Ratios: Tier I (4% minimum requirement) 10.27% 9.71% 9.74% Total (8% minimum requirement) 12.63% 12.23% 12.14% Tier I Leverage Ratio (3% minimum requirement) 6.67% 5.99% 6.49%
- - - -------------------------------------------------------------------------------- (1) Limited to 1.25% of risk weighted assets 22 COMMERCE BANK Form F-4 June 30, 1994 Signatures Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE BANK Date: August 10, 1994 /s/ Gerald T. McDonald --------------- ---------------------------- Gerald T. McDonald Executive Vice President/CFO (804) 456-1006 Date: August 10, 1994 /s/ Clyde E. McFarland --------------- ---------------------------- Clyde E. McFarland Vice President/Controller (804) 456-1093 23 EX-99.2 5 COMMERCE F-4 (MARCH 31) EXHIBIT 99.2 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D. C. 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1994 COMMERCE BANK ------------- (Exact name of bank as specified in charter) 54-1027360 22584 ------------------------------------------------------- (I.R.S. Identification No.) (FDIC Insurance Cert. No.) ------------------------------------------------------- VIRGINIA -------- (State of Incorporation) 3450 Pacific Avenue Virginia Beach, Virginia 23451 (804) 456-1093 --------------- (Address of principal office and telephone number) Indicate by check mark whether the Bank (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the Bank's classes of common stock, as of the latest practicable date. 2,702,538 shares of common stock ($2.50 par value) were outstanding as of March 31, 1994. ITEM 1: FINANCIAL STATEMENTS COMMERCE BANK BALANCE SHEET (Unaudited) (In thousands, except common stock data)
March 31, December 31, 1994 1993 1993 --------- -------- -------- Assets Cash and due from banks $ 29,503 $ 23,807 $ 25,800 Temporary investments 22,416 25,988 13,431 Securities: Held to maturity (Market value March 31: 1994 - $87,090, 1993 - $248,200, December 31, 1993 - $251,596) 88,588 240,076 247,175 Available for sale 137,047 - - --------- -------- -------- Total Securities 225,633 240,078 247,175 Loans: Commercial 177,888 140,516 165,409 Consumer 104,208 90,370 102,611 Real estate mortgage 91,259 82,926 88,850 Real estate construction & development 12,954 15,477 17,074 Tax-exempt 6,419 6,174 6,477 Less: Unearned income and deferred fees (1,741) (3,646) (2,163) --------- -------- -------- Loans, net of unearned income and deferred fees 390,987 331,817 378,258 Less: Allowance for loan losses (6,809) (6,211) (6,527) --------- -------- -------- Loans, net 384,178 325,606 371,731 Bank premises and equipment net 18,892 16,568 18,384 Foreclosed property 2,733 5,035 3,080 Other assets 10,160 11,877 10,029 --------- -------- -------- Total assets $ 693,515 $ 648,959 $ 689,630 - - - -------------------------------------------------------------------------------------------------- Liabilities Deposits: Noninterest bearing demand $ 97,089 $ 89,695 $ 103,197 Interest bearing demand 77,843 59,464 72,221 Money market savings 242,129 251,184 227,751 Regular savings 30,238 23,912 28,389 Certificates of deposit less than $100,000 152,706 150,130 164,122 Certificates of deposit greater than $100,000 35,860 24,486 38,461 --------- -------- -------- Total deposits 635,865 598,871 634,141 Short-term borrowings - 175 1,400 Long-term debt 6,809 6,890 6,828 Other liabilities 4,659 4,240 3,672 --------- -------- -------- Total liabilities 647,333 610,176 646,041 --------- -------- -------- Shareholders' Equity Common stock, $2.50 par: 5,000,000 shares authorized: 2,702,538, 2,522,667 and 2,686,792 issued and outstanding 6,756 6,307 6,717 Capital surplus 29,359 25,556 29,062 Retained earnings 9,155 6,950 7,810 Unrealized loss on marketable equity securities - (30) 0 Net unrealized gains on securities available for sale 912 - - --------- -------- -------- Total shareholders' equity 46,182 38,783 43,589 --------- -------- -------- Total liabilities and shareholders' equity $ 693,515 $ 648,959 $ 689,630 - - - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 1 COMMERCE BANK STATEMENT OF INCOME (Unaudited) (In thousands, except share data)
March 31, March 31, December 31, Three Months Ended, 1994 1993 1993 ------------- ------------- -------------- Interest Income Loans, including fees $ 8,045 $ 7,376 $ 7,702 Securities held to maturity and available for sale 3,541 4,002 3,772 Temporary investments 164 160 414 --------- --------- --------- Total interest income 11,750 11,538 11,888 Interest Expense Deposits 4,737 5,178 4,992 Short-term borrowings 29 2 10 Long-term debt 165 145 165 --------- --------- --------- Total interest expense 4,931 5,325 5,167 --------- --------- --------- Net Interest Income 6,819 6,213 6,721 Provision for loan losses 600 800 600 --------- --------- --------- Net Interest Income After Provision For Loan Losses 6,219 5,413 6,121 Noninterest Income Service charges on deposit accounts 939 770 943 Mortgage brokerage income 590 746 668 Credit card merchant fees 196 168 254 Securities gains 59 86 52 Trust income 170 150 155 Other income 440 253 326 --------- --------- --------- Total noninterest income 2,394 2,173 2,398 Noninterest Expenses Salaries and benefits 2,875 2,555 2,793 Occupancy of bank premises 665 583 637 Furniture and equipment 414 424 396 Other expenses 2,010 1,776 2,168 --------- --------- --------- Total noninterest expenses 5,964 5,338 5,994 --------- --------- --------- Income Before Income Taxes 2,649 2,248 2,525 Provision for income taxes 888 748 834 --------- --------- --------- Net Income $ 1,761 $ 1,500 $ 1,691 - - - ----------------------------------------------------------------------------------------------------- Net Income Per Share Primary $ 0.63 $ 0.55 $ 0.61 Fully diluted 0.60 0.53 0.58 Weighted Average Shares Outstanding Primary 2,789 2,719 2,773 Fully diluted 3,054 2,989 3,037 - - - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 2 COMMERCE BANK STATEMENT OF CASH FLOWS (Unaudited) (In thousands)
Three months ended March 31, 1994 1993 ---------- ---------- Cash Flows From Operating Activities: Net income $ 1,761 $ 1,500 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 600 800 Depreciation and amortization of premises and equipment 425 381 Net amortization of premiums and accretion of discounts 213 165 Amortization of intangible assets 68 80 Gain on sale of securities available for sale (59) - Gain on sale of securities held to maturity - (86) (Increase) decrease in deferred income tax benefits (90) 6 (Decrease) increase in interest receivable 165 (711) Decrease in interest payable (173) (66) Increase in other liabilities 1,138 979 Decrease in other assets 73 49 --------- --------- Net cash provided by operating activities 4,121 3,097 --------- --------- Cash Flows From Investing Activities: Securities held to maturity: Proceeds from maturities, calls and prepayments - 4,859 Proceeds from sales - 5,062 Purchases (9,358) (11,398) Securities available for sale: Proceeds from maturities, calls and prepayments 12,603 - Proceeds from sales 19,045 - Net increase in temporary investments (8,985) (10,299) Purchases of premises and equipment (933) (205) Net sale (repurchase) of loan participations (450) 29 Net (increase) decrease in loans (12,597) 4,018 --------- --------- Net cash used in investing activities (675) (7,934) --------- --------- Cash Flows From Financing Activities: Net increases in deposit accounts 1,724 887 Proceeds from issuance of common stock 336 125 Net decrease in short-term borrowings (1,400) (388) Principal payments on capital lease obligations (19) (21) Cash dividends paid (384) (191) --------- --------- Net cash provided by financing activities 257 412 --------- --------- Net increase in cash and due from banks 3,703 (4,425) Cash and due from banks at beginning of period 25,800 28,232 --------- --------- Cash and due from banks at end of period $ 28,767 $ 23,807 - - - ------------------------------------------------------------------------------------------- Supplemental Disclosures Of Cash Flow Information: Cash paid during the period for interest $ 5,104 $ 5,392 Noncash financing and investing activities: Capital lease obligation - 1,285 - - - -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 3 COMMERCE BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (In thousands)
Unrealized Loss on Common Stock Marketable ----------------------- Capital Retained Equity Shares Amount Surplus Earnings Security Total ---------- ----------- ----------- ----------- ------------ ----------- Three months ended March 31, 1993 Balance at January 1, 1993 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413 Net income - - - 1,500 - 1,500 Issuance of common stock 11 29 96 - - 125 Cash dividends declared - - - (255) - (255) ---------- ------------ ------------ ------------ ------------- ------------ Balance at March 31, 1993 2,522 $ 6,307 $ 25,556 $ 6,950 $ (30) $ 38,783 ---------- ------------ ------------ ------------ ------------- ------------ Three months ended March 31, 1994 Balance at January 1, 1994 2,687 $ 6,717 $ 29,062 $ 7,810 $ - $ 43,589 Adjustment to beginning balance for change in accounting method for net unrealized gain on securities available for sale, net of tax of $1,253,000 - - 2,327 - 2,327 Net income - - - 1,761 - 1,761 Issuance of common stock 16 39 297 - - 336 Change in net unrealized gains on securities available for sale, net of tax benefit of $763,000 - - (1,417) - (1,417) Cash dividends declared - - - (414) - (414) ---------- ------------ ------------ ------------ ------------- ------------ Balance at March 31, 1994 2,703 $ 6,756 $ 29,359 $ 9,155 $ 912 $ 46,182 - - - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements 4 COMMERCE BANK Form F-4 March 31, 1994 Notes to Financial Statements - - - ----------------------------- Note 1. General ------- The financial statements in this report have not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. These statements should be read in conjunction with the 1993 annual report on Form F-2. Results of operations for the three months ended March 31, 1994 are not necessarily indicative of the results of operations for the full year or any other interim periods. Note 2. Preferred Stock Arrangement with BB&T Financial Corporation ----------------------------------------------------------- Subsequent to March 31, 1994, Commerce entered into an arrangement with BB&T Financial Corporation, Wilson, North Carolina under which BB&T has agreed to purchase up to $12 million of a newly created class of Commerce preferred stock. The preferred stock arrangement with BB&T calls for BB&T to purchase initially 30,000 shares of a new series of Commerce Bank preferred stock for $3.0 million, with a commitment through December 31, 2000 by BB&T to purchase an additional 90,000 shares for $9.0 million upon demand by Commerce. The preferred stock is intended to qualify as Tier 1 capital for bank regulatory purposes. The initial annual dividend rate on the preferred stock is 6.75% through 1996. Thereafter, the rate will float to 275 basis points over the interest rate on the 3-year U.S. Treasury note, subject to a ceiling of 11.0% and a floor of 5.0%. The preferred stock is nonvoting and will have a liquidation value of $100 per share. The preferred stock may be redeemed by Commerce Bank, subject to the receipt of required bank regulatory approvals. Any redemption is subject to the payment of the applicable redemption premium, including a special redemption premium of 10% of the aggregate liquidation value of the outstanding shares of preferred stock in the case of redemption upon a change in control of Commerce. If the preferred stock is not first redeemed, it may be converted at the option of BB&T into Commerce common stock in the limited circumstances where 5 COMMERCE BANK Form F-4 March 31, 1994 Commerce's leverage capital ratio falls below a designated minimum level or if a change in control with respect to Commerce occurs. The conversion price will equal the closing market price of Commerce common stock on the date of initial issuance of the preferred stock. Based on Commerce's closing price of $25.00 on Wednesday, April 20th, each share of preferred stock would be convertible in the limited circumstances described above into four shares of Commerce common stock, and the conversion of the initial 30,000 shares of preferred stock would represent on a pro forma basis 4.2% of Commerce's then outstanding common shares. While it is anticipated that the initial sale of $3.0 million of preferred stock will close by the end of April, there are no definite plans at this time for sale to BB&T of any of the remaining 90,000 shares of preferred stock covered by the commitment. The sale of the Commerce preferred stock to BB&T is subject to receipt of confirmation from the FDIC that the preferred stock qualifies as Tier 1 capital and from the Federal Reserve on certain other regulatory matters. Note 3. Commitments ----------- At March 31, 1994, the amount of off-balance sheet commitments to extend credit were $31.4 million and standby letters of credit and financial guarantees were $5.7 million. Note 4. Accounting Change ----------------- Effective January 1, 1994, Commerce adopted Statement of Financial Accounting Standard No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. SFAS 115 requires that certain securities be classified into one of three categories: held to maturity, available for sale, or trading based on management's ability and intent at time of purchase. Securities classified as held to maturity are carried at their amortized cost; securities classified as available for sale are carried at their fair values with the amount of unrealized gains or losses, net of income taxes, reported as a separate component of shareholders' equity; and securities classified as trading are carried at their fair value with the unrealized gains or losses 6 COMMERCE BANK Form F-4 March 31, 1994 included in earnings. As a result of the adoption of SFAS 115, on January 1, 1994, Commerce classified securities with a fair value of approximately $155 million as securities available for sale. The opening balance of shareholders equity was increased by $2.32 million relating to net unrealized gain on securities available for sale of $3.58 million, less applicable income taxes of $1.25 million. Prior to the adoption of SFAS 115, securities deemed available for sale were carried at the lower of aggregate amortized cost or market value. Note 5. Earnings Per Share ------------------ Primary earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period after giving retroactive effect to the 5% stock dividends declared in 1993 and 1992. Dilutive stock options have been converted to common stock equivalents for the calculation of weighted average shares outstanding based upon the average market price of Commerce's common stock. Fully diluted earnings per share assumes the conversion of outstanding convertible subordinated capital notes and elimination of interest paid thereon, after tax effect, and the exercise of dilutive stock options, as of the beginning of each period. The dilutive effect of outstanding options and convertible subordinated debt is computed using the greater of the closing price or the average market price of Commerce's stock. The computation of earnings per share is provided on the following page. 7 COMMERCE BANK Form F-4 March 31, 1994 Earnings per share were determined as follows:
(In thousands except per share) Three months ended March 31, 1994 1993 ----- ----- Primary Average common shares outstanding 2,695 2,645 Dilutive common stock options assumed exercised 94 74 - - - ------------------------------------------------------------------ Average primary shares outstanding 2,789 2,719 - - - ------------------------------------------------------------------ Net Income 1,761 1,500 Per Share Amount .63 .55 - - - ------------------------------------------------------------------ Fully diluted Average common shares outstanding 2,695 2,645 Dilutive common stock options 96 81 Dilutive convertible subordinated capital notes assumed converted 263 263 - - - ------------------------------------------------------------------ Average fully diluted shares outstanding 3,054 2,989 - - - ------------------------------------------------------------------ Net Income 1,761 1,500 Add interest on convertible subordinated capital notes, after taxes 81 81 - - - ------------------------------------------------------------------ Adjusted net income 1,842 1,581 - - - ------------------------------------------------------------------ Per share amount .60 .53 - - - ------------------------------------------------------------------
8 COMMERCE BANK FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data)
Three Months Ended March 31, 1994 1993 Increase ----------- ---------- ------------ Earnings: Net interest income $ 6,819 $ 6,213 9.8 % Net income 1,761 1,500 17.4 - - - ------------------------------------------------------------------------------- Per Share Data: Net income : Primary $ 0.63 $ 0.55 14.5 % Fully diluted 0.60 0.53 13.2 Book value at period end 17.09 15.37 11.2 Cash dividends 0.15 0.10 50.0 - - - ------------------------------------------------------------------------------- Selected Financial Ratios: Return on average assets 1.05 % 0.97 % Return on average equity 15.25 15.85 Net interest spread 3.83 3.80 Net interest margin 4.38 4.33 Net overhead ratio 2.33 2.27 Average loans / average deposits 61.84 57.10 - - - ------------------------------------------------------------------------------- Daily Averages: Assets $ 683,119 $ 629,588 8.5 % Earning assets 631,930 581,498 8.7 Loans, net of unearned income 384,233 326,879 17.5 Investment securities 234,876 239,994 (2.1) Deposits 621,360 580,925 7.0 Shareholders' equity 46,828 38,386 22.0 Primary shares outstanding 2,789 2,719 2.6 Fully diluted shares outstanding 3,054 2,989 2.2 - - - ------------------------------------------------------------------------------- At Period End: Assets $ 693,515 $ 648,959 6.9 % Earning assets 639,035 597,883 6.9 Loans, net of unearned income 390,987 331,817 17.8 Investment securities 225,633 240,078 (6.0) Deposits 635,865 598,871 6.2 Shareholders' equity 46,182 38,783 19.1 Allowance for loan losses 6,809 6,211 9.6 Nonperforming assets 4,227 6,855 (38.3) - - - ------------------------------------------------------------------------------- Risk-Based Capital Ratios: Tier I 10.47 % 9.69 % Total 12.88 12.27 Tier I leverage 6.63 5.84 Total risk weighted assets $ 432,010 $ 377,791 - - - -------------------------------------------------------------------------------
9 COMMERCE BANK Selected Quarterly Financial Data (Dollars in thousands, except per share data)
First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter 1994 1993 1993 1993 1993 - - - ------------------------------------------------------------------------------------------------------------------------------------ Results of operations: Interest income $ 11,750 $ 11,888 $ 11,957 $ 11,864 $ 11,538 Interest expense 4,931 5,167 5,192 5,299 5,325 - - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 6,819 6,721 6,765 6,565 6,213 Provision for loan losses 600 600 700 725 800 - - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 6,219 6,121 6,065 5,840 5,413 Noninterest income 2,335 2,346 2,625 2,190 2,087 Securities gains 59 53 1,268 - 86 Noninterest expense (1) 5,964 5,995 6,831 5,542 5,338 - - - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 2,649 2,525 3,127 2,488 2,248 Provision for income taxes 888 834 1,415 840 748 - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,761 $ 1,691 $ 1,712 $ 1,648 $ 1,500 ==================================================================================================================================== Per Share Data: Net income : Primary $ 0.63 $ 0.61 $ 0.62 $ 0.60 $ 0.55 Fully diluted 0.60 0.58 0.60 0.57 0.53 Book value at period end 17.09 16.22 16.48 15.91 15.37 Cash dividends 0.15 0.15 0.14 0.12 0.10 Common stock price: (2) High 27.50 25.50 25.50 24.75 24.50 Low 25.50 23.00 22.75 21.00 19.12 Close 26.50 24.00 23.75 24.25 24.50 ==================================================================================================================================== Average Balance Sheet Data Assets: Loans, net of unearned income $ 384,233 $ 369,323 $ 354,239 $ 339,361 $ 326,879 Investment securities 234,876 245,039 240,369 246,729 239,994 Temporary Investments 12,821 12,356 20,941 16,409 14,625 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 631,930 626,718 615,549 602,499 581,498 Allowance for loan losses (6,809) (6,844) (6,713) (6,313) (5,885) Other Assets 57,998 58,637 56,375 55,984 53,975 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 683,119 $ 678,511 $ 665,211 $ 652,170 $ 629,588 ==================================================================================================================================== Liabilities and Shareholders' Equity: Interest bearing deposits $ 528,279 $ 529,081 $ 516,719 $ 511,875 $ 501,638 Short-term borrowings 3,623 1,337 818 859 429 Long-term borrowings 6,818 6,837 6,856 6,878 6,018 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 538,720 537,255 524,393 519,612 508,085 Non interest bearing liabilities 93,081 98,291 99,022 92,636 83,117 Equity 46,828 42,965 41,796 39,922 38,386 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity $ 683,119 $ 678,511 $ 665,211 $ 652,170 $ 629,588 ==================================================================================================================================== Financial Ratios: Return on average assets 1.05 % 0.99 % 1.02% 1.01% 0.97% Return on average equity 15.25 15.61 16.25 16.56 15.85 Net interest margin 4.38 4.28 4.36 4.37 4.33 ====================================================================================================================================
(1) The third quarter of 1993 included a non-recurring, noncash adjustment of $910,000 for the write down of an intangible asset. (2) As reported by NASDAQ 10 COMMERCE BANK Form F-4 March 31, 1994 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist readers in understanding and evaluating the results of operations and financial condition of Commerce Bank ("Commerce"). The following should be read in conjunction with Commerce's 1993 Annual Report on Form F-2. Performance Summary - - - ------------------- Net income for the first quarter of 1994 was $1.8 million and represented a 17.4% increase over first quarter earnings for 1993 of $1.5 million. Fully diluted earnings per share were $.60 for the first quarter of 1994 compared with $.53 for the first quarter of 1993. The return on annualized average assets was 1.05% for the first quarter of 1994 compared with .97% for the same period in 1993. The annualized return of average equity was 15.25% for the first quarter of 1994 compared with 15.85% for the same period of 1993. ROA of 1.05% for the first quarter of 1994 was up from the fourth quarter 1993 ROA of .99% while ROE decreased from 15.61% for the fourth quarter of 1993 to 15.25% for the first quarter of 1994. Total assets at March 31, 1994 were $693.5 million while total deposits were $635.9 million which represented a 6.9% and 6.2% growth rate over the prior year levels, respectively. Average earning assets increased 8.7% to $631.9 million during the first quarter of 1994 when compared with 1993. 11 COMMERCE BANK Form F-4 March 31, 1994 The following table presents an analysis of Commerce's return on average assets and equity.
Analysis of Return on Average Assets and Equity March 31, December 31, Three Months Ended 1994 1993 1993 -------- -------- ------------ As a percent of average earning assets: Net Interest Income 4.38 % 4.33 % 4.25 % Provision for Loan Losses (0.39) (0.56) (0.38) Noninterest Income 1.50 1.46 1.49 Noninterest Expenses (3.83) (3.72) (3.79) Securities Gains 0.04 0.06 0.03 Applicable Income Taxes (0.57) (0.52) (0.53) -------- ------- ------------ Return on Average Earning Assets 1.13 % 1.05 % 1.07 % Multiplied by Average Earning Assets to Average Total Assets 92.51 92.36 92.37 -------- ------- ------------ Return on Average Assets 1.05 % 0.97 % 0.99 % Multiplied by Ratio of Average Assets to Average Equity 14.52 16.34 15.77 -------- ------- ------------ Return on Average Total Equity 15.25 % 15.85 % 15.61 % - - - ---------------------------------------------------------------------------------
EARNINGS ANALYSIS Net Interest Income - - - ------------------- Net interest income, the principal source of Commerce's earnings, is the amount of income generated by interest-earning assets (primarily loans and investment securities) reduced by the total interest cost of the funds (chiefly deposits) incurred to carry them. Net interest income for the first quarter of 1994 was $6.8 million, a 9.8% increase over comparative 1993. Average earning assets increased $50.4 million, or 8.7%, rising from $581.5 million for the first quarter of 1993 to $631.9 million in 1994. 12 COMMERCE BANK Form F-4 March 31, 1994 Net interest margin was 4.38% for the first quarter of 1994, reflecting a 5 basis point improvement over comparative 1993. Net interest margin for 1994 was favorably impacted by a 18% increase in average loans which was partially offset by a 66 basis point decrease in yield. The annualized yield on earning assets decreased 51 basis points from 8.05% for the first quarter of 1994 to 7.54% for comparative 1994. The decline was principally due to a lower rate environment. The annualized cost of interest bearing liabilities decreased 54 basis points, from 4.25% for the first quarter of 1993 to 3.71% for the first quarter of 1994. The decrease was due to a lower rate environment as the yield on interest bearing deposits decreased 55 basis points, from 4.19% for the first quarter of 1993 to 3.64% for compartive 1994. See "Deposits" for further information on Commerce's deposit structure and cost rates. Net interest margin improved 13 basis points when comparing the fourth quarter of 1993 with the first quarter of 1994. Net interest spread improved 12 basis points reflecting a 10 basis point decrease on the cost of interest bearing deposits. Net interest income was $6.8 million for the first quarter of 1994, representing a 15% increase. The tables on the following page present Commerce's average balance sheet, interest earned or paid and the related yields and rates on major categories for the first quarter of 1994 and 1993, and the fourth quarter of 1993. 13 COMMERCE BANK Form F-4 March 31, 1994
(Dollars in thousands) Three Months Ended March 31, 1994 / Three Months Ended March 31, 1993 --------------------------------------------------------------------------------------------------- Average Balance Income/Expense Yield/Rate Change due to (3) --------------------- --------------------- --------------- Increase ----------------------- Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume --------- --------- --------- --------- ------- ------ ----------- ---------- ---------- Loans, net of unearned income & deferred fees (1)(2) $ 384,233 $ 326,879 $ 8,045 $ 7,376 8.49 % 9.15 % $ 669 $ (559) $ 1,228 Investment securities(2) 234,876 239,994 3,541 4,002 6.11 6.61 (461) (360) (101) Temporary investments 12,821 14,625 164 160 5.19 4.44 4 25 (21) --------- --------- --------- --------- --------- --------- --------- Total earning assets 631,930 581,498 11,750 11,538 7.54 8.05 212 (894) 1,106 Allowance for loan losses (6,723) (5,885) Nonearning assets 57,912 53,975 --------- --------- Total assets $ 683,119 $ 629,588 ========= ========= Liabilities & Shareholders' Equity: Interest bearing deposits $ 528,279 $ 501,638 $ 4,737 $ 5,179 3.64 % 4.19 % $ (442) $ (706) $ 264 Short-term borrowings 3,623 430 29 2 2.50 1.89 27 2 25 Long-term debt 6,818 6,017 165 144 9.81 9.71 21 1 20 --------- --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 538,720 508,085 4,931 5,325 3.71 4.25 (394) (703) 309 Noninterest bearing liabilities 97,571 83,117 Shareholders' equity 46,828 38,386 --------- --------- Total liabilities & equity $ 683,119 $ 629,588 ========= ========= --------- --------- --------- --------- --------- Net interest income $ 6,819 $ 6,213 $ 606 $ (191) $ 797 ========= ========= ========= ========= ========= Net interest spread 3.83 % 3.80 % Net interest margin 4.38 % 4.33 % - - - -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 1994 / Three Months Ended December 31, 1993 --------------------------------------------------------------------------------------------------- Average Balance Income/Expense Yield/Rate Change due to (3) --------------------- --------------------- --------------- Increase ----------------------- Assets: 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume --------- --------- --------- --------- ------- ------ ----------- ---------- ---------- Loans, net of unearned income & deferred fees (1)(2) $ 384,233 $ 369,323 $ 8,045 $ 7,974 8.49 % 8.57 % $ 71 $ (105) $ 176 Investment securities(2) 234,876 245,039 3,541 3,772 6.11 6.11 (231) 0 (231) Temporary investments 12,821 12,356 164 140 5.19 4.50 24 (36) 60 --------- --------- --------- --------- --------- --------- --------- Total earning assets 631,930 626,718 11,750 11,886 7.54 7.52 (136) (141) 5 Allowance for loan losses (6,723) (6,527) Nonearning assets 57,912 58,320 --------- --------- Total assets $ 683,119 $ 678,511 ========= ========= Liabilities & Shareholders' Equity: Interest bearing deposits $ 528,279 $ 529,081 $ 4,737 $ 4,992 3.64 % 3.74 % $ (255) $ (242) $ (13) Short-term borrowings 3,623 1,337 29 10 3.25 2.97 19 1 18 Long-term debt 6,818 6,837 165 166 9.81 9.63 (1) (1) 0 --------- --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 538,720 537,255 4,931 5,168 3.71 3.82 (237) (242) 5 Noninterest bearing liabilities 97,571 98,291 Shareholders' equity 46,828 42,965 --------- --------- Total liabilities & equity $ 683,119 $ 678,511 ========= ========= --------- --------- --------- --------- --------- Net interest income $ 6,819 $ 6,718 $ 101 $ 101 $ 0 ========= ========= ========= ========= ========= Net interest spread 3.83 % 3.71 % Net interest margin 4.38 % 4.25 % - - - --------------------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans, and income on such loans is recognized on a cash basis. (2) Interest and yields are presented on a book basis, as tax-equivalent adjustments are not significant. (3) The changes for each category of income and expenses are divided between the portion of change attributable to the variances in average levels and yields or rates for that category, with the amount of change that cannot be separated being allocated to each variance proportionately. 14 COMMERCE BANK Form F-4 March 31, 1994 Noninterest Income - - - ------------------ Total noninterest income, exclusive of securities gains, was $2.3 million for the first quarter of 1994, representing a 11.9% increase over the same period of 1993. Service charges on deposit accounts increased $169,000 or 21.9% during the first quarter of 1994 when compared with 1993 and were due to the implementation of various fee charges and account and activity growth. Mortgage brokerage income decreased $156,000 or 20.9% when comparing the first quarter of 1994 with 1993 reflecting a decrease in refinancing loan origination volume. Other income increased 73.9% or $187,000 for the first quarter of 1994 over 1993 and was due to a higher volume of fee-based customer services. Commerce recorded $59,000 in securities gains during the first quarter of 1994 compared with $86,000 for the same period of 1993. Noninterest income, exclusive of securities gains, for the first quarter of 1994 decreased $11,000 or .5% when compared with the fourth quarter of 1993. The following table provides an analysis of noninterest income.
(Dollars in thousands) Increase(Decrease) -------------------------------------------------------------------------------------- Three Months Ended March 31, / ------------------------------------------ ---------------------------------------- Three Months Ended March 31, Three Months Ended December 31, / ------------------------------------------ ---------------------------------------- 1994 over 1993 1994 over 1993 ------------------ ------------------ 1994 1993 Amount Percent 1994 1993 Amount Percent ------ ------ ------ ------- ------ ------ ------ ------- Service charges on deposit accounts $ 939 $ 770 $ 169 21.9 % $ 939 $ 943 $ (4) (0.4)% Mortgage brokerage income 590 746 (156) (20.9) 590 668 (78) (11.7) Credit card merchant fees 196 168 28 16.7 196 254 (58) (22.8) Trust income 170 150 20 13.3 170 155 15 9.7 Other income 440 253 187 73.9 440 326 114 35.0 ------ ------ ------ ------ ------ ------ 2,335 2,087 248 11.9 2,335 2,346 (11) (.5) Securities gains 59 86 27 (31.4) 59 52 7 (13.5) ------ ------ ------ ------ ------ ------ Total noninterest income $2,394 $2,173 $ 221 10.2 % $2,394 $2,398 $ (4) (.2)% ====== ====== ====== ====== ====== ======
n/m -- not meaningful 15 COMMERCE BANK Form F-4 March 31, 1994 Noninterest Expense - - - ------------------- Total noninterest expense for the first quarter of 1994 was $6.0 million, representing a 11.7% increase over the comparative period of 1993. Salaries and benefits expense was $2.9 million for the first quarter of 1994, up 12.5% from comparative 1993. The higher expense reflected an increase in the number of employees to service growth in the customer base. The number of full-time-equivalent employees was 340 at March 31, 1994 compared with 294 for March 31, 1993. Occupancy of bank premises expense increased 14.1% or $82,000, during the first quarter of 1994 when compared with 1993 due to scheduled rent increases and increased lease space for branch locations and operations. FDIC insurance premiums increased 7.7%, or $25,000, during the first quarter of 1994 when compared with 1993 due to growth in the deposit base. Other expenses increased 14.4%, or $209,000 for the first quarter of 1994 when compared with 1993. The increase was primarily due to the added expenses of servicing a larger customer base. Noninterest expense for the first quarter of 1994 decreased $30,000 or .5% when compared with the fourth quarter of 1993. The following table provides an analysis of noninterest expense.
(Dollars in thousands) Increase(Decrease) -------------------------------------------------------------------------------------- Three Months Ended March 31, ------------------------------------------ ---------------------------------------- Three Months Ended March 31, Three Months Ended December 31, ------------------------------------------ ---------------------------------------- 1994 over 1993 1994 over 1993 ------------------ ------------------ 1994 1993 Amount Percent 1994 1993 Amount Percent ------ ------ ------ ------- ------ ------ ------ ------- Salaries and benefits $2,875 $2,555 $ 320 12.5 % $2,875 $2,793 $ 82 2.9 % Occupancy of bank premises 665 583 82 14.1 665 637 28 4.4 Furniture and equipment 414 424 (10) (2.4) 414 396 18 4.5 FDIC insurance premiums 351 326 25 7.7 351 338 13 3.8 Other expenses 1,659 1,450 209 14.4 1,659 1,830 (171) (9.3) ------ ------ ------ ------ ------ ------ Total noninterest expenses $5,964 $5,338 $ 626 11.7 % $5,964 $5,994 $ (30) (0.5)% ====== ====== ====== ====== ====== ======
16 COMMERCE BANK Form F-4 March 31, 1994 Provision for Income Taxes - - - -------------------------- Commerce reported income taxes of $888,000 and $748,000 for the first quarter of 1994 and 1993, respectively. The effective tax rate was 33.5% and 33.3%, respectively. BALANCE SHEET ANALYSIS Temporary Investments - - - --------------------- Temporary investments were $22.4 million at March 31, 1994 and consisted of interest bearing deposits with other banks in the amount of $1 million, federal funds sold of $2.0 million, and mortgage loans held for sale of $6.4 million. Temporary investments are used for daily cash management purposes, management of short-term interest rate opportunities and interest rate risk, and as a result daily balances vary. The average balance of temporary investments during the first quarter of 1994 was $12.8 million and represented 2.0% of total earning assets compared with 2.5% for 1993. Securities - - - ---------- As further discussed under Financial Statements Note 4, Commerce adopted SFAS No. 115. Total securities were $225.6 million on March 31, 1994, representing a 6% decrease from comparative 1993. Loans and Asset Quality - - - ----------------------- During the first quarter of 1994, average loans, net of unearned income and deferred fees, increased 17.5% to $384.2 million and were 60.8% of total earning assets compared with 56.2% for 1993. Loans, net of unearned income and deferred fees, at March 31, 1994 were $391.0 million, representing a $59.2 million or 17.8% increase over comparative 1993. Commercial loans increased $37.4 million, or 26.6% while consumer loans increased 15%, or $13.8 million when comparing March 31, 1994 with March 31, 1993. Nonperforming assets at March 31, 1994 were $4.2 million as compared with $6.9 million a year earlier and $4.0 million at December 31, 1993. 17 COMMERCE BANK Form F-4 March 31, 1994 Net loan charge-offs were $318,000 for the first quarter of 1994, compared with $260,000 for the same respective period of 1993. The provision for loan losses for the first quarter of 1994 was $600,000, compared with the $800,000 provision for comparative 1993. The allowance for loan losses at March 31, 1994 was $6.8 million, which was equivalent to 1.74% of period end loans, compared with 1.87% at March 31, 1993 and 1.73% at December 31, 1993. The following tables summarize activity in the allowance for loan losses and provide information on nonperforming assets and asset quality ratios.
(In thousands) Three Months Ended March 31, December 31, March 31, Allowance for Loan Losses 1994 1993 1993 ---------- ------------ ---------- Balance, beginning of period $ 6,527 $ 6,985 $ 5,671 Provision charged to earnings 600 600 800 Loan charge-offs (411) (1,109) (372) Loan recoveries 93 51 112 --------- --------- --------- Net charge-offs (318) (1,058) (260) --------- --------- --------- Balance, end of period $ 6,809 $ 6,527 $ 6,211 ========= ========= =========
(Dollars in thousands) March 31, December 31, March 31, Nonperforming assets: 1994 1993 1993 ---------- ------------ ---------- Nonperforming loans $ 1,494 $ 918 $ 1,820 Foreclosed property 2,733 3,080 5,035 --------- --------- --------- Total nonperforming assets 4,227 3,998 6,855 ========= ========= ========= Loans past due 90 days accruing interest $ 1,010 $ 404 $ 558 - - - -------------------------------------------------------------------------------------------- Asset Quality Ratios Allowance for loan losses to nonperforming loans 4.56 X 7.11 X 3.41 X Allowance for loan losses to period end loans 1.74 % 1.73 % 1.87 % Nonperforming assets to period end assets 0.61 0.58 1.06 Nonperforming assets to period end loans 1.08 1.06 2.07 Net charge-offs to average loans (annualized) 0.33 0.57 0.32 - - - --------------------------------------------------------------------------------------------
18 COMMERCE BANK Form F-4 March 31, 1994 Deposits - - - -------- Total deposits at March 31, 1994 were $635.9 million, representing an increase of 6.2% or $37 million over comparative 1993. The growth in deposits was attributable to market share gains in the existing branch locations. The cost of interest bearing deposits was 4.19%, 3.74% and 3.64% for the first and fourth quarters of 1993, and first quarter of 1994 respectively, and reflected the continued lowering of market rates of interest. Average noninterest bearing deposits increased 17.4% during the first quarter of 1994 when compared with the first quarter of 1993. Average noninterest bearing demand deposits as a percentage of average total deposits were 15.0% during the first quarter of 1994 compared with 13.6% for 1993. The following table sets forth a summary of Commerce's various deposits categories and their respective cost rates. Average Balance/Cost Rate -------------------------
March 31, March 31, December 31, Three months ended, 1994 1993 1993 ---------------- ---------------- ---------------- Interest bearing demand $ 69,688 2.21 % $ 59,890 2.72 % $ 68,595 2.27 % Money market savings 237,718 3.14 246,142 3.84 226,774 3.21 Certificates:Less than $100,000 158,305 4.85 151,910 5.26 171,861 4.89 Greater than $100,000 33,985 5.17 21,925 5.85 33,224 5.31 Regular savings 28,583 2.74 21,771 3.00 28,627 2.77 -------- -------- -------- Total interest bearing 528,279 3.64 501,638 4.19 529,081 3.74 Noninterest bearing 93,081 79,287 94,760 -------- -------- -------- Total $621,360 3.09 % $580,925 3.62 % $623,841 3.17 % ======== ======== ========
19 COMMERCE BANK Form F-4 March 31, 1994 Short-Term Borrowings and Long-Term Debt - - - ---------------------------------------- Commerce had no short-term borrowings at March 31, 1994, however, the average balance during the first quarter of 1994 was $3.6 million. Long-term debt was $6.8 million at March 31, 1994 and consisted of $5 million, 10% convertible subordinated capital notes issued September 1, 1990 and capital lease obligations of $1.8 million. Common Stock and Dividends - - - -------------------------- Commerce's Board of Directors declared a $.15 cash dividend during the first quarter of 1994 representing a 50% increase over the $.10 declared for 1993. The high and low prices for Commerce's common stock are set forth with other selected quarterly financial data on page 10. Liquidity and Capital Structure - - - ------------------------------- Commerce continued to experience a high degree of liquidity during the first quarter of 1994 as reflected in its liquid asset ratio of 40.0% at March 31, 1994. Average loans to average deposits were 61.8% for the first quarter of 1994 in comparison with 56.3% for 1993. Subsequent to March 31, 1994, Commerce entered into an arrangement with BB&T Financial Corporation, under which BB&T has agreed to purchase up to $12 million of a newly created class of Commerce preferred stock. Financial Statement Note 2 provides a summary of the arrangement. Shareholders' equity at March 31, 1994 was $46.2 million, or 19.1% above comparative 1993. As further discussed under Financial Statements Note 4, Commerce adopted SFAS No. 115 effective January 1, 1994. As a result, net unrealized gains of $912,000 were recorded as a separate component of shareholders' equity. 20 COMMERCE BANK Form F-4 March 31, 1994 The following table provides information on the risk-based capital position of Commerce.
March 31, December 31, (Dollars in thousands) 1994 1993 1993 ---------- --------- ------------ Tier I Capital: Shareholders' equity $ 46,183 $ 38,783 $ 43,589 Less: intangible assets 956 2,158 1,024 -------- -------- -------- Total Tier I 45,227 36,625 42,565 Tier II Capital: Qualifying allowance for loan losses (1) 5,418 4,724 5,460 Mandatory convertible debt instruments 4,995 4,995 4,995 -------- -------- -------- Total Tier II 10,413 9,719 10,455 -------- -------- -------- Total Risk Based Capital $ 55,640 $ 46,344 $ 53,020 ======== ======== ======== Total Assets $693,515 $648,959 $689,630 Total Risk Weighted Assets 432,010 377,791 436,800 Risk Weighted Assets to Total Assets 62.29% 58.21% 63.34% Risk Based Capital Ratios: Tier I (4% minimum requirement) 10.47% 9.69% 9.74% Total (8% miminum requirement) 12.88% 12.27% 12.14% Tier I Leverage Ratio (3% minimum 6.63% 5.84% 6.49% requirement) - - - --------------------------------------------------------------------------------
(1) Limited to 1.25% of risk weighted assets 21 COMMERCE BANK Form F-4 March 31, 1994 Signatures Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE BANK Date: May 12, 1994 /s/ Gerald T. McDonald ------------------------- ------------------------------ Gerald T. McDonald Executive Vice President and Chief Financial Officer (804) 456-1007 Date: May 12, 1994 /s/ Clyde McFarland ------------------------- ------------------------------ Clyde McFarland Vice President/Controller (804) 456-1093 22 EX-99.3 6 EXHIBIT 99.3 Exhibit 99.3 [LOGO OF COMMERCE BANK APPEARS HERE] BALANCE SHEET
(In thousands, except common stock data) - - - ----------------------------------------------------------------------------------------------- December 31, 1993 1992 - - - ----------------------------------------------------------------------------------------------- Assets Cash and due from banks (Note 2) $ 25,800 $ 28,232 Temporary investments (Note 3) 13,431 25,548 Investment securities: (Market Value: 1993 - $251,596, 1992 - $242,323) (Note 4) 247,175 238,680 Loans: (Notes 5 & 7) Commercial 165,409 129,565 Consumer 102,611 97,572 Real estate mortgage 88,850 82,199 Real estate construction & development 17,074 14,921 Tax-exempt 6,477 6,217 Less: Unearned income and deferred fees (2,163) (4,209) - - - ----------------------------------------------------------------------------------------------- Loans, net of unearned income and deferred fees 378,258 326,265 Less: Allowance for loan losses (Note 6) (6,527) (5,671) - - - ----------------------------------------------------------------------------------------------- Loans, net 371,731 320,594 Bank premises and equipment, net (Note 8) 18,384 15,459 Foreclosed property 3,080 5,808 Other assets (Notes 9 & 14) 10,029 10,528 - - - ----------------------------------------------------------------------------------------------- Total assets $ 689,630 $ 644,849 =============================================================================================== Liabilities Deposits: Noninterest bearing demand $ 103,197 $ 94,229 Interest bearing demand 72,221 62,962 Money market savings 227,751 248,001 Regular savings 28,389 19,794 Certificates of deposit less than $100,000 164,122 149,370 Certificates of deposit greater than $100,000 38,461 23,628 - - - ----------------------------------------------------------------------------------------------- Total deposits 634,141 597,984 Short-term borrowings (Note 10) 1,400 563 Long-term debt (Note 11) 6,828 5,626 Other liabilities 3,672 3,263 - - - ----------------------------------------------------------------------------------------------- Total liabilities 646,041 607,436 - - - ----------------------------------------------------------------------------------------------- Contingent Liabilities (Notes 8, 17 & 18) Shareholders' Equity (Notes 12) Common stock, $2.50 par value: 5,000,000 shares authorized: 2,686,792 shares in 1993 and 2,511,327 shares in 1992 issued and outstanding 6,717 6,278 Capital surplus 29,062 25,460 Retained earnings 7,810 5,705 Unrealized loss on marketable equity securities -- (30) - - - ----------------------------------------------------------------------------------------------- Total shareholders' equity 43,589 37,413 - - - ----------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 689,630 $ 644,849 ===============================================================================================
The accompanying notes are an integral part of the financial statements. [LOGO OF COMMERCE BANK APPEARS HERE] STATEMENT OF INCOME
(In thousands, except per share data) - - - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1993 1992 1991 - - - --------------------------------------------------------------------------------------------------------------------------------- Interest Income Loans, including fees: Taxable $ 30,370 $ 29,780 $ 31,391 Tax-exempt 491 395 334 Temporary investments: Interest bearing deposits in other financial institutions 60 115 246 Federal funds sold 261 526 577 Mortgages held for sale 376 434 204 Investment securities: Taxable 15,649 13,608 8,178 Tax-exempt 40 81 97 - - - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 47,247 44,939 41,027 Interest Expense Deposits 20,322 21,845 23,796 Short-term borrowings 26 19 94 Long-term debt 635 550 568 - - - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 20,983 22,414 24,458 - - - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 26,264 22,525 16,569 Provision for loan losses (Note 6) 2,825 4,225 2,925 - - - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision For Loan Losses 23,439 18,300 13,644 Noninterest Income Service charges on deposit accounts 3,428 3,006 2,341 Mortgage brokerage income 2,895 1,838 950 Credit card merchant fees 907 679 586 Securities gains 1,407 1,098 900 Trust income 633 508 390 Other income 1,385 1,081 593 - - - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 10,655 8,210 5,760 Noninterest Expense Salaries and benefits 10,721 8,926 7,403 Occupancy of bank premises 2,443 2,268 2,068 Furniture and equipment 1,691 1,462 1,261 Other expense (Notes 9 & 13) 8,851 6,435 4,852 - - - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 23,706 19,091 15,584 Income Before Income Taxes 10,388 7,419 3,820 Provision for income taxes (Note 14) 3,837 2,477 1,221 - - - --------------------------------------------------------------------------------------------------------------------------------- Net Income $ 6,551 $ 4,942 $ 2,599 ================================================================================================================================= Net Income Per Share (Note 15) Primary $ 2.38 $ 2.05 $ 1.36 Fully diluted 2.28 1.97 1.35 Weighted Average Shares Outstanding Primary 2,748 2,413 1,913 Fully diluted 3,013 2,676 2,176
The accompanying notes are an integral part of the financial statements. [LOGO OF COMMERCE BANK APPEARS HERE] STATEMENT OF CASH FLOWS
(In thousands) - - - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1993 1992 1991 - - - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 6,551 $ 4,942 $ 2,599 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 2,825 4,225 2,925 Depreciation and amortization of premises and equipment 1,655 1,479 1,318 Net amortization of premiums and accretion of discounts (747) 429 98 Amortization of intangible assets (Note 9) 1,214 381 328 (Gain) loss on sale of property and equipment (80) -- 2 Gain on sale of investment securities (1,407) (1,098) (900) (Increase) decrease in deferred income tax benefits (452) (648) 294 Increase in interest receivable (137) (705) (1,221) (Decrease) increase in interest payable 211 (1,100) (342) (Decrease) increase in other liabilities 63 (60) 622 Decrease (increase) in other assets 2,602 580 (545) - - - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,298 8,425 5,178 - - - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from maturities, calls and prepayments of securities 32,024 31,722 12,590 Proceeds from sales of securities 51,433 35,853 42,585 Purchases of securities (89,799) (181,889) (106,157) Net (increase) decrease in temporary investments 12,118 (7,271) 9,520 Purchases of premises and equipment (3,215) (1,720) (867) Net sale (repurchase) of loan participations (615) 1,224 (2,947) Net increase in loans (53,347) (36,383) (27,755) - - - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (51,401) (158,464) (73,031) - - - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increases in deposit accounts 36,157 87,673 17,975 Net cash received from acquired deposits -- 65,087 51,995 Proceeds from issuance of common stock 892 9,327 143 Net increase (decrease) in short-term borrowings 837 22 (726) Principal payments on capital lease obligation (83) (45) (26) Cash dividends paid (1,132) (487) -- - - - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 36,671 161,577 69,361 - - - --------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and due from banks (2,432) 11,538 1,508 Cash and due from banks at beginning of year 28,232 16,694 15,186 - - - --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 25,800 $ 28,232 $ 16,694 - - - --------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 20,772 $ 22,701 $ 24,675 Income taxes 3,837 3,114 1,054 Noncash financing and investing activities: Transfer of loans to foreclosed property -- 2,007 2,730 Capital lease obligation 1,285 -- -- =================================================================================================================================
Cash and equivalents are defined as cash and noninterest bearing accounts due from banks. The accompanying notes are an integral part of the financial statements. [LOGO OF COMMERCE BANK APPEARS HERE] STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- - - --------------------------------------------------------------------------------------------------------------------------- Unrealized Loss On Common Stock Marketable ---------------- Capital Retained Equity (In thousands) Shares Amount Surplus Earnings Securities Total - - - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1990 1,650 $ 4,126 $ 14,749 $ 2,236 $ (6) $ 21,105 Net income for 1991 -- -- -- 2,599 -- 2,599 Proceeds from issuance of common stock 12 29 114 -- -- 143 5% stock dividend 83 206 825 (1,031) -- -- Cash dividends declared ($.05 per share) -- -- -- (83) -- (83) Change in valuation allowance for marketable equity securities -- -- -- -- 6 6 - - - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 1,745 $ 4,361 $ 15,688 $ 3,721 -- $ 23,770 Net income for 1992 -- -- -- 4,942 -- 4,942 Proceeds from issuance of common stock 646 1,617 7,710 -- -- 9,327 5% stock dividend 120 300 2,062 (2,362) -- -- Cash dividends declared ($.26 per share) -- -- -- (596) -- (596) Change in valuation allowance for marketable equity securities -- -- -- -- (30) (30) - - - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 2,511 $ 6,278 $ 25,460 $ 5,705 $ (30) $ 37,413 Net income for 1993 -- -- -- 6,551 -- 6,551 Proceeds from issuance of common stock 49 121 771 -- -- 892 5% stock dividend 127 318 2,831 (3,149) -- Cash dividends declared ($.51 per share) -- -- -- (1,297) -- (1,297) Change in valuation allowance for marketable equity securities -- -- -- -- 30 30 - - - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 2,687 $ 6,717 $ 29,062 $ 7,810 $ -- $ 43,589 ===========================================================================================================================
The accompanying notes are an integral part of the financial statements. [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Note 1 -- Summary of Significant Accounting Policies Accounting Policies The accounting and reporting policies of Commerce Bank ("Commerce") conform to generally accepted accounting principles and general practices within the financial services industry. The following is a summary of the more significant policies. Temporary Investments Temporary investments are carried at the lower of aggregate cost or market value. Investment Securities Marketable debt securities are stated at cost adjusted for discount accreted and premium amortized based on management's intention to hold these assets on a long-term basis and Commerce's ability to hold them to maturity or the foreseeable future. In making this determination, management considers significant known liquidity requirements and capital planning; however, investment securities may be sold as part of prudent asset/liability management. Marketable equity securities are carried at the lower of aggregate cost or market value, and unrealized losses are reflected as a reduction of shareholders' equity in accordance with Statement of Financial Accounting Standards ("SFAS") No. 12. Gains and losses on the sale of securities are determined by the specific identification method and are classified as securities gains or losses in the accompanying statement of income. As described in Note 4, Commerce will adopt SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" beginning in 1994. Loans Loans are carried at the principal amount outstanding, net of unearned income and deferred loan fees, net of costs. Interest on loans and amortization of unearned income, deferred fees and origination costs are computed by methods which generally result in level rates of return on principal amounts outstanding. Commerce discontinues the accrual of interest on loans based on delinquency status, an evaluation of the related collateral and the financial strength of the borrower. Loans generally are placed in nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier if collection is uncertain based upon an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Income recognized on consumer loans is generally discontinued after a delinquent status period of 120 days, unless conditions warrant otherwise. Management may elect to continue the accrual of interest if the loan is well collateralized and in the process of collection. Income is recognized on the cash basis for nonaccrual loans unless there is doubt as to collectibility of principal, in which case interest payments are applied to reduce principal. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. When loans are placed on nonaccural, uncollected interest credited to income in the current year is reversed and uncollected interest accrued in prior years is charged to the allowance for loan losses. As described in Note 6, Commerce will be required to adopt SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" beginning in 1995. Allowance for Loan Losses The allowance for loan losses is established by management based on an evaluation of the potential loss exposure in the loan portfolio. The level of the allowance for loan losses is based upon the quality of the loan portfolio as determined by management after a detailed specific review of problem loans, consideration of current and historical loan loss experience, diversification as to the type of loans in the portfolio, the amount of collateralized and uncollateralized loans, banking industry standards and averages, and general economic conditions. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses and additional write-downs in the valuation of real estate owned may be necessary based on changes in economic conditions. Bank Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed by the straight-line method. Premises and equipment are depreciated over the estimated useful lives of the assets, except for leasehold improvements which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Generally, estimated lives of the principal items of premise and equipment are buildings and improvements--15 to 40 years, furniture, fixtures and equipment--3 to 20 years, and capital leases over lease terms. The costs of major renovations are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. Gains and losses on dispositions are reflected in operations. [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Foreclosed Property Foreclosed property consists of properties acquired through foreclosure, acceptance in lieu of foreclosure, or insubstance foreclosures. In-substance foreclosures are properties in which the borrower has little or no equity in the collateral, where repayment of the loan is expected only from the operation or sale of the collateral, and the borrower either effectively abandons control of the property or the borrower has retained control of the property but his ability to rebuild equity based on current financial conditions is considered doubtful. These properties are carried at the lower of cost or estimated fair value. Losses from the acquisition of property in full or partial satisfaction of debt are charged against the allowance for loan losses at transfer from loans into foreclosed property. Estimated fair value is reviewed periodically by management on a specific property basis, and an allowance for loss is established for any declines in value. Net operating expenses are charged to noninterest expense. Income Taxes Effective January 1, 1993, Commerce changed its method of accounting for income taxes from the deferred method under Accounting Principles Board Opinion No. 11 to the liability method required by SFAS No. 109, "Accounting for Income Taxes" (see Note 14 "Income Taxes"). For years prior to 1993, Commerce deferred the past tax effects of timing differences between financial reporting and taxable income. Under the asset and liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. As permitted under SFAS No. 109, prior years' financial statements have not been restated. The adoption of SFAS 109 did not have a material effect on Commerce's financial position or results of operations for 1993. Earnings Per Share Primary earnings per share are calculated on the basis of the weighted average number of shares outstanding during the year after giving retroactive effect to the 5% stock dividends declared in 1993, 1992 and 1991. Dilutive stock options have been converted to common stock equivalents for the calculation of weighted average shares outstanding based upon the average market price of Commerce's common stock. Fully diluted earnings per share assumes the conversion of outstanding convertible subordinated capital notes and elimination of interest paid thereon, after tax effect, and the exercise of dilutive stock options, as of the beginning of each year. The dilutive effect of outstanding options and convertible subordinated debt is computed using the greater of the closing price or the average market price of Commerce's common stock. Trust Assets and Income Assets held in an agency or fiduciary capacity are not assets of Commerce and are not included in the accompanying financial statements. Trust service income is recognized on the accrual basis. Other Certain reclassifications have been made to amounts previously reported in 1992 and 1991 to conform with the 1993 presentation. Note 2 -- Restrictions on Cash and Due from Banks Commerce is required to maintain average reserve balances on transactional deposit accounts with the Federal Reserve Bank under Regulation D. The daily average amounts of these reserve balances for the years ended December 31, 1993 and 1992 were $4.9 million and $4.6 million, respectively. On December 31, 1993 and 1992, these reserve balances were $5.2 million and $5.4 million, respectively. Note 3 -- Temporary Investments Temporary investments consist of the following:
(In thousands) - - - ---------------------------------------------------------- December 31, 1993 1992 - - - ---------------------------------------------------------- Federal funds sold $ -- $ 7,000 Interest earning deposits with other banks 1,000 500 Securities purchased under resale agreements -- 5,000 Mortgages held for sale 12,431 13,048 - - - ---------------------------------------------------------- $13,431 $25,548 ==========================================================
[LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Note 4 -- Investment Securities The amortized cost and approximate market value at December 31, 1993 and 1992 were:
- - - ------------------------------------------------------------------------------------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value - - - ------------------------------------------------------------------------------------------------------------------------------ 1993 - - - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury $ 80,203 $ 2,867 $ -- $ 83,070 U.S. Government agencies & corporations 69,067 1,145 (257) 69,955 Mortgage-backed securities of U.S. Government agencies 93,564 1,211 (578) 94,197 State and municipal 1,001 28 (1) 1,028 Other securities 3,340 15 (9) 3,346 - - - ------------------------------------------------------------------------------------------------------------------------------ $ 247,175 $ 5,266 $ (845) $ 251,596 ============================================================================================================================== 1992 U.S. Treasury $ 74,355 $ 1,872 $ (164) $ 76,063 U.S. Government agencies & corporations 88,079 1,705 (661) 89,123 Mortgage-backed securities of U.S. Government agencies 65,700 1,232 (519) 66,413 State and municipal 849 32 -- 881 Other securities 9,697 146 -- 9,843 - - - ------------------------------------------------------------------------------------------------------------------------------ $ 238,680 $ 4,987 $ (1,344) $ 242,323 ==============================================================================================================================
The amortized cost and approximate market value of investment securities at December 31, 1993, by contractual maturity, are show below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Approximate Amortized Market (in thousands) Cost Value - - - ---------------------------------------------------------------------- Due in one year or less $ 16,540 $ 16,755 Due after one year through five years 97,917 100,993 Due after five years through ten years 38,690 39,185 Due after ten years 464 466 Mortgage-backed securities 93,564 94,197 - - - ---------------------------------------------------------------------- Total investment securities $ 247,175 $ 251,596 ======================================================================
During 1993, Commerce purchased $89.8 million in investment securities and had sales of $51.4 million that resulted in gains of $1.42 million and losses of $20,000. During 1992, Commerce purchased $181.9 million in investment securities and had sales of $35.8 million that resulted in gains of $1.1 million and losses of $20,000. Securities with carrying values of approximately $18.6 million and $13.5 million on December 31, 1993 and 1992, respectively, were pledged to provide collateral for public deposits and for other purposes required or permitted by law. In May 1993, the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires investments in equity securities that have readily determinable fair values and all investments in debt securities to be divided into three separate categories: held-to-maturity, trading, and available-for-sale. The new standard will be effective for 1994 reporting. Retroactive application is prohibited. Under SFAS No. 115, securities are classified as held-to-maturity when management has the ability and intent to hold them to maturity, and are stated at cost adjusted for discount accreted and premium amortized. Trading securities that are bought and held principally for the purpose of selling them in the near term are reported at fair value, with unrealized gains and losses included in earnings. Commerce does not anticipate establishment of a trading account upon adoption of SFAS 115 or any effect on the results of operations. Available-for-sale securities that management intends to hold [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS for an indefinite period of time but not necessarily to maturity, are reported at fair value, with unrealized gains and losses, net of deferred tax, included as a separate component of shareholders' equity. SFAS 115 is effective for fiscal years beginning after December 15, 1993. Commerce plans to adopt the standard as required during the first quarter of 1994 and anticipates classification of the investment portfolio at January 1, 1994 as follows:
- - - --------------------------------------------------------------------- Carrying Approximate (In thousands) Value Market Value - - - --------------------------------------------------------------------- Held-to-maturity $ 29,068 $ 30,192 Available-for-sale 218,107 221,404 - - - --------------------------------------------------------------------- $ 247,175 $ 251,596 =====================================================================
Note 5 -- Loans, Net of Unearned Interest and Deferred Fees Excluding loans in nonaccrual status, loans net of unearned interest and deferred fees on December 31, 1993 and 1992, with fixed and floating rates of interest were $377.3 million and $325.8 million, respectively. Loans on which the accrual of interest has been discontinued amounted to $918,000 and $490,000 on December 31, 1993 and 1992, respectively. Interest income would have increased $86,000 and $267,000 for 1993 and 1992, respectively, if interest had been accrued on average outstanding nonperforming loans. There were no material commitments to lend additional funds to customers whose loans were classified as nonperforming on December 31, 1993. In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which is effective for fiscal years beginning after December 15, 1994 with earlier application permitted. SFAS No. 114 requires that loans within its scope be measured on either the present value of expected cash flows discounted at the loan's effective interest rate or, if more practical, at the loan's observable market price or the fair value of the collateral when the loan is collateral dependent. SFAS No. 114 amends SFAS No. 5, "Accounting for Contingencies," to clarify that a creditor should evaluate the collectibility of both contractual interest and contractual principal of all receivables in assessing the need for a loss accrual. The statement also amends SFAS No. 15, "Accounting by Debtors and Creditors of Troubled Debt Restructuring," to require a creditor to measure all restructured loans from troubled debt restructurings that involve a modification of terms in accordance with this statement. Commerce is currently evaluating the impact of the new statement and anticipates adoption during the first quarter of 1995, without restatement of prior years. Commerce, however, does not believe the adoption of SFAS 114 will have a material adverse effect on its financial condition or results of operations. Note 6 -- Allowance for Loan Losses A summary of the transactions in the allowance for loan losses follows:
(In thousands) - - - ------------------------------------------------------------------ December 31, 1993 1992 1991 - - - ------------------------------------------------------------------ Balance at beginning of year $5,671 $3,717 $3,387 Provision charged to earnings 2,825 4,225 2,925 Losses charged to allowance (2,309) (2,669) (2,766) Recoveries of amounts charged-off 340 398 171 - - - ------------------------------------------------------------------ Net charge-offs (1,969) (2,271) (2,595) - - - ------------------------------------------------------------------ Balance at end of year $6,527 $5,671 $3,717 ==================================================================
Note 7 -- Related Party Transactions During 1993 and 1992, certain executive officers and directors of Commerce, including their immediate families and companies with which they are associated, were loan customers of Commerce. Total loans outstanding to these persons on December 31, 1993, and 1992 amounted to $20.3 million and $15.9 million, respectively. During 1991 an internally classified loan to a former director was resolved by a charge to the allowance for loan losses in the amount of $1.1 million. In the ordinary course of its business, Commerce has engaged in certain transactions with certain of its directors and/or corporations and other entities in which they are significantly interested. Commerce has engaged legal services and has purchased equipment from directors. Except for the lease agreement described in the next paragraph, no transactions amounted to more than $60,000 for any one interested director for the three years ended December 31, 1993. Also, during 1993, on behalf of Commerce, a director provided appraisal services to customers of Commerce, which management used in credit decisions. Customers reimburse Commerce for these services and the director does not participate further on these credit transactions. Commerce leases office space from an entity in which a director of Commerce holds approximately a 33% interest. Lease expense for this location was $246,000, $224,000, and $213,000 for 1993, 1992 and 1991, respectively. [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Note 8 -- Bank Premises and Equipment Included in the accompanying balance sheets are the following components of premises and equipment:
(In thousands) - - - --------------------------------------------------------------------- December 31, 1993 1992 - - - --------------------------------------------------------------------- Land $ 3,194 $ 2,423 Building and improvements 6,722 5,837 Furniture, fixtures and equipment 11,216 10,154 Leasehold improvements 2,283 1,887 Capital leases: Building 1,455 728 - - - --------------------------------------------------------------------- 24,870 21,029 Less: Accumulated depreciation and amortization (7,915) (6,367) - - - --------------------------------------------------------------------- 16,955 14,662 Construction in progress 1,429 797 - - - --------------------------------------------------------------------- Total premises and equipment $ 18,384 $ 15,459 =====================================================================
Commerce has entered into lease agreements for premises and equipment which contain renewal options and escalation clauses. These leases provide that Commerce pay taxes, maintenance, insurance and other operating expenses applicable to the leased property. The future minimum lease payments under noncancellable operating leases and capital leases with remaining terms in excess of one year on December 31, 1993, are as follows:
(In thousands) - - - ---------------------------------------------------------------------- Operating Capital Leases Leases - - - ---------------------------------------------------------------------- 1994 $ 1,415 $ 228 1995 1,415 667 1996 1,205 141 1997 491 141 1998 296 141 Thereafter 2,731 1,977 - - - ---------------------------------------------------------------------- Total minimum lease payments $ 7,553 $ 3,295 ------- Imputed interest (1,462) Present value of net minimum lease payments (included in long-term debt) $ 1,833 ======================================================================
Total lease expense for buildings and equipment was $1.3 million in 1993, $1.3 million in 1992, and $1.2 million in 1991. Note 9 -- Intangible Assets As of December 31, 1993, Commerce had unamortized intangible assets of $1.0 million. This included the excess of cost over the fair value of net tangible and identified intangible assets of acquired branches and deposit based intangibles. During the third quarter of 1993 Commerce recorded a special nonrecurring, noncash adjustment of $910,000 for the writedown of an intangible asset of deposits acquired on September 15, 1990. The adjustment better aligns management's estimate of the asset's value, given changes in market and economic conditions. The remaining intangible asset is amortized over a weighted average life of six years. Note 10 -- Short-Term Borrowings Short-term borrowings consist of federal funds purchased in the amount of $1.4 million on December 31, 1993, and securities sold under agreement to repurchase in the amount of $563,000 on December 31, 1992. These borrowings generally mature within 1 to 21 days or are due upon demand. The following amounts and rates applied during 1993 and 1992:
- - - -------------------------------------------------------------------- (Dollars in thousands) 1993 1992 - - - -------------------------------------------------------------------- Amount outstanding on December 31, $ 1,400 $ 563 Rate of interest on December 31, 3.06% 2.50% Highest amount outstanding during the year $ 12,175 $ 563 Average amount outstanding during the year $ 864 $ 411 Average rate of interest paid 3.01% 3.72% ====================================================================
Securities with carrying values of approximately $994,000 on December 31, 1992, were pledged as collateral for securities under agreements to repurchase. On December 31, 1993, Commerce had unused federal funds lines of credit of $18.6 million. Note 11 -- Long-Term Debt Long-term debt consists of the following:
(Dollars in thousands) - - - ----------------------------------------------------------------------- December 31, 1993 1992 - - - ----------------------------------------------------------------------- 10% Convertible subordinated capital notes due 2002 $ 4,995 $ 5,000 Obligations under capital leases (6% -9.25%) 1,833 626 - - - ----------------------------------------------------------------------- Total $ 6,828 $ 5,626 =======================================================================
[LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS The subordinated capital notes were issued by Commerce under terms of an indenture dated September 1, 1990, and are convertible into Commerce's common stock on or before August 31, 2002, unless previously redeemed at a conversion price of $19.00 per share, subject to adjustment in certain events. The notes are redeemable, in whole or in part, at Commerce's option subject to regulatory approval, beginning September 1, 1995 at 105% of the principal amount plus accrued and unpaid interest, and at reducing premiums thereafter. The notes bear interest at 10% per annum with interest payable quarterly. The notes are subordinated to the claims of depositors and certain other creditors of Commerce, and are considered equity contract notes, which are included in Tier 2 risk-based capital for bank regulatory purposes. Note 12 -- Shareholders' Equity and Stock Option Plan Commerce is authorized to issue 5 million shares of common stock, par value $2.50 per share. A summary of shares of common stock reserved for issuance as of December 31, 1993 follows:
- - - ------------------------------------------------------------------------- Shares Reserved - - - ------------------------------------------------------------------------- Subordinated capital notes (See Note 11) 262,895 Dividend Reinvestment and Stock Purchase Plan 234,547 1985 and 1993 Stock Option and Incentive Stock Plan 367,137 - - - ------------------------------------------------------------------------- Total 864,579 =========================================================================
Commerce is authorized to issue 1 million shares of preferred stock, par value $5.00 per share. At December 31, 1993, no shares of preferred stock were issued. The rights of common shareholders are subordinated to the rights of preferred shareholders. Commerce issued 625,000 additional shares of common stock during May, 1992, through an underwritten offering resulting in net proceeds of $9.0 million. During 1993, $5,000 of convertible subordinated capital notes were converted to 250 shares of common stock. Prior to 1993, no amounts were converted. Under Commerce's Dividend Reinvestment and Stock Purchase Plan, common shareholders of record may reinvest quarterly common stock dividends in shares of common stock at prices 5% below current average market prices, without payment of service charges or brokerage commissions. Optional cash purchases of common stock may be made by common shareholders at the current average market price. Optional cash payments may not be less than $100 per payment and the total of all such payments may not exceed $5,000 in any calendar quarter. The 1985 Stock Option Plan provides for the granting of incentive stock options and nonqualified options to key management employees of Commerce. The option price is the fair market value of the stock at the date of grant. All options shall expire not more than 10 years from the date of grant, if not previously exercised. In 1993, the Board of Directors adopted and the shareholders approved the 1993 Incentive Stock Plan which provides for the granting of awards in the form of stock options, stock appreciation rights and restricted stock to key management employees of Commerce. The option price is the fair market value of the stock at the date of grant. No options are exercisable until at least six months after grant or after ten years from grant. All stock option amounts have been adjusted to reflect stock dividends and stock splits since the inception of the plan. Federal income tax effects relating to exercised shares are credited to capital surplus. A summary of activity in the 1985 Stock Option Plan and 1993 Incentive Stock Plan follows:
- - - --------------------------------------------------------------------- Year ended December 31, 1993 1992 1991 - - - --------------------------------------------------------------------- Options outstanding at January 1 227,131 234,131 251,025 Options granted 62,918 72,319 -- Options exercised (20,007) (7,000) -- Options canceled/ expired -- (72,319) (16,894) - - - --------------------------------------------------------------------- Options outstanding at December 31 270,042 227,131 234,131 Options available for grant at December 31 97,095 2,516 2,516 - - - --------------------------------------------------------------------- Total reserved shares 367,137 229,647 236,647 - - - --------------------------------------------------------------------- Options exercisable at December 31 202,672 221,269 226,585 - - - --------------------------------------------------------------------- Option prices per share: Granted $ 24.00 $ 18.00 -- Exercised $ 9.41/ $ 10.37/ -- 12.34 12.96 Canceled -- $ 12.96 -- Outstanding $ 9.41/$ 9.88/ $ 14.69/ 22.86 17.41 17.41 =====================================================================
[LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS In 1993, 1992 and 1991, Commerce declared 5% stock dividends which were recorded at fair market value with cash being paid in lieu of fractional shares. In 1993, 1992, and 1991, Commerce declared $.51, $.26 and $.05 per share in cash dividends, respectively. Total cash dividends declared in 1993, 1992 and 1991 were $1.30 million, $596,000, and $83,000, respectively. State law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. Among other requirements that must be satisfied, a Virginia bank must maintain a surplus fund amounting to 20% of its capital stock, and no dividends may be paid that would reduce the surplus fund below this mandatory amount. On December 31, 1993, Commerce had a surplus fund in excess of Virginia law. Commerce is also required to maintain minimum amounts of capital to total risk-weighted assets, as defined by the banking regulators. At December 31, 1993, Commerce was required to have minimum Tier 1 and total capital ratios of 4.00% and 8.00%, respectively. Commerce's actual ratios at that date were 9.74% and 12.14%, respectively. Commerce's Tier 1 leverage ratio at December 31, 1993, was 6.49%. Note 13 -- Other Expenses The components of other expenses are as follows:
(In thousands) - - - -------------------------------------------------------------------------------- December 31, 1993 1992 1991 - - - -------------------------------------------------------------------------------- Advertising and marketing $ 957 $ 556 $ 309 Directors' fees 256 209 189 Stationery and supplies 662 531 477 Credit card merchant 710 526 448 Telephone, postage and courier 813 695 606 FDIC and other insurance 1,666 1,347 1,036 State franchise tax and assessments 231 143 136 Professional fees 396 299 234 Dues and subscriptions 119 76 62 Travel, education and meetings 110 91 60 Outside processing 346 258 218 Intangibles amortization 1,214 381 328 Automatic teller machine 153 159 125 Contributions 158 203 48 Loan 478 212 189 Foreclosed property 195 231 45 Miscellaneous 387 518 342 - - - -------------------------------------------------------------------------------- Total other expenses $ 8,851 $ 6,435 $ 4,852 ================================================================================
Note 14 -- Income Taxes As discussed in Note 1, Commerce adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," for 1993. Applying the provisions of SFAS No. 109 had no material effect on Commerce's financial statements. Prior years' financial statements were not restated, therefore, the amounts shown for fiscal years 1992 and 1991 were determined in accordance with the provisions of the Accounting Principles Board Opinion No. 11. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Commerce's deferred tax liabilities and assets at December 31, 1993 are as follows:
(In thousands) Deferred tax liabilities: Depreciation $ 921 Other 67 - - - ---------------------------------------------------------------------------- Total deferred tax liabilities 988 - - - ---------------------------------------------------------------------------- Deferred tax assets: Loan loss 1,945 Deferred compensation 228 Loan origination fees 232 Other 3 - - - ---------------------------------------------------------------------------- Total deferred tax assets 2,408 - - - ---------------------------------------------------------------------------- Net deferred tax assets $ 1,420 ============================================================================ The provision for income taxes is summarized as follows:
(In thousands) - - - ---------------------------------------------------------------------------- December 31, 1993 1992 1991 - - - ---------------------------------------------------------------------------- Federal income taxes current $ 4,298 $ 3,189 $ 1,168 Deferred (461) (712) 53 - - - ---------------------------------------------------------------------------- Provision for income taxes $ 3,837 $ 2,477 $ 1,221 ============================================================================
The components of the provision for deferred income taxes for the years ended December 31, 1993, 1992 and 1991 are as follows:
- - - ---------------------------------------------------------------------------- (In thousands) 1993 1992 1991 - - - ---------------------------------------------------------------------------- Deferred (benefit): Provision for loan losses $ (375) $ (705) $ (112) Loan origination fees and costs (20) (7) 56 Depreciation 44 12 129 Deferred compensation (53) (33) (23) Other (57) 21 3 - - - ---------------------------------------------------------------------------- Provision for deferred income taxes $ (461) $ (712) $ 53 ============================================================================
[LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Commerce's income tax returns through 1991 have been examined or are no longer subject to examination by the Internal Revenue Service. In addition to federal income taxes, Commerce incurred Virginia bank franchise taxes of $149,000 in 1993, $83,000 in 1992, and $77,000 in 1991. This tax is imposed upon banks in Virginia in lieu of income and personal property taxes. Commerce remits 80% of the tax to the Virginia municipalities in which it does business and the remaining 20% to the State. The applicable federal income tax effect of investment security gains was $481,000 in 1993, $374,000 in 1992, and $306,000 in 1991. Differences between the provision for income taxes at the statutory rate and that shown in the statement of income are summarized as follows:
(In thousands) - - - ---------------------------------------------------------------------------- December 31, 1993 1992 1991 - - - ---------------------------------------------------------------------------- Tax expense at statutory rate $ 3,553 $ 2,522 $ 1,299 Increase (reduction) in taxes resulting from: Tax-exempt interest (196) (146) (127) Goodwill 363 88 40 Other 117 13 9 - - - ---------------------------------------------------------------------------- Provision for income taxes $ 3,837 $ 2,477 $ 1,221 ============================================================================
Note 15 -- Earnings Per Share Earnings per share were determined as follows:
(In thousands, except per share) - - - ---------------------------------------------------------------------------- Year ended December 31, 1993 1992 1991 - - - ---------------------------------------------------------------------------- Primary Average common shares outstanding 2,660 2,351 1,913 Dilutive common stock options assumed exercised 88 62 * - - - ---------------------------------------------------------------------------- Average primary shares outstanding 2,748 2,413 1,913 - - - ---------------------------------------------------------------------------- Net Income $ 6,551 $ 4,942 $ 2,599 Per Share Amount $ 2.38 $ 2.05 $ 1.36 - - - ---------------------------------------------------------------------------- Fully Diluted Average common shares outstanding 2,660 2,351 1,913 Dilutive common stock options 90 62 -- Dilutive convertible subordinated capital notes assumed converted 263 263 263 - - - ---------------------------------------------------------------------------- Average fully diluted shares outstanding 3,013 2,676 2,176 - - - ---------------------------------------------------------------------------- Net Income $ 6,551 $ 4,942 $ 2,599 Add interest on convertible subordinated capital notes, after taxes 324 336 336 - - - ---------------------------------------------------------------------------- Adjusted net income $ 6,875 $ 5,278 $ 2,935 - - - ---------------------------------------------------------------------------- Per share amount $ 2.28 $ 1.97 $ 1.35 ============================================================================
* Anti-dilutive, therefore not considered in the calculation. Note 16 -- Acquisitions of Deposits Commerce acquired deposits from the Resolution Trust Corporation, as receiver of the failed Trustbank, F.S.B., and Atlantic Permanent Savings Bank, F.S.B., on March 20, 1992 and July 12, 1991, respectively. These acquisitions were accounted for as purchases. The results of operations related to these transactions are included in the financial statements since the date of such acquisitions. [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS The following table summarizes the acquisitions:
- - - ---------------------------------------------------------------------------- (In thousands) 1992 1991 - - - ---------------------------------------------------------------------------- Cash received $ 65,087 $ 51,995 Loans -- net 239 646 Other assets 622 330 Bank premises and equipment -- -- Deposits (65,136) (52,834) Other liabilities (812) (137) ============================================================================
Note 17 -- Contingent Liabilities Commerce is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing Commerce in connection with such claims and lawsuits, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position of Commerce. Note 18 -- Financial Instruments with Off-Balance Sheet Risk In the normal course of business, in order to meet the financing needs of its customers, Commerce is a party to financial instruments with off-balance sheet risk. These include commitments to extend credit and standby letters of credit. These instruments involve, to various degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of Commerce's allowance for loan losses. Management does not anticipate any material losses as a result of these transactions. Commerce's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Commerce uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commerce evaluates each customer's credit- worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Commerce upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, income-producing properties and balances left on deposit. Standby letters of credit are conditional commitments issued by Commerce to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The following table indicates the amount of off-balance sheet transactions:
(In thousands) - - - ---------------------------------------------------------------------------- December 31, 1993 1992 - - - ---------------------------------------------------------------------------- Commitments to extend credit $61,644 $41,355 Standby letters of credit and financial guarantees $ 5,223 $ 3,908 ============================================================================
Note 19 -- Risk Factors Commerce's operations are affected by various risk factors, including interest rate risk, credit risk and risk from geographic concentration of lending activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide a well diversified loan portfolio and assurance that loans will only be granted to credit-worthy borrowers. Commerce considers the allowance for loan losses of $6.53 million to be a reasonable estimate of potential loss exposure in the loan portfolio on December 31, 1993; however, subjective factors and factors beyond the control of Commerce could impact this estimate on an on-going basis. In addition, Commerce is a community bank and, as such, is mandated by the Community Reinvestment Act and other regulations to conduct most of its lending activities within the Hampton Roads, Virginia market. As a result, Commerce and its borrowers may be vulnerable to the consequences of change in the local economy. Note 20 -- Retirement Plan Commerce has a 401(K) Retirement, Thrift and Profit Sharing Plan. The Plan is a defined contribution plan covering all employees who have completed at least 1,000 hours of service during the twelve-month period beginning [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS on the first day of employment. It is subject to the provisions of the Employee Retirement Income Security Act of 1974. Commerce contributes an amount equal to at least 50% of participant's payroll savings contribution up to 6% of a participant's annual compensation. Additionally, a profit sharing contribution may be made at the discretion of the Board of Directors. Each participant is required to contribute at least 1% of their compensation but may contribute up to the lesser of 15% of their compensation or $8,994. Bank contributions were $304,000, $232,000, and $118,000 for 1993, 1992 and 1991, respectively. Note 21 - Disclosures about Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires Commerce to disclose estimated fair value for each class of financial instrument. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These valuations, where applicable, do not reflect any premium or discount that could result from offering for sale at one time Commerce's entire holdings of a particular financial instrument. In addition, no market exists for a significant portion of Commerce's financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on - and off - balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. SFAS 107 specifically excludes certain items that do not meet the definition of a financial instrument. These items include such things as Commerce's mortgage brokerage operation that contributes net fee income annually, the trust department, deferred tax assets, property, plant, and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses may have a significant effect on fair value and have not been considered in the estimates. Accordingly, the fair value information presented does not purport to represent any underlying "market value" of Commerce taken as a whole. The following methods and assumptions were used to estimate the fair value of Commerce's financial instruments. Cash and Due from Banks Cash and due from banks consist of currency and coin, cash items in process of collection and demand account balances, and their carrying amounts approximate fair value. Temporary Investments Temporary investments consist of interest bearing deposits with other banks, and mortgages held for sale, and their carrying amounts approximate fair value. Investment Securities Fair value for investment securities are based on quoted market prices where available. Otherwise, fair values are based on bid quotations received from independent securities dealers or are estimated utilizing independent pricing services based on available market data. In addition, fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transactions costs. See Note 4 for related fair value information. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate, installment and tax-exempt. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair values of performing loans (loans that are on accrual status) are calculated by discounting estimated cash flows using estimated market rates that reflect the credit and interest rate risk and prepayments inherent in the loan. For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting expected cash flows at a rate commensurate with the risk associated with the estimated cash flows, or recent appraisals of the underlying collateral. Deposit Liabilities The recorded amounts of deposits with no stated maturity, such as noninterest bearing demand deposits, savings and NOW accounts, and money market and checking accounts, by definition approximate fair value. The fair value of deposits with contractual maturities is based on the discounted value of expected cash flows. The discount rates used are those currently offered for deposits with similar remaining maturities. Short-term Borrowings Short-term borrowings consist of securities sold under agreement to repurchase and represent overnight transactions, and the carrying values approximate fair value. [LOGO OF COMMERCE BANK APPEARS HERE] NOTES TO FINANCIAL STATEMENTS Long-term Debt The fair value of the capital notes is calculated by discounting the contractual cash flows using an incremental rate of borrowing that would be currently available to Commerce for new debt of similar remaining maturity and terms. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties which approximates carrying value. The fair value of financial instruments not presented in other portions of the footnotes follows:
- - - ---------------------------------------------------------------------------- At December 31, 1993 ------------------------------- Carrying Estimated (In thousands) Amount Fair Value - - - ---------------------------------------------------------------------------- Cash and due from banks $ 25,800 $ 25,800 Temporary investments 13,431 13,431 Loans 378,258 380,499 Deposit liabilities 634,141 639,456 Short-term borrowings 1,400 1,400 Long-term debt 6,828 7,677 ============================================================================
Report of Independent Auditors To the Board of Directors and Shareholders of Commerce Bank: We have audited the accompanying balance sheet of Commerce Bank as of December 31, 1993 and the related statement of income, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of Commerce's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Commerce Bank for the years ended December 31, 1992, and 1991 were audited by other auditors, whose report, dated January 15, 1993, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1993 financial statements referred to above present fairly, in all material respects, the financial position of Commerce Bank as of December 31, 1993 and the results of its operations and its cash flows for the year ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ Ernst & Young Virginia Beach, Virginia January 21, 1994 Report of Independent Accountants --------------------------------- To the Board of Directors and Shareholders of Commerce Bank: We have audited the accompanying balance sheets of Commerce Bank as of December 31, 1992 and 1991 and the related statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1992, 1991 and 1990. These financial statements are the responsibility of Commerce's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commerce Bank as of December 31, 1992 and 1991, and the results of its operations and its cash flows for the years ended December 31, 1992, 1991 and 1990 in conformity with generally accepted accounting principles. Norfolk, Virginia /s/ COOPERS & LYBRAND January 15, 1993 -----END PRIVACY-ENHANCED MESSAGE-----