2013 Annual Report
Letter to Shareholders Vince Lombardi put it best, It s not whether you get knocked down, it s whether you get up. We faced several challenges in 2013 (and earlier) as the Board of Directors and Management Team agreed to aggressively deal with the remaining problem loans in our portfolio. It took the focus of every one of your bank s employees, but we made it happen. Our accomplishments include: Classified assets dropped over 37% Loan Loss Reserves are strong at 1.49% of total loans Charge-offs totaled $2.9M, down from $4.1M in 2012 Maintained our string of profitable years Other achievements include increasing our commercial loan portfolio by $10 million and significantly reducing delinquent loans to 1.15% at year-end. We maintained our net interest margin despite fierce competition. Finally, non-interest bearing deposit growth was admirable in 2013, up 27% and positively contributed to our net interest margin. Although profits were down for the year, we are in a better financial position going forward. It is an exciting time to be a part of Commerce State Bank as a shareholder, as a client, and as an employee. I have said that before and I believe it more today. After completing our 8th full calendar year of business, and entering into our 9th, I see many opportunities for Commerce State Bank.
As I write this letter, 2014 is just underway and early indications for the bank are positive. After just 2 months, net income for the bank already surpasses the total for all of 2013. Exciting projects for the year include a new Cedarburg office and mobile banking to better serve our clients. Goals for 2014 Increase net income Grow our commercial loan por olio Further reduce classified assets Grow local deposits This annual report reviews many of the great things your bank is doing to enrich the lives of its clients, employees, and its communities. The stories presented are inspiring and represent just how much your bank is doing to create sustainable value for shareholders. Share the story of Commerce State Bank with everyone you know. Perhaps they will want to become part of our story. Joe Fazio, III Chairman of the Board Chief Executive Officer
CFO Insight The financial philosophy of Commerce Financial Holdings Inc. is to enhance shareholder value. To achieve this, the Board of Directors and management focus on increasing profitability, maintaining secure capital levels, and earning new relationships in the markets we serve. Profitability Book Value (Dollars) 27.0 As the company focused on improving 22.5 the quality of our loan portfolio in 2013 18.0 our earnings fell to $33,963. However, 13.5 24.05 24.78 25.41 26.07 25.77 21.56 22.66 Substandard and Doubtful loans were 18.24 18.39 9.0 reduced to $4,506,135 from $13,927,069 4.5 0.0 in 2012. In addition, the company suffered 2005 2006 2007 2008 2009 2010 2011 2012 2013 negative repercussions as a result of the slowing retail mortgage refinance business. Fee income from the sale of retail mortgage loans fell to $668,110 from a historical high of $1,298,200 in 2012. This downturn occurred due to a rise in mortgage interest rates which diminished refinance volume. 27.0 Capital Capital ( illi ) (millions) The capital of the company at year-end was 18.0 $26,607,550 with a book value of $25.77. 13.5 26.86 26.61 24.29 25.02 26.14 Since 2005, the book value of the company 19.83 20.88 9.0 ranged from a low of $18.24 to a high of 10.94 11.04 4.5 $26.07. Commerce State Bank continues to 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 maintain a strong capital position posting a Tier One Capital/Asset ratio of 9.68% and Total Risk-Based Capital Ratio of 12.48% at year-end. In addition, the bank has $3,806,959 in Loan Loss Reserve which represents 1.49% of the loan portfolio. 22.5 Earning Relationships Our assets increased to $319,239,761 in 2013. The growth emerged from commercial lending and deposits gathered from the markets we serve. Lending to small- and medium-sized businesses remains our core competency with $231,901,078 or 91% of Loans 260 234 208 182 156 130 104 78 52 26 0 (millions) 257.82 25 57 882 25 251.12 51 112 250.54 50 554 241.95 25 4 237.79 247.10 158.52 15 58 552 90.10 24.52 24 44.522 2005 2006 2007 2008 2009 2010 2011 2012 2013
the loan portfolio attributed to commercial lending. The loan portfolio grew 3.79% while at the same time reducing Substandard and Doubtful loans by $9,420,934 or 68%. Deposits continue to generate strong growth year-over-year. Our total deposits grew 6.44% or $17,278,228. The company believes that increasing our market share 330 297 264 231 198 165 132 99 66 33 0 29.38 109.84 186.86 277.78 Assets (millions) 298.96 321.47 317.04 311.82 319.24 2005 2006 2007 2008 2009 2010 2011 2012 2013 300 270 240 210 180 150 120 90 60 30 0 Deposits (millions) 229.64 251.08 273.29 271.05 268.38 285.66 165.62 97.98 18.39 2005 2006 2007 2008 2009 2010 2011 2012 2013 in core non-interest bearing deposits will provide the most desirable long-term franchise value for our shareholders. Our deposit products were redesigned in 2012 to capitalize on the opportunities created by bank mergers and consolidations. In 2013, we posted positive results and gained market share as non-interest bearing deposits grew $5,327,405 or 27%. 2014 Financial Focus Building profitable deposit and loan rela onships with our clients. Effec vely managing our costs and risks. Growing new sources of revenue. Providing a superior client experience to encourage brand loyalty. Dave Borchardt Chief Financial Officer Chief Operating Officer
Client Experience We are grateful for Commerce State Bank believing in us from the very beginning as Healing Elements Day Spa enters its seventh year in business. Prior to being a business owner, I was a practicing Massage Therapist for 8 years and knew physically I would not be able to massage forever. I wanted to stay in the industry so I began making plans to open my own Day Spa. With over a year of creating a business plan, my husband and I began looking at financing options. The financial industry gave us the impression that unless we had a lot of money (more than enough to open a spa on our own) there was no interest in lending to us. This all changed when we went to Commerce State Bank. They were helpful, caring, and took the time in exploring several options for us. Since signing the paperwork, Commerce State Bank has been exceptional to do business with on a day-to-day basis. Healing Elements Day Spa is proving to be a success, and it is with many thanks to the efforts of Commerce State Bank. Nicolette Kearns Business Owner Healing Elements Day Spa
P.D. Peterka & Associates, Inc. Making Outsourcing the Comfortable Choice Our entrepreneurial challenges in this new era of technology have been horrific and challenging in the last 10 years. Not only governmental regulations and other industry regulations, but also financial institutions have changed their mode of business strategy adding to this dilemma. Commerce State Bank has been able to enhance the financial banking industry with a new and innovative strategy called Customer Service. My bank has formulated a business plan which defines who the customer is and not what the customer needs to be. This strategy gives new meaning to the word partner as Commerce State Bank strives to find who you are and not what you are in today s financial banking world. P.D. Peterka & Associates, with this strategy, can concentrate on growing its business with a strong financial partner who thrives on the awareness of client relationships. A new banking strategy for this technological age has evolved at Commerce State Bank. Patrick Peterka P.D. Peterka & Associates
Enriching Communities Five years ago, a small group of athletes formed a triathlon club called TrY Ozaukee. Today, this club has over 200 members and is considered one of the largest multi-sport clubs in Wisconsin. The focus of the club is developing all levels of age group athletes. Our mission is to support members through teaching, inspiring, and forming friendships. We do this by encouraging people to take on personal challenges associated with the sports of swimming, biking, and running. TrY Ozaukee partnered with Commerce State Bank as a major club sponsor. Their generous support and contributions have helped us make our training and club programs affordable for all members. Their leadership team has played an active role at our club events, and we share a mutual dedication to hard work, community involvement, and personal growth. As the Club Director, I would like to personally thank Commerce State Bank for their continued support in making a positive impact within our community. Mike Campbell Club Director Feith Family Ozaukee Center/YMCA of Metropolitan Milwaukee
2013 Community Donation Recipients Bay Lake Boy Scouts Big Brothers Big Sisters of Washington County Boys & Girls Club of Washington County Cedar Community Foundation Cedarburg Architectural Treasures Cedarburg Chamber of Commerce Cedarburg Community Scholarship Fund Cedarburg Grafton Rotary Cedarburg Lions Club Citizen Advocacy of Washington County Economic Development Washington County Family Promise of Washington County Feith Family Ozaukee YMCA-Triathlon Club Flag Day Foundation Greater Cedarburg Community Foundation Greater Random Lake/Adell United Fund Habitat for Humanity of Washington County Hartford Energizers Dance Team Hartford Gridiron Club Holy Angels Congregation Community Support Commerce State Bank partnered with Out & Out as part of our Random Act of Commerce program to support the community and our clients. Enjoy and have a cone on us! Good from May 27 thru September 2, 2013 Just one of many events at Commerce State Bank supporting local businesses in the community. Juvenile Diabetes Research Foundation Kettle Moraine YMCA Kewaskum Youth Scholarship Leadership Greater West Bend Mel s Pig Roast Mequon-Thiensville Chamber of Commerce Ozaukee County Agricultural Society Ozaukee Economic Development Foundation Random Lake Area Historical Society Random Lake Fire Department Rotary Club of Slinger-Allenton Saukville Chamber of Commerce Saukville Lions Club Silver Creek Fire Department St. Francis Borgia School St. John s Lutheran Church & School St. Mary s School The Service Club of Milwaukee United Way of Washington County Village of Saukville Vision Walk West Bend Beautification Committee West Bend Christmas Parade West Bend Firefighters Charity West Bend Friends of Park & Recreation West Bend Sunrise Rotary Club West Bend Sunrise Rotary Foundation West Bend Youth Football Wisconsin Banker s Association
Board of Directors Thomas C. Hopp President and a Director of the Corporation since 2004; President of the Bank since 2005 and a Director of the Bank since 2007. Before joining the Corporation, Mr. Hopp served as a Senior Vice President for West Bend Savings Bank. Prior to joining West Bend Savings Bank, Mr. Hopp served in various roles in commercial banking. David R. Borchardt Chief Operating Officer, Treasurer and a Director of the Corporation since 2004; Secretary of the Corporation and Bank from 2004 to 2009. Chief Financial Officer and Chief Operating Officer of the Bank since 2005 and a Director of the Bank since 2007. Mr. Borchardt previously served as Vice President for West Bend Savings Bank and prior to joining West Bend Savings Bank he served as Vice President and Corporate Secretary of Wisconsin State Bank. Jack Enea Director of the Corporation and the Bank since 2005 and the Corporation s Chairman of the Board since 2012. Mr. Enea is an attorney in the Milwaukee office of Whyte Hirschboeck Dudek S. C. where he focuses his practice on business and tax law, estate planning, estate administration, and real estate transactions and development. Mr. Enea is also a licensed CPA and served as a tax attorney at Arthur Anderson & Co. Van A. Mobley, Ph.D. Director of the Bank since 2011 and a Director of the Corporation since 2012. Dr. Mobley is the Associate Professor of History and Economics at Concordia University since 2008. Dr. Mobley was the managing partner of Do-Mo Capital Management from 2007- Not pictured Cory Davis 2011. Since 2012, Dr. Mobley has served as Village of Thiensville President, and was a Trustee from 2005-2012. Dr. Mobley was Director of Community & Government Relations from 2005-2008 and Assistant Professor of History & Economics from 2001-2007 at Concordia University. William A. Wernecke, Jr. Director of the Bank since 2011 and a Director of the Corporation since 2012. Mr. Wernecke is the Director of Wealth Management Services at Reinhart Partners since 2010. Prior to joining Reinhart Partners, Mr. Wernecke was President and CEO of Cedarburg Lumber Company until its sale in 2005 and was Senior Vice President of the Onion, Inc. from 2006 to 2010. Mr. Wernecke has served as the past president of Forward Cedarburg, Cedarburg/Grafton Rotary and of the Board of Trustees of the University School of Milwaukee. David L. Stroik Director of the Bank since 2010 and a Director of the Corporation since 2011. Mr. Stroik is President and CEO of Zimmerman Architectural Studios, Inc. since 1999 and he joined the company in 1976. Mr. Stroik is the Treasurer of the Channel 10/36 Friends Milwaukee Public Television and serves as the Chairman of the Southeastern Wisconsin Regional Planning Commission. Joseph Fazio, III Chief Executive Officer and a Director of the Corporation since 2004; Chief Executive Officer and a Director of the Bank since 2005 and Chairman of the Bank since 2007. Mr. Fazio served on the Board of The Bancorp and has more than 25 years of management experience in the financial services and technology industries.
Kevin E. Volm Executive Vice President of the Corporation and Bank since 2007; Secretary of the Corporation and of the Bank since 2009, Director of the Bank since 2011, Chief Risk Officer of the bank and a Director of the Corporation since 2012. Mr. Volm previously served as President of M&I Bank of Mayville from 1998 to 2007. Prior to becoming President, Mr. Volm served in various commercial lending roles at M&I Bank of Mayville and M&I First National Bank, West Bend, WI. Scott A. Tennies Director of the Corporation and the Bank since 2005. Mr. Tennies is the President and sole owner of Tennies Accounting and Business Services, CPA s. Mr. Tennies is a CPA and holds Series 6, 7 and 63 securities licenses. Board of Directors Cont. Appointment of Officers Mark G. Sellers Director of the Corporation and the Bank since 2005. Mr. Sellers is CEO and majority shareholder of MGS Manufacturing Group since 1982. Cory J. Davis Director of the Corporation and Bank since 2005. Mr. Davis has been a financial advisor with Robert W. Baird & Co. since 1990. Mr. Davis holds Series 6, 7 and 63 securities licenses and Life and Health insurance licenses. Chairman of the Board/ Chief Executive Officer............. Joseph Fazio, III* President...................................... Thomas C. Hopp* Chief Financial Officer/ Chief Operating Officer........... David R. Borchardt* Chief Risk Officer/ EVP/ Secretary....................... Kevin E. Volm* Senior Vice President Loan Administration................. David Clauff* Vice President Information Technology / Security Officer....... Peter Garancis Vice President Commercial Lender........................ Luke Hagel Vice President Audit and Compliance................. Suzanne Hoeppner Vice President Commercial Lender...................... John Housiaux Vice President Cash Management........................ Barb Lemler Vice President Marketing and Business Development............. Sue Miller Vice President Mortgage Operations Manager............... Steve Nadolny Vice President Operations............................... Mark Olig Vice President Credit Manager............................ John Ross Vice President Commercial Lender........................Jon Willems Asst. Vice President Retail Lender.......................... Eric Bast Asst. Vice President Retail Lender.......................... Doug Hall Asst. Vice President Retail Lender.......................Amy Schmoldt Asst. Vice President Retail Lender......................... Tom Sloey Controller....................................... Joyce Zirtzlaff Officer Operations Control Manager................... Rozanne Butzlaff Officer Loan Review / CRA Officer................... Danette Neuendorf Officer CSR Supervisor............................. Sandy McGrath Note - * denotes Reg. O Officer
Teamwork Amy I take pride in knowing that Commerce State Bank allows me to customize my approach to clients needs, as well as having the ability to say we can do this! As a mortgage loan provider, we think outside the box and provide solutions for our clients, and have experts as teammates. As a client, wouldn t you want an expert to work for you? Amy Schmoldt Assistant Vice President Mortgage Lending I have the ability to work with a superb group of banking professionals that pride themselves on delivering top notch service to our local clients and communities. I m driven by creating positive relationships and experiences for Commerce State Bank clients and knowing that we are helping to enhance the way they do business. Luke Hagel Vice President Commercial Lending Luke Fresh Brewed Ideas Our clients are always welcome to stop by for a cup of coffee and a chat with one of our knowledgeable bankers.
Alone we can do so little Together we can do so much ~ Helen Keller Barb I am passionate in guiding clients to their pathway of financial success and dreams. I love being part of a great team where I feel proud spreading the word about Commerce State Bank. When you love what you do, you never have to work a day in your life. Barb Lemler Vice President Cash Management Commerce State Bank is a great place to work. You are treated as a valued employee with opportunities for growth and advancement. I enjoy sharing the knowledge I have gained over the years with my fellow coworkers. Rozanne Butzlaff Officer-Operations Control Manager Rozanne Caroline I love my job and my co-workers! I take pride in my work and responsibilities at Commerce State Bank. The sky is the limit with many opportunities for growth and development. Caroline Wollner Operations Controls Assistant
Our story of how Commerce State Bank began... Have you ever wondered what it takes to start a bank? We hope our story will inspire others to pursue their dreams. The bank was founded by Joe Fazio of Cedarburg, Tom Hopp of West Bend, and David Borchardt of Random Lake. The men met in the fall of 2003, and spent a year toward setting up the business. You create your business plan, and then it has to be submitted to the state and to the FDIC for approval. Each segment of putting the bank together was a full time job. We began with ten individuals who put together the seed capital to fund applying for our charter and getting the necessary technology in place, explained Joe Fazio. If things did not go well, all that money (lots of money) would be lost. The startup group never considered that. Failure was not an option. We just kept heading forward, said Joe. Failure was not an option. We just kept heading forward. provide all the services you expect from a financial institution. The bank opened in a little strip mall on Highway 33 on August 31, 2005. There were eight employees. We all took turns cleaning the bank on Friday afternoons, recalled Joe. In 2009, the bank moved to a new facility on south Silverbrook Drive. In the same year, a second branch was opened in Cedarburg. Why choose Commerce State Bank? We have great products provided by knowledgeable, experienced advisors, said Joe. We always felt the advice portion of this business is important. You can find a low rate anywhere. Another one of our mantras has always been to be responsive and fair. We live that every day. We love what we do and we can look at it as fun too. No other bank that started when we did still has the original management team in place or has done as well financially. In eight months they worked on getting their charter and the group raised twelve million dollars. We had to gain the confidence of our investors, and convince them there was a real opportunity to invest in West Bend, said Joe. Commerce State Bank focuses on doing three things well. The first is serving the needs of small and medium sized businesses. The second is home equity and mortgage loans for our clients and the third is unbeatable deposit rates. Additionally, we l to r: Dave Borchardt - Chief Financial Officer / Chief Operating Officer; Joe Fazio, III - Chairman of the Board / Chief Executive Officer; Thomas C. Hopp - President
Independent Auditor s Report Independent Auditor s Report Board of Directors and Stockholders Commerce Financial Holdings, Inc. West Bend, Wisconsin We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheets of Commerce Financial Holdings, Inc. and Subsidiary, as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for the years then ended, and in our report dated March 27, 2014, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Wipfli LLP March 27, 2014 Oak Brook, Illinois
Commerce Financial Holdings, Inc. and Subsidiary Consolidated Balance Sheets - December 31, 2013 and 2012 Assets 2013 2012 Cash and due from banks $ 13,157,778 $ 13,926,323 Federal funds sold 1,828,327 8,043,548 Cash and cash equivalents $ 14,986,105 $ 21,969,871 Securities available for sale 25,850,594 23,661,188 Securities held to maturity 695,800 0 Loans, net 251,120,857 241,948,259 Premises and equipment, net 10,978,365 9,908,608 Federal Home Loan Bank stock 967,900 967,900 Accrued interest receivable 1,044,462 1,041,995 Foreclosed assets, net 5,546,101 4,064,923 Cash value of life insurance 6,187,210 5,961,575 Other assets 1,862,367 2,296,690 TOTAL ASSETS $ 319,239,761 $ 311,821,009 Liabilities and Stockholders Equity 2013 2012 Liabilities: Non-interest-bearing deposits $ 24,900,778 $ 19,573,373 Interest-bearing deposits 260,753,293 248,802,470 Total deposits $ 285,654,071 $ 268,375,843 Borrowed funds 0 9,000,000 Subordinated debentures 5,535,000 5,535,000 Accrued interest payable 381,112 496,212 Other liabilities 1,062,028 1,553,570 Total liabilities $ 292,632,211 $ 284,960,625 Stockholders' equity: Preferred stock- $.01 par value: Authorized - 1,000,000 shares No issued or outstanding shares Common stock - $.01 par value: 0 0 Authorized - 10,000,000 shares Issued and outstanding - 1,032,396 and 1,030,492 shares at December 31, 2013 and 2012, respectively 10,324 10,305 Additional paid-in capital 23,894,327 23,724,320 Retained earnings 2,238,828 2,204,865 Accumulated other comprehensive income 464,071 920,894 Total stockholders' equity $ 26,607,550 $ 26,860,384 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 319,239,761 $ 311,821,009
Commerce Financial Holdings, Inc. and Subsidiary Consolidated Statements of Income - Years Ended December 31, 2013 and 2012 2013 2012 Interest and dividend income: Loans, including fees $ 12,220,102 $ 13,142,438 Securities: Taxable 470,169 426,289 Tax-exempt 402,851 399,966 Interest-bearing deposits 10,941 8,642 Other 10,926 12,398 Total interest and dividend income 13,114,989 13,989,733 Interest expense: Deposits 2,776,399 3,318,339 Borrowed funds 181,487 520,212 Subordinated debentures 448,950 387,446 Total interest expense $ 3,406,836 $ 4,225,997 Net interest income 9,708,153 9,763,736 Provision for loan losses 2,509,000 2,845,000 Net interest income after provision for loan losses 7,199,153 6,918,736 Noninterest income: Service fees 157,835 145,744 Loan servicing income 585,891 796,839 Income from sale of loans 668,110 1,298,200 Increase in cash value of life insurance 225,636 228,851 Other 176,896 189,330 Total noninterest income $ 1,814,368 $ 2,658,964 Noninterest expense: Salaries and benefits $ 4,581,563 $ 4,214,843 Occupancy 1,001,785 862,225 Data processing 904,809 744,544 Net expenses related to foreclosed assets 573,118 764,718 Advertising and promotions 188,616 167,053 Professional fees 451,850 388,047 Other 1,568,187 1,493,819 Total non interest expense 9,269,928 8,635,249 Income (loss) before provision (benefit) for income taxes (256,407) 942,451 Provision (benefit) for income taxes (290,370) 206,426 Net income $ 33,963 $ 736,025
Disclosure This Annual report may contain certain forward-looking statements with respect to the financial condition, results of operations, objectives, plans, future performance and business of the company. Statements that are not historical facts, including statements about beliefs and expectations, are forwardlooking statements. These statements are based on beliefs and assumptions for the Company s management and on information currently available to management. Statements containing the words believe, expect, anticipate, plan, intends, estimate, may, will, would, could, and should, or similar expressions are forward-looking statements. All statements in this report, including forward-looking statements, speak only as of the day they are made, and the Company undertakes no obligation pursuant to this section to update any statement in light of new information of future events. Commerce State Bank is a wholly owned subsidiary of Commerce Financial Holdings, Inc.
West Bend 1700 South Silverbrook Drive West Bend, Wisconsin, 53095 262-247-2800 Fax: 262-247-2888 Cedarburg W61 N297 Washington Avenue Cedarburg, Wisconsin, 53012 262-375-9600 Fax: 262-375-0888 commercestatebank.com