UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to __________________.
Commission File #0-12874
COMMERCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
(State of other jurisdiction of incorporation (I.R.S. Employee
or organization) Identification Number)
Commerce Atrium
1701 Route 70 East 08034-5400
Cherry Hill, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 609-751-9000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
Title of Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $426,539,000.(1)
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Common Stock $1.5625 Par Value 15,584,842
Title of Class No. of Shares Outstanding as of 3/7/97
Series C ESOP Cumulative Convertible 417,000
Preferred Stock No. of Shares Outstanding as of 3/7/97
Title of Class
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV incorporate certain information by reference from the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1996 (the "Annual Report"). Part III incorporates certain information by
reference from the Registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by officers, directors, and shareholders owning in
excess of 10% of the Registrant's Common Stock multiplied by the last sale price
for the Registrant's Common Stock on March 7, 1997. The information provided
shall in no way be construed as an admission that the officer, director, or 10%
shareholder in the Registrant may be deemed an affiliate of the Registrant or
that he is the beneficial owner of the shares reported as being held by him, and
any such inference is hereby disclaimed. The information provided herein is
included solely for the recordkeeping purpose of the Securities and Exchange
Commission.
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COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
The preceding Annual Report and Form 10-K incorporates into a single
document the requirements of the accounting profession and the Securities and
Exchange Commission. There has been no action by the Commission, however, to
approve or disapprove or pass upon the accuracy or adequacy of the Annual Report
and Form 10-K.
Page
Part I
Item 1. Business ..........................................................56
Item 2. Properties ........................................................56
Item 3. Legal Proceedings .................................................60
Item 4. Submission of Matters to a Vote of Security Holders
(This item is omitted since no matters were
submitted for security vote during the fourth
quarter of 1996.)
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholders Matters ......................................28
Item 6. Selected Financial Data ............................................1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............................17
Item 8. Financial Statements and Supplementary Financial Data .............30
Item 9. Disagreements on Accounting and Financial Disclosure
(This item is omitted since it is not applicable)
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Management Remuneration and Transactions
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
(The information required by the items in this
part has been omitted since it will be contained
in the definitive proxy statement to be filed
pursuant to Regulation 14A.)
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................................54
(a) (3) - Exhibits:
2.1 Agreement and Plan of Reorganization, dated October
15, 1996 by and between Commerce Bancorp, Inc. and
Independence Bancorp, Inc. The Schedules to this
agreement are not filed as an exhibit hereto pursuant
to Regulation S-K, Item 601 (b) (2); however, the
Registrant will furnish a copy of these Schedules to
the Commision upon its request. (K)
2.2 Agreement and Plan of Merger, dated October 15, 1996 by
and between Commerce Bancorp, Inc., and Independence
Bancorp, Inc. (K)
3.1 Restated Certificate of Incorporation of the Company,
as amended. (I)
3.2 Certificate of Amendment to the Restated Certificate
of Incorporation of the Company, setting forth the
preferences, limitations and relative rights of the
Company's Series C ESOP Cumulative Convertible
Preferred Stock. (I)
3.3 By-laws of the Company, as amended. (L)
4.1 Form of Trust Indenture, dated July 15, 1993, between
the Company and United Jersey Bank, with respect to the
Company's $23,000,000 8 3/8% Subordinated Notes due
July 15, 2003. (I)
10.1 Ground lease, dated July 1, 1984, between Commerce NJ
and Group Four Equities, relating to the branch office
in Gloucester Township, New Jersey. (A)
10.2 Ground lease, dated April 15, 1986, between Commerce
NJ and Mount Holly Equities, relating to Commerce NJ's
branch office in Mt. Holly, New Jersey. (C)
*10.3 The Company's 1984 Incentive Stock Option Plan. (A)
*10.4 The Company's Employee Stock Ownership Plan. (F)
10.5 Lease, dated March 29, 1985, between Commerce PA and
Devon Properties (Ltd.), and lease dated September 4,
1985, between Commerce PA and Devon Properties (Ltd.),
relating to Commerce PA's branch office in Devon,
Pennsylvania. (B)
10.6 Assignment of Lease and Assumption Agreement dated
November 30, 1987, between the Company and Commerce PA,
relating to Commerce PA's branch office in Devon,
Pennsylvania. (C)
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10.7 Lease between the Company and Astoria Associates,
relating to the Company's and Commerce NJ's
headquarters facilities. (B)
10.8 Ground lease, dated April 15, 1986, between Commerce NJ
and U.S. Equities, relating to one of Commerce NJ's
branch offices in Washington Township, New Jersey. (D)
10.9 Ground lease, dated February 1, 1988, between Commerce
NJ and Diversified Properties of New Jersey, relating
to one of Commerce NJ's branch offices in Washington
Township, New Jersey. (D)
10.10 Ground lease, dated February 15, 1988, between Commerce
NJ and Diversified Properties of New Jersey, relating
to one of Commerce NJ's branch offices in Cherry Hill,
New Jersey. (D)
*10.11 The Company's 1989 Stock Option Plan for Non-Employee
Directors. (E)
*10.12 A copy of employment contracts with Vernon W. Hill, II,
C. Edward Jordan, Jr., and Peter Musumeci, Jr., dated
January 2, 1992. (G)
*10.13 A copy of the Retirement Plan for Outside Directors of
Commerce Bancorp, Inc. (H)
*10.14 The Company's 1994 Employee Stock Option Plan. (J)
10.15 Term Loan Agreement between Commerce Bancorp, Inc.
Employee Stock Ownership Trust and Mellon Bank, N.A.
dated as of November 29, 1994. (J)
11.1 Computation of Net Income Per Share.
13.1 The Registrant's Annual Report to Shareholders for its
fiscal year ended December 31, 1996.
21.1 Subsidiaries of the Company (incorporated by reference
from PART I, Item 1. "BUSINESS" of this Report on Form
10-K.)
23.1 Consent of Ernst & Young LLP.
27.1 The Registrant's Financial Data Schedule.
______________________
(A) Incorporated by reference from the Company's
Registration Statement on Form S-1, and Amendments Nos.
1 and 2 thereto (Registration No. 2-94189).
(B) Incorporated by reference from the Company's
Registration Statement on Form S-2 (Registration No
33-12603).
(C) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1987.
(D) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1988.
(E) Incorporated by reference from the Company's
Registration Statement on Form S-2, and Amendments Nos.
1 and 2 thereto (Registration No. 33-31042).
(F) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1989.
(G) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991.
(H) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992.
(I) Incorporated by reference from the Company's
Registration Statement on Form S-2 and Amendments Nos.
1 and 2 thereto (Registration No. 33-62702).
(J) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1994.
(K) Incorporated by reference from the Company's Current
Report on Form 8-K dated October 21, 1996 (Exhibits 3
and 4).
(L) Incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-10771).
* Management contract or compensation plan or arrangement.
(b) A Current Report on Form 8-K related to the proposed
acquisition of Independence Bancorp, Inc. was filed on October 22,
1996.
(c)(d) Exhibits and Financial Statement Schedules - All other
exhibits and schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instruction or are
inapplicable and, therefore, have been omitted.
Item 15. Signatures ........................................................62
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PART I
Item 1. Business
General
Commerce Bancorp, Inc. (the "Company") is a New Jersey business corporation
which is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended (the "Holding Company Act"). The Company was incorporated on
December 9, 1982 and became an active bank holding company on June 30, 1983
through the acquisition of 100% of the outstanding shares of Commerce Bank, N.A.
("Commerce NJ"). On January 2, 1987, the Company acquired all of the outstanding
shares of Commerce Bank/Pennsylvania, N.A. ("Commerce PA"). On December 31, 1988
the Company acquired all of the outstanding shares of Citizens State Bank of New
Jersey, Forked River, which was subsequently converted to a national charter and
renamed Commerce Bank/Shore, N.A. ("Commerce Shore"). On September 30, 1993, the
Company acquired all of the outstanding shares of The Coastal Bank, Ocean City,
New Jersey, ("Coastal") which was merged into Commerce NJ.
Effective January 21, 1997, the Company acquired Independence Bancorp,
Inc., a bank holding company headquarted in Bergen County, New Jersey.
Independence Bancorp, Inc.'s wholly-owned state-chartered bank subsidiary,
Independence Bank of New Jersey, was subsequently renamed Commerce Bank/North.
At the time of acquisition, Independence Bank of New Jersey had eight branches
in Bergen and Passaic Counties, New Jersey, and had approximately $377 million
in assets.
On November 15, 1996, two insurance brokerage agencies, Keystone National
Companies, Inc., Cherry Hill, New Jersey, and Morales, Potter & Buckelew, Inc.,
t/a Buckelew & Associates, Toms River, New Jersey, were acquired by the Company
and thereafter merged to form Commerce National Insurance Services, Inc.
("Commerce Insurance"). Commerce Insurance is currently a wholly-owned
subsidiary of Commerce Bank/North.
Effective December 1, 1996, a third insurance brokerage agency, Chesley &
Cline, Inc., Mt. Holly, New Jersey was merged with and into Commerce Insurance.
Effective January 1, 1997, a fourth insurance brokerage agency, Colkate, Inc.,
t/a The Morrissey Agency, Mt. Laurel, New Jersey, was merged with and into
Commerce Insurance.
Except as otherwise indicated, all references herein to the Company include
Commerce NJ, Commerce PA, Commerce Shore, and Commerce Insurance.
The Company's principal executive offices are located at Commerce Atrium,
1701 Route 70 East, Cherry Hill, New Jersey 08034-5400, and its telephone number
is (609) 751-9000.
The total number of full-time equivalent persons employed by the Company
was 1,681 as of December 31, 1996. The Company believes that its relationship
with its employees is good.
Commerce NJ
Commerce NJ provides retail and commercial banking services through 37
retail branch offices in Camden, Burlington, Gloucester, Atlantic, and Cape May
Counties in Southern New Jersey. It currently has six offices in Cherry Hill,
three offices in Washington Township, two offices each in Marlton, Medford and
Moorestown, and one office each in Absecon, Atco, Bellmawr, Berlin, Brigantine,
Cinnaminson, Glassboro, Gloucester Township, Haddonfield, Hammonton, Marmora,
Mt. Holly, Mullica Hill, Northfield, Ocean City, Sicklerville, Somers Point,
Stratford, Voorhees, West Deptford, Williamstown, and Woodbury.
Commerce NJ's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). Commerce Capital, a division of Commerce NJ, provides
municipal bond underwriting, investment banking, and personal investment
services. Commerce NJ acquired the former Cypress Securities, Inc. in March of
1995. Vernon W. Hill, II, the Chairman, President and Chief Executive Officer of
the Company, was the principal shareholder of Cypress Securities, Inc.
As of December 31, 1996, Commerce NJ had total assets of $2.123 billion,
total deposits of $1.910 billion and total stockholders' equity of $143.3
million.
Service Area
Commerce NJ's primary service area includes Burlington, Camden, Gloucester,
Atlantic and Cape May Counties, New Jersey. Commerce NJ has attempted to locate
its branches in the fastest growing communities within its service area. Retail
deposits gathered through these focused branching activities are used to support
Commerce NJ's lending throughout Southern New Jersey.
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Retail Banking Activities
Commerce NJ provides a broad range of retail banking services and products,
including free checking accounts (subject to minimum balances) and savings
programs, money market accounts, negotiable orders of withdrawal ("NOW")
accounts, certificates of deposit, safe deposit facilities, consumer loan
programs (including installment loans for home improvement and the purchase of
consumer goods and automobiles), home equity and Visa Gold card revolving lines
of credit, overdraft checking and automated teller facilities. Commerce NJ also
offers construction loans and permanent mortgages for houses.
Trust Activities
Commerce NJ offers trust services primarily focusing on corporate trust
activities, particularly as bond trustee, paying agent, and registrar for
municipal bond offerings.
Commercial Banking Activities
Commerce NJ offers a broad range of commercial banking services, including
free checking accounts (subject to minimum balance), night depository
facilities, money market accounts, certificates of deposit, short-term loans for
seasonal or working capital purposes, term loans for fixed assets and expansion
purposes, revolving credit plans and other commercial loans to fit the needs of
its customers. Commerce NJ also finances the construction of business properties
and makes real estate mortgage loans on completed buildings. Where the needs of
a customer exceed Commerce NJ's legal lending limit for any one customer
(approximately $23.7 million as of December 31, 1996), Commerce NJ may
participate with other banks, including Commerce PA, Commerce Shore, and
Commerce Bank/North, in making a loan.
Commerce PA
In 1987, the Company acquired all of the issued and outstanding shares of
capital stock of Commerce PA. As a result of this transaction, Commerce PA
became a wholly-owned subsidiary of the Company.
Commerce PA was organized as a national bank on December 28, 1983 and
commenced operations on June 29, 1984. As of December 31, 1996, Commerce PA had
total assets of $365.3 million, total deposits of $340.9 million and total
stockholders' equity of $21.5 million.
Commerce PA provides retail and commercial banking services through 14
retail branch offices in Philadelphia, Chester, Delaware and Montgomery Counties
in Southeastern Pennsylvania. It currently has one office in Center City
Philadelphia, one in West Philadelphia, one in South Philadelphia, and one
office each in the Philadelphia suburbs of Chichester, Collegeville, Devon,
Haverford, Lawrence Park, Media, Newtown Square, Springfield, Trooper, Wayne and
Whitpain. Commerce PA's deposits are insured by the FDIC.
Commerce PA generally provides the same retail and commercial banking
services and products as Commerce NJ and Commerce Shore. Commerce PA does not
offer trust services.
Commerce Shore
In 1988, the Company acquired all of the issued and outstanding shares of
capital stock of Commerce Shore. As a result of this transaction, Commerce Shore
became a wholly-owned subsidiary of the Company.
Commerce Shore was organized as a state-chartered bank on December 8, 1972
and commenced operations on January 29, 1973. In 1989, Commerce Shore converted
to a national charter. As of December 31, 1996, Commerce Shore had total assets
of $389.6 million, total deposits of $331.3 million and total stockholders'
equity of $21.8 million.
Commerce Shore provides retail and commercial banking services through
eight retail branch offices in Ocean County, New Jersey. It currently has two
offices each in Forked River and Toms River, and one office each in Barnegat,
Bayville, Long Beach Island, and Manahawkin. Commerce Shore's deposits are
insured by the FDIC.
Commerce Shore generally provides the same retail and commercial banking
services and products as Commerce NJ and Commerce PA. Commerce Shore does not
offer trust services.
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Commerce Insurance
Commerce Insurance operates as a regional insurance brokerage firm
concentrating on commercial property, casualty and surety as well as personal
lines. In addition, Commerce Insurance offers a line of employee benefit
programs including both group as well as individual medical, life, disability
and pension. Commerce Insurance currently operates out of nine locations in New
Jersey. Commerce Insurance places insurance for clients in multiple states,
primarily New Jersey and Pennsylvania.
Other Activities
Commerce NJ Equities Corporation, a New Jersey corporation, is a
wholly-owned subsidiary of Commerce NJ which purchases, holds and sells
investments of Commerce NJ. Commerce Shore Equities Corporation, a New Jersey
corporation, is a wholly-owned subsidiary of Commerce Shore which purchases,
holds and sells investments of Commerce Shore.
As part of the Commerce Network, the Company has an equity investment in
Commerce Bank/Harrisburg, Camp Hill, Pennsylvania (17.72% beneficial ownership).
The Commerce Network provides certain marketing support and technical support
services to its members.
Competition
The Company's service area is characterized by intense competition in all
aspects and areas of its business from commercial banks, savings and loan
associations, mutual savings banks and other financial institutions. Other
competitors, including credit unions, consumer finance companies, factors,
insurance companies and money market mutual funds, compete with certain lending
and deposit gathering services offered by the Company. Many competitors have
substantially greater financial resources and larger lending limits and larger
branch systems than those of the Company.
In commercial transactions, Commerce NJ's, Commerce PA's and Commerce
Shore's legal lending limit to a single borrower (approximately $23.7 million,
$3.8 million, and $3.7 million, respectively, as of December 31, 1996) enables
them to compete effectively for the business of smaller and mid-sized
businesses. However, these legal lending limits are considerably lower than that
of various competing institutions and thus may act as a constraint on Commerce
NJ's, Commerce PA's and Commerce Shore's effectiveness in competing for
financing in excess of these limits.
The Company believes that it is able to compete on a substantially equal
basis with larger financial institutions because it offers longer hours of
operation than those offered by most of its competitors, free checking accounts
for customers maintaining certain minimum balances and competitive interest
rates on savings and time accounts with low minimum deposit requirements.
The Company seeks to provide personalized services through management's
knowledge and awareness of its market area, customers and borrowers. The Company
believes this knowledge and awareness provides a business advantage in serving
the retail depositors and the small and mid-sized commercial borrowers that
comprise the Company's customer base.
Supervision and Regulation
The Company
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("Holding Company Act"), and is therefore
subject to regulation by the Board of Governors of the Federal Reserve System
("FRB").
Under the Holding Company Act, the Company is required to secure the prior
approval of the FRB before it can merge or consolidate with any other bank
holding company or acquire all or substantially all of the assets of any bank or
acquire direct or indirect ownership or control of any voting shares of any bank
that is not already majority owned by it, if after such acquisition it would
directly or indirectly own or control more than 5% of the voting shares of such
bank. See "Recent Legislation/Interstate Banking."
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The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control or more than
5% of the voting shares of any company engaged in non-banking activities unless
the FRB, by order or regulation, has found such activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making such a determination, the FRB considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public which outweigh the possible adverse
effects. The FRB has by regulation determined that certain activities are
closely related to banking within the meaning of the Holding Company Act. These
activities include, among others, operating a mortgage, finance, credit card or
factoring company; performing certain data processing operations; providing
investment and financial advice; acting as an insurance agent for certain types
of credit-related insurance; leasing property on a full-payout, non-operating
basis; and certain stock brokerage and investment advisory services.
In addition, under the Holding Company Act, the Company is required to file
periodic reports of its operations with, and is subject to examination by, the
FRB.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.
Commerce NJ, Commerce PA, and Commerce Shore
Commerce NJ, Commerce PA and Commerce Shore, as national banks, are subject
to the National Bank Act. Each is also subject to the supervision of, and is
regularly examined by, the Office of the Comptroller of the Currency ("OCC") and
is required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under present New Jersey
law, Commerce NJ and Commerce Shore would be permitted to operate offices at any
location in New Jersey which is approved by the OCC. Under present Pennsylvania
law, Commerce PA would be permitted to operate offices within any county in
Pennsylvania, subject to the prior approval of the OCC.
Under the Community Reinvestment Act, as amended ("CRA"), as implemented by
OCC regulations, a bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods. CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with CRA. CRA requires the OCC to assess an institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires that the OCC
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. An institution's CRA rating is considered
in determining whether to grant charters, branches and other deposit facilities,
relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. In addition, under
applicable regulations a bank having a less than satisfactory rating is not
entitled to participate on the bid list for FDIC offerings. In 1996, Commerce
NJ, Commerce PA and Commerce Shore each received a "satisfactory" rating.
Commerce NJ, Commerce PA and Commerce Shore are members of the FDIC and
members of the FRB and, therefore, are subject to additional regulation by these
agencies. Some of the aspects of the lending and deposit business of Commerce
NJ, Commerce PA and Commerce Shore which are regulated by these agencies include
personal lending, mortgage lending and reserve requirements. The operation of
Commerce NJ, Commerce PA and Commerce Shore are also subject to numerous
federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
Commerce NJ, Commerce PA and Commerce Shore are subject to certain
limitations on the amount of cash dividends that they can pay. See Note 18 of
the Company's Notes to Consolidated Financial Statements which appears elsewhere
herein.
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Recent Legislation/Interstate Banking
On September 29, 1994, the President signed into law the "Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994" (the "Interstate Act"). Among
other things, the Interstate Act permits bank holding companies to acquire banks
in any state one year after enactment. Beginning June 1, 1997, a bank may merge
with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31,1997. States may enact laws opting out of interstate branching before June 1,
1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. New Jersey and Pennsylvania have enacted laws
opting in immediately to interstate merger and interstate branching
transactions. Interstate acquisitions and mergers would both be subject, in
general, to certain concentration limits and state entry rules relating to the
age of the bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania
recently passed such a law. The recently passed New Jersey law does not
authorize establishment of interstate branches other than by means of acquiring
such branches from another institution.
The foregoing necessarily is a summary and general description of certain
provisions of the Interstate Act and does not purport to be complete. Many of
the provisions will be implemented through the adoption of regulation by the
various Federal banking agencies. Moreover, many of the significant provisions
of the legislation have not yet become effective. As of the date thereof, the
Company is continuing to study the legislation and regulations relating to the
legislation but cannot yet assess its impact on the Company.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Company, Commerce NJ, Commerce PA and Commerce Shore are
affected by the policies of regulatory authorities, including the OCC, the FRB
and the FDIC. An important function of the FRB is to regulate the money supply
and credit conditions. Among the instruments used to implement these objectives
are open market operations in U.S. Government securities, setting the discount
rate, and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall growth and
distribution of credit, bank loans, investments and deposits, and their use may
also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings and growth of the Company, Commerce NJ, Commerce PA and
Commerce Shore cannot be predicted.
Legal Proceedings
Other than routine litigation incidental to its business, none of the
Company, Commerce NJ, Commerce PA, Commerce Shore or any of their properties is
subject to any material legal proceedings, nor are any such proceedings known to
be contemplated.
Employee Stock Ownership Plan
Effective January 1, 1989, the Company's Board of Directors approved the
restatement of the Company's Stock Bonus Plan to an Employee Stock Ownership
Plan ("ESOP"). The ESOP is intended to be a qualified retirement plan
established and maintained in accordance with the Employee Retirement Income
Security Act of 1974 for the benefit of the Company's and its bank subsidiaries'
eligible employees. The ESOP is intended to invest primarily in "Qualifying
Employer Securities" (i.e., common stock or preferred stock which is convertible
into common stock). The assets of the ESOP are held in a trust fund pursuant to
a Trust Agreement. The trustees under the Trust Agreement are authorized to
invest up to 100% of the trust fund in Qualifying Employer Securities. The
trustees are also authorized to borrow money for the purpose of purchasing
Qualifying Employer Securities.
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Generally, each participant in the ESOP is entitled to direct the trustees
with respect to the voting rights, if any, of the Qualifying Employer Securities
allocated to the participant's account. In other cases (i.e., unallocated
shares), the voting of shares held by the ESOP is determined by the trustees.
The current trustees are Vernon W. Hill, II and C. Edward Jordan, Jr., the
trustees under the Company's former Stock Bonus Plan.
The Company is responsible for the operation and administration of the
ESOP. The Company determines investment policies under which the trustees act.
These duties are carried out by a committee appointed by the Board of Directors.
The Board of Directors has the sole responsibility to appoint and remove members
of the committee of trustees, to determine the amount of contributions to the
ESOP by the Company and its subsidiary banks, and to amend or terminate, in
whole or in part, the ESOP or the Trust Agreement.
The Company's Board of Directors approved the creation of a new series of
cumulative convertible preferred stock known as "Series C ESOP Cumulative
Convertible Preferred Stock." On January 31, 1990, the ESOP borrowed $7.5
million from another financial institution to complete the purchase of 417,000
shares of Series C ESOP Cumulative Convertible Preferred Stock from the Company,
at $18.00 per share, with an annual dividend rate of $1.35. This loan was
guaranteed by the Company. During 1994, the loan was refinanced with another
financial institution, also with the guarantee of the Company. The balance of
the loan at December 31, 1996 was $3,333,000.
If all of the unallocated shares of Series C ESOP Cumulative Convertible
Preferred Stock held of record by the ESOP Trust as of March 1, 1997 were
converted into the Company's common stock, the unallocated shares of common
stock the ESOP Trust would hold of record would be 1.69% of the Company's common
stock.
61
<PAGE>
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Commerce Bancorp, Inc.
By /s/ Vernon W. Hill, II
Vernon W. Hill, II
Chairman of the Board and President
Date: March 27,1997
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Vernon W. Hill, II Chairman of the Board and President March 27, 1997
Vernon W. Hill, II (Principal Executive Officer)
/s/ C. Edward Jordan, Jr. Executive Vice President and Director March 27, 1997
C. Edward Jordan, Jr. (Principal Financial and Accounting
Officer)
/s/ Robert C. Beck Secretary and Director March 27, 1997
Robert C. Beck
/s/ David Baird, IV Director March 27, 1997
David Baird, IV
/s/ Jack R Bershad Director March 27, 1997
Jack R Bershad
/s/ Morton N. Kerr Director March 27, 1997
Morton N. Kerr
/s/ Steven M. Lewis Director March 27, 1997
Steven M. Lewis
/s/ Daniel J. Ragone Director March 27, 1997
Daniel J. Ragone
/s/ Joseph T. Tarquini, Jr. Director March 27, 1997
Joseph T. Tarquini, Jr.
/s/ Joseph Buckelew Director March 27, 1997
Joseph Buckelew
</TABLE>
Exhibit No. 11.1
Commerce Bancorp, Inc. and Subsidiaries
Computation of Net Income Per Share
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Primary Net Income Per Share
Adjustment of income:
Net income $26,625 $23,485 $20,377
Preferred stock dividends 563 563 1,074
------- ------- -------
Adjusted net income applicable to
common stock $26,062 $22,922 $19,303
======= ======= =======
Average shares of common stock and
equivalents outstanding:
Average common shares outstanding 12,060 11,553 9,327
Common stock equivalents - dilutive
options 491 350 311
------- ------- -------
Average shares of common stock and
equivalents outstanding 12,551 11,903 9,638
====== ======= =======
Net income per share of common stock $ 2.08 $ 1.92 $ 2.00
======= ======= =======
Fully Diluted Net Income Per Share
Net income applicable to common stock
on a fully diluted basis $26,625 $23,485 $20,377
Less: additional ESOP contribution
under the if-converted method 103 133 150
------- ------- -------
Adjusted net income applicable to
common stock on a fully diluted basis $26,522 $23,352 $20,227
======= ======= =======
Average number of shares outstanding on a fully
diluted basis:
Average common shares outstanding 12,060 11,553 9,327
Additional shares considered in fully
diluted computation assuming:
Exercise of stock options 712 423 352
Conversion of preferred stock 616 616 1,188
------- ------- -------
Average number of shares outstanding
on a fully diluted basis 13,388 12,592 10,867
====== ====== =======
Fully diluted net income per share of
common stock $ 1.98 $ 1.85 $ 1.86
======= ======= =======
</TABLE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes.
1996 Overview
In 1996, the Company posted increases in net income, deposits, loans, and
assets. The increase in net income was due to increases in net interest income
and noninterest income. These increases offset increased noninterest expenses,
which included a one-time special assessment of approximately $1.3 million from
a legislative mandate to recapitalize the Savings Association Insurance Fund
(SAIF). This assessment impacted after tax net income by approximately $850
thousand. Loan growth totaled 21% for 1996, and deposit growth totaled 16%. At
December 31, 1996, the Company had total assets of $2.9 billion, total loans of
$1.1 billion, total investment securities of $1.5 billion, and total deposits of
$2.6 billion.
Average Balances and Net Interest Income
The table on page 19 sets forth balance sheet items on a daily average basis for
the years ended December 31, 1996, 1995, and 1994 and presents the daily average
interest rates earned on assets and the daily average interest rates paid on
liabilities for such periods. During 1996, average interest earning assets
totaled $2.36 billion, an increase of $228.7 million, or 11% over 1995. This
increase resulted primarily from the increase in the average balance of loans,
which rose $155.3 million and the average balance of investment securities which
rose $77.9 million. The growth in the average balance of interest earning assets
was funded by an increase in the average balance of deposits (including
noninterest-bearing demand deposits) of $312.9 million. The growth in deposits
was also used to reduce short-term borrowings. The average balance of other
borrowed money was $24.8 million in 1996, a decrease of $76.5 million from 1995.
Net Interest Income and Net Interest Margin
Net interest margin on a tax-equivalent basis was 4.63% for 1996, an increase of
14 basis points from 1995.
Net interest income on a tax-equivalent basis (which adjusts for the tax-exempt
status of income earned on certain loans and investments to express such income
as if it were taxable) for 1996 was $109.4 million, an increase of $13.6
million, or 14%, over 1995. Interest income on a tax-equivalent basis increased
to $180.2 million from $166.0 million, or
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
9%. This increase was primarily related to volume increases in the loan
portfolio. Interest expense for 1996 rose only $646 thousand to $70.9 million,
from $70.2 million in 1995.
The tax-equivalent yield on interest earning assets during 1996 was 7.63%, a
decrease of 15 basis points from 7.78% in 1995. The decrease resulted primarily
from decreased yields in the investment and loan portfolios due to slightly
lower general market interest rates in 1996 as compared to 1995.
The cost of interest-bearing liabilities decreased 26 basis points in 1996 to
3.58% from 3.84%, which offset higher levels of deposits. The decrease in cost
of interest-bearing liabilities resulted from slightly lower market interest
rates in 1996 as compared to 1995, as well as the replacement of other borrowed
money with lower costing deposits during 1996. The cost of total funding sources
decreased 29 basis points in 1996 to 3.00% from 3.29%.
The following table presents the major factors that contributed to the changes
in net interest income for the years ended December 31, 1996 and 1995 as
compared to the respective previous periods.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
Volume Rate Total Volume Rate Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest on
investments:
Taxable $ 3,748 $ (1,168) $ 2,580 $ (3,456) $ 3,922 $ 466
Tax-exempt 1,227 (5) 1,222 235 (35) 200
Trading 133 48 181 182 182
Federal
funds sold (240) (276) (516) 1,711 317 2,028
Interest on
loans:
Mortgages &
construction 5,072 (1,530) 3,542 3,922 2,622 6,544
Commercial 4,141 (840) 3,301 2,045 1,478 3,523
Consumer 5,025 (762) 4,263 3,588 1,078 4,666
Tax-exempt (264) (21) (285) (33) 16 (17)
-------- -------- -------- -------- -------- --------
Total interest
income 18,842 (4,554) 14,288 8,194 9,398 17,592
-------- -------- -------- -------- -------- --------
Interest expense:
Regular
savings 938 (421) 517 (927) 207 (720)
N.O.W
accounts (1,681) (859) (2,540) 1,552 1,835 3,387
Money
market plus 5,178 (991) 4,187 1,840 1,197 3,037
Time
deposits 3,061 546 3,607 2,306 3,724 6,030
Public funds 452 (534) (82) 6,734 1,867 8,601
Other borrowed
money (4,123) (920) (5,043) (13,885) 6,302 (7,583)
Long-term
debt
Total interest
expense 3,825 (3,179) 646 (2,380) 15,132 12,752
-------- -------- -------- -------- -------- --------
Net increase $ 15,017 $ (1,375) $ 13,642 $ 10,574 $ (5,734) $ 4,840
-------- -------- -------- -------- -------- --------
<FN>
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change in each.
</FN>
</TABLE>
Noninterest Income
For 1996, noninterest income totaled $30.0 million, an increase of $8.5 million
from 1995. Deposit charges and service fees increased $4.2 million due primarily
to transaction volumes. The $3.1 million increase in other operating income to
$8.1 million was partly due to revenues from Commerce National Insurance
Services, Inc. (Commerce Insurance), the insurance brokerage subsidiary formed
during 1996 (see Mergers and Acquisitions). Also, this increase reflects higher
levels of bank card fees. Securities gains increased to $1.3 million in 1996
from $106 thousand in 1995.
Noninterest Expenses
Noninterest expenses totaled $94.1 million for 1996, an increase of $16.4
million, or 21% over 1995. Contributing to this increase was the addition of
nine new branches and the formation of Commerce Insurance during 1996. With the
addition of these new offices and the insurance business, staff, facilities, and
related expenses rose accordingly. Audit and regulatory fees and assessments for
1996 decreased $405 thousand or 12% to $2.9 million in spite of the one-time
special assessment of approximately $1.3 million to recapitalize SAIF. Other
real estate expenses totaled $1.8 million, a decrease of $623 thousand from
1995, reflecting lower levels of other real estate for 1996. Other noninterest
expenses rose $1.8 million to $11.3 million in 1996. Higher bank card-related
service charges and higher provisions for non-credit-related losses contributed
to the increase.
A key industry productivity measure is the operating efficiency ratio. This
ratio expresses the relationship of noninterest expenses (excluding other real
estate expenses and, in 1996, the SAIF assessment) to net interest income plus
noninterest income (excluding non-recurring gains). Over the last three years,
this ratio equaled 66.31%, 64.50% and 63.98% in 1996, 1995 and 1994,
respectively. The Company's efficiency ratio remains slightly above its peer
group primarily due to its aggressive growth expansion activities and
investments in technology.
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
Taxable $1,285,714 $ 84,859 6.60% $1,228,921 $ 82,279 6.70% $1,280,548 $ 81,812 6.39%
Tax-exempt 23,404 1,512 6.46 4,407 290 6.58 828 90 10.87
Trading 5,740 363 6.32 3,649 182 4.99
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total investment securities 1,314,858 86,734 6.60 1,236,977 82,751 6.69 1,281,376 81,902 6.39
Federal funds sold 41,164 2,192 5.33 45,663 2,708 5.93 16,808 681 4.05
Loans
Mortgage and construction 534,266 49,323 9.23 479,331 45,781 9.55 438,269 39,236 8.95
Commercial 189,083 17,721 9.37 144,893 14,420 9.95 124,343 10,897 8.76
Consumer 276,793 23,618 8.53 217,901 19,355 8.88 177,506 14,689 8.28
Tax-exempt 6,602 651 9.86 9,281 936 10.09 9,610 954 9.93
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total loans 1,006,744 91,313 9.07 851,406 80,492 9.45 749,728 65,776 8.77
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total earning assets $2,362,766 $180,239 7.63% $2,134,046 $ 165,951 7.78% $2,047,912 $148,359 7.24%
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Sources of Funds
Interest-bearing liabilities
Regular savings $ 512,134 $ 11,742 2.29% $ 471,213 $ 11,225 2.38% $ 510,108 $ 11,945 2.34%
N.O.W. accounts 303,338 6,799 2.24 378,321 9,339 2.47 315,427 5,952 1.89
Money market plus 410,267 11,094 2.70 217,077 6,907 3.18 159,313 3,870 2.43
Time deposits 490,639 25,641 5.23 432,076 22,034 5.10 386,864 16,004 4.14
Public funds 212,468 12,221 5.75 204,617 12,303 6.01 92,615 3,702 4.00
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total deposits 1,928,846 67,497 3.50 1,703,304 61,808 3.63 1,464,327 41,473 2.83
Other borrowed money 24,782 1,336 5.39 101,240 6,379 6.30 321,598 13,962 4.34
Long-term debt 23,000 2,025 8.80 23,000 2,025 8.80 23,000 2,025 8.80
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total deposits and interest-
bearing liabilities 1,976,628 70,858 3.58 1,827,544 70,212 3.84 1,808,925 57,460 3.18
Noninterest-bearing
funds (net) 386,138 306,502 238,987
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Total sources to fund
earning assets $2,362,766 70,858 3.00 $2,134,046 70,212 3.29 $2,047,912 57,460 2.81
========== ====== ==== ========== ====== ==== ========== ====== ====
Net interest income and
margin tax-equivalent basis 109,381 4.63 95,739 4.49 90,899 4.43
Tax-exempt adjustment 875 429 365
---------- -------- ---- ---------- ---------- ---- ---------- -------- ----
Net interest income and margin $108,506 4.59% $ 95,310 4.47% $ 90,534 4.42%
========== ======== ==== ========== =========== ==== ========== ======== ====
Other Balances
Cash and due from banks $ 127,034 $ 113,823 $ 91,949
Other assets 130,587 113,155 103,554
Total assets 2,606,321 2,347,853 2,232,052
Demand deposits
(noninterest-bearing) 453,887 366,499 305,837
Other liabilities 10,183 8,812 11,961
Stockholders' equity 165,623 144,998 105,330
<FN>
Notes--Weighted average yields on tax-exempt obligations have been computed on a
tax-equivalent basis assuming a federal tax rate of 35%.
--Non-accrual loans have been included in the average loan balance.
--Investment securities includes investments available for sale.
--Mortgage and construction loans include mortgage loans held for sale.
</FN>
</TABLE>
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Income Taxes
The provision for federal and state income taxes for 1996 was $14.8 million
compared to $13.4 million in 1995 and $11.6 million in 1994.
The increase in 1996 total tax expense was the result of an increase in income
before income taxes. The effective tax rate was 35.8%, 36.3% and 36.3% in 1996,
1995, and 1994, respectively.
Net Income
Net income for 1996 was $26.6 million, an increase of $3.1 million, or 13% over
the $23.5 million recorded for 1995. Net income for 1996 was negatively impacted
by approximately $850 thousand due to the one-time SAIF assessment. The increase
in net income was due to increases in net interest income and noninterest
income, which offset increased noninterest expenses.
Fully diluted net income per share of common stock for 1996 was $1.98 compared
to $1.85 per common share for 1995.
Return on Average Equity and Average Assets
Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. For 1996, the Company's
ROA was 1.02%, compared to 1.00% in 1995. Return on average equity ("ROE") is
determined by dividing annual net income by average stockholders' equity and
indicates how effectively a company can generate net income on the capital
invested by its stockholders. For 1996, the Company's ROE was 16.08% compared to
16.20% for 1995.
Loan Portfolio
The following table summarizes the loan portfolio of the Company by type of loan
as of December 31, for each of the years 1992 through 1996.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial real estate:
Owner-occupied $ 167,702 $ 149,258 $ 151,420 $ 157,452 $ 146,739
Other 226,537 206,422 175,260 136,819 117,743
Construction 45,359 46,816 51,042 45,926 39,555
---------- ---------- ---------- ---------- ----------
439,598 402,496 377,722 340,197 304,037
Commercial:
Term 138,688 110,252 87,128 91,336 86,666
Line of credit 82,886 59,122 48,489 36,928 26,837
Demand 77 127 262 404 1,075
---------- ---------- ---------- ---------- ----------
221,651 169,501 135,879 128,668 114,578
Consumer:
Mortgages
(1-4 family
residential) 119,486 104,515 83,484 71,583 67,454
Installment 48,970 41,212 29,793 25,275 31,027
Home equity 257,772 182,103 167,674 128,028 87,051
Credit lines 8,692 7,688 7,400 7,611 6,821
---------- ---------- ---------- ---------- ----------
434,920 335,518 288,351 232,497 192,353
---------- ---------- ---------- ---------- ----------
Total loans $1,096,169 $ 907,515 $ 801,952 $ 701,362 $ 610,968
========== ========== ========== ========== ==========
</TABLE>
The Company manages risk associated with its loan portfolio through
diversification, underwriting policies and procedures which are reviewed and
updated on at least an annual basis, and ongoing loan monitoring efforts. The
commercial real estate portfolio includes owner-occupied (owner occupies greater
than 50% of the property), other commercial real estate, and construction loans.
Owner-occupied and other commercial real estate loans generally have five year
call provisions and bear the personal guarantees of the principals involved.
Construction loans are primarily used for single-family residential properties.
Financing is provided against firm agreements of sale, with speculative
construction limited to one sample per project. The commercial loan portfolio is
comprised primarily of amortizing loans to small businesses in the Southern New
Jersey/Southeastern Pennsylvania market area. These loans are generally secured
by business assets, personal guarantees, and/or personal assets of the borrower.
The consumer loan portfolio is comprised primarily of loans secured by first and
second mortgage liens on residential real estate. Such loans comprised
approximately 87% of consumer loans at December 31, 1996.
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range, as of
December 31, 1996, are summarized in the following table.
<TABLE>
<CAPTION>
December 31, 1996
Due in One Due in One to Due in Over
Year or Less Five Years Five Years Total
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Commercial $ 75,517 $ 289,711 $ 29,011 $ 394,239
Construction 39,793 5,490 76 45,359
---------- ---------- ---------- ----------
115,310 295,201 29,087 439,598
Commercial:
Term 46,639 80,552 11,497 138,688
Line of credit 82,007 879 82,886
Demand 55 22 77
---------- ---------- ---------- ----------
128,701 81,453 11,497 221,651
Consumer:
Mortgages
(1-4 family
residential) 14,208 29,169 76,109 119,486
Installment 17,230 24,522 7,218 48,970
Home equity 26,432 98,322 133,018 257,772
Credit lines 2,706 5,986 8,692
---------- ---------- ---------- ----------
60,576 157,999 216,345 434,920
---------- ---------- ---------- ----------
Total loans $ 304,587 $ 534,653 $ 256,929 $1,096,169
========== ========== ========== ==========
Interest rates:
Predetermined $ 95,962 $ 339,646 $ 170,729 $ 606,337
Floating 208,625 195,007 86,200 489,832
---------- ---------- ---------- ----------
Total loans $ 304,587 $ 534,653 $ 256,929 $1,096,169
========== ========== ========== ==========
</TABLE>
During 1996, loans increased $188.7 million, or 21% from $907.5 million to $1.1
billion. At December 31, 1996, loans represented 43% of total deposits and 38%
of total assets. Growth in the loan portfolio was reflected in all types,
including commercial real estate, commercial, and consumer. The Company has
traditionally been an active provider of commercial real estate loans to
creditworthy local borrowers, with such loans secured by properties within the
Company's primary trade area. At December 31, 1996, $167.7 million, or 43%, of
commercial real estate loans (other than construction) were secured by
owner-occupied properties. Growth in commercial loans was primarily in term
loans, reflecting an increase in loans to small businesses. Growth in consumer
loans was due primarily to loans secured by one to four family residential
properties, including home equity loans and home equity lines of credit.
Commercial real estate construction loans decreased $1.4 million to $45.4
million in 1996. At December 31, 1996, construction loans for 1-4 family
residential dwellings totaled $1.2 million and construction loans secured by
commercial properties amounted to $8.2 million. The balance of $36.0 million was
for land development, of which $30.1 million was residential. As of December 31,
1996, there were no concentrations of loans to any one type of industry
exceeding 10% of total loans nor were there any loans classified as highly
leveraged transactions.
Non-Performing Loans and Assets
Non-performing assets (non-performing loans and other real estate, excluding
loans past due 90 days or more and still accruing interest) at December 31, 1996
were $17.2 million or .60% of total assets, as compared to $19.1 million or .79%
of total assets at December 31, 1995.
Total non-performing loans (non-accrual loans and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at December 31, 1996
were $9.1 million as compared to $8.5 million a year ago. The Company generally
places a loan on non-accrual status and ceases accruing interest when loan
payment performance is deemed unsatisfactory. Generally loans past due 90 days
are placed on non-accrual status, unless the loan is both well secured and in
the process of collection. At December 31, 1996, loans past due 90 days or more
and still accruing interest amounted to $249 thousand, compared to $126 thousand
at December 31, 1995. Additional loans considered as potential problem loans
($13.2 million at December 31, 1996) by the Company's internal loan review
department have been evaluated as to risk exposure in determining the adequacy
of the allowance for loan losses.
Other real estate (ORE) totaled $8.0 million at December 31, 1996 as compared to
$10.6 million at December 31, 1995. These properties have been written down to
the lower of cost or fair value less disposition costs.
The Company has on an ongoing basis updated appraisals on loans secured by real
estate, particularly those categorized as non-performing loans and potential
problem loans. In those instances where updated appraisals reflect reduced
collateral values, an evaluation of the borrowers' overall financial condition
is made to determine the need, if any, for possible writedowns or appropriate
additions to the allowance for loan losses.
21
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following summary presents information regarding non-performing loans and
assets as of December 31, 1992 through 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans(1):
Commercial $ 757 $ 629 $ 1,624 $ 2,348 $ 5,943
Consumer 747 853 1,427 1,676 1,678
Real estate
Construction 2,156 1,787 955 866 1,666
Mortgage 4,927 4,708 7,240 3,482 7,022
------- ------- ------- ------- -------
Total non-accrual
loans 8,587 7,977 11,246 8,372 16,309
------- ------- ------- ------- -------
Restructured loans(1):
Commercial 21 161 143 84
Consumer 29 60 29
Real estate
Construction
Mortgage 481 301 404 84
------- ------- ------- ------- -------
Total restructured
loans 531 522 576 168
------- ------- ------- ------- -------
Total non-performing
loans 9,118 8,499 11,822 8,540 16,309
======= ======= ======= ======= =======
Other real estate 8,032 10,561 10,517 18,325 16,102
======= ======= ======= ======= =======
Total non-performing
assets $17,150 $19,060 $22,339 $26,865 $32,411
======= ======= ======= ======= =======
Non-performing
assets as a percent
of total assets 0.60% 0.79% 0.97% 1.32% 2.26%
======= ======= ======= ======= =======
Loans past due 90 days
or more and still
accruing interest $ 249 $ 126 $ 211 $ 272 $ 1,202
======= ======= ======= ======= =======
<FN>
(1) Interest income of approximately $1,050,000, $943,000, $1,246,000,
$639,000, and $1,580,000 would have been recorded in 1996, 1995, 1994,
1993, and 1992 respectively, on non-performing loans in accordance with
their original terms. Actual interest recorded on these loans amounted to
$262,000 in 1996, $299,000 in 1995, $317,000 in 1994, $270,000 in 1993, and
$513,000 in 1992.
</FN>
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
a loan loss reserve which it believes is adequate for estimated losses in its
loan portfolio. Based on an evaluation of the loan portfolio, management
presents a quarterly review of the loan loss reserve to the Board of Directors,
indicating any changes in the reserve since the last review and any
recommendations as to adjustments in the reserve. In making its evaluation,
management considers the results of recent regulatory examinations, the effects
on the loan portfolio of current economic indicators and their probable impact
on borrowers, the amount of charge-offs for the period, the amount of
non-performing loans and related collateral security, the evaluation of its loan
portfolio by the internal loan review department and the annual examination of
the Company's financial statements by its independent auditors. Charge-offs
occur when loans are deemed to be uncollectible.
During 1996, net charge-offs amounted to $2.0 million, or .20% of average loans
outstanding for the year, compared to $931 thousand or .11% of average loans
outstanding for 1995. During 1996, the Company recorded provisions of $3.0
million to the allowance for loan losses compared to $2.2 million for 1995. At
December 31, 1996, the allowance aggregated $14.3 million or 1.31% of total
loans and provided coverage of 157% of non-performing loans.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $ 13,320 $ 12,036 $ 10,023 $ 8,839 $ 8,899
Provisions charged to
operating expenses 2,997 2,215 4,210 5,981 6,286
-------- -------- -------- -------- --------
16,317 14,251 14,233 14,820 15,185
Recoveries of loans
previously charged-off:
Commercial 186 154 123 213 102
Consumer 145 144 100 295 69
Real estate 95 292 22 112 42
-------- -------- -------- -------- --------
Total recoveries 426 590 245 620 213
-------- -------- -------- -------- --------
Loans charged-off:
Commercial (727) (595) (1,536) (4,337) (1,997)
Consumer (748) (580) (531) (1,113) (788)
Real estate (929) (346) (375) (967) (3,774)
-------- -------- -------- -------- --------
Total charged-off (2,404) (1,521) (2,442) (6,417) (6,559)
-------- -------- -------- -------- --------
Net charge-offs (1,978) (931) (2,197) (5,797) (6,346)
-------- -------- -------- -------- --------
Allowance for loan losses
acquired bank 1,000
-------- -------- -------- -------- --------
Balance at end of period $ 14,339 $ 13,320 $ 12,036 $ 10,023 $ 8,839
======== ======== ======== ======== ========
Net charge-offs as a
percentage of average
loans outstanding 0.20% 0.11% 0.29% 0.88% 1.06%
======== ======== ======== ======== ========
Allowance for loan losses
as a percentage of
year-end loans 1.31% 1.47% 1.50% 1.43% 1.45%
======== ======== ======== ======== ========
</TABLE>
22
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future loan losses may
occur. The total allowance is available to absorb losses from any segment of
loans.
<TABLE>
<CAPTION>
Allowance for Loan Losses at December 31,
1996 1995 1994 1993 1992
% Gross % Gross % Gross % Gross %Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 2,838 20% $ 2,413 19% $ 1,806 17% $ 2,008 18% $ 2,532 19%
Consumer 8,332 40 7,937 37 2,410 36 1,983 33 1,373 31
Real estate 3,169 40 2,970 44 7,820 47 6,032 49 4,934 50
------- --- ------- --- ------- --- ------- --- ------- ---
$14,339 100% $13,320 100% $12,036 100% $10,023 100% $ 8,839 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
Investment Securities
The following table summarizes the book value of securities available for sale
and securities held to maturity by the Company as of the dates shown.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government agency
and mortgage-backed
obligations $ 681,097 $ 510,445 $ 116,167
Obligations of state and
political subdivisions 15,743
Equity securities 8,374 3,834 2,688
Other 20,673 6,035
---------- ---------- ----------
Securities available
for sale $ 725,887 $ 520,314 $ 118,855
---------- ---------- ----------
U.S. Government agency
and mortgage-backed
obligations $ 690,704 $ 653,522 $1,113,359
Obligations of state and
political subdivisions 16,114 12,289 565
Other 16,493 16,891 31,209
---------- ---------- ----------
Securities held to
maturity $ 723,311 $ 682,702 $1,145,133
========== ========== ==========
</TABLE>
Consistent with accounting and regulatory pronouncements, the Company has
segregated a portion of its investment portfolio as securities available for
sale. The balance of the investment portfolio (excluding trading securities) is
categorized as securities held to maturity. Investment securities are classified
as available for sale if they might be sold in response to changes in interest
rates, prepayment risk, the Company's income tax position, the need to increase
regulatory capital, liquidity needs or other similar factors. These securities
are carried at fair market value. Investment securities are classified as held
to maturity when the Company has the intent and ability to hold those securities
to maturity. Securities held to maturity are carried at cost and adjusted for
accretion of discounts and amortization of premiums.
In total, investment securities increased $252.7 million from $1.21 billion to
$1.46 billion at December 31, 1996. Net security purchases of approximately
$523.3 million were partially offset by prepayments on mortgage-backed
securities in the existing portfolio. These security purchases were funded
primarily through deposit growth in 1996.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that report, management
reclassified $361.1 million of investment securities from the held to maturity
category to the available for sale category as of December 31, 1995. The
reclassification of these securities should provide increased flexibility in
managing interest rate risk, portfolio yields, and liquidity.
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company's investment portfolio consists almost entirely of U.S. Government
agency and mortgage-backed obligations. These securities have little, if any
credit risk since they are either backed by the full faith and credit of the
U.S. Government or their principal and interest payments are guaranteed by an
agency of the U.S. Government. These investment securities carry fixed coupons
whose rate does not change over the life of the securities. Since most
securities are purchased at premiums or discounts, their yield will change
depending on any change in the estimated rate of prepayments. The Company
amortizes premiums and accretes discounts over the estimated average life of the
securities. Changes in the estimated average life of the investment portfolio
will lengthen or shorten the period in which the premium or discount must be
amortized or accreted, thus affecting the Company's investment yields.
For the year ended December 31, 1996, the yield on the investment portfolio was
6.60%, a decrease of nine basis points from 6.69% in fiscal 1995. This decrease
resulted from the slightly lower general market interest rates in 1996 as
compared to 1995. At both December 31, 1996 and 1995, the average life and
duration of the investment portfolio were 6.6 years and 4.8 years, respectively.
At December 31, 1996 the yield on the portfolio was 6.57%, down slightly from
6.65% at December 31, 1995.
At December 31, 1996, the unrealized depreciation in securities available for
sale included in stockholders' equity totaled $4.0 million, net of tax, compared
to unrealized appreciation of $165 thousand, net of tax, at December 31, 1995.
The decline in the market value of the investment portfolio resulted primarily
from general market interest rates being higher at year-end 1996 as compared to
year-end 1995.
The contractual maturity distribution and weighted average yield of the
Company's investment portfolio (excluding equity and trading securities) at
December 31, 1996, are summarized in the following table. Weighted average yield
is calculated by dividing income within each maturity range by the outstanding
amount of the related investment and has been tax effected on tax-exempt
obligations.
<TABLE>
<CAPTION>
December 31, 1996
Due Under Due Over
1 Year Due 1-5 Years Due 5-10 Years 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government agency and
mortgage-backed obligations $ 38,122 5.87% $ 38,441 6.48% $ 61,134 5.72% $543,400 6.68% $ 681,097 6.53%
Obligations of state and
political subdivisions 1,422 5.94 7,472 6.30 6,849 7.14 15,743 6.63
Other securities 20,673 3.88 20,673 3.88
-------- ---- -------- ---- -------- ---- -------- ---- --------- ----
$ 60,217 5.17% $ 45,913 6.11% $ 67,983 5.88% $543,400 6.68% $ 717,513 6.46%
-------- ---- -------- ---- -------- ---- -------- ---- --------- ----
Securities held to maturity:
U.S. Government agency and
mortgage-backed obligations $ 9,852 6.70% $680,852 6.61% $ 690,704 6.61%
Obligations of state and
political subdivisions $ 16,114 5.67% 16,114 5.67
Other securities 15,494 6.00 $ 5 5.52% 994 9.50 16,493 6.21
-------- ---- -------- ---- -------- ---- -------- ---- --------- ----
$ 31,608 5.83% $ 5 5.52% $ 10,846 6.96% $680,852 6.61% $ 723,311 6.57%
-------- ---- -------- ---- -------- ---- -------- ---- --------- ----
</TABLE>
24
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Deposits
Total deposits averaged $2.4 billion for 1996, an increase of $312.9 million or
15% above the 1995 average. The Company remains a deposit-driven financial
institution with emphasis on core deposit accumulation and retention as a basis
for sound growth and profitability. The Company regards core deposits as all
deposits other than certificates of deposit, retail and public, in excess of
$100 thousand. Of the $348.3 million increase in total deposits at year end
1996, $311.3 million was in the various core categories. The average balance of
noninterest-bearing demand deposits in 1996 was $453.9 million, an $87.4 million
or 24% increase over the average balance for 1995. The average total balance of
passbook and statement savings accounts increased $40.9 million, or 9% compared
to the prior year. The average balance of interest-bearing demand accounts
(money market and N.O.W. accounts) for 1996 was $713.6 million, an $118.2
million or 20% increase over the average balance for the prior year. The average
balance of time deposits for 1996 was $703.1 million, a $66.4 million or 10%
increase over the average balance for 1995.
For 1996, the cost of total deposits was 2.83% as compared to 2.99% in 1995. The
decrease resulted from slightly lower market interest rates in 1996 as compared
to 1995, as well as the growth in 1996 in the Company's lower costing deposit
products, including noninterest-bearing demand deposits.
The Company believes that its record of sustaining core deposit growth is
reflective of the Company's retail approach to banking which emphasizes a
combination of free checking accounts (subject to a small minimum balance
requirement), convenient branch locations, extended hours of operation, quality
service, and active marketing.
The average balances and weighted average rates of deposits for each of the
years 1996, 1995, and 1994 are presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(dollars in thousands)
<S> <C> <C> <C>
Demand deposits:
Noninterest-bearing $ 453,887 $ 366,499 $ 305,837
Interest-bearing
(money market
and N.O.W. accounts) 713,605 2.51% 595,398 2.73% 474,740 2.07%
Savings deposits 512,134 2.29 471,213 2.38 510,108 2.34
Time deposits 703,107 5.38 636,693 5.39 479,479 4.11
---------- ---- ---------- ---- ---------- ----
Total deposits $2,382,733 $2,069,803 $1,770,164
========== ==== ========== ==== ========== ====
</TABLE>
The remaining maturity of certificates of deposit for $100,000 or more as of
December 31, 1996, 1995, and 1994 is presented below:
Maturity 1996 1995 1994
(dollars in thousands)
3 months or less $220,487 $180,919 $ 95,197
3 to 6 months 29,835 7,765 17,867
6 to 12 months 7,154 31,198 4,271
Over 12 months 1,445 2,063 400
-------- -------- --------
Total $258,921 $221,945 $117,735
======== ======== ========
25
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest Rate Sensitivity and Liquidity
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
The following table illustrates the GAP position of the Company as of December
31, 1996.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
December 31, 1996
1-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Rate Sensitive:
Interest-earning
assets
Loans $ 480.6 $ 26.4 $ 49.0 $ 348.4 $ 184.0 $ 1,088.4
Investment
securities 77.2 40.2 87.1 462.8 797.2 1,464.5
Federal funds sold 13.0 13.0
-------- -------- ---------- -------- -------- ----------
Total interest-
earning assets 570.8 66.6 136.1 811.2 981.2 2,565.9
-------- -------- ---------- -------- -------- ----------
Interest-bearing
liabilities
Transaction
accounts 457.1 884.0 1,341.1
Time deposits 309.7 148.9 92.8 147.2 698.6
Other borrowed
money 70.0 70.0
Long-term debt 23.0 23.0
-------- -------- ---------- -------- -------- ----------
Total interest-
bearing
liabilities 836.8 148.9 92.8 147.2 907.0 2,132.7
-------- -------- ---------- -------- -------- ----------
Period gap (266.0) (82.3) 43.3 644.0 74.2 $ 433.2
-------- -------- ---------- -------- -------- ----------
Cumulative gap $ (266.0) $ (348.3) $ (305.0) $ 359.0 $ 433.2
======== ======== ========== ======== ========
Cumulative gap as a
percentage of total
interest-earning
assets (10.4)% (13.6)% (11.9)% 14.0% 16.9%
======== ======== ========== ======== ========
</TABLE>
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis captures not only the potential of all assets
and liabilities to mature or reprice, but also the probability that they will do
so. Income simulation also attends to the relative interest rate sensitivities
of these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate 200 basis point change during the next year, with rates remaining
constant in the second year.
The Company's Asset/Liability Committee (ALCO) policy has established that
interest income sensitivity will be considered acceptable if net income in the
above interest rate scenario is within 15% of net income in the flat rate
scenario in the first year and within 30% over the two year time frame. At
December 31, 1996, the Company's income simulation model indicates an acceptable
level of interest rate risk.
In the event the model indicates an unacceptable level of risk, the Company
could undertake a number of actions that would reduce this risk, including the
sale of a portion of its available for sale portfolio, the use of risk
management strategies such as interest rate swaps and caps, or the extension of
the maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point
26
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
change would result in the loss of 70% or more of the excess of market value
over book value in the current rate scenario. At December 31, 1996, the market
value of equity indicates an acceptable level of interest rate risk.
The market value of equity model reflects certain estimates and assumptions
regarding the impact on the market value of the Company's assets and liabilities
given an immediate 200 basis point change in interest rates. One of the key
assumptions is the market value assigned to the Company's core deposits, or the
core deposit premium. In 1996 the Company completed a comprehensive core deposit
study in order to assign its own core deposit premiums as permitted by
regulation. The study resulted in core deposit premiums which are significantly
higher than the core deposit premiums supplied by the Office of Thrift
Supervision, which the Company utilized in its market value of equity model in
prior years. The study confirmed management's assertion that the Company's core
deposits have stable balances over long periods of time, and are generally
insensitive to changes in interest rates. Thus, these core deposit balances
provide an internal hedge to market value fluctuations in the Company's
mortgage-backed securities portfolio. Management believes the core deposit
premiums produced by its core deposit study and utilized in its market value of
equity model at December 31, 1996 provide a more accurate assessment of the
Company's interest rate risk.
Liquidity involves the Company's ability to raise funds to support asset growth
or reduce assets to meet deposit withdrawals and other borrowing needs, to
maintain reserve requirements and to otherwise operate the Company on an ongoing
basis. The Company's liquidity needs are primarily met by growth in core
deposits, its cash and federal funds sold position, and cash flow from its
amortizing investment and loan portfolios. If necessary, the Company has the
ability to raise liquidity through collateralized borrowings, FHLB advances, or
the sale of its available for sale investment portfolio. During 1996, deposit
growth and repayments in the investment portfolio were used to fund growth in
the loan portfolio and purchase additional investment securities.
Short-Term Borrowings
Short-term borrowings consist primarily of securities sold under agreement to
repurchase, and were used in 1996 to meet short-term liquidity needs. For 1996,
securities sold under agreements to repurchase averaged $21.4 million as
compared to $101.2 million in 1995. The average rate on the Company's securities
sold under agreements to repurchase was 5.87% and 6.30% during 1996 and 1995,
respectively. As of December 31, 1996, securities sold under agreements to
repurchase amounted to $70 million and had an average rate of 6.33%.
Long-Term Debt
A $23 million public offering of capital-qualifying 8.375% subordinated debt was
completed in July 1993. Proceeds from this debt offering were used for general
corporate purposes, including additional capitalization of existing banking
subsidiaries.
Stockholders' Equity and Dividends
At December 31, 1996, stockholders' equity totaled $181.4 million, up $19.3
million or 12% over stockholders' equity of $162.0 million at December 31, 1995.
This increase was primarily due to the Company's net income for the year.
Stockholders' equity as a percent of total assets was 6.34% at December 31,
1996, as compared to 6.71% at December 31, 1995.
Risk-based capital standards issued by bank regulatory authorities in the United
States attempt to relate a banking company's capital to the risk profile of its
assets and provide the basis for which all banking companies and banks are
evaluated in terms of capital adequacy. The risk-based capital standards require
all banks to have Tier 1 capital of at least 4% and total capital, including
Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes
common stockholders' equity and qualifying perpetual preferred stock together
with related surpluses and retained earnings. Total capital may be comprised of
limited life preferred stock, qualifying subordinated debt instruments, and the
reserve for possible loan losses.
27
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Banking regulators have also issued leverage ratio requirements. The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted average
assets. The following table provides a comparison of the Company's risk-based
capital ratios and leverage ratio to the minimum regulatory requirements for the
periods indicated.
<TABLE>
<CAPTION>
Minimum
Regulatory
December 31, Requirements
1996 1995 1996 1995
Risk-Based Capital Ratios:
<S> <C> <C> <C> <C>
Tier 1 12.64% 13.02% 4.00% 4.00%
Total 15.27 16.06 8.00 8.00
Leverage capital 6.44 6.54 3.00-5.00 3.00-5.00
---- ---- --------- ---------
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
which became law in December of 1991, required each federal banking agency
including the Board of Governors of the Federal Reserve System ("FRB"), to
revise its risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and the
risks of non-traditional activities, as well as reflect the actual performance
and expected risk of loss on multi-family mortgages. This law also requires each
federal banking agency, including the FRB, to specify, by regulation, the levels
at which an insured institution would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized, "
or "critically undercapitalized." At December 31, 1996, the Company's
consolidated capital levels and each of the Company's banking subsidiaries met
the regulatory definition of a "well capitalized" financial institution, i.e., a
leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding
6%, and a total risk-based capital ratio exceeding 10%.
Effective September 26, 1996, the Company's common stock was listed for trading
on the New York Stock Exchange under the symbol CBH. Prior to that date, the
Company's common stock traded on the NASDAQ Stock Market under the symbol COBA.
The quarterly market price ranges and dividends declared per common share for
each of the last two years are shown in the table below. The prices and
dividends per share have been adjusted to reflect common stock dividends of 5%
with record dates of January 8, 1997, January 12, 1996, and January 2, 1995. As
of February 28, 1997, there were approximately 15,000 holders of record of the
Company's common stock.
Common Share Data
Sale Prices Cash Dividends
High Low Per Share
1996 Quarter Ended
December 31 $ 31.55 $ 24.53 $ 0.1667
September 30 26.67 20.00 0.1667
June 30 23.58 19.28 0.1667
March 31 21.78 19.17 0.1587
1995 Quarter Ended
December 31 $ 22.45 $ 19.84 $ 0.1474
September 30 23.02 17.34 0.1474
June 30 17.58 14.97 0.1474
March 31 17.13 14.06 0.1404
The Company offers a Dividend Reinvestment and Stock Purchase Plan by which
dividends on the Company's Common Stock and optional cash payments of up to
$5,000 per quarter may be invested in Common Stock at a 3% discount to the
market price and without payment of brokerage commissions.
Results of Operations - 1995 versus 1994
Net income for 1995 was $23.5 million compared to $20.4 million in 1994. Fully
diluted net income per common share was $1.85 compared to $1.86 per common share
for the prior year. Net income per share for 1995 was impacted by the issuance
of 1,725,000 shares of common stock via an underwritten public offering in the
first quarter of 1995.
Net interest income on a tax-equivalent basis for 1995 amounted to $95.7
million, an increase of $4.8 million, or 5% over 1994.
28
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest income on a tax-equivalent basis increased $17.6 million or 12% to
$166.0 million in 1995. This increase was primarily related to volume increases
and rate increases in the loan portfolio. Interest expense for 1995 rose $12.7
million to $70.2 million from $57.5 million in 1994. This 22% increase was
attributable to higher levels of deposits which offset reduced levels of other
borrowings, and higher rates paid on deposits and borrowings.
The provision for loan losses was $2.2 million in 1995 compared to $4.2 million
in the prior year. The decrease in the provision for loan losses was associated
with the decrease in non-performing assets.
For 1995, noninterest income totaled $21.5 million, an increase of $4.0 million
from 1994. Increased deposit charges and service fees and other operating income
offset a decrease in net investment securities gains. Deposit charges and
service fees increased $2.6 million due primarily to transaction volumes. The
$1.9 million increase in other operating income to $5.0 million includes gross
revenues of Commerce Capital, the bank securities dealer division of Commerce NJ
established in March 1995. Securities gains of $106 thousand in 1995 and $641
thousand in 1994 resulted from the sale of equity securities.
Noninterest expenses totaled $77.7 million for 1995, an increase of $5.8
million, or 8% over 1994. Contributing to this increase was the addition of six
new branches during 1995. With the addition of these new offices, staff,
facilities, and related expenses rose accordingly. Audit and regulatory fees and
assessments decreased by $1.6 million to $3.3 million, due to the reduction in
Federal deposit insurance rates effective June 1, 1995. Other real estate
expenses totaled $2.4 million, a decrease of $700 thousand, reflecting lower
levels of other real estate for most of 1995. Other noninterest expenses rose
$200 thousand to $9.5 million in 1995. Higher consulting expenses and banking
service charges were offset by decreased printing expenses and lower provisions
for non-credit-related losses.
Mergers and Acquisitions
In late 1996, Commerce National Insurance Services, Inc. was formed through the
acquisition and combination of three insurance brokerage agencies: Keystone
National Companies, Inc., Cherry Hill, New Jersey; Morales, Potter & Buckelew,
Inc., t/a Buckelew & Associates, Toms River, New Jersey; and Chesley & Cline,
Inc., Mt. Holly, New Jersey. Effective January 1, 1997, Colkate, Inc., t/a The
Morrissey Agency, Mount Laurel, New Jersey was merged with and into Commerce
Insurance. The Company issued approximately 740,000 shares of common stock in
exchange for all of the outstanding shares of these agencies. The transactions
were accounted for as poolings of interests. However, financial statements of
the periods prior to the acquisitions have not been restated as the changes
would be immaterial. Commerce Insurance offers a full range of commercial,
personal, and employee benefit services and is one of the largest insurance
agencies in New Jersey.
Effective January 21, 1997, the Company acquired Independence Bancorp, Inc.
("Independence"), a one bank holding company headquartered in Bergen County, New
Jersey, with approximately $377 million in assets and $348 million in deposits.
The Company issued approximately 2,660,000 shares of common stock to
shareholders of Independence based on an exchange ratio of .98175 of a share of
the Company's common stock for each share of Independence common stock. The
transaction was accounted for as a pooling of interests. The combined
organization will have approximately $3.2 billion in assets, $3.0 billion in
deposits, and 67 branch offices throughout New Jersey and Metropolitan
Philadelphia, Pennsylvania.
29
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 159,577 $ 147,465
Federal funds sold 12,950 29,550
---------- ----------
Cash and cash equivalents 172,527 177,015
Mortgages held for sale 1,314 5,442
Trading securities 15,327 8,843
Securities available for sale 725,887 520,314
Securities held to maturity 723,311 682,702
(market value 1996-$702,475;
1995-$671,539)
Loans 1,096,169 907,515
Less allowance for loan losses 14,339 13,320
---------- ----------
1,081,830 894,195
Bank premises and equipment, net 87,957 74,289
Other assets 53,799 53,094
---------- ----------
$2,861,952 $2,415,894
========== ==========
Liabilities
Deposits:
Demand:
Interest-bearing $ 768,966 $ 657,568
Noninterest-bearing 533,719 439,609
Savings 572,135 485,522
Time 698,585 642,399
---------- ----------
Total deposits 2,573,405 2,225,098
Other borrowed money 70,000
Other liabilities 10,861 1,417
Obligation to Employee Stock
Ownership Plan (ESOP) 3,333 4,359
Long-term debt 23,000 23,000
---------- ----------
2,680,599 2,253,874
========== ==========
Stockholders' Equity
Common stock, 12,893,292 shares issued
(11,948,853 shares in 1995) 19,190 16,880
Series C preferred stock,
417,000 shares authorized,
issued and outstanding
(liquidating preference:
$18.00 per share totaling
$7,506) 7,506 7,506
Capital in excess of par or stated value 126,121 112,894
Retained earnings 33,493 30,723
---------- ----------
186,310 168,003
Less commitment to ESOP 3,333 4,359
Less treasury stock, at cost,
100,159 common shares in 1996
and 1995 1,624 1,624
---------- ----------
Total stockholders' equity 181,353 162,020
---------- ----------
$2,861,952 $2,415,894
========== ==========
</TABLE>
See accompanying notes.
30
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands, except per share amounts) 1996 1995 1994
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 91,086 $ 80,165 $ 65,443
Interest on investment securities 85,036 81,888 81,531
Other interest 3,242 3,469 1,020
-------- -------- --------
Total interest income 179,364 165,522 147,994
======== ======== ========
Interest expense
Interest on deposits:
Demand 17,893 16,246 9,822
Savings 11,742 11,225 11,945
Time 37,862 34,337 19,706
-------- -------- --------
Total interest on deposits 67,497 61,808 41,473
Interest on other borrowed money 1,336 6,379 13,962
Interest on long-term debt 2,025 2,025 2,025
-------- -------- --------
Total interest expense 70,858 70,212 57,460
Net interest income 108,506 95,310 90,534
Provision for loan losses 2,997 2,215 4,210
-------- -------- --------
Net interest income after provision for loan losses 105,509 93,095 86,324
-------- -------- --------
Noninterest income
Deposit charges and service fees 20,551 16,362 13,779
Other operating income 8,126 5,024 3,114
Net investment securities gains 1,337 106 641
-------- -------- --------
Total noninterest income 30,014 21,492 17,534
======== ======== ========
Noninterest expense
Salaries 32,618 26,430 22,750
Benefits 8,033 7,072 6,648
Occupancy 10,709 8,645 7,828
Furniture and equipment 13,050 9,742 8,340
Office 9,540 7,428 6,267
Audit and regulatory fees and assessments 2,873 3,278 4,877
Marketing 4,146 3,135 2,722
Other real estate (net) 1,800 2,423 3,127
Other 11,302 9,540 9,304
-------- -------- --------
Total noninterest expenses 94,071 77,693 71,863
======== ======== ========
Income before income taxes 41,452 36,894 31,995
Provision for federal and state income taxes 14,827 13,409 11,618
-------- -------- --------
Net income 26,625 23,485 20,377
Dividends on preferred stocks 563 563 1,074
-------- -------- --------
Net income applicable to common stock $ 26,062 $ 22,922 $ 19,303
======== ======== ========
Net income per common and common equivalent share:
Primary $ 2.08 $ 1.92 $ 2.00
======== ======== ========
Fully diluted $ 1.98 $ 1.85 $ 1.86
======== ======== ========
Average common and common equivalent
shares outstanding:
Primary 12,551 11,903 9,638
======== ======== ========
Fully diluted 13,388 12,592 10,867
======== ======== ========
Cash dividends declared, common stock $ 0.66 $ 0.58 $ 0.53
======== ======== ========
</TABLE>
See accompanying notes.
31
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Operating activities
Net income $ 26,625 $ 23,485 $ 20,377
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 2,997 2,215 4,210
Provision for depreciation, amortization
and accretion 15,725 13,565 16,068
Gains on sales of securities available for sale (1,337) (106) (641)
Proceeds from sales of mortgages held for sale 23,683 18,343 76,249
Originations of mortgages held for sale (19,555) (21,522) (35,361)
Net loan chargeoffs (1,978) (931) (2,197)
Net increase in trading securities (6,484) (8,843)
Decrease (increase) in other assets 931 (8,720) 12,715
Increase (decrease) in other liabilities 9,218 (1,573) (19,860)
Deferred income tax expense (benefit) 226 (575) (1,105)
--------- --------- ---------
Net cash provided by operating
activities 50,051 15,338 70,455
Investing activities
Proceeds from sales of securities available for sale 83,701 189 961
Proceeds from the maturity of securities available
for sale 179,262 29,406 36,752
Proceeds from the maturity of securities held
to maturity 88,082 96,081 120,052
Purchase of securities available for sale (475,652) (48,781)
Purchase of securities held to maturity (131,380) (13,858) (346,264)
Net increase in loans (197,965) (112,283) (106,617)
Proceeds from sales of loans 9,311 6,720 6,027
Purchases of premises and equipment (24,091) (24,059) (21,235)
--------- --------- ---------
Net cash used by investing activities (468,732) (66,585) (310,324)
Financing activities
Net increase in demand and savings deposits 292,121 216,651 119,666
Net increase (decrease) in time deposits 56,186 173,875 (30,009)
Net increase (decrease) in other borrowed money 70,000 (312,895) 177,895
Issuance of common stock 25,774
Dividends paid (8,430) (7,116) (5,796)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 4,140 2,681 1,913
Purchase of treasury stock (352) (214)
Other 176 197 136
--------- --------- ---------
Net cash provided by financing activities 414,193 98,815 263,591
(Decrease) increase in cash and cash equivalents (4,488) 47,568 23,722
Cash and cash equivalents at beginning of year 177,015 129,447 105,725
--------- --------- ---------
Cash and cash equivalents at end of year $ 172,527 $ 177,015 $ 129,447
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 69,162 $ 70,247 $ 56,143
Income taxes 12,754 13,265 12,540
Other noncash activities
Transfer of securities to securities available for sale $ 361,126
--------- --------- ---------
</TABLE>
See accompanying notes.
32
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements Of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995, and 1994
Common Preferred Capital Retained Commitment Treasury
(in thousands, except per share amounts) Stock Stock Surplus Earnings to ESOP Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ 10,985 $ 8,179 $ 73,821 $ 13,203 $ (5,954) $ (1,058) $ 99,176
Accounting change adjustment for
unrealized gain on securities
available for sale, net of tax 954 954
Net income 20,377 20,377
5% common stock dividend and cash paid
in lieu of fractional shares (348 shares) 543 5,196 (5,749) (10)
Cash dividends, common stock
($0.53 per share) (4,712) (4,712)
Common stock issued in connection with
incentive stock option plan (98 shares) 153 808 (214) 747
Cash dividends, preferred stock (1,074) (1,074)
Decrease in obligation to ESOP 569 569
Conversion of Series B preferred stock
to common at 1.4071 for 1 (737 shares) 1,472 (669) (803) 0
Redemption of Series B preferred stock
(4 shares) (4) (57) (61)
Tax benefit from ESOP dividends 197 197
Proceeds from issuance of common stock
under dividend reinvestment plan
(58 shares) 81 871 952
Fair value adjustment on available for
sale securities, net of tax (5,242) (5,242)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1994 13,234 7,506 80,033 17,757 (5,385) (1,272) 111,873
Net income 23,485 23,485
5% common stock dividend and cash paid
in lieu of fractional shares (419 shares) 655 7,201 (7,869) (13)
Cash dividends, common stock
($0.58 per share) (6,540) (6,540)
Common stock issued in connection with
incentive stock option plan (108 shares) 169 899 (352) 716
Cash dividends, preferred stock (563) (563)
Decrease in obligation to ESOP 1,026 1,026
Common stock issued (1,725 shares) 2,695 23,079 25,774
Tax benefit from ESOP dividends 197 197
Proceeds from issuance of common stock
under dividend reinvestment plan
(85 shares) 127 1,485 1,612
Fair value adjustment on available for
sale securities, net of tax 4,453 4,453
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1995 16,880 7,506 112,894 30,723 (4,359) (1,624) 162,020
Acquisition of Commerce National
Insurance Services (713 shares) 1,114 (1,135) (21)
--------- --------- --------- --------- --------- --------- ---------
As adjusted balance at January 1, 1996 17,994 7,506 111,759 30,723 (4,359) (1,624) 161,999
Net income 26,625 26,625
5% common stock dividend and cash paid
in lieu of fractional shares (534 shares) 834 10,387 (11,244) (23)
Cash dividends, common stock
($0.66 per share) (7,844) (7,844)
Common stock issued in connection with
incentive stock option plan (78 shares) 121 622 743
Cash dividends, preferred stock (563) (563)
Decrease in obligation to ESOP 1,026 1,026
Tax benefit from ESOP dividends 197 197
Proceeds from issuance of common stock
under dividend reinvestment plan
(162 shares) 241 3,156 3,397
Fair value adjustment on available for
sale securities, net of tax (4,204) (4,204)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1996 $ 19,190 $ 7,506 $ 126,121 $ 33,493 $ (3,333) $ (1,624) $ 181,353
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
33
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. (the Company) and its wholly-owned subsidiaries (Banks), Commerce Bank,
N.A. (Commerce NJ), Commerce Bank/Pennsylvania, N.A. (Commerce PA) and Commerce
Bank/Shore, N.A. (Commerce Shore). All material intercompany transactions have
been eliminated. Certain amounts from prior years have been reclassified to
conform with 1996 presentation.
The Company is a multi-bank holding company headquartered in Cherry Hill, New
Jersey, operating primarily in the metropolitan Philadelphia and Southern New
Jersey markets. Through its subsidiaries, the Company provides retail and
commercial banking services, corporate trust services, municipal bond
underwriting services, and insurance brokerage services.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Investment Securities
Trading account securities are carried at market value. Gains and losses, both
realized and unrealized, are included in other operating income.
Investment securities are classified as held to maturity when the Company has
the intent and ability to hold those securities to maturity. Securities held to
maturity are stated at cost and adjusted for accretion of discounts and
amortization of premiums.
Those securities that might be sold in response to changes in market interest
rates, prepayment risk, the Company's income tax position, the need to increase
regulatory capital, or similar other factors are classified as available for
sale. Available for sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported as a component of stockholders' equity.
The amortized cost of debt securities in this category is adjusted for accretion
of discounts and amortization of premiums. Realized gains and losses are
determined on the specific certificate method and are included in noninterest
income.
Loans
Loans are stated at principal amounts outstanding, net of deferred loan
origination fees and costs. Interest income on loans is accrued and credited to
interest income monthly as earned. Loan origination fees are generally
considered as adjustments of interest rate yields and are amortized into
interest income on loans over the terms of the related loans.
Loans are placed on a non-accrual status and cease accruing interest when loan
payment performance is deemed unsatisfactory. However, all loans past due 90
days are placed on non-accrual status, unless the loan is both well secured and
in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Based upon management's
evaluation of the loan portfolio, the allowance is maintained at a level
considered adequate to absorb estimated inherent losses in the Banks' loan
portfolios.
34
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation.
Depreciation and amortization is determined on the straight-line method for
financial reporting purposes, and accelerated methods for income tax purposes.
Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan is reported in other assets at
the lower of cost or fair value less disposition costs. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to ORE and recorded
at the lower of cost or fair value less disposition costs based on their
appraised value at the date actually or constructively received. Losses arising
from the acquisition of such property are charged against the allowance for loan
losses. Subsequent adjustments to the carrying values of ORE properties are
charged to operating expense.
Intangible Assets
The excess of cost over fair value of net assets acquired (goodwill) is included
in other assets and is being amortized on a straight-line basis over the period
of expected benefit, which approximates 15 years. Goodwill amounted to
$3,377,000 and $3,699,000 at December 31, 1996 and 1995, respectively. Other
intangible assets are amortized on a straight-line basis over 10- to 15-year
lives. Other intangibles amounted to $2,923,000 and $3,374,000 at December 31,
1996 and 1995, respectively.
Earnings and Cash Dividends Per Share
Primary net income per common and common equivalent share is based on the
weighted average common shares and common share equivalents outstanding during
the period after retroactive recognition is given to the earliest period
presented for common stock dividends. Fully diluted net income per share assumes
conversion of preferred stock. All common stock per share information has been
adjusted for the 5% common stock dividend declared on December 19, 1996.
Income Taxes
The provision for income taxes is based on current taxable income. When income
and expenses are recognized in different periods for book purposes, deferred
taxes are provided.
Restriction on Cash and Due From Banks
The Banks are required to maintain reserve balances with the Federal Reserve
Bank. The weighted average amount of the reserve balances for 1996 and 1995 were
approximately $27,769,000 and $31,057,000, respectively.
Recent Accounting Statement
The Financial Accounting Standards Board (FASB) recently issued Statement No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125). FAS 125 requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in FAS 125. FAS 125 is
applicable to transactions occurring after December 31, 1996, except for
provisions dealing with securities lending and repurchase/dollar repurchase
agreements, which will become effective after December 31, 1997. The adoption of
FAS 125 is not expected to have a material impact on the Company's results of
operations or financial condition.
35
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
2. Mergers and Acquisitions
On November 15, 1996, two insurance brokerage agencies, Keystone National
Companies, Inc., Cherry Hill, New Jersey, and Morales, Potter & Buckelew, Inc.,
t/a Buckelew & Associates, Toms River, New Jersey, were acquired by the Company
and thereafter merged to form Commerce National Insurance Services, Inc.
("Commerce Insurance"). Effective December 1, 1996, a third insurance brokerage
agency, Chesley & Cline, Inc., Mt. Holly, New Jersey, was merged with and into
Commerce Insurance. The Company issued approximately 713,000 shares of common
stock in exchange for all of the outstanding shares of these agencies. The
transactions were accounted for as poolings of interests. However, financial
statements of the periods prior to the acquisitions have not been restated as
the changes would be immaterial.
Effective January 1, 1997 a fourth insurance brokerage agency, Colkate, Inc.,
t/a The Morrissey Agency ("Morrissey"), Mount Laurel, New Jersey, was merged
with and into Commerce Insurance. The Company issued approximately 27,000 shares
of common stock in exchange for all of the outstanding shares of Morrissey. The
transaction was accounted for as a pooling of interests.
Effective January 21, 1997, the Company acquired Independence Bancorp, Inc.
("Independence"), a one bank holding company headquartered in Bergen County, New
Jersey, with approximately $377 million in assets and $348 million in deposits.
The Company issued approximately 2,660,000 shares of common stock to
shareholders of Independence based on an exchange ratio of .98175 of a share of
the Company's common stock for each share of Independence common stock. The
transaction was accounted for as a pooling of interests.
A summary of unaudited pro forma financial information for the Company and
Independence combined follows:
1996 1995 1994
Operating results (in thousands,
except per share data):
Net interest income $125,413 $109,899 $102,997
Noninterest income 32,776 23,623 19,591
Net income 28,025 26,535 22,060
Fully diluted net income
per common and common
equivalent share 1.73 1.72 1.62
Average fully diluted shares
outstanding 16,124 15,310 13,525
1996 1995
Balance sheet at year-end
(dollars in thousands):
Assets $3,232,216 $2,738,691
Loans 1,248,840 1,032,801
Deposits 2,919,670 2,529,186
Stockholders' equity 204,072 179,865
36
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
3. Investment Securities
A summary of the amortized cost and market value of securities available for
sale and securities held to maturity (in thousands) at December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency and
mortgage-backed obligations $ 691,355 $ (10,258) $ 681,097 $ 511,048 $ 1,868 $ (2,471) $ 510,445
Obligations of state and
political subdivisions 15,670 $ 73 15,743
Equity securities 4,560 3,814 8,374 2,988 846 3,834
Other 20,673 20,673 6,035 6,035
--------- --------- --------- --------- --------- --------- --------- ---------
Securities available for sale $ 732,258 $ 3,887 $ (10,258) $ 725,887 $ 520,071 $ 2,714 $ (2,471) $ 520,314
--------- --------- --------- --------- --------- --------- --------- ---------
U.S. Government agency and
mortgage-backed obligations $ 690,704 $ (20,836) $ 669,868 $ 653,522 $ (11,173) $ 642,349
Obligations of state and
political subdivisions 16,114 16,114 12,289 $ 10 12,299
Other 16,493 16,493 16,891 16,891
--------- --------- --------- --------- --------- --------- --------- ---------
Securities held to maturity $ 723,311 $ (20,836) $ 702,475 $ 682,702 $ 10 $ (11,173) $ 671,539
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The amortized cost and estimated market value of investment securities (in
thousands) at December 31, 1996, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because obligors
have the right to repay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 60,105 $ 60,217 $ 31,518 $ 31,518
Due after one year through five years 25,223 24,981 18 18
Due after five years through ten years 9,027 9,080 995 995
Due after ten years 21,777 20,730
Mortgage-backed securities 611,566 602,505 690,780 669,944
Equity securities 4,560 8,374
-------- -------- -------- --------
$732,258 $725,887 $723,311 $702,475
======== ======== ======== ========
</TABLE>
Proceeds from sales of securities available for sale during 1996, 1995, and 1994
were $83,701,000, $189,000, and $961,000, respectively. Gross gains of
$1,337,000, $106,000 and $641,000 were realized on the sales in 1996, 1995, and
1994, respectively.
At December 31, 1996 and 1995, investment securities with a carrying value of
$268,373,000 and $219,459,000, respectively, were pledged to secure deposits of
public funds.
On November 15, 1995, the FASB issued a special report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with the provisions of that report,
management reclassified $362,420,000 of investment securities from the held to
maturity category to the available for sale category as of December 31, 1995.
Unrealized losses on those securities transferred were $1,294,000.
At December 31, 1996, the unrealized depreciation in securities available for
sale included in retained earnings totaled $4,039,000, net of tax, compared to
unrealized appreciation of $165,000, net of tax, at December 31, 1995.
37
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
4. Loans
The following is a summary of loans outstanding (in thousands) at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Commercial real estate:
Owner-occupied $ 167,702 $ 149,258
Other 226,537 206,422
Construction 45,359 46,816
---------- ----------
439,598 402,496
Commercial loans:
Term 138,688 110,252
Line of credit 82,886 59,122
Demand 77 127
---------- ----------
221,651 169,501
Consumer:
Mortgages (1-4 family residential) 119,486 104,515
Installment 48,970 41,212
Home equity 257,772 182,103
Credit lines 8,692 7,688
---------- ----------
434,920 335,518
---------- ----------
$1,096,169 $ 907,515
========== ==========
</TABLE>
At December 31, 1996 and 1995, loans of approximately $5,847,000 and $5,341,000,
respectively, were outstanding to certain of the Company's and the Banks'
directors and officers, and approximately $13,306,000 and $11,784,000,
respectively, of loans were outstanding from companies in which certain of the
Company's and the Banks' directors and officers are associated, exclusive of
loans to any such person and associated companies which in aggregate did not
exceed $60,000. The terms of these loans are substantially the same as those
prevailing at the time for comparable unrelated transactions. A summary (in
thousands) of the related party loans outstanding at December 31, 1996 is as
follows:
1996
Balance, January 1 $17,329
New loans 8,275
Loan payments 6,450
-------
Balance, December 31 $19,154
=======
The Company engaged in certain activities with other entities which are
affiliated with directors of the Company. The Company received real estate
appraisal services from a company owned by a director of the Company. Such real
estate appraisal services amounted to $195,000 in 1996, $222,500 in 1995, and
$264,000 in 1994. The Company received legal services from two law firms of
which two directors of the Company are partners. Such aggregate legal services
amounted to $1,243,000 in 1996, $1,371,000 in 1995, and $1,307,000 in 1994.
38
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
5. Allowances for Loan Losses
The following is an analysis of changes in the allowance for loan losses (in
thousands) for 1996, 1995, and 1994:
1996 1995 1994
Balance, January 1 $ 13,320 $ 12,036 $ 10,023
Provision charged to
operating expense 2,997 2,215 4,210
Recoveries of loans
previously charged off 426 590 245
Loan charge-offs (2,404) (1,521) (2,442)
-------- -------- --------
Balance, December 31 $ 14,339 $ 13,320 $ 12,036
======== ======== ========
6. Nonaccrual and Restructured Loans and Other Real Estate
The total of non-performing loans (nonaccrual and restructured loans) was
$9,118,000 and $8,499,000 at December 31, 1996 and 1995, respectively.
Non-performing loans of $1,758,000, $5,664,000, and $1,861,000 net of charge
offs of $250,000, $103,000, and $153,000 were transferred to other real estate
during 1996, 1995, and 1994, respectively. Other real estate ($8,032,000 and
$10,561,000 at December 31, 1996 and 1995, respectively) is included in other
assets.
At December 31, 1996 and 1995 , the recorded investment in loans considered to
be impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment
of a Loan" totaled $7,213,000 and $6,668,000, respectively, all of which are
included in non-performing loans. As permitted, all homogenous smaller balance
consumer and residential mortgage loans are excluded from individual review for
impairment. The majority of impaired loans were measured using the fair market
of collateral. No portion of the allowance for loan losses for 1996 or 1995 was
allocated to these loans. During 1996 and 1995, impaired loans averaged
approximately $7,097,000 and $7,227,000 respectively. Interest income of
approximately $1,050,000 and $943,000 would have been recorded on non-performing
loans (including impaired loans) in accordance with their original terms in 1996
and 1995, respectively. Actual interest income recorded on these loans amounted
to $262,000 and $299,000 during 1996 and 1995, respectively.
7. Bank Premises, Equipment, and Leases
A summary of bank premises and equipment (in thousands) is as follows:
December 31,
1996 1995
Land $ 18,123 $ 15,320
Buildings 41,107 33,779
Leasehold improvements 5,206 5,391
Furniture, fixtures and equipment 48,727 38,723
Leased property under capital leases 124 124
-------- --------
113,287 93,337
Less accumulated depreciation
and amortization 25,330 19,048
-------- --------
$ 87,957 $ 74,289
======== ========
39
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
At December 31, 1996, Commerce NJ leased one of its branches under a capital
lease with an unrelated party. All other branch leases are accounted for as
operating leases with the related rental payments being expensed ratably over
the life of the lease.
The Company leases its headquarters building from a limited partnership in which
the Company is a 49% limited partner at December 31, 1996. The lease is
accounted for as an operating lease with an annual rent of $965,000. The lease
expires in 2001 and is renewable for five additional terms of five years each.
The Company leases its operations facility from a limited partnership in which
the Company is a 44% limited partner at December 31, 1996. The lease is
accounted for as an operating lease with an annual rent of $572,000. The lease
expires in 2004 and is renewable for two additional terms of five years each.
At December 31, 1996, the Company leased from related parties under separate
operating lease agreements the land on which it has constructed five branch
offices. The aggregate annual rental under these related party leases for 1996,
1995, and 1994 was approximately $200,000. These leases expire periodically
through 2010 but are renewable through 2030. Aggregate annual rentals escalate
to $274,000 in 2004.
The Company leases land to a limited partnership partially comprised of the
directors of Commerce PA and Commerce NJ. The initial lease term is 25 years,
with two successive 10-year options. As of December 31, 1996, the future minimum
lease payments to be received by the Company amount to approximately $55,000 for
each of the next three years and $487,000 thereafter for the remainder of the
initial lease term. In accordance with the provision of the land lease, the
limited partnership constructed and owns the office building located on the
land. Commerce PA leases the building as a branch facility through 2010.
Total rent expense charged to operations under operating leases was
approximately $2,829,000 in 1996, $2,728,000 in 1995, and $2,524,000 in 1994.
The future minimum rental commitments, by year, under the non-cancelable leases
are as follows (in thousands) at December 31, 1996:
Capital Operating
1997 $ 12 $2,800
1998 12 2,805
1999 12 2,625
2000 12 2,310
2001 12 2,201
Later years 155 12,236
---- -------
Net minimum lease payment $215 $24,977
---- -------
Less amount representing
interest 111
---- -------
Present value of net minimum
lease payments $104
==== =======
The Company obtained interior design and general contractor services for
$526,000, $496,000, and $468,000 in 1996, 1995, and 1994, respectively, from a
business owned by the spouse of the Chairman of the Board of the Company.
Additionally, the business received commissions of approximately $990,000,
$931,000, and $962,000 in 1996, 1995, and 1994, respectively, on furniture and
facility purchases made directly by the Company.
40
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
8. Deposits
The aggregate amount of time certificates of deposits in denominations of
$100,000 or more was $258,921,000 and $221,945,000 at December 31, 1996 and
1995, respectively.
9. Other Borrowed Money
Other borrowed money consisted of securities sold under agreements to
repurchase, which ranged up to three months in maturity. The following table
represents information for securities sold under agreements to repurchase.
December 31,
1996 1995
Average Average
Amount Rate Amount Rate
Securities sold under
agreements to repurchase $70,000 6.33%
Average amount outstanding 21,398 5.87 $101,240 6.30%
Maximum month-end balance 70,000 347,531
------- ---- -------- ----
As of December 31, 1996, the Company had a line of credit of $346,851,000
available from the Federal Home Loan Bank of New York.
10.Long-Term Debt
On July 15, 1993, the Company issued $23,000,000 of 8 3/8% subordinated notes
due 2003. Interest on the debt is payable semi-annually on January 15 and July
15 of each year. The notes may be redeemed in whole or in part at the option of
the Company after July 15, 2000 at a price from 102% to 100% of the principal
plus accrued interest, if any, to the date fixed for redemption, subject to
certain conditions. The notes qualify for total risk-based capital for
regulatory purposes, subject to certain limitations.
11.Income Taxes
The provision for income taxes consists of the following (in thousands):
1996 1995 1994
Current:
Federal $ 13,757 $ 12,999 $ 11,917
State 844 985 806
Deferred:
Federal 171 (459) (1,038)
State 55 (116) (67)
-------- -------- --------
$ 14,827 $ 13,409 $ 11,618
======== ======== ========
The above provision includes income taxes related to securities gains of
$468,000, $37,000 and $224,000 for 1996, 1995, and 1994, respectively.
41
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
The provision for income taxes differs from the expected statutory provision as
follows:
1996 1995 1994
Expected provision at statutory rate: 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt interest on loans (0.3) (0.4) (0.6)
Tax-exempt interest on securities (0.8) (0.3) (0.1)
Purchase accounting adjustments 0.3 0.3 0.3
Other 1.6 1.7 1.7
---- ---- ----
35.8% 36.3% 36.3%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
Deferred tax assets:
Loan loss reserves $5,609 $5,157
Other reserves 223 181
Fair value adjustment, available
for sale securities 2,333
Investment valuations 48 48
Net operating losses 181
Other 831 756
------ ------
Total deferred tax assets 9,044 6,323
------ ------
Deferred tax liabilities:
Depreciation 1,564 977
Intangibles 227 102
Fair value adjustment, available
for sale securities 77
Other 1,170 534
------ ------
Total deferred tax liabilities 2,961 1,690
------ ------
Net deferred assets $6,083 $4,633
====== ======
12. Commitments and Letters of Credit
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit, which are not reflected in the
accompanying financial statements. These arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Company's normal credit policies. Collateral is obtained based on
management's credit assessment of the borrower. At December 31, 1996, the Banks
had outstanding standby letters of credit in the amount of $15,322,000.
42
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
In addition, the Banks are committed as of December 31, 1996 to advance
$49,867,000 on construction loans, $91,227,000 on home equity lines of credit
and $60,031,000 on lines of credit. All other commitments total approximately
$90,539,000. The Company anticipates no material losses as a result of these
transactions.
13. Dividends
On December 19, 1996, the Board of Directors declared a cash dividend of $0.20
for each share of common stock outstanding and a 5% stock dividend payable
January 21, 1997 to stockholders of record on January 8, 1997. Payment of the
stock dividend will result in the issuance of 611,134 additional common shares
and cash of $23,850 in lieu of fractional shares.
14. Common Stock and Preferred Stock
At December 31, 1996 , the Company's common stock had a par value of $1.5625.
The Company had 20,000,000 shares authorized as of this date.
At December 31, 1996 the Company had 417,000 shares of Series C ESOP Cumulative
Convertible Preferred Stock authorized and issued without par value, (stated
value of $1.00 per share) which is convertible at any time into the common stock
on a share-for-share basis, after adjustment for common stock dividends and
splits. The annual dividend is $1.35 per share payable quarterly. The Series C
ESOP Cumulative Convertible Preferred Stock is redeemable at the option of the
Company. These shares have been issued to the Company's Employee Stock Ownership
Plan (see Note 15).
15. Benefit Plans
Employee Stock Option Plan
The Company has an Employee Stock Option Plan (the Plan) for the officers and
employees of the Company and the Banks as well as a plan for its non-employee
directors. The Plan authorizes the issuance of up to 1,157,625 shares of common
stock (as adjusted for stock dividends) upon the exercise of options. The option
price for options issued under the Plan must be at least equal to 100% of the
fair market value of the Company's common stock as of the date the option is
granted. These options generally become exercisable to the extent of 25%
annually beginning one year from the date of grant, although the amount
exercisable beginning one year from the date of grant may be greater depending
on the employees' length of service. The options expire not later than 10 years
from the date of grant.
Information concerning option activity for 1996 is as follows:
Shares Under Weighted Average
Option Exercise Price
Balance at January 1, 1996 1,076,370 $ 12.63
Options granted 703,791 24.45
Options exercised 87,610 11.11
Options canceled 23,115 17.22
Balance at December 31, 1996 1,663,899 17.68
---------- ---------
43
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Information concerning options outstanding as of December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Number Average
exercise prices Outstanding Contractural Life Exercise Price Exercisable Exercise Price
<C> <C> <C> <C> <C> <C>
$4.44 to $14.99 689,425 6.43 $11.11 636,196 $10.99
$15.00 and greater 974,474 9.77 22.34 244,222 16.93
</TABLE>
All shares and per share prices have been adjusted for the 5% common stock
dividend declared on December 19, 1996.
The Company has elected not to adopt the recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which
requires a fair value based method of accounting for all employee stock
compensation plans. The Company will continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations to
account for its stock-based compensation plans. If the Company had accounted for
stock options granted in 1996 and 1995 under the fair value provisions of FAS
123, net income and earnings per share would have been as follows (in thousands,
except per share amounts):
1996 1995
Pro forma net income $ 25,632 $ 22,847
Pro forma earnings per share:
Primary $ 2.01 $ 1.87
Fully diluted 1.91 1.81
Due to the inclusion of only options granted in 1996 and 1995, the pro forma
effects of applying FAS 123 in 1996 and 1995 may not be representative of the
pro forma impact in future years.
The fair value of options granted in 1996 and 1995 was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.16% to 6.70%, dividend yield
of 4%, volatility factors of the expected market price of the Company's common
stock of .215 to .332, and a weighted average expected life of the options of 4
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
44
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Employee Stock Ownership Plan
As of December 31, 1996 the Company maintains an Employee Stock Ownership Plan
(ESOP) for the benefit of its officers and employees who meet age and service
requirements. The ESOP held 417,000 shares of Series C ESOP Cumulative
Convertible Preferred Stock, purchased at a price of $18.00 per share. The
Company guarantees a loan outstanding held by the ESOP. The loan is payable in
quarterly installments with the final payment due January 28, 2000. The loan
currently bears interest at a variable rate, although the rate can be fixed at
future repricing dates in accordance with the loan agreement. The preferred
stock has been pledged as security to the loan and pays an annual dividend of
$1.35 per share, which the ESOP applies to its obligations under the loan.
Employer contributions are determined at the discretion of the Board of
Directors but will be sufficient to enable the ESOP to discharge current
obligations, including interest, under the loan. The total contribution expense
associated with the Plan for 1996, 1995, and 1994 was $885,000, $934,000, and
$648,000, respectively.
Post-employment and Post-retirement Benefits
The Company offers no post-employment and post-retirement benefits.
16. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
(FAS 107), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following table represents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 172,527 $ 172,527 $ 177,015 $ 177,015
Mortgages held for sale 1,314 1,314 5,442 5,442
Trading securities 15,327 15,327 8,843 8,843
Investment securities 1,449,198 1,428,362 1,203,016 1,191,853
Loans (net) 1,081,830 1,102,709 894,195 921,449
Financial liabilities:
Deposits 2,573,405 2,584,519 2,225,098 2,233,133
Other borrowed money 70,000 70,000
Obligation to ESOP 3,333 3,333 4,359 4,359
Long-term debt 23,000 24,610 23,000 25,663
----------- ----------- ----------- -----------
Off-balance sheet instruments:
Standby letters of credit $ (153) $ (128)
Commitments to extend credit (550) (440)
</TABLE>
45
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, mortgages held for sale and trading securities: The
carrying amounts reported approximate those assets' fair value.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans receivable were estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loans with significant collectibility
concerns were fair valued on a loan-by-loan basis utilizing a discounted cash
flow method. The carrying amount of accrued interest approximates its fair
value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest-bearing and noninterest-bearing checking, passbook savings, and certain
types of money market accounts) are, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
of deposit to a schedule of aggregated expected monthly maturities on time
deposits.
Other borrowed money: The carrying amounts reported approximate fair value.
Obligation to ESOP: The fair value of the guarantee of the ESOP obligation is
estimated using a discounted cash flow calculation that applies interest rates
currently being offered to obligations of a similar maturity.
Long-term debt: Current quoted market prices were used to estimate fair value.
Off-balance sheet instruments: Off-balance sheet instruments of the Company
consist of letters of credit, loan commitments and unfunded lines of credit.
Fair values for the Company's off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
46
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
17. Quarterly Financial Data (Unaudited)
The following represents summarized unaudited quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentation (in thousands,
except per share amounts):
Three Months Ended
December 31 September 30 June 30 March 31
1996
Interest income $48,300 $45,783 $43,411 $41,870
Interest expense 19,154 18,059 16,888 16,757
Net interest income 29,146 27,724 26,523 25,113
Provision for loan losses 824 825 674 674
Net investment securities gains 820 517
Provision for federal and state
income taxes 4,320 3,329 3,670 3,508
Net income 7,760 6,008 6,596 6,261
Net income applicable to
common stock 7,619 5,867 6,456 6,120
Net income per common share:
Primary $ 0.59 $ 0.47 $ 0.52 $ 0.50
Fully diluted 0.55 0.45 0.50 0.48
1995
Interest income $41,937 $41,574 $41,594 $40,417
Interest expense 17,134 17,603 17,938 17,537
Net interest income 24,803 23,971 23,656 22,880
Provision for loan losses 582 388 388 857
Net investment securities gains 88 18
Provision for federal and state
income taxes 3,482 3,577 3,356 2,994
Net income 6,149 6,277 5,816 5,243
Net income applicable to
common stock 6,008 6,136 5,676 5,102
Net income per common share:
Primary $ 0.49 $ 0.50 $ 0.47 $ 0.46
Fully diluted 0.47 0.48 0.46 0.44
47
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
18. Condensed Financial Statements of the Parent Company and Other Matters
Balance Sheets
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1996 1995
<S> <C> <C>
Assets
Cash $ 8,294 $ 5,979
Securities available for sale 8,374 4,077
Securities held to maturity 77 110
Investment in Banks 186,724 172,392
Other assets 8,713 8,850
--------- ---------
$ 212,182 $ 191,408
========= =========
Liabilities
Other liabilities $ 4,496 $ 2,029
Long-term debt 23,000 23,000
Obligation to Employee Stock
Ownership Plan (ESOP) 3,333 4,359
--------- ---------
30,829 29,388
========= =========
Stockholders' equity
Common stock 19,190 16,880
Series C preferred stock 7,506 7,506
Capital in excess of par or stated value 126,121 112,894
Retained earnings 33,493 30,723
--------- ---------
186,310 168,003
Less commitment to ESOP 3,333 4,359
Less treasury stock 1,624 1,624
========= =========
Total stockholders' equity 181,353 162,020
--------- ---------
$ 212,182 $ 191,408
========= =========
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Income:
Dividends from Banks $ 11,406 $ 8,203 $ 4,400
Interest income 728 207 203
Other 173 325 872
--------- --------- ---------
12,307 8,735 5,475
--------- --------- ---------
Expenses:
Interest expense 2,025 2,025 2,025
Operating expenses 1,911 1,479 1,601
--------- --------- ---------
3,936 3,504 3,626
Income before income taxes and equity
in undistributed income of Banks 8,371 5,231 1,849
Income tax benefit (975) (956) (834)
9,346 6,187 2,683
Equity in undistributed income of Banks 17,279 17,298 17,694
--------- --------- ---------
Net income 26,625 23,485 20,377
Dividends on preferred stock 563 563 1,074
--------- --------- ---------
Net income applicable to common stock $ 26,062 $ 22,922 $ 19,303
========= ========= =========
</TABLE>
48
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net income $ 26,625 $ 23,485 $ 20,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of Banks (17,279) (17,298) (17,694)
Gains on sales of securities available for sale (106) (641)
Decrease in other assets 137 429 699
Increase in other liabilities 1,428 706 44
-------- -------- --------
Net cash provided by operating activities 10,911 7,216 2,785
Investing activities:
Investment in Banks (3,000) (25,925) (2,900)
Proceeds from sale of securities available for sale 189 961
Purchase of equity securities (1,572) (918)
Other 69 18 (139)
-------- -------- --------
Net cash used by investing activities (4,503) (26,636) (2,078)
Financing activities:
Net proceeds from common stock offering 25,774
Tax benefit from ESOP dividends 197 197 197
Proceeds from issuance of common stock
under dividend reinvestment plan 3,397 1,612 952
Cash dividends (8,430) (7,116) (5,796)
Proceeds from exercise of stock options 743 1,068 961
Purchase of treasury stock (352) (214)
Redemption of preferred B stock (61)
-------- -------- --------
Net cash (used) provided by financing
activities (4,093) 21,183 (3,961)
Increase (decrease) in cash and cash equivalents 2,315 1,763 (3,254)
Cash and cash equivalents at beginning of year 5,979 4,216 7,470
-------- -------- --------
Cash and cash equivalents at end of year $ 8,294 $ 5,979 $ 4,216
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,926 $ 1,926 $ 1,926
Income taxes 11,905 12,245 11,763
-------- -------- --------
</TABLE>
49
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
Holders of common stock of the Company are entitled to receive dividends when
declared by the Board of Directors out of funds legally available. Under the New
Jersey Business Corporation Act, the Company may pay dividends only if it is
solvent and would not be rendered insolvent by the dividend payment and only to
the extent of surplus (the excess of the net assets of the Company over its
stated capital).
The approval of the Comptroller of the Currency is required for a national bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds net profits (as defined) for that year combined with its retained net
profits for the preceding two calendar years. Under this formula, Commerce NJ,
Commerce PA and Commerce Shore can declare dividends in 1997 without approval of
the Comptroller of the Currency of approximately $23,259,000, $4,116,000, and
$7,201,000, respectively, plus an additional amount equal to each bank's net
profit for 1997 up to the date of any such dividend declaration.
The Federal Reserve Act requires the extension of credit by Commerce NJ,
Commerce PA and Commerce Shore to certain affiliates, including Commerce
Bancorp, Inc. (parent), be secured by readily marketable securities, that
extension of credit to any one affiliate be limited to 10% of the capital and
capital in excess of par or stated value, as defined, and that extensions of
credit to all such affiliates be limited to 20% of capital and capital in excess
of par or stated value. At December 31, 1996 and 1995, the Company complies with
these guidelines.
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific guidelines that involve quantitative measures of
the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiaries to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-based assets
(as defined) and of Tier I capital to average assets (as defined), or leverage.
Management believes, as of December 31, 1996, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
50
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements
The following table presents the Company's and Commerce NJ's risk-based and
leverage capital ratios at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Company
Risk based capital ratios:
Tier 1 $179,571 12.64% $ 56,805 4.00% $ 85,208 6.00%
Total capital 216,910 15.27 113,610 8.00 142,013 10.00
Leverage ratio 179,571 6.44 83,593 3.00 139,322 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $146,226 13.61% $ 42,984 4.00% $ 64,475 6.00%
Total capital 157,735 14.68 85,967 8.00 107,459 10.00
Leverage ratio 146,226 7.06 62,165 3.00 103,609 5.00
December 31, 1995
Company
Risk based capital ratios:
Tier 1 $155,502 13.02% $ 47,771 4.00% $ 71,656 6.00%
Total capital 191,822 16.06 95,542 8.00 119,427 10.00
Leverage ratio 155,502 6.54 71,534 3.00 119,223 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $135,393 14.40% $ 37,615 4.00% $ 56,422 6.00%
Total capital 146,217 15.55 75,230 8.00 94,037 10.00
Leverage ratio 135,393 7.20 56,356 3.00 93,927 5.00
</TABLE>
51
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
The Board of Directors and Stockholders
Commerce Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Commerce
Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company'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 consolidated financial position of Commerce Bancorp,
Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 24, 1997
52
<PAGE>
Corporate Information
Headquarters
Commerce Bancorp, Inc.
Commerce Atrium
1701 Route 70 East
Cherry Hill, New Jersey
08034-5400
Annual Shareholders' Meeting
CommerceBancorp, Inc.'s annual shareholders' meeting will be held on Tuesday,
June 17, 1997 at 5:30 p.m. at Commerce University, 17000 Horizon Way at
Springdale Road, Mount Laurel, New Jersey.
Dividend Reinvestment and Stock Purchase Plan
Commerce Bancorp, Inc. offers its shareholders a convenient plan to increase
their investment in the company. Through the Dividend Reinvestment and Stock
Purchase Plan, holders of common stock may have their quarterly dividends and
optional cash payments of up to $5,000 per quarter reinvested in additional
common shares at a 3% discount from the market price and without brokerage fees,
commissions, or service charges. Shareholders not enrolled in this plan, as well
as brokers and custodians who hold stock for clients, may receive a plan
prospectus and enrollment card by contacting ChaseMellon Shareholder Services,
LCC at (800) 526-0801.
Contacts
Analysts, portfolio managers, and others seeking financial information about
Commerce Bancorp, Inc. should contact C. Edward Jordan, Jr., Executive Vice
President, at (609) 751-9000.
News media representatives and others seeking general corporate information
should contact John J. Cunningham, Jr., Senior Vice President, at (609)
751-9000.
Shareholders seeking assistance should contact Cathy L. Lowther, Assistant
Secretary. For assistance with stock records, please contact ChaseMellon
Shareholder Services, LCC at (800) 526-0801.
Annual Report and Form 10-K
Additional copies of Commerce Bancorp, Inc.'s Annual Report and Form 10-K are
available without charge by writing
Commerce Bancorp, Inc.
Shareholder Relations
1701 Route 70 East
Cherry Hill, New Jersey 08034-5400.
New York Stock Exchange Symbol
Shares of Commerce Bancorp, Inc.'s common stock are traded on the New York Stock
Exchange under the symbol CBH.
Transfer and Dividend Paying Agent/Registrar
ChaseMellon Shareholder Services, LCC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Consent of Independent Auditors
We consent to the incorporation by reference in this Registration Statement
(Form S-3 No. 33-40465) of Commerce Bancorp, Inc. and in the related Prospectus,
and in the Registration Statement (Form S-8 No. 33-82742) pertaining to the
Stock Option Plans of Commerce Bancorp, Inc. of our report dated January 24,
1997 with respect to the consolidated financial statements of Commerce Bancorp,
Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year
ended December 31, 1996.
Philadelphia, Pennsylvania
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000715096
<NAME> COMMERCE BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 159,577
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,950
<TRADING-ASSETS> 15,327
<INVESTMENTS-HELD-FOR-SALE> 725,887
<INVESTMENTS-CARRYING> 723,311
<INVESTMENTS-MARKET> 702,475
<LOANS> 1,096,169
<ALLOWANCE> 14,339
<TOTAL-ASSETS> 2,861,952
<DEPOSITS> 2,573,405
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,861
<LONG-TERM> 26,333
0
7,506
<COMMON> 19,190
<OTHER-SE> 154,657
<TOTAL-LIABILITIES-AND-EQUITY> 2,861,952
<INTEREST-LOAN> 91,086
<INTEREST-INVEST> 85,036
<INTEREST-OTHER> 3,242
<INTEREST-TOTAL> 179,364
<INTEREST-DEPOSIT> 67,497
<INTEREST-EXPENSE> 70,858
<INTEREST-INCOME-NET> 108,506
<LOAN-LOSSES> 2,997
<SECURITIES-GAINS> 1,337
<EXPENSE-OTHER> 94,071
<INCOME-PRETAX> 41,452
<INCOME-PRE-EXTRAORDINARY> 41,452
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,625
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 4.63
<LOANS-NON> 8,587
<LOANS-PAST> 249
<LOANS-TROUBLED> 531
<LOANS-PROBLEM> 13,199
<ALLOWANCE-OPEN> 13,320
<CHARGE-OFFS> 2,404
<RECOVERIES> 426
<ALLOWANCE-CLOSE> 14,339
<ALLOWANCE-DOMESTIC> 14,339
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
