<PAGE>
Rule 424(b)(4)
PROSPECTUS
$50,000,000
COMMERCE CAPITAL TRUST I
[LOGO] 8-3/4% CAPITAL SECURITIES
(Liquidation Amount $25.00 per Capital Security)
fully and unconditionally guaranteed, as described herein, by
COMMERCE BANCORP, INC.
---------------------
The 8-3/4% Capital Securities (the "Capital Securities") offered
hereby will represent beneficial interests in Commerce Capital Trust I, a
business trust formed under the laws of the State of Delaware (the "Trust").
Commerce Bancorp, Inc., a New Jersey corporation (the "Corporation" or the
"Company"), will be the owner of all of the beneficial interests represented by
common securities of the Trust (the "Common Securities," and together with the
Capital Securities, the "Trust Securities"). Wilmington Trust Company is the
Property Trustee of the Trust. The Trust exists for the exclusive purposes of
issuing the Trust Securities and investing the proceeds thereof in the 8-3/4%
Junior Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures"), to be issued by the Corporation, and certain other limited
activities as described herein. The Junior Subordinated Debentures are scheduled
to mature on June 30, 2027 (the "Stated Maturity Date"). The Capital Securities
will have a preference over the Common Securities under certain circumstances
with respect to cash distributions and amounts payable on liquidation,
redemption or otherwise. See "Description of Capital Securities -- Subordination
of Common Securities."
(Continued on next page)
---------------
See "Risk Factors" beginning on page 10 for a discussion of certain
factors that should be considered by prospective investors in evaluating an
investment in the Capital Securities.
---------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER INSURER OR GOVERNMENTAL AGENCY.
---------------
Application will be made to list the Capital Securities on the New York
Stock Exchange under the symbol "CBHPrT." If approved for listing, trading of
the Capital Securities on the New York Stock Exchange is expected to commence
within 30 days after the initial delivery of the Capital Securities.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
Initial Public Underwriting Proceeds to
Offering Price Commission(1) Trust(2)(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Capital Security..................... $ 25.00 (3) $ 25.00
- ----------------------------------------------------------------------------------------------------------------------
Total(4)................................. $50,000,000 (3) $50,000,000
======================================================================================================================
</TABLE>
<PAGE>
(1) The Corporation and the Trust have agreed to indemnify the several
Underwriters against certain liabilities, including certain liabilities
under the Securities Act. See "Underwriting."
(2) Before deducting estimated expenses of $250,000 payable by the Corporation.
(3) In view of the fact that the proceeds of the sale of the Capital
Securities will be invested in the Junior Subordinated Debentures, the
Corporation, as issuer of the Junior Subordinated Debentures, has agreed
to pay the Underwriters, as compensation, $0.75 per Capital Security
(or $1,500,000 in the aggregate). See "Underwriting."
(4) The Trust and the Company have granted to the Underwriters an option
exercisable for 30 days to purchase up to an additional $7,500,000 of
Capital Securities at the initial public offering price per Capital
Security solely to cover over-allotments, if any. The Company will pay to
the Underwriters, as Underwriters' Compensation, the commission set forth
above in footnote (3) with respect to such additional Capital Securities.
If such option is exercised in full, the Total Initial Public Offering
Price, Underwriting Commission and Proceeds to the Trust will be
$57,500,000, $1,725,000 and $57,500,000, respectively. See "Underwriting."
The Capital Securities are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the Capital Securities will be made in book-entry form only through the
facilities of The Depository Trust Company ("DTC") on or about June 9, 1997,
against payment therefor in immediately available funds.
Wheat First Butcher Singer Janney Montgomery Scott Inc.
The date of this Prospectus is June 6, 1997
<PAGE>
(Continued from the previous page)
The Capital Securities will be represented by a global Capital Security
in fully registered form, deposited with a custodian for and registered in the
name of a nominee of DTC. Beneficial interests in such Capital Securities will
be shown on, and transfers thereof will be effected through, records maintained
by DTC and its participants. Except as described under "Description of Capital
Securities," Capital Securities in definitive form will not be issued and owners
of beneficial interests in the global securities will not be considered holders
of the Capital Securities. Application will be made to list Capital Securities
on the New York Stock Exchange. See "Underwriting." Settlement for the Capital
Securities will be made in immediately available funds. The Capital Securities
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity for the Capital Securities will therefore settle in immediately
available funds.
Holders of the Trust Securities will be entitled to receive cumulative
cash distributions arising from the payment of interest on the Junior
Subordinated Debentures, accruing from the date of original issuance and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, commencing September 30, 1997, at the annual rate of 8-3/4% of the
Liquidation Amount of $25.00 per Trust Security ("Distributions"). So long as
there is no Debenture Event of Default (as defined herein), the Corporation will
have the right to defer payments of interest on the Junior Subordinated
Debentures for a period not exceeding 20 consecutive quarterly periods with
respect to each deferral period (each, an "Extension Period"), provided that an
Extension Period must end on an Interest Payment Date (as defined herein) and
may not extend beyond the Stated Maturity Date. Upon the termination of any such
Extension Period and the payment of all amounts then due, the Corporation may
elect to begin a new Extension Period, subject to the requirements set forth
herein. If and for so long as interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Trust Securities also will be
deferred, and the Corporation will not be permitted, subject to certain
exceptions described herein, to declare or pay any cash distributions with
respect to the Corporation's capital stock or to make any payment with respect
to debt securities of the Corporation that rank pari passu with or junior to the
Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Trust Securities are entitled will
continue to accumulate) at the rate of 8-3/4% per annum, compounded quarterly,
and holders of Trust Securities will be required to include deferred interest
income in their gross income for United States federal income tax purposes prior
to the receipt of the cash attributable to such income. See "Description of
Junior Subordinated Debentures -- Option to Extend Interest Payment Date" and
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
The Corporation will, through the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Indenture (each as defined herein),
guarantee all of the Trust's obligations under the Trust Securities. See
"Relationship Among the Capital Securities, the Junior Subordinated Debentures
and the Guarantee -- Full and Unconditional Guarantee." The Guarantee will
guarantee payments of Distributions and payments upon liquidation of the Trust
or redemption of the Trust Securities, but only to the extent that the Trust has
funds legally available therefor and has failed to make such payments, as
described herein. See "Description of Guarantee." If the Corporation fails to
make a required payment on the Junior Subordinated Debentures, the Trust will
not have sufficient funds to make the related payments, including Distributions,
on the Trust Securities. The Guarantee will not cover any such payment when the
Trust does not have sufficient funds legally available therefor. In such event,
a holder of Capital Securities may institute a legal proceeding directly against
the Corporation to enforce its rights in respect of such payment. See
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Capital Securities." The obligations of the Corporation under the
Guarantee and the Junior Subordinated Debentures will be unsecured and will rank
subordinate and junior in right of payment to all Senior Indebtedness (as
defined in "Description of Junior
-2-
<PAGE>
Subordinated Debentures -- Subordination"). See "Risk Factors -- Ranking of
Subordinated Obligations Under the Guarantee and the Junior Subordinated
Debentures; Limitation on Source of Funds." In addition, because the Corporation
is a holding company, the Junior Subordinated Debentures and the Guarantee
effectively will be subordinated to all existing and future liabilities,
including deposits, of the Corporation's banking subsidiaries.
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein), (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Junior Subordinated Debentures at a redemption price
equal to 100% of the principal amount of, plus accrued and unpaid Distributions
on, the Junior Subordinated Debentures (the "Redemption Price"), (ii) in whole
but not in part, at any time prior to , 2002 (the "Initial Optional
Prepayment Date"), contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Corporation, upon the occurrence and continuation
of a Special Event (as defined herein), at the Redemption Price, and (iii) in
whole or in part, on or after the Initial Optional Prepayment Date,
contemporaneously with the optional prepayment by the Corporation of all or part
of the Junior Subordinated Debentures, at the Redemption Price. See "Description
of Capital Securities -- Redemption."
Subject to the Corporation having received any required regulatory
approvals, the Junior Subordinated Debentures will be prepayable prior to the
Stated Maturity Date at the option of the Corporation (i) on or after the
Initial Optional Prepayment Date, in whole or in part, at a price (the
"Prepayment Price") equal to 100% of the principal amount to be prepared
together with accrued and unpaid Distributions to, but excluding, the date fixed
for prepayment, or (ii) at any time prior to the Initial Optional Prepayment
Date, in whole but not in part, upon the occurrence and continuation of a
Special Event, at the Prepayment Price See "Description of Junior Subordinated
Debentures -- Optional Prepayment" and "-- Special Event Prepayment."
The Corporation will have the right at any time to terminate the Trust
and, after satisfaction of liabilities of creditors of the Trust as required by
applicable law, to cause a Like Amount of the Junior Subordinated Debentures to
be distributed to the holders of the Trust Securities in liquidation of the
Trust, subject to (i) the Corporation having received an opinion of counsel to
the effect that such distribution will not be a taxable event to holders of
Capital Securities and (ii) the receipt of any required regulatory approvals.
Unless the Junior Subordinated Debentures are distributed to the holders of the
Trust Securities, in the event of a liquidation of the Trust as described
herein, after satisfaction of liabilities to creditors of the Trust as required
by applicable law, the holders of the Trust Securities generally will be
entitled to receive a Liquidation Amount of $25.00 per Trust Security plus
accumulated and unpaid Distributions thereon to the date of payment. See
"Description of Capital Securities -- Liquidation of the Trust and Distribution
of Junior Subordinated Debentures."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED
OBLIGATIONS OF THE COMPANY AND LIKE THE CAPITAL SECURITIES DO NOT EVIDENCE
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER INSURER OR GOVERNMENTAL AGENCY.
------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MADE HEREBY MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF
THE CAPITAL SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, PURCHASING OF
CAPITAL SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSING OF
PENALTY BIDS. SUCH STABILIZING, IF COMMENCED, MAYBE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
-3-
<PAGE>
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies
of such material may also be obtained by mail from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. If available, such information also may be accessed through
the Commission's electronic data gathering, analysis and retrieval system
("EDGAR") via electronic means, including the Commission's home page on the
Internet (http://www.sec.gov). The Corporation's common stock is traded on the
New York Stock Exchange. Such reports, proxy statements and other information
concerning the Corporation also may be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company and the Trust have filed with the Commission a Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus omits, in accordance with the rules and regulations of the
Commission, certain of the information contained in the Registration Statement.
Reference is hereby made to the Registration Statement and the exhibits, and the
financial statements, notes and schedules filed as a part thereof or
incorporated by reference therein for further information with respect to the
Company, the Trust and the securities offered hereby. Statements contained
herein concerning the provisions of any document are not necessarily complete
and, in each instance, where a copy of such document has been filed as an
exhibit to the Registration Statement or otherwise has been filed with the
Commission, reference is made to the copy so filed. Each such statement is
qualified in its entirety by such reference.
No separate financial statements of the Trust have been included
herein. The Corporation and the Trust do not consider that such financial
statements would be material to holders of the Capital Securities because (i)
the Trust is a newly-formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated
Debentures, issuing the Trust Securities and engaging in incidental activities,
(ii) all of the voting securities of the Trust will be owned, directly or
indirectly, by the Company, a reporting company under the Exchange Act, and
(iii) the obligations of the Trust under the Capital Securities are guaranteed
by the Company as described herein. See "Commerce Capital Trust I," "Description
of Capital Securities," "Description of Junior Subordinated Debentures" and
"Description of Guarantee." In addition, the Corporation does not expect that
the Trust will file reports, proxy statements and other information under the
Exchange Act with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 as amended by the Company's Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1997, the Company's Current Reports on Form 8-K
dated January 28, 1997 and Form 8-K/A dated March 31, 1997, the Company's Form
10-K/A dated April 28, 1997, and Independence Bancorp, Inc.'s
-4-
<PAGE>
Form 10-K for the fiscal year ended December 31,1995 previously filed by the
Company (or Independence Bancorp, Inc.) with the Commission, are incorporated by
reference in this Prospectus and shall be deemed to be a part hereof.
Each document filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of any offering of securities made
by this Prospectus shall be deemed to be incorporated herein by reference and to
be a part hereof from the date of filing such document. Any statement contained
herein, or in a document all or a portion of which is incorporated or deemed to
be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Registration Statement and this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
The Company will provide without charge to any person to whom a copy of
this Prospectus is delivered, upon written or oral request of such person, a
copy of any and all of the documents that have been or may be incorporated by
reference herein (other than exhibits to such documents which are not
specifically incorporated by reference into such documents). Such requests
should be directed to Commerce Bancorp, Inc., Commerce Atrium, 1701 Route 70
East, Cherry Hill, New Jersey 08034-5400, Attention: C. Edward Jordan, Jr.,
Executive Vice President; telephone (609) 751-9000.
-5-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. As used herein, (i) the
"Indenture" means the Indenture, to be dated as of June 6, 1997, as amended and
supplemented from time to time, between the Corporation and Wilmington Trust
Company, as trustee (the "Debenture Trustee"), relating to the Junior
Subordinated Debentures, (ii) the "Trust Agreement" means the Amended and
Restated Declaration of Trust relating to the Trust among the Corporation, as
Sponsor, Wilmington Trust Company, as Property Trustee (the "Property Trustee"),
Wilmington Trust Company, as Delaware Trustee (the "Delaware Trustee"), and the
Administrative Trustees named therein (collectively, with the Property Trustee,
the Delaware Trustee and the Administrative Trustees, the "Issuer Trustees") and
(iii) the "Guarantee" means the Guarantee Agreement relating to the Capital
Securities between the Corporation and Wilmington Trust Company, as Guarantee
Trustee (the "Guarantee Trustee").
Commerce Bancorp, Inc.
Commerce Bancorp, Inc. (the "Corporation" or the "Company") is a
multi-bank holding company headquartered in Cherry Hill, New Jersey which
operates three nationally chartered bank subsidiaries and one New Jersey
chartered bank subsidiary: Commerce Bank, N.A.("Commerce NJ"), Cherry Hill, New
Jersey, Commerce Bank/Pennsylvania, N.A. ("Commerce PA"), Devon Pennsylvania,
Commerce Bank/Shore, N.A. ("Commerce Shore"), Toms River, New Jersey and
Commerce Bank/North ("Commerce North"), Ramsey, New Jersey (Commerce NJ,
Commerce PA, Commerce Shore and Commerce North are herein collectively referred
to as the "Banks"). These four bank subsidiaries have 45 retail branch offices
in Southern New Jersey, 9 retail branch offices in Northern New Jersey and 14
retail branch offices in Metropolitan Philadelphia. As of March 31, 1997, the
Company, on a consolidated basis, had total assets of approximately $3.3
billion, total deposits of approximately $3.1 billion and total stockholders'
equity of approximately $204.3 million.
The Company provides a full range of retail and commercial banking
services for consumers and small and mid-sized companies. Lending services are
focused on commercial real estate and commercial and consumer loans to local
borrowers. The Company's lending and investment activities are funded
principally by retail deposits gathered through its retail branch office
network.
Commerce National Insurance Services, Inc., a wholly-owned subsidiary
of Commerce North ("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 many
states, primarily New Jersey and Pennsylvania.
The Company maintains its executive office at 1701 Route 70 East,
Cherry Hill, New Jersey, 08034-5400; telephone (609) 751-9000.
See "Selected Consolidated Financial Data" and "Commerce Bancorp, Inc."
-6-
<PAGE>
Commerce Capital Trust I
The Trust is a statutory business trust formed under Delaware law upon
the filing of a certificate of trust with the Delaware Secretary of State. The
Trust's business and affairs are conducted by the Issuer Trustees: the Property
Trustee, the Delaware Trustee, and the three individual Administrative Trustees,
who are officers of the Corporation. The Trust exists for the exclusive purposes
of (i) issuing and selling the Trust Securities, (ii) using the proceeds from
the sale of the Trust Securities to acquire the Junior Subordinated Debentures
issued by the Corporation and (iii) engaging in only those other activities
necessary, advisable or incidental thereto. The Junior Subordinated Debentures
will be the sole assets of the Trust and, accordingly, payments under the Junior
Subordinated Debentures will be the sole revenue of the Trust. All of the Common
Securities will be owned by the Corporation. See "Commerce Capital Trust I."
-7-
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered........................ $50,000,000 aggregate Liquidation Amount of 8-3/4% Capital
Securities (Liquidation Amount $25.00 per Capital Security).
Offering Price............................ $25.00 per Capital Security.
Distribution Dates........................ March 31, June 30, September 30 and December 31 of each year, commencing
September 30, 1997.
Extension Periods......................... So long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, Distributions on Capital Securities will be
deferred for the duration of any Extension Period elected by the
Corporation with respect to the payment of interest on the Junior
Subordinated Debentures. No Extension Period will exceed 20 consecutive
quarterly periods, end on a date other than an Interest Payment Date or
extend beyond the Stated Maturity Date. If a deferral of interest
payments occurs, the holders of Capital Securities will be required to
include deferred interest income in their gross income for United
States federal income tax purposes in advance of any corresponding cash
distributions. See "Description of Junior Subordinated Debentures --
Option to Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
Ranking................................... The Capital Securities will rank pari passu, and payments thereon will
be made pro rata, with the Common Securities except as described under
"Description of Capital Securities -- Subordination of Common
Securities." The Junior Subordinated Debentures will rank pari passu
with all other junior subordinated debentures (if any) issued by the
Corporation (the "Other Debentures"), which are issued and sold (if at
all) to other trusts established by the Corporation (if any), in each
case similar to the Trust ("Other Trusts"), and will constitute
unsecured obligations of the Corporation and will rank subordinate and
junior in right of payment to all Senior Indebtedness to the extent and
in the manner set forth in the Indenture. See "Description of Junior
Subordinated Debentures." The Guarantee will rank pari passu with all
other guarantees (if any) issued by the Corporation with respect to
capital securities (if any) issued by Other Trusts ("Other Guarantees")
and will constitute an unsecured obligation of the Corporation and will
rank subordinate and junior in right of payment to all Senior
Indebtedness to the extent and in the manner set forth in the Guarantee
Agreement. See "Description of Guarantee." In addition, because the
Corporation is a holding company, the Junior Subordinated Debentures
and the Guarantee will effectively be subordinated to all existing and
future liabilities of the Corporation's subsidiaries, including the
Bank's
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
deposit liabilities. See "Description of Junior Subordinated
Debentures--Subordination."
Redemption.............................. The Trust Securities will be subject to mandatory redemption in a Like
Amount, (i) in whole but not in part, on the Stated Maturity Date upon
repayment of the Junior Subordinated Debentures, (ii) in whole but not
in part, at any time prior to June 30, 2002, contemporaneously with the
optional prepayment of the Junior Subordinated Debentures by the
Corporation upon the occurrence and continuation of a Special Event (as
defined herein) and (iii) in whole or in part, on or after June 30, 2002,
contemporaneously with the optional prepayment by the Corporation of
all or part of the Junior Subordinated Debentures, in each case at the
Redemption Price (i.e. 100% of the principal amount of, plus accrued
and unpaid Distributions on, the Junior Subordinated Debentures to be
prepaid). See "Description of Capital Securities -- Redemption" and
"Description of Junior Subordinated Debentures -- Special Event
Prepayment."
NYSE Symbol............................. Application will be made to have the Capital Securities approved for
quotation on the New York Stock Exchange ("NYSE") under the symbol
"CBHPT." See "Underwriting."
Use of Proceeds......................... All of the proceeds from the sale of the Trust Securities will be
invested by the Trust in the Junior Subordinated Debentures. The
Corporation intends to use the net proceeds from the sale of the Junior
Subordinated Debentures for general corporate purposes, including
contributions to the Banks to fund its operations and the financing of
one or more future acquisitions by the Corporation. Initially, the net
proceeds may be used to make investments in short average-life
securities. See "Use of Proceeds."
ERISA Considerations.................... Prospective investors must carefully consider the information set forth
under "ERISA Considerations."
Risk Factors............................ For a discussion of considerations relevant to an investment in the
Capital Securities which should be carefully considered by prospective
investors, see "Risk Factors" beginning on page 10.
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in
connection with the financial information included elsewhere herein and the
Company's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1997.
See "Available Information" and "Incorporation of Certain Documents by
Reference." The former Independence Bancorp, Bergen County, New Jersey, was
merged into the Company on January 21, 1997, and its wholly-owned subsidiary
bank, Independence Bank of New Jersey, was thereafter renamed Commerce
Bank/North. The transaction was accounted for as a pooling of interests. The
Company's originally reported results of operations have been restated herein to
include Commerce North's results of operations for all periods presented.
Interim unaudited data for the three-month periods ended March 31, 1997 reflect,
in the opinion of management of the Corporation, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of such
data. Results for the three months ended March 31, 1997 are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole.
<TABLE>
<CAPTION>
At March 31, Year Ended December 31,
---------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except per share
data)
Income Statement Data:
Net interest income................ $ 34,466 $ 28,973 $ 125,413 $ 109,899 $ 102,997 $ 81,432 $ 62,183
Provision for loan losses.......... 1,626 794 4,857 2,774 5,224 8,616 8,983
Noninterest income................. 12,949 7,245 32,776 23,623 19,591 20,677 14,735
Noninterest expense................ 31,206 24,323 109,031 89,316 82,734 68,785 52,479
Income before income taxes......... 14,583 11,101 44,301 41,432 34,630 24,708 15,456
Net income......................... 9,434 7,161 28,250 26,652 22,145 15,824 11,020
Balance Sheet Data:
Total assets....................... $3,345,298 $2,805,904 $3,232,152 $ 2,738,587 $2,571,704 $2,291,545 $1,671,143
Loans (net)........................ 1,286,235 1,073,523 1,248,880 1,032,801 916,437 811,580 730,003
Securities available for sale...... 812,418 630,537 767,487 571,553 126,437 191,881 341,918
Securities held to maturity........ 864,132 770,978 837,512 772,999 1,257,551 1,001,040 346,524
Trading securities................. 8,165 5,150 15,327 8,843
Federal funds sold................. 25,650 28,065 26,975 42,370 18,300 23,675 58,800
Deposits........................... 3,072,459 2,590,329 2,919,670 2,529,186 2,099,247 1,989,598 1,567,214
Long-term debt..................... 26,077 27,103 26,333 27,359 28,385 28,954 6,520
Stockholders' equity............... 204,321 178,773 203,964 179,695 126,582 112,810 95,121
Per Share Data:
Net income-primary................. $ 0.57 $ 0.49 $ 1.87 $ 1.88 $ 1.83 $ 1.34 $ 1.05
Net income-fully diluted........... 0.56 0.45 1.76 1.77 1.66 1.25 1.03
Cash dividends..................... 0.20 0.16 0.66 0.58 0.53 0.41 0.35
Book value......................... 12.80 12.97 12.65 13.15 10.74 9.37 8.12
Average shares outstanding:
Primary......................... 16,292 14,016 14,679 13,558 11,222 10,222 8,859
Fully diluted................... 16,908 15,365 16,037 15,024 13,218 12,519 10,680
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
At March 31, Year Ended December 31,
---------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios:
Performance
Return on average assets............ 1.17% 1.03% 0.96% 1.01% 0.89% 0.79% 0.73%
Return on average equity............ 18.26 15.83 15.43 16.57 18.54 15.55 13.94
Net interest margin................. 4.78 4.67 4.72 4.58 4.51 4.50 4.55
Liquidity and Capital
Average loans to average deposits... 43.33% 41.67% 42.84% 41.92% 43.24% 44.23% 50.91%
Dividend payout..................... 35.09 32.65 35.23 30.99 28.93 30.33 33.18
Stockholders' equity to total assets 6.11 6.37 6.31 6.56 4.92 4.92 5.69
Risk-based capital:
Tier 1........................... 12.65 12.65 12.57 12.64 10.04 9.13 9.49
Total............................ 15.17 15.42 15.09 15.49 13.08 12.20 10.74
Leverage capital.................... 6.58 6.47 6.46 6.43 4.93 4.59 5.53
Asset Quality
Non-performing assets to total
year-end assets.................... 0.56% 0.71% 0.60% 0.81% 1.05% 1.48% 2.59%
Net charge-offs to average loans
outstanding......................... 0.02 0.21 0.25 0.14 0.35 1.19 1.22
Non-performing loans to total
year-end loans...................... 0.82 0.93 0.89 0.97 1.64 1.44 3.21
Allowance for loan losses to total
year-end loans..................... 1.50 1.49 1.42 1.53 1.58 1.52 1.65
Allowance for loan losses to
non-performing loans............... 183.00 160.00 159.88 156.72 96.26 105.53 51.38
</TABLE>
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RISK FACTORS
Prospective purchasers of the Capital Securities should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the following matters. Information contained in this Prospectus
contains "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 which can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
"projected," "contemplates" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology. See, e.g., "Recent Developments."
No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results
contemplated by such forward-looking statements. Other factors, such as the
general state of the economy, could also cause actual results to vary
materially from the future results contemplated by such forward-looking
statements.
Ranking of Subordinated Obligations Under the Guarantee and the
Junior Subordinated Debentures; Limitations on Source of Funds
The obligations of the Corporation under the Guarantee issued by it for
the benefit of the holders of Capital Securities, as well as under the Junior
Subordinated Debentures, will be unsecured and will rank subordinate and junior
in right of payment to all Senior Indebtedness to the extent and in the manner
set forth in the Guarantee and the Indenture, respectively. No payment may be
made of the principal of, or premium, if any, or interest on the Junior
Subordinated Debentures, or in respect of any redemption, retirement, purchase
or other acquisition of any of the Junior Subordinated Debentures, at any time
when (i) there shall have occurred and be continuing a default in any payment
in respect of any Senior Indebtedness, or there has been an acceleration of the
maturity thereof because of a default, or (ii) in the event of the acceleration
of the maturity of the Junior Subordinated Debentures, until payment has been
made on all Senior Indebtedness. At March 31, 1997, the Corporation had $26.1
million of Senior Indebtedness outstanding. Because the Corporation is a
holding company, the right of the Corporation to participate in any
distribution of assets of any subsidiary upon such subsidiary's liquidation or
reorganization or otherwise (and thus the ability of holders of the Capital
Securities to benefit indirectly from such distribution) is subject to the
prior claims of creditors of that subsidiary (including depositors, in the case
of the Banks), except to the extent that the Corporation may itself be
recognized as a creditor of that subsidiary. At March 31, 1997, the
subsidiaries of the Corporation had total liabilities (excluding liabilities
owed to the Corporation) of $25.0 million. Accordingly, the Junior Subordinated
Debentures effectively will be subordinated to all existing and future
liabilities of the Corporation's subsidiaries (including the Banks' deposit
liabilities, which aggregated $3.1 billion at March 31, 1997) and holders of
Junior Subordinated Debentures should look only to the assets of the
Corporation for payments on the Junior Subordinated Debentures. The Guarantee
will constitute an unsecured obligation of the Corporation and will rank
subordinate and junior in right of payment to all Senior Indebtedness in the
same manner as the Junior Subordinated Debentures. None of the Indenture, the
Guarantee or the Trust Agreement places any limitation on the amount of secured
or unsecured debt, including Senior Indebtedness, that the Corporation or any
of its subsidiaries may incur or issue. See "Description of Junior Subordinated
Debentures -- General," " -- Subordination" and "Description of Guarantee --
Status of the Guarantee."
The ability of the Trust to pay amounts due on the Capital Securities
is solely dependent upon the Corporation making payments on the Junior
Subordinated Debentures as and when required.
There are regulatory limitations on the payment of dividends to the
Corporation from the Banks. As of March 31, 1997, the Banks had approximately
$52.5 million of total capital available under applicable
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banking regulations for payment of dividends to the Corporation. The Office of
the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC") each have the power to prohibit the payment of dividends
under certain circumstances, including if such payment would constitute an
unsafe or unsound banking practice. In addition to restrictions on the payment
of dividends, the Banks are subject to certain restrictions imposed by federal
law on extensions of credit to, and certain other transactions with, the
Corporation and certain other affiliates, and on investments in stock or other
securities thereof. Such restrictions prevent the Corporation and such other
affiliates from borrowing from the Banks unless the loans are secured by various
types of collateral. Further, such secured loans, other transactions and
investments by the Banks are generally limited in amount as to the Corporation
and as to each of such other affiliates to 10% of the Banks' capital and surplus
and as to the Corporation and all of such other affiliates to an aggregate of
20% of the Banks' capital and surplus.
Option to Extend Interest Payment Period; Tax Consequences; Market Price
Consequences
So long as there is no Debenture Event of Default (as defined herein),
the Corporation will have the right under the Indenture to defer payments of
interest on the Junior Subordinated Debentures for a period not exceeding 20
consecutive quarterly periods with respect to each Extension Period, provided
that an Extension Period must end on an Interest Payment Date and may not extend
beyond the Stated Maturity Date. As a consequence of any such deferral,
quarterly Distributions on the Trust Securities will be deferred from the
relevant payment date for such Distributions during any such Extension Period
(and the amount of Distributions to which holders of the Trust Securities are
entitled will accumulate additional Distributions thereon at the rate of 8-3/4%
per annum, compounded quarterly, but not exceeding the interest rate then
accruing on the Junior Subordinated Debentures). During an Extension Period, the
Corporation generally will be prohibited from declaring or paying dividends on
the Corporation's capital stock. See "Description of Capital Securities --
Distributions."
Before the end of an Extension Period, the Corporation may further
extend such Extension Period, provided that such extension does not cause such
Extension Period to exceed 20 consecutive quarterly periods, end on a date other
than an Interest Payment Date or extend beyond the Stated Maturity Date. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid on the Junior Subordinated Debentures (together with interest
thereon at the annual rate of 8-3/4%, compounded quarterly, to the extent
permitted by applicable law), the Corporation may begin a new Extension Period,
subject to the above requirements. There is no limitation on the number of times
that the Corporation may begin an Extension Period. See "Description of Capital
Securities -- Distributions" and "Description of Junior Subordinated Debentures
- -- Option to Extend Interest Payment Date."
The Corporation has no plan to exercise its right to defer payments of
interest on the Junior Subordinated Debentures. However, should the Corporation
exercise its right to defer payments of interest on the Junior Subordinated
Debentures, each holder of Trust Securities will be required to accrue income
(as original issue discount ("OID")) in respect of the deferred stated interest
allocable to its Trust Securities for United States federal income tax purposes,
which will be allocated but not distributed to holders of Trust Securities. As a
result, each holder of Capital Securities will recognize income for United
States federal income tax purposes in advance of the receipt of cash and would
not receive the cash related to such income from the Trust if the holder
disposes of the Capital Securities prior to the record date for the payment of
Distributions thereafter. See "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount" and "--Sales of Capital Securities."
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If the Corporation exercises its right to defer payments of interest on
the Junior Subordinated Debentures, the market price of the Capital Securities
is likely to be affected. A holder that disposes of its Capital Securities
during an Extension Period, therefore, might not receive the same return on his
investment as a holder that continues to hold his Capital Securities. In
addition, the mere existence of the Corporation's right to defer payments of
interest on the Junior Subordinated Debentures may cause the market price of the
Capital Securities to be more volatile than the market prices of other
securities on which OID accrues and that are not subject to such deferrals.
Special Event Redemption
If a Special Event (including a Tax Event, a Regulatory Capital Event
or an Investment Company Event (in each case as defined under "Description of
Junior Subordinated Debentures -- Special Event Prepayment")) occurs before the
Initial Optional Prepayment Date, the Corporation will have the right to prepay
the Junior Subordinated Debentures in whole (but not in part) at the Prepayment
Price within 90 days following the occurrence of such Special Event and
therefore cause a mandatory redemption of the Trust Securities at the Redemption
Price. The exercise of such right is subject to the Corporation having received
any required regulatory approval. See "Description of Capital Securities --
Redemption."
Proposed Tax Legislation
On February 6, 1997, as part of President Clinton's Fiscal 1998 Budget
Proposal, the Clinton Administration proposed legislation that would, among
other things, deny an issuer a deduction for United States federal income tax
purposes for the payment of interest on instruments with characteristics similar
to the Junior Subordinated Debentures. If the proposed legislation were enacted
in its current form, it is not expected to apply to the Junior Subordinated
Debentures since the proposed effective date for this provision is the date of
"first committee action." There can be no assurances, however, that the proposed
legislation, if enacted, or similar legislation enacted after the date hereof
would not adversely affect the tax treatment of the Junior Subordinated
Debentures, resulting in a Tax Event, which may permit the Corporation, upon the
receipt of any required regulatory approval, to cause a redemption of the Trust
Securities at the Redemption Price by electing to prepay the Junior Subordinated
Debentures at the Prepayment Price. See "Description of Capital Securities --
Redemption" and "Description of Junior Subordinated Debentures -- Special Event
Prepayment." See also "Certain Federal Income Tax Consequences -- Proposed Tax
Law Changes."
Liquidation Distribution of Junior Subordinated Debentures
The Corporation will have the right to liquidate the Trust and cause
the Junior Subordinated Debentures to be distributed to the holders of the Trust
Securities. Under current United States federal income tax law, a distribution
of the Junior Subordinated Debentures upon the dissolution of the Trust would
not be a taxable event to holders of the Capital Securities. Upon the occurrence
of a Special Event, however, a dissolution of the Trust in which holders of the
Capital Securities receive cash would be a taxable event to such holders. See
"Certain Federal Income Tax Considerations -- Receipt of Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust."
Possible Adverse Effect on Market Prices
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Capital Securities if a termination of the Trust were to occur.
Accordingly, the Capital Securities or the Junior Subordinated Debentures
may trade at a discount from
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the price that the investor paid to purchase the Capital Securities offered
hereby. Because holders of the Capital Securities may receive the Junior
Subordinated Debentures in liquidation of the Trust and because Distributions
are otherwise limited to payments on the Junior Subordinated Debentures,
prospective purchasers of the Capital Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein. See "Description of Junior Subordinated Debentures."
Trading Characteristics of the Capital Securities
Application will be made to list the Capital Securities on the New York
Stock Exchange. The Capital Securities are a new issue of securities with no
established trading market. Accordingly, no assurance can be given as to the
development or liquidity of any market for the Capital Securities. See
"Underwriting."
The Capital Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder who disposes of his Capital Securities between
record dates for payments of distributions thereon will be required to include
accrued but unpaid interest in the event that such holder uses the accrual
method of tax accounting, or OID, if applicable (regardless of whether the
holder uses the cash or accrual method of tax accounting), on the Junior
Subordinated Debentures through the date of disposition in his taxable income
for United States federal income tax purposes (notwithstanding that the holder
may receive a separate payment from the purchaser with respect to accrued
interest), and to deduct that amount from the sales proceeds received (including
the separate payment, if any, with respect to accrued interest) for the Capital
Securities (or as to OID only, to add such amount to such holder's adjusted tax
basis in its Capital Securities). To the extent the selling price is less than
the holder's adjusted tax basis (which will include accrued but unpaid OID, if
any), a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses generally cannot be applied to offset ordinary income
for United States federal income tax purposes. See "Certain Federal Income Tax
Considerations -- Interest Income and Original Issue Discount" and "-- Sales of
Capital Securities."
Rights Under the Guarantee
The Guarantee will guarantee to the holders of the Capital Securities
the following payments, to the extent not paid by or on behalf of the Trust: (i)
any accumulated and unpaid Distributions required to be paid on the Capital
Securities, to the extent that the Trust has funds legally available therefor at
such time, (ii) the applicable Redemption Price with respect to the Capital
Securities called for redemption, to the extent that the Trust has funds legally
available therefor at such time and (iii) upon a voluntary or involuntary
termination, winding up or liquidation of the Trust (unless the Junior
Subordinated Debentures are distributed to holders of the Capital Securities),
the lesser of (a) the aggregate of the Liquidation Amount and all accumulated
and unpaid Distributions to the date of payment, to the extent that the Trust
has funds legally available therefor at such time and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Capital
Securities at such time, after the satisfaction of liabilities to creditors of
the Trust as provided by applicable law.
The holders of a majority in Liquidation Amount of the Capital
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Capital
Securities may institute a legal proceeding directly against the Corporation to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee or any other person or
entity. If the Corporation defaults on its obligation to pay
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amounts payable under the Junior Subordinated Debentures, the Trust will not
have sufficient funds for the payment of Distributions or amounts payable on
redemption of the Capital Securities or otherwise, and, in such event, holders
of the Capital Securities will not be able to rely upon the Guarantee for
payment of such amounts. Instead, if a Debenture Event of Default is
attributable to the failure of the Corporation to pay the principal of (or
premium, if any) or interest (including Additional Sums (as defined below) and
Compounded Interest (as defined below), if any) or Liquidated Damages, if any,
on the Junior Subordinated Debentures when such payment is due and payable, then
a holder of Capital Securities may institute a legal proceeding directly against
the Corporation for enforcement of payment to such holder of the principal of
(or premium, if any) or interest (including Additional Sums and Compounded
Interest, if any) or Liquidated Damages, if any, on such Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Capital Securities of such holder (a "Direct Action"). Notwithstanding any
payments to a holder of the Capital Securities by the Corporation in connection
with a Direct Action, the Corporation shall remain obligated to pay the
principal of (and premium, if any) and interest (including Additional Sums and
Compounded Interest, if any) or Liquidated Damages, if any, on the Junior
Subordinated Debentures, and the Corporation shall be subrogated to the rights
of the holder of such Capital Securities with respect to payments on the Capital
Securities to the extent of any payments made by the Corporation to such holder
in any Direct Action. Except as described herein, holders of Capital Securities
will not be able to exercise directly any other remedy available to the holders
of the Junior Subordinated Debentures or to assert directly any other rights in
respect of the Junior Subordinated Debentures. See "Description of Junior
Subordinated Debentures -- Enforcement of Certain Rights by Holders of Capital
Securities," "-- Debenture Events of Default" and "Description of Guarantee."
The Trust Agreement will provide that each holder of Capital Securities by
acceptance thereof agrees to the provisions of the Indenture.
Limited Voting Rights
Holders of the Capital Securities generally will have voting rights
relating only to the modification of the Capital Securities and the exercise of
the Trust's rights as holder of Junior Subordinated Debentures. Holders of the
Capital Securities will not be entitled to vote to appoint, remove or replace,
or to increase or decrease the number of, the Issuer Trustees, which voting
rights are vested exclusively in the holder of the Common Securities except upon
the occurrence of certain events described herein. The Property Trustee, the
Administrative Trustees and the Corporation may amend the Trust Agreement
without the consent of holders of the Capital Securities to ensure that the
Trust will be classified for United States federal income tax purposes as a
grantor trust. Holders of the Capital Securities will have no voting rights with
respect to any matters submitted to a vote of the Corporation's stockholders.
See "Description of Capital Securities -- Voting Rights; Amendment of the Trust
Agreement" and "-- Removal of Issuer Trustees."
Status of the Corporation as a Bank Holding Company
The Corporation is a holding company and almost all of the operating
assets of the Corporation are owned by the Corporation's subsidiaries. The
Corporation relies primarily on dividends from the Banks to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses. The Corporation is a legal entity separate and distinct from
its Subsidiaries. Holders of the Junior Subordinated Debentures should look only
to the Corporation for payments on the Junior Subordinated Debentures. There are
regulatory limitations on the payment of dividends directly or indirectly to the
Corporation from the Banks. In addition, the Banks are subject to certain
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates, and on
investments in stock or other securities thereof. Such restrictions prevent the
Corporation and such other affiliates from borrowing from the Banks unless the
loans are secured by various types of collateral.
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Further, such secured loans, other transactions and investments by the Banks are
generally limited in amount as to the Corporation and as to each of such other
affiliates to 10% of the Banks' capital and surplus and as to the Corporation
and all of such other affiliates to an aggregate of 20% of the Banks' capital
and surplus. Accordingly, the Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries.
Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors, in the case of the Banks), except to the extent the
Corporation may itself be recognized as a creditor of that subsidiary.
Accordingly, the Junior Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of the Corporation's subsidiaries
(including the Banks' deposit liabilities) and all liabilities of any future
subsidiaries of the Corporation. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Corporation or any
subsidiary, including Senior Indebtedness.
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COMMERCE BANCORP, INC.
General
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"). In 1987, the Company acquired Commerce Bank/Pennsylvania, N.A. ("Commerce
PA") and 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 headquartered 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
("Commerce 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 were thereafter merged to form Commerce National Insurance
Services, Inc. ("Commerce Insurance"). Commerce Insurance is currently a
wholly-owned subsidiary of Commerce North.
Effective December 1, 1996, a third insurance brokerage agency, Chesley
& Cline, Inc., Mount 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 or
the Corporation include Commerce NJ, Commerce PA, Commerce Shore, Commerce North
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.
NEITHER THE CAPITAL SECURITIES NOR THE JUNIOR SUBORDINATED DEBENTURES
ARE OBLIGATIONS OF OR GUARANTEED BY ANY BANK.
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
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Moorestown, and one office each in Absecon, Atco, Bellmawr, Berlin, Brigantine,
Cinnaminson, Glassboro, Gloucester Township, Haddonfield, Hammonton, Marmora,
Mount 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.
As of March 31, 1997, Commerce NJ had total assets of $2.2 billion,
total deposits of $2.0 billion and total stockholders' equity of $142.0 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.
Retail Banking Activities. Commerce NJ provides a broad range of retail
banking 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.
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 North, in making a loan.
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.
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 March 31, 1997, Commerce PA had
total assets of $407.8 million, total deposits of $385.7 million and total
stockholders' equity of $20.5 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
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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 the other three Commerce Banks. Commerce PA offers
trust services similar to Commerce NJ.
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 March 31, 1997, Commerce Shore had total
assets of $388.1 million, total deposits of $312.3 million and total
stockholders' equity of $21.3 million.
Commerce Shore provides retail and commercial banking services through
eight retail branch offices in Ocean County, New Jersey. It currently has two
offices in Toms River, and one office each in Barnegat, Bayville, Forked River,
Long Beach Island, Manahawkin and Stafford. Commerce Shore's deposits are
insured by the FDIC.
Commerce Shore generally provides the same retail and commercial
banking services and products as the other three Commerce Banks. Commerce Shore
does not offer trust services.
Commerce North
In January 1997, the Company acquired all of the issued and outstanding
shares of capital stock of Commerce North. As a result of this transaction,
Commerce North became a wholly-owned subsidiary of the Company.
Commerce North was organized as a state-chartered bank in 1982 and
commenced operations in 1983 under the name "Independence Bank of New Jersey".
As of March 31, 1997, Commerce North had total assets of $439.2 million, total
deposits of $364.1 million and total stockholders' equity of $28.0 million.
Commerce North provides retail and commercial banking services through
nine retail branch offices in Bergen and Passaic Counties, New Jersey. It
currently has one office each in Ramsey, Allendale, Ridgewood, Mahwah, Montvale,
Park Ridge, Hackensack, Hawthorne and Westwood. Commerce North's deposits are
insured by the FDIC.
Commerce North generally provides the same retail and commercial
banking services and products as the other three Commerce Banks. Commerce North
does not offer trust services.
Commerce Insurance
Commerce National Insurance Services, Inc. (a wholly-owned subsidiary
of Commerce North) 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
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of nine locations in New Jersey. Commerce Insurance places insurance for clients
in many states, primarily New Jersey and Pennsylvania.
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USE OF PROCEEDS
The proceeds to the Trust from the offering of the Trust Securities
will be $50,000,000. All of the proceeds from the sale of Trust Securities
will be invested by the Trust in the Junior Subordinated Debentures. The
estimated net proceeds of approximately $48,250,000 will be available to the
Corporation for general corporate purposes, including contributions to the Banks
to fund their operations, the financing of one or more future acquisitions by
the Corporation, repayment of indebtedness of the Company or the Banks,
investments in or extensions of credit to its subsidiaries, and the repurchase
of shares of the Company's outstanding Common Stock. From time to time, the
Corporation investigates, and holds discussions and negotiations in connection
with, possible transactions with other financial institutions and holding
companies thereof. As of the date of this Prospectus, the Corporation has not
entered into any agreements or understandings with respect to any such
acquisitions or any other material transactions of the type referred to above.
Initially, the net proceeds may be used to make investments in short
average-life securities.
-22-
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges
of the Corporation on a consolidated basis for the respective periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
------------------------ ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ----------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Excluding Deposits:
Net income...................... $ 9,434 $ 7,161 $ 28,250 $ 26,652 $ 22,145 $ 15,824 $ 11,020
Taxes........................... 5,149 3,940 16,051 14,780 12,485 8,884 4,436
Interest income................. 55,339 47,289 202,735 186,118 164,944 130,462 109,119
Interest expense................ 966 537 3,361 8,404 15,987 3,930
Ratio 16.10% 21.67% 14.18% 5.93% 3.17% 7.29% N/A
Including Deposits:
Net income...................... $ 9,434 $ 7,161 $ 28,250 $ 26,652 $ 22,145 $ 15,824 $ 11,020
Taxes........................... 5,149 3,940 16,051 14,780 12,485 8,884 4,436
Interest income................. 55,339 47,289 202,735 186,118 164,944 130,462 109,119
Interest expense................ 20,873 18,343 77,322 76,219 61,947 49,030 46,936
Ratio 1.70% 1.61% 1.57% 1.54% 1.56% 1.50% 1.33%
</TABLE>
For purposes of computing the ratios of earnings to fixed charges,
earnings represent net income before extraordinary items and cumulative effect
of changes in accounting principles plus applicable income taxes and fixed
charges. Fixed charges, excluding interest on deposits, include gross interest
expense (other than on deposits) and the proportion deemed representative of the
interest factor of rent expense, net of income from subleases. Fixed charges,
including gross interest on deposits, include all interest expense and the
proportion deemed representative of the interest factor of rent expense, net of
income from subleases.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a
subsidiary of the Corporation and, accordingly, the accounts of the Trust will
be included in the consolidated financial statements of the Corporation. The
Capital Securities will be shown as a separate line item within Long Term Debt
in the consolidated balance sheets of the Corporation, as "Corporation-Obligated
Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures of the Corporation" and appropriate disclosures
about the Capital Securities, the Guarantee and the Junior Subordinated
Debentures will be included in the notes to the consolidated financial
statements of the Corporation. For financial reporting purposes, the Corporation
will record Distributions payable on the Capital Securities as interest expense
in its consolidated statements of income.
-23-
<PAGE>
REGULATORY TREATMENT
The Company is required by the Federal Reserve to maintain certain
levels of capital for bank regulatory purposes. The proceeds from the sale of
the Capital Securities are expected to qualify as Tier 1 or core capital with
respect to the Company under the risk-based capital guidelines established by
the Federal Reserve. However, capital received from the proceeds of the sale of
the Capital Securities cannot constitute more than 25% of the total Tier 1
capital of the Company (the "25% Capital Limitation"). Amounts in excess of the
25% Capital Limitation will constitute Tier 2 or supplementary capital of the
Company.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company and its subsidiaries as of March 31, 1997, and as adjusted to give
effect to the consummation of the offering of the Capital Securities.
<TABLE>
<CAPTION>
Actual As Adjusted
--------------- ----------------
(In Thousands)
<S> <C> <C>
Long-Term Debt:
Obligation to Employee Stock Ownership Plan.............................. $ 3,007 $ 3,007
8 3/8% Subordinated Notes due 2003....................................... 23,000 23,000
Company-obligated mandatorily redeemable capital securities
of subsidiary trust holding solely junior subordinated
debentures of the Company (1)........................................ 50,000(3)
------------ ---------------
Total Long-Term Debt ............................................... 26,007 76,007
Stockholders' Equity:
Preferred Stock, 5,000,000 shares authorized:
Series C ESOP Cumulative Convertible Preferred, $1.00
stated value, 417,000 shares authorized, issued and
outstanding (liquidating preference: $18.00 per share
totaling $7,506,000).............................................. 7,506 7,506
Common Stock, par value $1.5625; authorized 20,000,000
shares, 15,721,180 shares issued..................................... 24,564 24,564
Capital in excess of par or stated value................................. 166,965 166,965
Retained earnings........................................................ 11,057 11,057
------------ ---------------
210,092 210,092
Less commitment to ESOP.................................................. 4,147 4,147
Less treasury stock, at cost (100,159 shares)............................ 1,624 1,624
------------ ---------------
Total Stockholders' Equity........................................... 204,321 204,321
------------ ---------------
Total Capitalization................................................. $ 230,328 $ 280,328
============ ===============
Capital Ratios:
Stockholders' Equity to Total Assets..................................... 6.11% 6.02%
Tier I Capital to Average Assets (Leverage).............................. 6.58 8.00
Tier I Capital to Risk-Adjusted Assets (2)............................... 12.65 15.16
Total Capital to Risk-Adjusted Assets (2)................................ 15.17 17.62
</TABLE>
-24-
<PAGE>
(1) As described herein, the sole assets of the Trust will be $50,000,000
principal amount of the Junior Subordinated Debentures issued by the
Company to the Trust (not including the $7,500,000 aggregate principal
amount of the Junior Subordinated Debentures to be purchased in the
event the Underwriters exercise their over-allotment option). The
Junior Subordinated Debentures will bear interest at a fixed rate of
8-3/4% and will mature on June 30, 2027, subject to the Maturity
Adjustment. The Company will own all of the Common Securities of the
Trust.
(2) Assumes net proceeds of the offering of the Capital Securities are
invested in assets with a 100% risk weighting under the risk-based
capital rules of the Federal Reserve.
(3) Does not reflect the up to $7,500,000 aggregate liquidation amount of
the Capital Securities subject to the Underwriters' over-allotment
option. See "Underwriting."
-25-
<PAGE>
COMMERCE CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law upon
the filing of a Certificate of Trust with the Delaware Secretary of State. The
Trust will be governed by the Trust Agreement. The Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, advisable or incidental thereto (such as registering the transfer of
the Trust Securities). The Junior Subordinated Debentures will be the sole
assets of the Trust, and, accordingly, payments under the Junior Subordinated
Debentures will be the sole revenues of the Trust. All of the Common Securities
will be owned by the Corporation. The Common Securities will rank pari passu,
and payments will be made thereon pro rata, with the Capital Securities, except
that if there is an event of default under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Corporation as holder of the
Common Securities to payments in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Capital Securities. See "Description of Capital
Securities--Subordination of Common Securities." The Corporation will acquire
Common Securities in a Liquidation Amount equal to at least 3% of the total
capital of the Trust. The Trust has a term of 30 years, but may terminate
earlier as provided in the Trust Agreement. The Trust's business and affairs are
conducted by the Issuer Trustees, each appointed by the Corporation as holder of
the Common Securities. The Issuer Trustees for the Trust will be Wilmington
Trust Company, as the Property Trustee, Wilmington Trust Company, as the
Delaware Trustee and three Administrative Trustees who are officers of the
Corporation. Wilmington Trust Company, as Property Trustee, will act as sole
indenture trustee under the Trust Agreement. Wilmington Trust Company will also
act as indenture trustee under the Guarantee and the Indenture. See "Description
of Guarantee" and "Description of Junior Subordinated Debentures." The holder of
the Common Securities or, if an Event of Default under the Trust Agreement has
occurred and is continuing, the holders of not less than a majority in
Liquidation Amount of the Capital Securities will be entitled to appoint, remove
or replace the Property Trustee and/or the Delaware Trustee. In no event will
the holders of the Capital Securities have the right to vote to appoint, remove
or replace the Administrative Trustees; such voting rights will be vested
exclusively in the holder of the Common Securities. The duties and obligations
of each Issuer Trustee are governed by the Trust Agreement. The Corporation, as
issuer of the Junior Subordinated Debentures, will pay all fees, expenses, debts
and obligations (other than the payment of principal, interest and premium, if
any, on the Trust Securities) related to the Trust and the offering of the
Capital Securities and will pay, directly or indirectly, all ongoing costs,
expenses and liabilities (other than the payment of principal, interest and
premium, if any, on the Trust Securities) of the Trust. The principal executive
office of the Trust is c/o Commerce Bancorp, Inc., Commerce Atrium, 1701 Route
70 East, Cherry Hill, NJ 08034-5400.
-26-
<PAGE>
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. The former Independence Bancorp, Bergen County, New Jersey,
was merged into the Company on January 21, 1997 and its wholly-owned subsidiary
bank, Independence Bank of New Jersey, was thereafter renamed Commerce
Bank/North. The transaction was accounted for as a pooling of interests. The
Company's originally reported results of operations have been restated herein to
include Commerce North's results of operations for all periods presented.
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 provisions for
loan losses and 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 15%. At December 31, 1996, the
Company had total assets of $3.2 billion, total loans of $1.3 billion, total
investment securities of $1.6 billion, and total deposits of $2.9 billion.
Average Balances and Net Interest Income
The following table 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 $2.68 billion, an increase of $271.1 million, or 11% over
1995. This increase resulted primarily from the increase in the average balance
of loans, which rose $175.6 million, and the average balance of investment
securities, which rose $97.9 million during 1996. 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 $359.2
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.
-27-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Earning Assets
- ---------------------------------------
Investment securities
Taxable $1,427,098 $93,501 6.55% $1,355,932 $89,644 6.61%
Tax-exempt 31,163 1,965 6.31 6,494 416 6.41
Trading 5,740 363 6.32 3,649 182 4.99
------------ ---------- ------- ------------ ---------- ------
Total investment securities 1,464,001 95,829 6.55 1,366,075 90,242 6.61
Federal funds sold 56,050 2,867 5.12 58,420 3,463 5.93
Loans
Mortgage and construction 624,168 57,029 9.14 553,144 52,218 9.44
Commercial 214,604 20,146 9.39 171,732 16,977 9.89
Consumer 316,017 27,183 8.60 251,385 22,673 9.02
Tax-exempt 7,269 740 10.18 10,230 1,058 10.34
------------ ---------- ------- ------------ ---------- ------
Total loans 1,162,058 105,098 9.04 986,491 92,926 9.42
------------ ---------- ------- ------------ ---------- ------
Total earning assets $2,682,109 $203,794 7.60% $2,410,986 $186,631 7.74%
============ ============
Sources of Funds
- ---------------------------------------
Interest-bearing liabilities
Regular savings $577,824 $12,907 2.23% $536,289 $12,609 2.35%
N.O.W. accounts 368,120 7,877 2.14 426,846 10,162 2.38
Money market plus 453,284 11,965 2.64 257,299 7,847 3.05
Time deposits 563,752 28,991 5.14 492,920 24,894 5.05
Public funds 212,468 12,221 5.75 204,617 12,303 6.01
------------ ---------- ------- ------------ ---------- ------
Total deposits 2,175,448 73,961 3.40 1,917,971 67,815 3.54
Other borrowed money 24,782 1,336 5.39 101,240 6,379 6.30
Long-term debt 23,000 2,025 8.80 23,000 2,025 8.80
------------ ---------- ------- ------------ ---------- ------
Total deposits and interest-bearing
liabilities 2,223,230 77,322 3.48 2,042,211 76,219 3.73
Noninterest-bearing funds (net) 458,879 368,775
------------ ---------- ------- ------------ ---------- ------
Total sources to fund earning assets $2,682,109 77,322 2.88 $2,410,986 76,219 3.16
============ ---------- ------- ============ ---------- ------
Net interest income and
margin tax-equivalent basis 126,472 4.72 110,412 4.58
Tax-exempt adjustment 1,059 513
---------- ----------
Net interest income and margin $125,413 4.68% $109,899 4.56%
========== ======= ========== ======
Other Balances
- ---------------------------------------
Cash and due from banks $147,768 $130,693
Other assets 141,848 122,913
Total assets 2,954,851 2,648,625
Demand deposits (noninterest-bearing) 537,079 435,311
Other liabilities 11,488 10,302
Stockholders' equity 183,055 160,801
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1994
----------------------------------
Average Average
Balance Interest Rate
----------------------------------
<S> <C> <C> <C>
(dollars in thousands)
Earning Assets
- ---------------------------------------
Investment securities
Taxable $1,394,624 $88,032 6.31%
Tax-exempt 961 103 10.72
Trading
------------ ---------- ------
Total investment securities 1,395,585 88,135 6.32
Federal funds sold 24,106 971 4.03
Loans
Mortgage and construction 500,646 44,608 8.91
Commercial 153,009 13,079 8.55
Consumer 209,239 17,484 8.36
Tax-exempt 10,608 1,079 10.17
------------ ---------- ------
Total loans 873,502 76,250 8.73
------------ ---------- ------
Total earning assets $2,293,193 $165,356 7.21%
============
Sources of Funds
- ---------------------------------------
Interest-bearing liabilities
Regular savings $577,191 $13,396 2.32%
N.O.W. accounts 359,611 6,647 1.85
Money market plus 195,672 4,649 2.38
Time deposits 433,931 17,566 4.05
Public funds 92,615 3,702 4.00
------------ ---------- ------
Total deposits 1,659,020 45,960 2.77
Other borrowed money 321,598 13,962 4.34
Long-term debt 23,000 2,025 8.80
------------ ---------- ------
Total deposits and interest-bearing
liabilities 2,003,618 61,947 3.09
Noninterest-bearing funds (net) 289,575
------------ ---------- ------
Total sources to fund earning assets $2,293,193 61,947 2.70
============ ---------- ------
Net interest income and
margin tax-equivalent basis 103,409 4.51
Tax-exempt adjustment 412
----------
Net interest income and margin $102,997 4.49%
========== ======
Other Balances
- ---------------------------------------
Cash and due from banks $105,423
Other assets 112,837
Total assets 2,497,502
Demand deposits (noninterest-bearing) 361,311
Other liabilities 13,105
Stockholders' equity 119,469
</TABLE>
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.
-28-
<PAGE>
Net Interest Income and Net Interest Margin
Net interest margin on a tax-equivalent basis was 4.72% 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 $126.5 million, an increase of
$16.1 million, or 15%, over 1995. Interest income on a tax-equivalent basis
increased to $203.8 million from $186.6 million, or 9%. This increase was
primarily related to volume increases in the loan portfolio. Interest expense
for 1996 rose only $1.1 million to $77.3 million, from $76.2 million in 1995.
The tax-equivalent yield on interest earning assets during 1996 was 7.60%,
a decrease of 14 basis points from 7.74% 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 25 basis points in 1996
to 3.48% from 3.73%, which offset higher levels of deposits. The decrease in
cost of interest-bearing liabilities resulted from slightly lower general 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 28 basis points in 1996 to 2.88% from 3.16%.
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.
-29-
<PAGE>
<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
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Interest on
investments:
Taxable $ 4,663 $ (806) $ 3,857 $ (2,558) $ 4,170 $ 1,612
Tax-exempt 1,556 (7) 1,549 354 (41) 313
Trading 132 49 181 182 182
Federal
funds sold (121) (475) (596) 2,034 458 2,492
Interest on
loans:
Mortgage &
construction 6,489 (1,678) 4,811 4,956 2,654 7,610
Commercial 4,025 (856) 3,169 1,851 2,047 3,898
Consumer 5,559 (1,049) 4,510 3,801 1,388 5,189
Tax-exempt (301) (17) (318) (39) 18 (21)
- -----------------------------------------------------------------------------------------------------------------------
Total interest
income 22,002 (4,839) 17,163 10,581 10,694 21,275
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Regular
savings 928 (630) 298 (962) 175 (787)
N.O.W.
accounts (1,257) (1,028) (2,285) 1,601 1,914 3,515
Money
market plus 5,173 (1,055) 4,118 1,879 1,319 3,198
Time
deposits 3,643 454 4,097 2,979 4,349 7,328
Public funds 452 (534) (82) 6,734 1,867 8,601
Other borrowed
money (4,122) (921) (5,043) (13,884) 6,301 (7,583)
- ------------------------------------------------------------------------------------------------------------------------
Total interest
expense 4,817 (3,714) 1,103 (1,653) 15,925 14,272
- ------------------------------------------------------------------------------------------------------------------------
Net increase $ 17,185 $ (1,125) $ 16,060 $ 12,234 $ (5,231) $ 7,003
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
-30-
<PAGE>
Noninterest Income
For 1996, noninterest income totaled $32.8 million, an increase of $9.2
million from 1995. Deposit charges and service fees increased $4.2 million due
primarily to transaction volumes. The $3.4 million increase in other operating
income to $9.3 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 in 1996. Securities gains
increased to $1.7 million in 1996 from $106 thousand in 1995.
Noninterest Expenses
Noninterest expenses totaled $109.0 million for 1996, an increase of
$19.7 million, or 22% over 1995. Contributing to this increase was the addition
of nine new branches and the formation of Commerce National 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 $548 thousand or 15% to $3.2 million in spite of the one-time
special assessment of approximately $1.3 million to recapitalize SAIF. Other
real estate expenses totaled $2.3 million, a decrease of $519 thousand from
1995, reflecting lower levels of other real estate for 1996. Other noninterest
expenses rose $3.1 million to $14.3 million in 1996. Higher bank card related
service charges, higher provisions for non-credit-related losses, and merger
related expenses 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 66.95%, 64.81% and 64.88% 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.
Income Taxes
The provision for federal and state income taxes for 1996 was $16.1
million compared to $14.8 million in 1995 and $12.5 million in 1994.
The increase in 1996 total tax expense was primarily the result of an
increase in income before income taxes. The effective tax rate was 36.2%, 35.7%
and 36.1% in 1996, 1995, and 1994, respectively.
Net Income
Net income for 1996 was $28.3 million, an increase of $1.6 million, or
6% over the $26.7 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 provisions for loan losses and
increased noninterest expenses.
Fully diluted net income per share of common stock for 1996 was $1.76
compared to $1.77 per common share for 1995.
-31-
<PAGE>
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 .96%, compared to 1.01% 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 15.43%
compared to 16.57% 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
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial real estate:
Owner-occupied $167,702 $149,258 $151,420 $157,452 $146,739
Other 288,733 250,782 215,063 171,282 146,399
Construction 52,372 52,593 53,792 49,811 40,439
- ---------------------------------------------------------------------------------------------------------------------
508,807 452,633 420,275 378,545 333,577
Commercial:
Term 153,793 126,120 106,536 117,649 121,650
Line of credit 91,418 68,372 54,379 41,329 34,325
Demand 529 407 766 1,118 1,697
- ---------------------------------------------------------------------------------------------------------------------
245,740 194,899 161,681 160,096 157,672
Consumer:
Mortgages
(1-4 family residential) 153,615 133,893 111,689 92,049 91,977
Installment 54,548 44,781 32,447 28,012 35,552
Home equity 293,591 212,845 195,362 155,206 113,678
Credit lines 10,554 9,764 9,649 10,187 9,786
- ---------------------------------------------------------------------------------------------------------------------
512,308 401,283 349,147 285,454 250,993
- ---------------------------------------------------------------------------------------------------------------------
Total loans $1,266,855 $1,048,815 $931,103 $824,095 $742,242
- ---------------------------------------------------------------------------------------------------------------------
</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
-32-
<PAGE>
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 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.
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 Due in Over
Year or Less To Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Real Estate:
Commercial $84,859 $302,059 $69,517 $456,435
Construction 44,719 7,158 495 52,372
- ---------------------------------------------------------------------------------------------------------------------
129,578 309,217 70,012 508,807
Commercial:
Term 52,659 89,288 11,846 153,793
Line of credit 84,851 6,567 0 91,418
Demand 507 22 0 529
- ---------------------------------------------------------------------------------------------------------------------
138,017 95,877 11,846 245,740
Consumer:
Mortgages
(1-4 family residential) 22,171 34,661 96,783 153,615
Installment 19,772 27,553 7,223 54,548
Home equity 29,632 109,200 154,759 293,591
Credit lines 3,761 6,263 530 10,554
- ---------------------------------------------------------------------------------------------------------------------
75,336 177,677 259,295 512,308
- ---------------------------------------------------------------------------------------------------------------------
Total loans $342,931 $582,771 $341,153 $1,266,855
- ---------------------------------------------------------------------------------------------------------------------
Interest rates:
Predetermined $121,736 $367,497 $198,709 $687,942
Floating 221,195 215,274 142,444 578,913
- ---------------------------------------------------------------------------------------------------------------------
Total loans $342,931 $582,771 $341,153 $1,266,855
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
During 1996, loans increased $218.0 million, or 21% from $1.0 billion
to $1.3 billion. At December 31, 1996, loans represented 43% of total deposits
and 39% 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 37%, 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 $221 thousand to
$52.4 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 $43.0 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 $19.5 million or .60% of total assets, as compared to
$22.1 million or .81% 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 $11.3 million as compared to $10.2 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 $259 thousand, compared
to $159 thousand at December 31, 1995. Additional loans considered as potential
problem loans ($13.6 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 $8.3 million at December 31, 1996 as
compared to $11.9 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.
-34-
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Non-accrual loans (1):
Commercial $1,263 $1,623 $3,925 $6,109 $12,944
Consumer 1,145 978 1,755 2,109 3,072
Real estate:
Construction 2,156 1,787 955 866 1,823
Mortgage 6,157 5,308 8,025 4,881 9,033
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 10,721 9,696 14,660 13,965 26,872
- --------------------------------------------------------------------------------------------------------------------
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 11,252 10,218 15,236 14,133 26,872
- --------------------------------------------------------------------------------------------------------------------
Other real estate 8,252 11,862 11,739 19,825 16,451
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $19,504 $22,080 $26,975 $33,958 $43,323
====================================================================================================================
Non-performing assets as a percent
of total assets 0.60% 0.81% 1.05% 1.48% 2.59%
- --------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing interest $259 $159 $400 $450 $1,840
-------------------------------------------------------------------
</TABLE>
(1) Interest income of approximately $1,226,000, $1,079,000, $1,496,000,
$912,000, and $2,284,000 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.
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.
-35-
<PAGE>
During 1996, net charge-offs amounted to $2.9 million, or .25% of
average loans outstanding for the year, compared to $1.4 million or .14% of
average loans outstanding for 1995. During 1996, the Company recorded provisions
of $4.9 million to the allowance for loan losses compared to $2.8 million for
1995. At December 31, 1996, the allowance aggregated $18.0 million or 1.42% of
total loans and provided coverage of 160% 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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Balance at beginning of period $16,014 $14,666 $12,515 $12,239 $12,083
Provisions charged to operating expenses 4,857 2,774 5,224 8,616 8,983
----------------------------------------------------------------
20,871 17,440 17,739 20,855 21,066
Recoveries of loans previously charged-off:
Commercial 286 486 335 545 911
Consumer 274 243 247 408 157
Real estate 95 292 23 133 58
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 655 1,021 605 1,086 1,126
- --------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial (1,202) (1,253) (2,608) (7,501) (4,454)
Consumer (1,046) (771) (683) (1,917) (1,582)
Real estate (1,303) (423) (387) (1,008) (3,917)
- --------------------------------------------------------------------------------------------------------------------
Total charged-off (3,551) (2,447) (3,678) (10,426) (9,953)
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs (2,896) (1,426) (3,073) (9,340) (8,827)
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses acquired bank 1,000
- --------------------------------------------------------------------------------------------------------------------
Balance at end of period $17,975 $16,014 $14,666 $12,515 $12,239
====================================================================================================================
Net charge-offs as a percentage of
average loans outstanding 0.25% 0.14% 0.35% 1.19% 1.22%
----------------------------------------------------------------
Allowance for loan losses as a
percentage of year-end loans 1.42% 1.53% 1.58% 1.52% 1.65%
----------------------------------------------------------------
</TABLE>
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.
-36-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Allowance for Loan Losses at December 31,
=======================================================================================================
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross
Amount Loans Amount Loans Amount Loans
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial $ 3,375 19% $ 3,364 19% $ 3,105 18%
Consumer 4,081 41 3,321 38 2,707 37
Real Estate 10,519 40 9,329 43 8,854 45
- -------------------------------------------------------------------------------------------------------
$17,975 100% $16,014 100% $14,666 100%
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Allowance for Loan Losses at December 31,
================================================================================
1993 1992
- --------------------------------------------------------------------------------
% Gross % Gross
Amount Loans Amount Loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Commercial $ 3,247 19% $ 4,534 21%
Consumer 2,360 35 1,959 34
Real Estate 6,908 46 5,746 45
- --------------------------------------------------------------------------------
$12,515 100% $12,239 100%
================================================================================
</TABLE>
-37-
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
U.S. Government agency and mortgage-backed obligations................. $707,316 $555,813 $119,618
Obligations of state and political subdivisions........................ 15,743
Equity securities...................................................... 3,994 2,896 1,959
Other.................................................................. 40,434 12,844 4,860
- --------------------------------------------------------------------------------------------------------------------
Securities available for sale.......................................... $767,487 $571,553 $126,437
====================================================================================================================
U.S. Government agency and mortgage-backed obligations................. $798,345 $738,511 $1,225,477
Obligations of state and political subdivisions........................ 22,674 17,597 865
Other.................................................................. 16,493 16,891 31,209
- --------------------------------------------------------------------------------------------------------------------
Securities held to maturity............................................ $837,512 $772,999 $1,257,551
====================================================================================================================
</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.
-38-
<PAGE>
In total, investment securities increased $266.9 million from $1.35
billion to $1.62 billion at December 31, 1996. Net security purchases of
approximately $582.4 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 $401.8 million of investment securities from the "held to maturity"
category to the "available for sale" category as of December 31, 1995. In
addition, management reclassified $83.8 million of investment securities from
held to maturity to the "available for sale" category during the first quarter
of 1997 in connection with its acquisition of Independence Bancorp, Inc. The
reclassification of these securities should provide increased flexibility in
managing interest rate risk, portfolio yields, and liquidity.
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 6.55%, a decrease of six basis points from 6.61% 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 approximately 6.2 years and 4.6
years, respectively. At December 31, 1996 the yield on the portfolio was 6.53%,
down slightly from 6.59% at December 31, 1995.
At December 31, 1996, the unrealized depreciation in securities
available for sale included in stockholders' equity totaled $5.8 million, net of
tax, compared to unrealized appreciation of $166 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.
-39-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Due Under Due Due Due Over
1 Year 1-5 Years 5-10 Years 10 Years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Securities available for sale:
U.S. Government agency
mortgage-backed obligations $42,132 5.91% $60,132 6.30% $61,651 5.72% $543,400 6.68% $707,315 6.51%
State and municipal bonds....... 1,422 5.94 7,472 6.30 6,849 7.14 15,743 6.63
Other securities................ 40,435 4.48 40,435 4.48
- ---------------------------------------------------------------------------------------------------------------------------------
$83,989 5.21% $67,604 6.07% $68,500 5.88% $543,400 6.68% $763,493 6.41%
=================================================================================================================================
Securities held to maturity:
U.S. Government agency
mortgage-backed obligations 3,746 4.90% $74,915 5.85% $19,470 6.45% $700,214 6.61% $798,345 6.53%
State and municipal bonds....... 22,373 5.81 301 7.70 22,674 5.83
Other securities................ 15,494 6.00 5 5.52 994 9.50 16,493 6.21
- ---------------------------------------------------------------------------------------------------------------------------------
$41,613 5.80% $75,221 5.86% $20,464 6.60% $700,214 6.61% $837,512 6.50%
=================================================================================================================================
</TABLE>
Deposits
Total deposits averaged $2.7 billion for 1996, an increase of $359.2
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 $390.5 million increase in total deposits at year end
1996, $345.2 million was in the various core categories. The average balance of
noninterest-bearing demand deposits in 1996 was $537.1 million, an $101.8
million or 23% increase over the average balance for 1995. The average total
balance of passbook and statement savings accounts increased $41.5 million, or
8% compared to the prior year. The average balance of interest-bearing demand
accounts (money market and N.O.W. accounts) for 1996 was $821.4 million, an
$137.3 million or 20% increase over the average balance for the prior year. The
average balance of time deposits for 1996 was $776.2 million, a $78.7 million or
11% increase over the average balance for 1995.
For 1996, the cost of total deposits was 2.73% as compared to 2.88% 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.
-40-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- ---------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Demand deposits:
Noninterest-bearing........... $537,079 $435,311 $361,311
Interest-bearing (money market
and N.O.W. accounts)....... 821,404 2.42% 684,145 2.63% 555,283 2.03%
Savings deposits.............. 577,824 2.23 536,289 2.35 577,191 2.32
Time deposits................. 776,220 5.31 697,537 5.33 526,546 4.04
-------------- ------------- -----------
Total deposits..................... $2,712,527 $2,353,282 $2,020,331
============== ============= ===========
</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.............. $240,188 $192,341 $100,207
3 to 6 months................. 30,767 8,276 18,454
6 to 12 months................ 7,297 31,918 4,503
Over 12 months................ 2,071 2,488 618
- -------------------------------------------------------------------------
Total......................... $280,323 $235,023 $123,782
============= ============ ============
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.
-41-
<PAGE>
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...................................... $515.6 $33.3 $65.4 $429.8 $212.9 $1,257.0
Investment securities...................... 98.6 42.2 93.1 559.7 826.7 1,620.3
Federal funds sold......................... 27.0 27.0
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets.............. 641.2 75.5 158.5 989.5 1,039.6 2,904.3
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities...............
Transaction accounts....................... 529.8 993.2 1,523.0
Time deposits.............................. 360.3 155.5 98.3 155.9 770.0
Other borrowed money....................... 70.0 70.0
Long-term debt............................. 23.0 23.0
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities......... 960.1 155.5 98.3 155.9 1,016.2 2,386.0
- -----------------------------------------------------------------------------------------------------------------
Period gap..................................... (318.9) (80.0) 60.2 833.6 23.4 $ 518.3
=================================================================================================================
Cumulative gap................................. $(318.9) $(398.9) $(338.7) $ 494.9 $ 518.3
=======================================================================================================
Cumulative gap as a percentage of
total interest-earning assets.............. (11.0)% (13.7)% (11.7)% 17.0% 17.8%
- -------------------------------------------------------------------------------------------------------
</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
-42-
<PAGE>
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 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.
-43-
<PAGE>
Stockholders' Equity and Dividends
At December 31, 1996, stockholders' equity totaled $204.0 million, up
$24.3 million or 14% over stockholders' equity of $179.7 million at December 31,
1995. This increase was primarily due to the Company's net income for the year,
as well as $6.6 million in capital raised through the issuance of common stock
pursuant to a rights offering. Stockholders' equity as a percent of total assets
was 6.31% at December 31, 1996, as compared to 6.56% 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.
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
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital ratios:
Tier 1....................................... 12.57% 12.64% 4.00% 4.00%
Total capital................................ 15.09 15.49 8.00 8.00
Leverage ratio............................... 6.46 6.43 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 National 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,
-44-
<PAGE>
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 $26.7 million compared to $22.1 million in
1994. Fully diluted net income per common share was $1.77 compared to $1.66 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
$110.4 million, an increase of $7.0 million, or 7% over 1994.
Interest income on a tax-equivalent basis increased $21.3 million or
13% to $186.6 million in 1995. This increase was primarily related to volume
increases and rate increases in the loan portfolio. Interest expense for 1995
rose $14.3 million to $76.2 million from $61.9 million in 1994. This 23%
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 $2.8 million in 1995 compared to $5.2
million in the prior year. The decrease in the provision for loan losses was
associated with the decrease in non-performing assets.
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For 1995, noninterest income totaled $23.6 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 $2.7 million due primarily to transaction
volumes. The $1.8 million increase in other operating income to $5.9 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 $89.3 million for 1995, an increase of
$6.6 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 $2.0 million to $3.7 million, due to the reduction in
Federal deposit insurance rates effective June 1, 1995. Other real estate
expenses totaled $2.8 million, a decrease of $770 thousand, reflecting lower
levels of other real estate for most of 1995.
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.
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DESCRIPTION OF CAPITAL SECURITIES
The Capital Securities will represent beneficial interests in the Trust
and the holders thereof will be entitled to a preference over the Common
Securities in certain circumstances with respect to Distributions and amounts
payable on redemption of the Trust Securities or liquidation of the Trust. See
"-- Subordination of Common Securities." The Trust Agreement is qualified under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). By its
terms, the Trust Agreement incorporates certain provisions of the Trust
Indenture Act and the Trust Agreement is subject to and governed by the Trust
Indenture Act. This summary of certain provisions of the Capital Securities, the
Common Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Trust Agreement, including the definitions therein of certain terms.
General
The Capital Securities will be limited to $50,000,000 aggregate
Liquidation Amount at any one time outstanding (which amount may be increased by
up to $7,500,000 aggregate Liquidation Amount of Capital Securities for exercise
of the Underwriters' over-allotment option). See "Underwriting." The Capital
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." Legal title to the Junior Subordinated Debentures will be held by
the Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee will not guarantee payment of Distributions or amounts
payable on redemption of the Capital Securities or liquidation of the Trust when
the Trust does not have funds legally available for such payments.
See "Description of Guarantee."
Distributions
Distributions on the Capital Securities will be cumulative, will
accumulate from June 9, 1997 and will be payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing September 30,
1997, at the annual rate of 8-3/4% of the Liquidation Amount to the holders of
the Capital Securities on the relevant record dates. The record dates will be
the 15th day of the month preceding the month in which the relevant Distribution
Date (as defined herein) falls. The amount of Distributions payable for any
period will be computed on the basis of a 360-day year of 12 30-day months and,
for any period of less than a full calendar month, the number of days elapsed in
such month. In the event that any date on which Distributions are payable on the
Capital Securities is not a Business Day (as defined below), payment of the
Distribution payable on such date will be made on the next succeeding day that
is a Business Day (and without any interest or other payment in respect to any
such delay), except that if such next succeeding Business Day falls in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date (each date on which Distributions are payable in accordance with
the foregoing, a "Distribution Date"). A "Business Day" shall mean any day other
than a Saturday or a Sunday, or a day on which banking institutions in New York,
New York or Philadelphia, Pennsylvania are authorized or required by law or
executive order to remain closed.
So long as no Debenture Event of Default shall have occurred and be
continuing, the Corporation will have the right under the Indenture to elect to
defer the payment of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided that no Extension Period shall
end on a date other than an Interest Payment Date or extend beyond the Stated
Maturity Date. Upon any such election, quarterly Distributions on
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the Capital Securities will be deferred by the Trust during such Extension
Period. Distributions to which holders of the Capital Securities are entitled
during any such Extension Period will accumulate additional Distributions
thereon at the rate per annum of 8-3/4% thereof, compounded quarterly from the
relevant Distribution Date, but not exceeding the interest rate then accruing on
the Junior Subordinated Debentures. The term "Distributions," as used herein,
shall include any such additional Distributions.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, to end
on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Corporation may elect
to begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Corporation must give the Property Trustee, the Administrative Trustees and
the Debenture Trustee notice of its election of any such Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Capital Securities would have been payable except
for the election to begin such Extension Period and (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or automated inter-dealer quotation system or to holders of such Capital
Securities of the record date or the date such Distributions are payable, but in
any event not less than five Business Days prior to such record date. There is
no limitation on the number of times that the Corporation may elect to begin an
Extension Period. See "Description of Junior Subordinated Debentures -- Option
to Extend Interest Payment Date" and "Certain Federal Income Tax Consequences --
Interest Income and Original Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal of or premium, if any, or interest on or
repay, repurchase or redeem any debt securities of the Corporation (including
Other Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation (including Other Guarantees) if such guarantee ranks pari passu
with or junior in right of payment to the Junior Subordinated Debentures (other
than (a) dividends or distributions in shares of, or options, warrants or rights
to subscribe for or purchase shares of, common stock of the Corporation, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) the purchase of fractional shares resulting
from a reclassification of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged and (f) purchases of common stock related to the
issuance of common stock or rights under any of the Corporation's benefit plans
for its directors, officers or employees or any of the Corporation's dividend
reinvestment plans). The Corporation has no current intention to exercise its
option to defer payments of interest on the Junior Subordinated Debentures.
The revenue of the Trust available for distribution to holders of the
Capital Securities will be limited to payments under the Junior Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. See "Description of Junior Subordinated Debentures
- -- General." If the Corporation does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Capital Securities. The payment of Distributions (if
and to the extent the Trust has funds legally available for the payment of such
Distributions) will be guaranteed by the Corporation on a limited basis as set
forth herein under "Description of Guarantee."
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Redemption
Upon the repayment on the Stated Maturity Date or prepayment in whole
or in part prior to the Stated Maturity Date of the Junior Subordinated
Debentures (other than following the distribution of the Junior Subordinated
Debentures to the holders of the Trust Securities), the proceeds from such
repayment or prepayment shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days notice of a date of redemption (the "Redemption Date"),
at the Redemption Price, which shall be equal to 100% of the principal of, and
accrued and unpaid Distributions on, the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Optional Prepayment" and "--
Special Event Prepayment." If less than all of the Junior Subordinated
Debentures are to be prepaid on a Redemption Date, then the proceeds of such
prepayment shall be allocated pro rata to the Trust Securities.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Junior Subordinated Debentures to be paid in accordance with their
terms and (ii) with respect to a distribution of Junior Subordinated Debentures
upon the liquidation of the Trust, Junior Subordinated Debentures having a
principal amount equal to the "Liquidation Amount" of the Trust Securities of
the holder to whom such Junior Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $25.00 per Trust Security.
The Corporation will have the option to prepay the Junior Subordinated
Debentures, (i) in whole or in part, on or after the Initial Optional Prepayment
Date, at the Prepayment Price and (ii) in whole but not in part, at any time
prior to the Initial Optional Prepayment Date, upon the occurrence of a Special
Event, at the Prepayment Price, in each case subject to the receipt of any
required regulatory approval. See "Description of Junior Subordinated Debentures
- -- Optional Prepayment" and "-- Special Event Prepayment."
Liquidation of the Trust and Distribution of Junior Subordinated Debentures
The Corporation will have the right at any time to terminate the Trust
and, after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to (i) the Corporation having received an opinion of counsel to the
effect that such distribution will not be a taxable event to holders of Capital
Securities and (ii) the receipt of any required regulatory approval.
The Federal Reserve's risk-based capital guidelines currently provide
that redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption should
consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a like
amount of a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption).
In the event the Company, while a holder of Common Securities,
terminates the Trust prior to the stated maturity of the Capital Securities and
the termination of the Trust is deemed to constitute the redemption of capital
instruments by the Federal Reserve under its risk-based capital guidelines or
policies, the termination of the Trust by the Company may be subject to the
prior approval of the Federal Reserve. Moreover, any changes in applicable law
or changes in the Federal Reserve's risk-based capital guidelines or policies
could
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impose a requirement on the Company that it obtain the prior approval of the
Federal Reserve to terminate the Trust.
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Junior Subordinated Debentures to
the holders of the Trust Securities, if the Corporation, as Sponsor, has given
written direction to the Property Trustee to terminate the Trust (which
direction is optional and, except as described above, wholly within the
discretion of the Corporation, as Sponsor); (iii) redemption of all of the Trust
Securities as described under "-- Redemption;" (iv) expiration of the term of
the Trust; and (v) the entry of an order for the dissolution of the Trust by a
court of competent jurisdiction.
If a termination occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practicable, in which event such holders will be entitled to receive out
of the assets of the Trust legally available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the aggregate of the Liquidation Amount plus accumulated
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust has insufficient assets legally available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Trust on the Trust Securities shall be paid on a pro rata basis, except
that if a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities. See "--
Subordination of Common Securities."
If the Corporation elects not to prepay the Junior Subordinated
Debentures prior to maturity in accordance with their terms and either elects
not to or is unable to liquidate the Trust and distribute the Junior
Subordinated Debentures to holders of the Trust Securities, the Trust Securities
will remain outstanding until the repayment of the Junior Subordinated
Debentures on the Stated Maturity Date.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities, (i) the Trust
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee
will receive, in respect of each registered global certificate, if any,
representing Trust Securities and held by it, a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution and (iii) any certificates representing Trust Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of such
Trust Securities, and bearing accrued and unpaid interest in an amount equal to
the accumulated and unpaid Distributions on such Trust Securities until such
certificates are presented to the Administrative Trustees or their agent for
cancellation, whereupon the Corporation will issue to such holder, and the
Debenture Trustee will authenticate, a certificate representing such Junior
Subordinated Debentures.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Trust, may trade at a discount to the price
that the investor paid to purchase the Capital Securities offered hereby.
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Redemption Procedures
If applicable, the Trust Securities shall be redeemed at the Redemption
Price with the proceeds from the contemporaneous repayment or prepayment of the
Junior Subordinated Debentures. Any redemption of the Trust Securities shall be
made and the Redemption Price shall be payable on the Redemption Date only to
the extent that the Trust has funds legally available for the payment of the
Redemption Price. See "-- Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are legally available, with respect to the Capital Securities
held by DTC or its nominees, the Property Trustee will deposit or cause the
Paying Agent (as defined herein) to deposit irrevocably with DTC funds
sufficient to pay the Redemption Price. With respect to the Capital Securities,
if any, held in certificated form, the Property Trustee, to the extent funds are
legally available, will irrevocably deposit with the paying agent for the
Capital Securities funds sufficient to pay the Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Capital Securities. See "-- Payment and Paying Agency." Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date shall be
payable to the holders of such Capital Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit, all
rights of the holders of the Capital Securities called for redemption will
cease, except the right of the holders of such Capital Securities to receive the
Redemption Price, but without interest on the Redemption Price, and such Capital
Securities will cease to be outstanding. In the event that any Redemption Date
of the Capital Securities is not a Business Day, then the Redemption Price
payable on such date will be paid on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such next succeeding Business Day falls in the next calendar
year, such payment shall be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price is improperly withheld or refused
and not paid either by the Trust or by the Corporation pursuant to the Guarantee
as described under "Description of Guarantee," (i) Distributions on the Capital
Securities will continue to accumulate at the then-applicable rate, from the
Redemption Date originally established by the Trust to the date the Redemption
Price is actually paid and (ii) the actual payment date will be the Redemption
Date for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days prior to the Redemption Date to each holder of the Trust Securities
at its registered address. Unless the Corporation defaults in payment of the
Redemption Price on, or in the repayment of, the Junior Subordinated Debentures,
on and after the Redemption Date, Distributions will cease to accrue on the
Trust Securities called for redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall
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be made unless payment in full in cash of all accumulated and unpaid
Distributions on all of the outstanding Capital Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
Redemption Price the full amount of such Redemption Price, shall have been made
or provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Capital Securities then due and payable.
In the case of any Event of Default, the Corporation as holder of the
Common Securities will be deemed to have waived any right to act with respect to
such Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Capital Securities and not on behalf of the
Corporation as holder of the Common Securities, and only the holders of the
Capital Securities will have the right to direct the Property Trustee to act on
their behalf.
Events of Default; Notice
The occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures -- Debenture Events of Default") constitutes an
"Event of Default" under the Trust Agreement.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Corporation, as Sponsor, unless such Event of
Default shall have been cured or waived. The Corporation, as Sponsor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Capital Securities shall have a preference over the Common Securities as
described under "-- Liquidation of the Trust and Distribution of Junior
Subordinated Debentures" and "-- Subordination of Common Securities."
Removal of Issuer Trustees
Unless a Debenture Event of Default shall have occurred and be
continuing, any Issuer Trustee may be removed at any time by the holder of the
Common Securities. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee may be removed at such
time by the holders of a majority in Liquidation Amount of the outstanding
Capital Securities. In no event will the holders of the Capital Securities have
the right to vote to appoint, remove or replace the Administrative Trustees,
which voting rights are vested exclusively in the Corporation as the holder of
the Common Securities. No resignation or removal of an Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any person succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Issuer Trustee under the
Trust Agreement, provided such person shall be otherwise qualified and eligible.
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Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other person,
except as described below or as otherwise described under "-- Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." The Trust may, at the
request of the Corporation, as Sponsor, with the consent of the Administrative
Trustees but without the consent of the holders of the Capital Securities, merge
with or into, consolidate, amalgamate, or be replaced by or convey, transfer or
lease its properties and assets as an entirety or substantially as an entirety
to a trust organized as such under the laws of any State; provided, that (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Trust Securities or (b) substitutes for the Trust
Securities other securities having substantially the same terms as the Trust
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Trust Securities rank in priority with respect to distributions
and payments upon liquidation, redemption and otherwise, (ii) the Corporation
expressly appoints a trustee of such successor entity possessing the same powers
and duties as the Property Trustee with respect to the Junior Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Securities are then
listed or quoted, if any, (iv) if the Capital Securities (including any
Successor Securities) are rated by any nationally recognized statistical rating
organization prior to such transaction, such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Capital Securities (including any Successor Securities) or, if the Junior
Subordinated Debentures are so rated, the Junior Subordinated Debentures, to be
downgraded by any such nationally recognized statistical rating organization,
(v) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose identical to that of
the Trust, (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Corporation has received an opinion from
independent counsel to the Trust experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect (other than any dilution of such holders' interests in the new
entity) and (b) following such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the Trust nor such successor entity will
be required to register as an investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and (viii) the
Corporation or any permitted successor or assignee owns all of the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except
with the consent of holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity not to be classified as a grantor
trust for United States federal income tax purposes.
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Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "-- Mergers, Consolidations,
Amalgamations or Replacements of the Trust" and "Description of Guarantee --
Amendments and Assignment" and as otherwise required by law and the Trust
Agreement, the holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Trust Securities (i) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement and (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust will be classified for United
States federal income tax purposes as a grantor trust at all times that any
Trust Securities are outstanding or to ensure that the Trust will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in each such case such action shall not adversely
affect in any material respect the interests of the holders of the Trust
Securities. Any amendments to the Trust Agreement pursuant to the foregoing
shall become effective when notice thereof is given to the holders of the Trust
Securities. The Trust Agreement may be amended by the Issuer Trustees and the
Corporation (i) with the consent of holders representing a majority (based upon
Liquidation Amount) of the outstanding Trust Securities and (ii) upon receipt by
the Issuer Trustees of an opinion of counsel experienced in such matters to the
effect that such amendment or the exercise of any power granted to the Issuer
Trustees in accordance with such amendment will not affect the Trust's status as
a grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment Company
Act, provided that, without the consent of each holder of the Trust Securities,
the Trust Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of the Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Debenture Trustee with respect to
the Junior Subordinated Debentures, (ii) waive certain past defaults under the
Indenture, (iii) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in Liquidation Amount of all of the outstanding Capital Securities;
provided, however, that where a consent under the Indenture would require the
consent of each holder of the Junior Subordinated Debentures affected thereby,
no such consent shall be given by the Property Trustee without the prior
approval of each holder of the Capital Securities. The Issuer Trustees shall not
revoke any action previously authorized or approved by a vote of the holders of
the Capital Securities except by subsequent vote of such holders. The Property
Trustee shall notify each holder of the Capital Securities of any notice of
default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of such holders of the Capital Securities,
prior to taking any of the foregoing actions, the Issuer Trustees shall obtain
an opinion of counsel experienced in such matters to the effect that the Trust
will not be classified as an association taxable as a corporation for United
States federal income tax purposes on account of such action.
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Any required approval of the holders of the Capital Securities may be
given at a meeting of such holders convened for such purpose or pursuant to
written consent. The Property Trustee will cause a notice of any meeting at
which holders of the Capital Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of the Capital Securities in the manner set forth in
the Trust Agreement.
No vote or consent of the holders of the Capital Securities will be
required for the Trust to redeem and cancel the Capital Securities in accordance
with the Trust Agreement.
Notwithstanding that holders of the Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by the Corporation, the Issuer Trustees or any
affiliate of the Corporation or any Issuer Trustees, shall, for purposes of such
vote or consent, be treated as if they were not outstanding.
Expenses and Taxes
In the Indenture, the Company has agreed to pay all debts and other
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including costs and expenses relating to the organization
of the Trust, the fees and expenses of the Trustees and the costs and expenses
relating to the operation of the Trust) and to pay any and all taxes and all
costs and expenses with respect thereto (other than United States withholding
taxes) to which the Trust might become subject. The foregoing obligations of the
Company under the Indenture are for the benefit of, and shall be enforceable by,
any person to whom any such debts, obligations, costs, expenses and taxes are
owed (a "Creditor") whether or not such Creditor has received notice thereof.
Any such Creditor may enforce such obligations of the Company directly against
the Company, and the Company has irrevocably waived any right or remedy to
require that any such Creditor take any action against the Trust or any other
person before proceeding against the Company. The Company has also agreed in the
Indenture to execute such additional agreements as may be necessary or desirable
to give full effect to the foregoing.
Book-Entry Issuance
DTC will act as securities depositary for all of the Capital
Securities. The Capital Securities will be issued only as fully-registered
securities registered in the name of Cede & Co. (DTC's nominee). One or more
fully-registered global certificates will be issued for the Capital Securities,
representing in the aggregate the total number of Capital Securities, and will
be deposited with DTC.
DTC is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain custodial relationships with
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Direct Participants, either directly or indirectly ("Indirect Participants").
The rules applicable to DTC and its Participants are on file with the
Commission.
Purchases of Capital Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual purchaser of
each Capital Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial owners will not receive
written confirmation from DTC of their purchase, but Beneficial Owners are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holdings, from the Direct or Indirect
Participant through which the Beneficial Owners purchased Capital Securities.
Transfers of ownership interests in the Capital Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Capital Securities, except in the event that use
of the book-entry system for the Capital Securities of the Trust is
discontinued.
To facilitate subsequent transfers, all Securities deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Securities with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Capital Securities; DTC's
records reflect only the identity of the Direct Participants to whose accounts
such Capital Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Capital Securities. If less than all of the Capital Securities are being
redeemed, DTC's current practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
Although voting with respect to the Capital Securities is limited to the
holders of record of the Capital Securities, in those instances in which a vote
is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Capital Securities. Under its usual procedures, DTC mails an omnibus
proxy (the "Omnibus Proxy") to the Property Trustee as soon as possible after
the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those Direct Participants to whose accounts such Capital Securities
are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Distribution payments on the Capital Securities will be made by the
Property Trustee to DTC. DTC's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of DTC, the
Property Trustee, the Trust or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
Distributions to DTC is the responsibility of the Property Trustee, disbursement
of such payments to Direct Participants is the responsibility of DTC, and
disbursements of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary
with respect to any of the Capital Securities at any time by giving reasonable
notice to the Property Trustee and the Company. In the event that
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a successor depositary is not obtained, definitive Capital Securities
certificates representing such Capital Securities are required to be printed and
delivered. The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depositary). In such
event, definitive certificates for Capital Securities will be printed and
delivered. In addition, after a Debenture Event of Default, the holders of a
majority in liquidation preference of Capital Securities may determine to
discontinue the system of book-entry transfers through DTC. In any such event,
definitive certificates for the Capital Securities will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Trust or the Company believe to
be reliable, but the Trust and the Company assume no responsibility for the
accuracy thereof. None of the Trustees, the Trust or the Company has any
responsibility for the performance by DTC or its Participants of their
respective obligations as described herein or under the rules and procedures
governing their respective operations.
Same-Day Settlement and Payment
Settlement for the Capital Securities will be made by the Underwriters
in immediately available funds.
Secondary trading in Capital Securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Capital
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Capital Securities will therefore be required by
DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Capital Securities.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Capital Securities after they have been called
for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreement and, during the existence of an
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any holder
of the Trust Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Capital
Securities or the Common Securities are entitled under the Trust Agreement to
vote, then the Property Trustee shall take such action as is directed by the
Corporation and, if not so directed, shall take such action as it deems
advisable and in the best interests of the holders of the Trust Securities and
will have no liability except for its own bad faith, negligence or willful
misconduct.
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Payment and Paying Agency
Payments in respect of the Capital Securities shall be made to DTC,
which shall credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Capital Securities are not held by DTC, such payments shall be
made by check mailed to the address of the holder entitled thereto as such
address shall appear on the Register. The paying agent (the "Paying Agent")
shall initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Regular Trustees and the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Company. In the event that the Property
Trustee shall no longer be the Paying Agent, the Regular Trustees shall appoint
a successor (which shall be a bank or trust company acceptable to the Regular
Trustees and the Company) to act as Paying Agent.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and in such a way that the Junior
Subordinated Debentures will be treated as indebtedness of the Corporation for
United States federal income tax purposes. In this connection, the Corporation
and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the Certificate of Trust of the Trust or the
Trust Agreement, that the Corporation and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes, as long as
such action does not materially adversely affect the interests of the holders of
the Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge
any of its assets.
Governing Law
The Trust Agreement will be governed by and construed in accordance
with the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture,
as supplemented from time to time (as so supplemented, the "Indenture"),
between the Corporation and Wilmington Trust Company, as trustee (the
"Debenture Trustee"). The Indenture will be qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), will incorporate certain
provisions of the Trust Indenture Act, and will be subject to and governed by
the Trust Indenture Act. This summary of certain terms and provisions of the
Junior Subordinated Debentures and the Indenture does not purport to be
complete, and where reference is made to particular provisions of the Indenture,
such provisions, including the definitions of certain terms, some of which are
not otherwise defined herein, are qualified in their entirety by reference to
all of the provisions of the Indenture and those terms made a part of the
Indenture by the Trust Indenture Act. A copy of the form of Indenture is
available from the Debenture Trustee upon request.
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General
Concurrently with the issuance of the Capital Securities, the Trust
will invest the proceeds thereof, together with the consideration paid by the
Corporation for the Common Securities, in Junior Subordinated Debentures issued
by the Corporation. The Junior Subordinated Debentures will bear interest from
June 9, 1997 at the annual rate of 8-3/4% of the principal amount thereof,
payable quarterly in arrears on March 31, June 30, September 30, and December 31
of each year (each, an "Interest Payment Date"), commencing September 30, 1997,
to the person in whose name each Junior Subordinated Debenture is registered,
subject to certain exceptions, at the close of business on the 15th day of the
month preceding the month in which the relevant payment date falls. It is
anticipated that, until the liquidation, if any, of the Trust, each Junior
Subordinated Debenture will be held in the name of the Property Trustee in trust
for the benefit of the holders of the Trust Securities. The amount of interest
payable for any period will be computed on the basis of a 360-day year of 12
30-day months and, for any period of less than a full calendar month, the number
of days elapsed in such month. In the event that any date on which interest is
payable on the Junior Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that if such next succeeding Business Day falls in
the next succeeding calendar year, then such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest on the amount thereof (to
the extent permitted by law) at the rate per annum of 8-3/4% thereof, compounded
quarterly. The term "interest," as used herein, shall include quarterly interest
payments, interest on quarterly interest payments not paid on the applicable
Interest Payment Date and Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will be issued in denominations of
$1,000 and integral multiples thereof. The Junior Subordinated Debentures
will mature on June 30, 2027 (the "Stated Maturity Date").
The Junior Subordinated Debentures will be unsecured and will rank pari
passu with all Other Debentures and subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
Indenture. See "-- Subordination."
The Corporation is a holding company and almost all of the operating
assets of the Corporation are owned by the Corporation's subsidiaries. The
Corporation is a legal entity separate and distinct from its subsidiaries.
Holders of the Junior Subordinated Debentures should look only to the
Corporation for payments on the Junior Subordinated Debentures. The principal
sources of the Corporation's income are dividends, interest and fees from its
subsidiaries. The Corporation relies primarily on dividends from the Banks to
meet its obligations for payment of principal and interest on its outstanding
debt obligations and corporate expenses. There are regulatory limitations on the
payment of dividends to the Corporation from the Banks. As of March 31, 1997,
under applicable regulations, the Banks had approximately $52.5 million of total
capital available for payment of dividends to the Corporation. The OCC and FDIC
have the power to prohibit payment of dividends under circumstances including if
such payment would constitute an unsafe or unsound banking practice. In
addition, the Banks are subject to certain restrictions imposed by federal law
on any extensions of credit to, and certain other transactions with, the
Corporation and certain other affiliates, and on investments in stock or other
securities thereof. Such restrictions prevent the Corporation and such other
affiliates from borrowing from the Banks unless the loans are secured by various
types of collateral. Further, such secured loans, other transactions and
investments by the Banks are generally limited in amount as to the
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Corporation and as to each of such other affiliates to 10% of the Banks' capital
and surplus and as to the Corporation and all of such other affiliates to an
aggregate of 20% of the Banks' capital and surplus.
Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors, in the case of the Banks), except to the extent the
Corporation may itself be recognized as a creditor of that subsidiary.
Accordingly, the Junior Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of the Corporation's subsidiaries
(including the subsidiaries' deposit liabilities) and all liabilities of any
future subsidiaries of the Corporation. The Indenture does not limit the
incurrence or issuance of other secured or unsecured debt of the Corporation or
any subsidiary, including Senior Indebtedness. See "-- Subordination."
Form, Registration and Transfer
If the Junior Subordinated Debentures are distributed to the holders of
the Trust Securities, the Junior Subordinated Debentures may be represented by
one or more global certificates registered in the name of Cede & Co. as the
nominee of DTC. The depositary arrangements for such Junior Subordinated
Debentures are expected to be substantially similar to those in effect for the
Capital Securities. For a description of DTC and the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Description of Capital Securities --
Book-Entry Issuance."
Payment and Paying Agents
Payment of principal of (and premium, if any) and interest on the
Junior Subordinated Debentures will be made at the office of the Debenture
Trustee in New York, New York or at the office of such Paying Agent or Paying
Agents as the Corporation may designate from time to time, except that at the
option of the Corporation payment of any interest may be made, except in the
case of the Junior Subordinated Debentures in global form, (i) by check mailed
to the address of the person entitled thereto as such address shall appear in
the register for the Junior Subordinated Debentures or (ii) by transfer to an
account maintained by the person entitled thereto as specified in such register,
provided that proper transfer instructions have been received by the relevant
Record Date. Payment of any interest on any Junior Subordinated Debenture will
be made to the person in whose name such Junior Subordinated Debenture is
registered at the close of business on the Record Date for such interest, except
in the case of defaulted interest. The Corporation may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent; however
the Corporation will at all times be required to maintain a Paying Agent in each
place of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Corporation, be repaid
to the Corporation and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Corporation for
payment thereof.
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Option to Extend Interest Payment Date
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation will have the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time and from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period shall end on
a date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. At the end of such Extension Period, the Corporation must pay all interest
then accrued and unpaid (together with interest thereon at the annual rate of
8-3/4%, compounded quarterly, to the extent permitted by applicable law
("Compounded Interest")). During an Extension Period, interest will continue to
accrue and holders of the Junior Subordinated Debentures (or holders of the
Trust Securities while Trust Securities are outstanding) will be required to
accrue such deferred interest income for United States federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation (including any Other Guarantees) if such guarantee ranks pari
passu with or junior in right of payment to the Junior Subordinated Debentures
(other than (a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, common stock of the Corporation,
(b) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Corporation's capital stock or the exchange or conversion of one class or series
of the Corporation's capital stock for another class or series of the
Corporation's capital stock, (e) the purchase of fractional interests in shares
of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
and (f) purchases of common stock related to the issuance of common stock or
rights under any of the Corporation's benefit plans for its directors, officers
or employees or any of the Corporation's dividend reinvestment plans).
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, the Corporation may elect to
begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Corporation must give the Property Trustee, the Administrative Trustees and
the Debenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Trust Securities would have been payable except
for the election to begin or extend such Extension Period or (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or to holders of Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than five Business Days
prior to such record date. The Debenture Trustee shall give notice of the
Corporation's election to begin or extend a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
the Corporation may elect to begin an Extension Period.
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Optional Prepayment
The Junior Subordinated Debentures will be prepayable, in whole or in
part, at the option of the Corporation on or after June 30, 2002 (the "Initial
Optional Prepayment Date"), subject to the Corporation having received any
required regulatory approval, at a prepayment price (the "Prepayment Price")
equal to 100% of the outstanding principal amount of the Junior Subordinated
Debentures to be prepaid, plus accrued and unpaid Distributions thereon to the
date of prepayment.
The Federal Reserve's risk-based capital guidelines, which are subject
to change, currently provide that redemptions of permanent equity or other
capital instruments before stated maturity could have a significant impact on a
bank holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organizations's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debentures by the Company
prior to their Stated Maturity would constitute the redemption of capital
instruments under the Federal Reserve's current risk-based capital guidelines
and may be subject to the prior approval of the Federal Reserve. The redemption
of the Junior Subordinated Debentures also could be subject to the additional
prior approval of the Federal Reserve under its current risk-based capital
guidelines.
Special Event Prepayment
Prior to the Initial Optional Prepayment Date (i.e. June 30, 2002),
if a Special Event shall occur and be continuing, the Corporation may, at its
option and subject to receipt of any required regulatory approval, prepay the
Junior Subordinated Debentures in whole but not in part at any time within 90
days of the occurrence of such Special Event, at the Prepayment Price.
A "Special Event" means a Tax Event, a Regulatory Capital Event or an
Investment Company Event, as the case may be.
A "Tax Event" means the receipt by the Corporation and the Trust of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws or any regulations thereunder of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the Issue Date, there is
more than an insubstantial risk that (i) the Trust is, or will be within 90 days
of the date of such opinion, subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures,
(ii) interest payable by the Corporation on the Junior Subordinated Debentures
is not, or within 90 days of the date of such opinion will not be, deductible by
the Corporation, in whole or in part, for United States federal income tax
purposes or (iii) the Trust is, or will be within 90 days of the date of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
A "Regulatory Capital Event" means that the Corporation shall have
received an opinion of independent bank regulatory counsel experienced in such
matters to the effect that, as a result of (a) any
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amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any rules,
guidelines or policies of an applicable regulatory agency or (b) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the Issue Date, the Capital
Securities do not constitute, or within 90 days of the date thereof, will not
constitute, Tier 1 Capital (or its then-equivalent); provided, however, that the
distribution of the Junior Subordinated Debentures in connection with the
liquidation of the Trust by the Corporation shall not in and of itself
constitute a Regulatory Capital Event unless such liquidation shall have
occurred in connection with a Tax Event.
An "Investment Company Event" means the receipt by the Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Trust is or will be considered an "investment company" that is required to
be registered under the Investment Company Act, which change or prospective
change becomes effective or would become effective, as the case may be, on or
after the date of the issuance of the Capital Securities.
Notice of any prepayment will be mailed at least 30 days but not more
than 60 days before the redemption date to each holder of Junior Subordinated
Debentures to be prepaid at its registered address. Unless the Corporation
defaults in payment of the prepayment price, on and after the prepayment date
interest ceases to accrue on such Junior Subordinated Debentures called for
prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Junior Subordinated Debentures such amounts as shall
be necessary in order that the amount of Distributions then due and payable by
the Trust on the outstanding Trust Securities shall not be reduced as a result
of any additional taxes, duties and other governmental charges to which the
Trust has become subject as a result of a Tax Event ("Additional Sums").
Certain Covenants of the Corporation
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(other than (a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, common stock of the Corporation,
(b) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
the purchase of fractional shares resulting from a reclassification of the
Corporation's capital stock, (d) the purchase of fractional interests in shares
of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
and (e) purchases of common stock related to the issuance of common stock or
rights under any of the Corporation's benefit plans for its directors, officers
or employees or any of the Corporation's dividend reinvestment plans), (ii) make
any payment of principal, interest or premium, if any, on or repay or repurchase
or redeem any debt securities of the Corporation (including Other Debentures)
that rank pari passu with or junior in right of payment to the Junior
Subordinated Debentures or (iii) make any guarantee payments (other than
payments under the Guarantee) with respect to any guarantee by the Corporation
of the debt securities of any subsidiary of the Corporation (including under
Other Guarantees) if such guarantee ranks pari passu or junior in right of
payment to the Junior Subordinated Debentures if at such time (1) there shall
have occurred any event of which the Corporation has actual knowledge that (a)
is, or with
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the giving of notice or the lapse of time, or both, would be, a Debenture Event
of Default and (b) in respect of which the Corporation shall not have taken
reasonable steps to cure, (2) the Corporation shall be in default with respect
to its payment of any obligations under the Guarantee or (3) the Corporation
shall have given notice of its election of an Extension Period as provided in
the Indenture and shall not have rescinded such notice, and such Extension
Period, or any extension thereof, shall have commenced and be continuing.
So long as the Trust Securities remain outstanding, the Corporation
also will covenant (i) to maintain 100% direct or indirect ownership of the
Common Securities, provided, however, that any permitted successor of the
Corporation under the Indenture may succeed to the Corporation's ownership of
such Common Securities, (ii) to use its reasonable efforts to cause the Trust
(a) to remain a business trust, except in connection with the distribution of
Junior Subordinated Debentures to the holders of Trust Securities in liquidation
of the Trust, the redemption of all the Trust Securities of the Trust, or
certain mergers, consolidations or amalgamations, each as permitted by the Trust
Agreement, and (b) to otherwise continue to be classified as a grantor trust for
United States federal income tax purposes and (iii) to use its reasonable
efforts to cause each holder of Trust Securities to be treated as owning an
undivided beneficial interest in the Junior Subordinated Debentures.
Modification of Indenture
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of the Junior Subordinated Debentures, amend,
waive or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies; provided that any such
action does not materially adversely affect the interest of the holders of
Junior Subordinated Debentures, and qualifying, or maintaining the qualification
of, the Indenture under the Trust Indenture Act. The Indenture contains
provisions permitting the Corporation and the Debenture Trustee, with the
consent of the holders of a majority in principal amount of the Junior
Subordinated Debentures, to modify the Indenture in a manner affecting the
rights of the holders of the Junior Subordinated Debentures; provided that no
such modification may, without the consent of the holders of each outstanding
Junior Subordinated Debenture so affected, (i) change the Stated Maturity Date,
or reduce the principal amount of the Junior Subordinated Debentures or reduce
the amount payable on redemption thereof or reduce the rate or extend the time
of payment of interest thereon except pursuant to the Corporation's right under
the Indenture to defer the payment of interest as provided therein (see "--
Option to Extend Interest Payment Date") or make the principal of, or interest
or premium on, the Junior Subordinated Debentures payable in any coin or
currency other than that provided in the Junior Subordinated Debentures, or
impair or affect the right of any holder of the Junior Subordinated Debentures
to institute suit for the payment thereof, or (ii) reduce the percentage of
principal amount of Junior Subordinated Debentures, the holders of which are
required to consent to any such modification of the Indenture.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including
Compounded Interest and Additional Sums, if any) or Liquidated Damages,
if any, on the Junior Subordinated Debentures or any Other Debentures,
when due (subject to the deferral of any due date in the case of an
Extension Period); or
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(ii) failure to pay any principal or premium, if any, on the
Junior Subordinated Debentures or any Other Debentures when due whether
at maturity, upon redemption, by declaration of acceleration of
maturity or otherwise; or
(iii) failure to observe or perform in any material respect
certain other covenants contained in the Indenture for 90 days after
written notice to the Corporation from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of
Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or
reorganization of the Corporation.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have, subject to certain exceptions, the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Debenture Trustee. The Debenture Trustee or the holders
of not less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) on or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest (and premium, if any) and principal due otherwise than
by acceleration has been deposited with the Debenture Trustee) or a default in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each outstanding Junior
Subordinated Debenture.
The Indenture requires the annual filing by the Corporation with the
Debenture Trustee of a certificate as to the absence of certain defaults under
the Indenture.
The Indenture provides that the Debenture Trustee may withhold notice
of a Debenture Event of Default from the holders of the Junior Subordinated
Debentures if the Debenture Trustee considers it in the interest of such holders
to do so.
Enforcement of Certain Rights by Holders of Capital Securities
If a Debenture Event of Default shall have occurred and be continuing
and shall be attributable to the failure of the Corporation to pay the principal
of (or premium, if any), or interest (including Compounded Interest and
Additional Sums, if any) or Liquidated Damages, if any, on the Junior
Subordinated Debentures on the due date, a holder of the Capital Securities may
institute a Direct Action. The Corporation may not amend the Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all of the Capital Securities. Notwithstanding any payments
made to a holder of the Capital Securities by the Corporation in connection with
a Direct Action, the Corporation shall remain obligated to pay the principal of
(or premium, if any) or interest (including Compounded Interest and Additional
Sums, if any) or Liquidated Damages, if any, on the Junior Subordinated
Debentures, and the Corporation shall be subrogated
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to the rights of the holder of such Capital Securities with respect to payments
on the Capital Securities to the extent of any payments made by the Corporation
to such holder in any Direct Action.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of Capital Securities -- Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Corporation shall not consolidate with
or merge into any other person or convey, transfer or lease its properties as an
entirety or substantially as an entirety to any person, and no person shall
consolidate with or merge into the Corporation or convey, transfer or lease its
properties as an entirety or substantially as an entirety to the Corporation,
unless: (i) in case the Corporation consolidates with or merges into another
person or conveys or transfers its properties substantially as an entirety to
any person, the successor person is organized under the laws of the United
States or any State or the District of Columbia, and such successor person
expressly assumes the Corporation's obligations on the Junior Subordinated
Debentures; (ii) immediately after giving effect thereto, no Debenture Event of
Default, and no event which, after notice or lapse of time or both, would become
a Debenture Event of Default, shall have occurred and be continuing; and (iii)
certain other conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Corporation that may adversely affect holders of
the Junior Subordinated Debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at maturity or called for redemption within one year, and the Corporation
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal (and premium, if any)
and interest to the date of the deposit or to the Stated Maturity Date, as the
case may be, then the Indenture will cease to be of further effect (except as to
the Corporation's obligations to pay all other sums due pursuant to the
Indenture and to provide the officers' certificates and opinions of counsel
described therein), and the Corporation will be deemed to have satisfied and
discharged the Indenture.
Subordination
In the Indenture, the Corporation has covenanted and agreed that any
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, all Senior Indebtedness must be paid
in full before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
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In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of such
Senior Indebtedness before the holders of the Junior Subordinated Debentures
will be entitled to receive or retain any payment in respect of the Junior
Subordinated Debentures.
No payments on account of principal (or premium, if any) or interest,
if any, in respect of the Junior Subordinated Debentures may be made if there
shall have occurred and be continuing a default in any payment with respect to
Senior Indebtedness, or an event of default with respect to any Senior
Indebtedness resulting in the acceleration of the maturity thereof, or if any
judicial proceeding shall be pending with respect to any such default.
"Indebtedness" shall mean (i) every obligation of the Corporation for
money borrowed; (ii) every obligation of the Corporation evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (iii)
every reimbursement obligation of the Corporation with respect to letters of
credit, banker's acceptances or similar facilities issued for the account of the
Corporation; (iv) every obligation of the Corporation issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business); (v)
every capital lease obligation of the Corporation; (vi) all indebtedness of the
Corporation whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products, including
interest rate, foreign exchange rate and commodity forward contracts, options
and swaps and similar arrangements; and (vii) every obligation of the type
referred to in clauses (i) through (vi) of another person and all dividends of
another person the payment of which, in either case, the Corporation has
guaranteed or is responsible or liable for, directly or indirectly, as obligor
or otherwise.
"Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures" shall mean (i) Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created, assumed or incurred, to the
extent such indebtedness specifically by its terms ranks equally with and not
prior to the Junior Subordinated Debentures in the right of payment upon the
happening of the dissolution or winding-up or liquidation or reorganization of
the Corporation and (ii) all other debt securities, and guarantees in respect of
those debt securities, issued to any other trust, or a trustee of such trust,
partnership or other entity affiliated with the Corporation that is a financing
vehicle of the Corporation (a "financing entity") in connection with the
issuance by such financing entity of equity securities or other securities
guaranteed by the Corporation pursuant to an instrument that ranks pari passu
with or junior in right of payment to the Guarantee. The securing of any
Indebtedness, otherwise constituting Indebtedness Ranking on a Parity with the
Junior Subordinated Debentures, shall not be deemed to prevent such Indebtedness
from constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures.
"Indebtedness Ranking Junior to the Junior Subordinated Debentures"
shall mean any Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
indebtedness by its terms ranks junior to and not equally with or prior to the
Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity
with the Junior Subordinated Debentures) in right of payment upon the happening
of the dissolution or winding-up or liquidation or reorganization of the
Corporation. The securing of any Indebtedness, otherwise constituting
Indebtedness Ranking Junior to the Junior Subordinated Debentures, shall not be
deemed to prevent such Indebtedness from constituting Indebtedness Ranking
Junior to the Junior Subordinated Debentures.
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"Senior Indebtedness" shall mean all Indebtedness, whether outstanding
on the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures,
and any deferrals, renewals or extensions of such Senior Indebtedness.
The Corporation is a holding company and almost all of the operating
assets of the Corporation are owned by the Corporation's subsidiaries. The
Corporation relies primarily on dividends from the Banks to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses. The Corporation is a legal entity separate and distinct from
its subsidiaries. Holders of the Junior Subordinated Debentures should look only
to the Corporation for payments on the Junior Subordinated Debentures. There are
regulatory limitations on the payment of dividends directly or indirectly to the
Corporation from the Banks. See "-- General." In addition, the Banks are subject
to certain restrictions imposed by federal law on any extensions of credit to,
and certain other transactions with, the Corporation and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Corporation and such other affiliates from borrowing
from the Banks unless the loans are secured by various types of collateral.
Further, such secured loans, other transactions and investments by the Banks are
generally limited in amount as to the Corporation and as to each of such other
affiliates to 10% of the Banks' capital and surplus and as to the Corporation
and all of such other affiliates to an aggregate of 20% of the Banks' capital
and surplus. Accordingly, the Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries.
Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors, in the case of the Banks), except to the extent the
Corporation may itself be recognized as a creditor of that subsidiary.
Accordingly, the Junior Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of the Corporation's Subsidiaries
(including the Banks' deposit liabilities) and all liabilities of any future
subsidiaries of the Corporation. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Corporation or any
subsidiary, including Senior Indebtedness.
Restrictions on Transfer
The Junior Subordinated Debentures will be issued, and may be
transferred, only in blocks having an aggregate principal amount of not less
than $1,000 and multiples of $1,000 in excess thereof. Any such transfer of the
Junior Subordinated Debentures in a block having an aggregate principal amount
of less than $1,000 shall be deemed to be void and of no legal effect
whatsoever. Any such transferee shall be deemed not to be the holder of such
Junior Subordinated Debentures for any purpose, including but not limited to
the receipt of payments on such Junior Subordinated Debentures, and such
transferee shall be deemed to have no interest whatsoever in such Junior
Subordinated Debentures.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of Delaware.
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Information Concerning the Debenture Trustee
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Trust of the Capital Securities for the
benefit of the holders from time to time of the Capital Securities. Wilmington
Trust Company will act as Guarantee Trustee under the Guarantee. The Guarantee
is qualified under the Trust Indenture Act. This summary of certain provisions
of the Guarantee does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Capital Securities.
General
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Capital Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and
unpaid Distributions required to be paid on the Capital Securities, to the
extent that the Trust has funds legally available therefor at such time, (ii)
the applicable Redemption Price with respect to the Capital Securities called
for redemption, to the extent that the Trust has funds legally available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution,
winding-up or liquidation of the Trust (other than in connection with the
distribution of the Junior Subordinated Debentures to holders of the Capital
Securities or the redemption of all Capital Securities), the lesser of (a) the
Liquidation Distribution, to the extent the Trust has funds legally available
therefor at the time, and (b) the amount of assets of the Trust remaining
available for distribution to holders of Capital Securities after satisfaction
of liabilities to creditors of the Trust as required by applicable law. The
Corporation's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Corporation to the holders of the Capital
Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness to the extent provided therein. See "-- Status
of the Guarantee." Because the Corporation is a holding company, the
right of the Corporation to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent the Corporation may itself be recognized as a creditor of that
subsidiary. Accordingly, the Corporation's obligations under the Guarantee
effectively will be subordinated to all existing and future liabilities of the
Corporation's Subsidiaries (including the Corporation's Subsidiaries' deposit
liabilities), and all liabilities of any future subsidiaries of the Corporation.
Claimants should look only to the assets of the
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Corporation for payments under the Guarantee. See "Description of the Junior
Subordinated Debentures -- General." The Guarantee does not limit the incurrence
or issuance of other secured or unsecured debt of the Corporation, including
Senior Indebtedness, whether under the Indenture, any other indenture that the
Corporation may enter into in the future or otherwise.
The Corporation will, through the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Indenture, taken together, fully,
irrevocably and unconditionally guarantee all of the Trust's obligations under
the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Indebtedness in the same manner as the Junior Subordinated Debentures.
The Guarantee will rank pari passu with all Other Guarantees issued by
the Corporation after the Issue Date with respect to capital securities (if any)
issued by Other Trusts. The Guarantee will constitute a guarantee of payment and
not of collection (i.e., the guaranteed party may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against any other person or
entity). The Guarantee will be held for the benefit of the holders of the
Capital Securities. The Guarantee does not place a limitation on the amount of
additional Senior Indebtedness that may be incurred by the Corporation.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payment or other obligations thereunder,
provided, however, that except with respect to a default in payment of any
Guarantee Payment, the Corporation shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice.
The holders of not less than a majority in Liquidation Amount of the Capital
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Corporation, as guarantor, will be required to file annually with
the Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
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Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of a majority of the Liquidation Amount of such outstanding
Capital Securities. The manner of obtaining any such approval will be as set
forth under "Description of Capital Securities -- Voting Rights; Amendment of
the Trust Agreement." All guarantees and agreements contained in the Guarantee
Agreement shall bind the successors, assigns, receivers, trustees and
representatives of the Corporation and shall inure to the benefit of the holders
of the Capital Securities then outstanding.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the applicable Redemption Price of the Capital Securities, upon
full payment of the Liquidation Amount payable upon liquidation of the Trust or
upon distribution of the Junior Subordinated Debentures to the holders of the
Capital Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Capital
Securities must restore payment of any sums paid under the Capital Securities or
the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Guarantee, will undertake
to perform only such duties as are specifically set forth in the Guarantee and,
in case a default with respect to the Guarantee has occurred, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his own affairs. Subject to this provision, the Guarantee Trustee
will be under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Capital Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of Delaware.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Capital
Securities (to the extent the Trust has funds legally available for the payment
of such Distributions) will be irrevocably guaranteed by the Corporation as and
to the extent set forth under "Description of Guarantee." Taken together, the
Corporation's obligations under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement and the Guarantee will provide, in the aggregate,
a full, irrevocable and unconditional guarantee of payments of Distributions and
other amounts due on the Capital Securities. No single document standing alone
or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the Trust's
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obligations under the Capital Securities. If and to the extent that the
Corporation does not make the required payments on the Junior Subordinated
Debentures, the Trust will not have sufficient funds to make the related
payments, including Distributions, on the Capital Securities. The Guarantee will
not cover any such payment when the Trust does not have sufficient funds legally
available therefor. In such event, the remedy of a holder of Capital Securities
is to institute a Direct Action. The obligations of the Corporation under the
Guarantee will be subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because: (i) the aggregate principal amount or Prepayment Price of the Junior
Subordinated Debentures will be equal to the sum of the Liquidation Amount or
Redemption Price, as applicable, of the Trust Securities; (ii) the interest rate
and interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Trust Securities; (iii) the Corporation, as Sponsor, shall pay for all and any
costs, expenses and liabilities of the Trust except the Trust's obligations to
holders of Trust Securities under such Trust Securities; and (iv) the Trust
Agreement will provide that the Trust is not authorized to engage in any
activity that is not consistent with the limited purposes thereof.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments may
be made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Trust Agreement.
Limited Purpose of the Trust
The Capital Securities will represent beneficial interests in the
Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities, using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures and engaging in only those other
activities necessary, advisable or incidental thereto.
Rights Upon Termination
Unless the Junior Subordinated Debentures are distributed to holders of
the Trust Securities, upon any voluntary or involuntary termination, winding-up
or liquidation of the Trust, after satisfaction of the liabilities of creditors
of the Trust as required by applicable law, the holders of the Trust Securities
will be entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Capital Securities -- Liquidation of
the Trust and Distribution of Junior Subordinated Debentures." Upon any
voluntary or involuntary liquidation or bankruptcy of the Corporation, the
Property Trustee, as holder of the
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Junior Subordinated Debentures, would be a subordinated creditor of the
Corporation, subordinated in right of payment to all Senior Indebtedness as set
forth in the Indenture, but entitled to receive payment in full of principal
(and premium, if any) and interest, before any stockholders of the Corporation
receive payments or distributions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Blank Rome Comisky and McCauley, in its capacity as
counsel to the Company and the Trust ("Counsel"), the following discussion
summarizes the material United States federal income tax consequences of the
purchase, ownership and disposition of the Capital Securities.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Counsel are
not binding on the Internal Revenue Service (the "IRS") or the courts, either of
which could take a contrary position. Moreover, no rulings have been or will be
sought from the IRS with respect to the transactions described herein.
Accordingly, there can be no assurance that the IRS will not challenge the
opinions expressed herein or that a court would not sustain such a challenge.
Except as otherwise stated, this summary deals only with the Capital
Securities held as a capital asset by a holder who or which (i) purchased the
Capital Securities upon original issuance (an "Initial Holder") at their
original offering price and (ii) is a US Holder (as defined below). This summary
does not address all the tax consequences that may be relevant to a US Holder,
nor does it address the tax consequences, except as stated below, to holders
that are not US Holders ("Non-US Holders") or to holders that may be subject to
special tax treatment (including, without limitation, banks, thrift
institutions, real estate investment trusts, regulated investment companies,
insurance companies, brokers and dealers in securities or currencies, other
financial institutions, tax-exempt organizations, persons holding the Capital
Securities as a position in a "straddle," as part of a "synthetic security,"
"hedging," "conversion" or other integrated investment or "interest rate swap"
transaction, and persons having a functional currency other than the U.S.
Dollar. Further, this summary does not address (a) the income tax consequences
to shareholders in or partners or beneficiaries of, a holder of the Capital
Securities, (b) the United States federal alternative minimum tax consequences
of the purchase, ownership of disposition of the Capital Securities, or (c) any
state, local or foreign tax consequences of the purchase, ownership and
disposition of Capital Securities.
A "US Holder" is a holder of the Capital Securities who or which is (i)
a citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated or organized for income tax
purposes) in or under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is includible in its gross income
for United States federal income tax purposes without regard to its source, or
(iv) a trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more United
States trustees have the authority to control all substantial decisions of the
trust.
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US Holders
Characterization of the Trust. In connection with the issuance of the
Capital Securities, Counsel will render its opinion generally to effect that,
under then current law and based on the representations, facts and assumptions
set forth in this Prospectus, and assuming full compliance with the terms of the
Trust Agreement (and other relevant documents), and based on certain assumptions
and qualifications referenced in the opinion, the Trust will be characterized
for United States federal income tax purposes as a grantor trust and will not be
characterized as an association taxable as a corporation. Accordingly, for
United States federal income tax purposes, each holder of the Capital Securities
generally will be considered the owner of an undivided interest in the Junior
Subordinated Debentures owned by the Trust, and each US Holder will be required
to include in gross income all income or gain recognized for United States
federal income tax purposes with respect to its allocable share of the Junior
Subordinated Debentures.
Characterization of the Junior Subordinated Debentures. The Company and
the Trust will agree to treat the Junior Subordinated Debentures as indebtedness
for all United States federal income tax purposes. In connection with the
issuance of the Junior Subordinated Debentures, Counsel will render its opinion
generally to the effect that, under then current law and based on the
representations, facts and assumptions set forth in this Prospectus, and such
opinion, assuming full compliance with the terms of the Junior Subordinated
Indenture (and other relevant documents), and based on certain assumptions and
qualifications referenced in the opinion, the Junior Subordinated Debentures
will be characterized for United States federal income tax purposes as debt of
the Company.
Interest Income and Original Issue Discount. Under the terms of the
Junior Subordinated Debentures, the Company has the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 20 consecutive quarterly periods, but not beyond the maturity of
the Junior Subordinated Debentures. Recently issued Treasury Regulations
("Regulations") under Section 1273 of the Code provide that debt instruments
like the Junior Subordinated Debentures will not be considered to be issued with
"original issue discount" ("OID") solely by reason of the Company's ability to
defer payments of interest if the likelihood of such deferral is "remote." The
Company has concluded, and this discussion assumes, that, as of the date of this
Prospectus, the likelihood of deferring payments of interest under the terms of
the Junior Subordinated Debentures is "remote" within the meaning of the
applicable Regulations. This conclusion is based, in part, upon the fact that
exercising such option would prevent the Company from declaring dividends on its
stock and would prevent the Company from making any payments with respect to
debt securities that rank pari passu with or junior to the Junior Subordinated
Debentures. Therefore, the Junior Subordinated Debentures should not be treated
as issued with OID by reason of the Company's deferral option. Rather, stated
interest on the Junior Subordinated Debentures will generally be taxable to a US
Holder as ordinary income when paid or accrued in accordance with that holder's
method of accounting for income tax purposes. It should be noted, however, that
these Regulations have not yet been interpreted in any rulings or any other
published authorities of the IRS. Accordingly, it is possible that the IRS could
take a position contrary to the interpretation described herein.
In the event that the Company exercises its option to defer payments of
interest, the Junior Subordinated Debentures would be treated as having been
retired and reissued for OID purposes and the sum of the remaining interest
payments (and any de minimis OID) on the Junior Subordinated Debentures would
thereafter be treated as OID -- which would accrue, and would be includible in a
US Holder's taxable income, on an economic accrual basis (regardless of the US
Holder's method of accounting for tax purposes) over the remaining term of the
Junior Subordinated Debentures (including any period of interest deferral),
without regard to the timing of actual payments under the Junior Subordinated
Debentures. In that event, subsequent distributions of interest on the Junior
Subordinated Debentures would not generally be taxable. The amount
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of OID that would accrue in any period would generally be approximately equal to
the amount of interest that accrued on the Junior Subordinated Debentures in
that period at the stated interest rate. Consequently, during any period of
interest deferral, US Holders will include OID in gross income in advance of a
corresponding receipt of cash, and a US Holder which disposes of a Capital
Security prior to the record date for payment of distributions on the Junior
Subordinated Debentures following that period will be subject to income tax on
OID accrued through the date of disposition (and not previously included in
income), but will not receive cash form the Trust with respect to the OID.
If the possibility of the Company's exercise of its option to defer
payments of interest is not treated as remote, the Junior Subordinated
Debentures would be treated as initially issued with OID in an amount equal to
the aggregate stated interest (plus any de minimis OID) over the term of the
Junior Subordinated Debentures. That OID would generally be includible in a US
Holder's taxable income over the term of the Junior Subordinated Debentures on
an economic accrual basis, without regard to whether any interest is actually
paid over such term.
Characterization of Income. Because the income underlying the Capital
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Capital Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Capital Securities.
Market Discount and Bond Premium. Holders of the Capital Securities
other than Initial Holders may be considered to have acquired their undivided
interests in the Junior Subordinated Debentures with "market discount" or
"acquisition premium" (as each phrase is defined for United States federal
income tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
the Trust. Under certain circumstances described herein (See e.g., "Description
of the Capital Securities -- Liquidation Distribution of Junior Subordinated
Debentures"), the Trust may distribute the Junior Subordinated Debentures to
holders in exchange for the Capital Securities and in liquidation of the Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in his Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Capital Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Trust would include the period during which the Capital
Securities were held by the holder. If, however, the relevant event is a Tax
Event which results in the Trust being treated as an association taxable as a
corporation, the distribution would likely constitute a taxable event to US
Holders of the Capital Securities (and the Trust) for United States federal
income tax purposes.
Under certain circumstances described herein (see "Description of the
Capital Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Capital Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
he had sold the Capital Securities for cash. See "-- Sales of Capital
Securities" below.
Sales of Capital Securities. A US Holder that sells Capital Securities
will recognize gain or loss equal to the difference between his adjusted basis
in the Capital Securities and the amount realized on the sale of such Capital
Securities. A US Holder's adjusted basis in the Capital Securities generally
will be his initial purchase price, increased by OID previously included (or
currently includible) in such holder's gross income to the date of disposition,
and decreased by payments received on the Capital Securities (other than any
interest received with respect to the period prior to the effective date of the
Company's first exercise of its option to defer payments of interest). Any such
gain or loss generally will be capital gain or loss, and generally will be a
long-
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term capital gain or loss if the Capital Securities have been held for more
than one year prior to the date of disposition.
A holder who disposes of his Capital Securities between record dates
for payments of distributions thereon will be required to include accrued but
unpaid interest in the event that such holder uses the accrual method of tax
accounting, or OID, if applicable (regardless of whether the holder uses the
cash or accrual method of tax accounting), on the Junior Subordinated Debentures
through the date of disposition in its taxable income for United States federal
income tax purposes (notwithstanding that the holder may receive a separate
payment from the purchaser with respect to accrued interest), and to deduct that
amount from the sales proceeds received (including the separate payment, if any,
with respect to accrued interest) for the Capital Securities (or as to OID only,
to add such amount to such holder's adjusted tax basis in its Capital
Securities). To the extent the selling price is less than the holder's adjusted
tax basis (which will include accrued but unpaid OID, if any), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
generally cannot be applied to offset ordinary income for United States federal
income tax purposes.
Proposed Tax Law Changes
On February 6, 1997, President Clinton released his budget proposals
for fiscal year 1998. One of the tax proposals therein (the "Tax Proposal")
would generally deny corporate issuers a deduction for interest on certain debt
obligations that have a maximum term in excess of 15 years and are not shown as
indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. As currently
drafted, the Tax Proposal would be effective generally for instruments issued on
or after the date of first Congressional "committee action." Although it is not
clear from the President's proposals as to what constitutes Congressional
"committee action" with respect to the Tax Proposal, it appears that, as
drafted, the Tax Proposal would not apply retroactively to the Junior
Subordinated Debentures. In any event, as the Capital Securities will be
reported within "Long Term Debt" on the consolidated balance sheets of the
Company, it appears that the Tax Proposal, if applicable, would not alter the
tax treatment of the Capital Securities. However, it is possible that if the Tax
Proposal (or similar legislation) is enacted with retroactive effect with
respect to the Junior Subordinated Debentures, the Company may not be entitled
to any interest deductions with respect to the Junior Subordinated Debentures.
There can be no assurance that the Tax Proposal, if enacted, will not apply
retroactively to the Junior Subordinated Debentures or that other legislation
enacted after the date hereof will not otherwise adversely affect the ability of
the Company to deduct the interest payable on the Junior Subordinated
Debentures. Accordingly, there can be no assurance that a Tax Event will not
occur. See "Description of the Capital Securities -- Redemption" and
"Distribution of Junior Subordinated Debentures -- Special Event Prepayment."
Non-US Holders
The following discussion applies to a Non-US Holder.
Payments to a holder of a Capital Security which is a Non-US Holder
will generally not be subject to withholding of income tax, provided that: (a)
the beneficial owner of the Capital Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Capital Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Capital Securities certifies to the Trust or its agent,
under penalties of perjury, that he is a Non-US Holder and provides his name and
address, or (ii) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution"), and holds the Capital Security in such
capacity, certifies to the Trust or its agent, under penalties of perjury, that
such a statement has been received from the beneficial owner by it or by another
Financial
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Institution between it and the beneficial owner in the chain of ownership, and
furnishes the Trust or its agent with a copy thereof.
As discussed above (see "Proposed Tax Law Changes"), changes in
legislation affecting the income tax consequences of the Junior Subordinated
Debentures are possible, and could adversely affect the ability of the Company
to deduct the interest payable on the Junior Subordinated Debentures. Moreover,
any such legislation could adversely affect Non-US Holders by characterizing
income derived from the Junior Subordinated Debentures as dividends, generally
subject to a 30% income tax (on a withholding basis) when paid to a Non-US
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a Non-US Holder. A Non-US Holder of a Capital
Security will generally not be subject to withholding of income tax on any gain
realized upon the sale or other disposition of a Capital Security. A Non-US
Holder which holds the Capital Securities in connection with the active conduct
of a United States trade or business will, however, be subject to income tax on
all income and gains recognized with respect to its proportionate share of the
Junior Subordinated Debentures.
Information Reporting
In general, information reporting requirements will apply to payments
made on, and proceeds from the sale of, the Capital Securities held by a
noncorporate US Holder. In addition, payments made on, and payments of the
proceeds from the sale of, the Capital Securities to or through the United
States office of a broker are subject to information reporting unless the holder
thereof certifies as to his Non-United States status or otherwise establishes an
exemption from information reporting and backup withholding. See "-- Backup
Withholding." Taxable income on the Capital Securities for a calendar year
should be reported to US Holders on Forms 1099 by January 31st of the following
calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY AND DOES NOT ADDRESS THE
CONSEQUENCES TO A PARTICULAR HOLDER OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF CAPITAL SECURITIES. POTENTIAL HOLDERS OF THE CAPITAL SECURITIES ARE URGED TO
CONTACT THEIR OWN TAX ADVISORS TO DETERMINE THEIR PARTICULAR TAX CONSEQUENCES.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS.
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ERISA CONSIDERATIONS
Each of the Corporation (the obligor with respect to the Junior
Subordinated Debentures held by the Trust), and its affiliates and the Property
Trustee may be considered a "party in interest" (within the meaning of ERISA) or
a "disqualified person" (within the meaning of Section 4975 of the Code) with
respect to many retirement plans or accounts that are subject to ERISA and/or
the Code (collectively referred to as "Plan" or "Plans"). The purchase and/or
holding of the Capital Securities by a Plan that is subject to the fiduciary
responsibility provisions of ERISA and/or the prohibited transaction provisions
of Section 4975 of the Code (including individual retirement arrangements and
other plans described in Section 4975(e)(1) of the Code) and with respect to
which the Corporation, the Property Trustee or any affiliate is a service
provider (or otherwise is a party in interest or a disqualified person) may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Capital Securities are acquired pursuant to and in
accordance with an applicable exemption, such as Prohibited Transaction Class
Exemption ("PTCE") 84-14 (an exemption for certain transactions determined by an
independent qualified professional asset manager), PTCE 91-38 (an exemption for
certain transactions involving bank collective investment funds), PTCE 90-1 (an
exemption for certain transactions involving insurance company pooled separate
accounts), PTCE 95-60 (an exemption for transactions involving certain insurance
company general accounts) or PTCE 96-23 (an exemption for certain transactions
determined by an in-house asset manager). In addition, a Plan fiduciary
considering the purchase of the Capital Securities should be aware that the
assets of the Trust may be considered "plan assets" for ERISA purposes. In such
event, the Property Trustee, as well as any other persons exercising discretion
with respect to the Junior Subordinated Debentures, may become fiduciaries,
parties in interest or disqualified persons with respect to investing Plans. In
order to avoid certain prohibited transactions under ERISA and/or the Code that
could thereby result, each investing Plan, by purchasing the Capital Securities,
will be deemed to have directed the Trust to invest in the Junior Subordinated
Debentures and to have consented to the appointment of the Property Trustee. In
this regard, it should be noted that, in an Event of Default, the Corporation
may not remove the Property Trustee without the approval of a majority of the
holders of the Capital Securities. A Plan fiduciary should consider whether the
purchase of the Capital Securities would constitute a violation of its fiduciary
duties under ERISA and/or the Code.
A Plan fiduciary should consider whether the purchase of the Capital
Securities could result in a delegation of fiduciary authority to the Property
Trustee, and, if so, whether such a delegation of authority is permissible under
the Plan's governing instrument or any investment management agreement with the
Plan. In making such determination, a Plan fiduciary should note that the
Property Trustee is a bank qualified to be an investment manager (within the
meaning of Section 3(38) of ERISA) to which such a delegation of authority
generally would be permissible under ERISA. Further, prior to an Event of
Default with respect to the Junior Subordinated Debentures, the Property Trustee
will have only limited custodial and ministerial authority with respect to Trust
assets.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY
THE TRUST, THE CORPORATION, THE PROPERTY TRUSTEE, THE UNDERWRITERS OR ANY OTHER
PERSON ASSOCIATED WITH THE SALE OF THE CAPITAL SECURITIES THAT SUCH SECURITIES
MEET RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY
OR ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE APPROPRIATE FOR
PLANS GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING TO ACQUIRE THE
CAPITAL SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT WITH HIS COUNSEL.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Trust have agreed that the Trust will sell to
each of the underwriters named below ("Underwriters") and each has severally
agreed to purchase from the Trust the respective aggregate Liquidation Amount
of Capital Securities set forth opposite its name below:
Liquidation
Amount of
Capital
Underwriter Securities
- ----------------------------------------------- ---------------------
Wheat, First Securities, Inc. ................. $30,000,000
Janney Montgomery Scott Inc. .................. 20,000,000
---------------------
Total................................. $50,000,000
=====================
Under the terms and conditions set forth in the Underwriting Agreement,
the Underwriters are committed to take and pay for all such Capital Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Capital Securities in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.50 per Capital Security. After the Capital
Securities are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than the earlier of (i) 30 days after the date of this Prospectus, or (ii)
prior to the effective date of any Tax Proposal, to purchase up to an additional
$7,500,000 aggregate Liquidation Amount of the Capital Securities at the public
offering price, less the underwriting discounts and commissions set forth on the
cover page of this Prospectus, plus accrued interest, if any, from June 9, 1997.
To the extent that the Underwriters exercises such option, the Company will be
obligated, pursuant to the option, to sell such Capital Securities to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Capital Securities offered
hereby. If purchased, the Underwriters will offer such additional Capital
Securities on the same terms as those on which the $50,000,000 aggregate
Liquidation Amount of the Capital Securities are being offered.
In connection with the offering of the Capital Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Capital Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Capital Securities
than they are committed to purchase from the Trust. In such a case, to cover all
or part of the short position, the Underwriters may exercise the over-allotment
option described above or may purchase Capital Securities in the open market
following completion of the initial offering of Capital Securities. The
Underwriters also may engage in stabilizing transactions in which they bid for,
and purchase, shares of the Capital Securities at a level above that which might
otherwise prevail in the open market for the purpose of preventing or retarding
a decline in the market price of the Capital Securities. The Underwriters also
may reclaim any selling concessions
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allowed to an Underwriter or dealer if the Underwriters repurchase shares
distributed by that Underwriter or dealer. Any of the foregoing transactions may
result in the maintenance of a price for the Capital Securities at a level above
that which might otherwise prevail in the open market. Neither the Company nor
any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Capital Securities. The Underwriters are not required
to engage in any of the foregoing transactions and, if commenced, such
transactions may be discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
Underwriters' Compensation for the Underwriters' arranging the investment
therein of such proceeds an amount of $0.75 per Capital Security for the
accounts of the several Underwriters.
The Company and the Trust have agreed that, during the period beginning
from the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the termination of trading restrictions on the Capital
Securities, as communicated to the Company by the Underwriters and (ii) 90
days following the Closing Date, they will not offer, sell, contract to sell or
otherwise dispose of any additional securities of the Trust or the Company
substantially similar to the Capital Securities or any securities convertible
into or exchangeable for or that represent the right to receive any such similar
securities, without the consent of the Underwriters, which consent shall not
be unreasonably withheld.
Prior to this offering, there has been no public market for the Capital
Securities. An application will be made to have the Capital Securities approved
for listing on the New York Stock Exchange (the "NYSE") under the symbol
"CBHPrT", subject to notice of issuance. In order to meet one of the
requirements for listing the Capital Securities on the NYSE, the Underwriters
will undertake to sell lots of 100 or more Capital Securities to a minimum of
400 beneficial holders. Trading of the Capital Securities on the NYSE is
expected to commence within 30 days after the initial delivery of the Capital
Securities. The Underwriters have advised the Company that they intend to
make a market in the Capital Securities prior to commencement of trading on the
NYSE, but are not obligated to do so and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of or the
existence of the trading market for the Capital Securities.
Participation by the Underwriters in this offering will be in
compliance with Rule 2810 of the NASD Conduct Rules, including the requirement
that the Underwriters shall not confirm sales to any accounts over which they
exercise discretionary authority without the prior written approval of the
customer.
The Company and the Trust have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The Underwriters or their affiliates have provided from time to time,
and expect to provide in the future, investment or commercial banking services
to the Company and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
LEGAL MATTERS
Certain legal matters will be passed upon for the Corporation and the
Trust by Blank Rome Comisky & McCauley, and for the Underwriters by Morgan,
Lewis & Bockius LLP. Jack R Bershad, a partner in Blank Rome Comisky & McCauley,
is a director of the Company, Commerce NJ and Commerce PA. Mr. Bershad and
certain other partners of Blank Rome Comisky & McCauley are shareholders of the
Company.
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INDEPENDENT AUDITORS
The consolidated financial statements of Commerce Bancorp, Inc. at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement
which, as to the years 1996, 1995, and 1994, are based in part on the reports of
other auditors. The financial statements referred to above are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Independence Bancorp, Inc. as
of December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996, incorporated by reference herein, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
-81-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Audited Annual Financial Statements:
Report of Independent Auditors......................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-2
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994.................. F-3
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994.................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994.................. F-5
Notes to Consolidated Financial Statements............................. F-6
-82-
<PAGE>
Report of Independent Auditors
To 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 did not audit the financial statements of Independence Bancorp,
Inc., a wholly-owned subsidiary, which statements reflect total assets
constituting 11.6% in 1996 and 11.9% in 1995, and net interest income
constituting 13.6% in 1996, 13.4% in 1995, and 12.2% in 1994, of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Independence Bancorp, Inc., is based solely on the reports of
the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, 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.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
May 30, 1997
F-1
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS:
Cash and due from banks .......................................... $ 181,858 $ 167,487
Federal funds sold ............................................... 26,975 42,370
---------- ----------
Cash and cash equivalents ................................... 208,833 209,857
Mortgages held for sale .......................................... 1,314 5,442
Trading securities ............................................... 15,327 8,843
Securities available for sale .................................... 767,487 571,553
Securities held to maturity ...................................... 837,512 772,999
(market value 1996, $815,888; 1995, $761,865)
Loans ............................................................ 1,266,855 1,048,815
Less allowance for loan losses .............................. 17,975 16,014
---------- ----------
1,248,880 1,032,801
Bank premises and equipment, net ................................. 94,339 79,744
Other assets ..................................................... 58,460 57,348
---------- ----------
$3,232,152 $2,738,587
========== ==========
LIABILITIES:
Deposits:
Demand:
Interest bearing ........................................ $ 884,310 $ 748,861
Non-interest bearing .................................... 626,664 520,228
Savings ..................................................... 638,660 550,450
Time ........................................................ 770,036 709,647
---------- ----------
Total Deposits .......................................... 2,919,670 2,529,186
Other borrowed money ............................................. 70,000
Other liabilities ................................................ 12,185 2,347
Obligation to Employee Stock Ownership Plan (ESOP) ............... 3,333 4,359
Long-term debt ................................................... 23,000 23,000
---------- ----------
3,028,188 2,558,892
STOCKHOLDERS' EQUITY:
Common stock, 15,689,167 shares issued (13,237,643 shares in 1995) 23,546 18,894
Series C preferred stock, 417,000 shares authorized,
issued and outstanding (liquidating preference: $18.00
per share totaling $7,506) .............................. 7,506 7,506
Series A preferred stock .................................... 30 777
Capital in excess of par or stated value .................... 144,551 125,911
Retained earnings ........................................... 36,086 34,276
---------- ----------
211,719 187,364
Less commitment to ESOP ..................................... 4,403 5,553
Less treasury stock, at cost, 267,378 shares
in 1996 (164,294 shares in 1995) ........................ 3,352 2,116
---------- ----------
Total stockholders' equity ......................... 203,964 179,695
---------- ----------
$3,232,152 $2,738,587
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
Years ended December 31,
-----------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................. $104,842 $ 92,558 $ 75,874
Interest on investment securities ...................... 95,026 90,097 88,099
Other interest ......................................... 2,867 3,463 971
-------- -------- --------
Total interest income ......................... 202,735 186,118 164,944
======== ======== ========
INTEREST EXPENSE:
Interest on deposits:
Demand ............................................ 19,842 18,009 11,296
Savings ........................................... 12,907 12,609 13,396
Time .............................................. 41,212 37,197 21,268
-------- -------- --------
Total interest on deposits .................... 73,961 67,815 45,960
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 ........................ 77,322 76,219 61,947
-------- -------- --------
Net interest income .................................... 125,413 109,899 102,997
Provision for loan losses .............................. 4,857 2,774 5,224
-------- -------- --------
Net interest income after provision for loan losses .... 120,556 107,125 97,773
-------- -------- --------
NON-INTEREST INCOME:
Deposit charges and service fees ....................... 21,850 17,661 14,933
Other operating income ................................. 9,251 5,856 4,017
Net investment securities gains ........................ 1,675 106 641
-------- -------- --------
Total non-interest income ..................... 32,776 23,623 19,591
======== ======== ========
NON-INTEREST EXPENSE:
Salaries ............................................... 37,668 30,768 26,694
Benefits ............................................... 9,389 8,153 7,500
Occupancy .............................................. 12,418 10,144 9,280
Furniture and equipment ................................ 14,336 10,783 9,232
Office ................................................. 10,646 8,318 6,780
Audit and regulatory fees and assessments .............. 3,173 3,721 5,741
Marketing .............................................. 4,777 3,409 2,855
Other real estate (net) ................................ 2,329 2,848 3,618
Other .................................................. 14,295 11,172 11,034
-------- -------- --------
Total non-interest expenses ....................... 109,031 89,316 82,734
-------- -------- --------
Income before income taxes ............................. 44,301 41,432 34,630
Provision for federal and state income taxes ........... 16,051 14,780 12,485
-------- -------- --------
Net income ............................................. 28,250 26,652 22,145
Dividends on preferred stocks .......................... 842 1,122 1,633
-------- -------- --------
Net income applicable to common stock .................. $ 27,408 $ 25,530 $ 20,512
======== ======== ========
Net income per common and common equivalent share:
Primary ........................................... $ 1.87 $ 1.88 $ 1.83
======== ======== ========
Fully diluted ..................................... $ 1.76 $ 1.77 $ 1.66
======== ======== ========
Average common and common equivalent shares outstanding:
Primary ........................................... 14,679 13,558 11,222
======== ======== ========
Fully diluted ..................................... 16,037 15,024 13,218
======== ======== ========
Cash dividends declared, common stock .................. $ 0.66 $ 0.58 $ 0.53
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................ $ 28,250 $ 26,652 $ 22,145
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses ........................................ 4,857 2,774 5,224
Provision for depreciation, amortization, and accretion .......... 16,156 14,423 17,057
Gains on sales of securities available for sale .................. (1,675) (106) (641)
Gains on sales of loans .......................................... (20) (22) (3)
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 .............................................. (2,896) (1,426) (3,073)
Net increase in trading securities ............................... (6,484) (8,843)
Decrease (increase) in other assets ............................. 524 (9,530) 13,037
Increase (decrease) in other liabilities ......................... 9,758 (1,824) (19,482)
Deferred income tax expense (benefit) ............................ 226 (575) (1,105)
--------- --------- ---------
Net cash provided by operating activities .................... 52,824 18,344 74,047
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................. 107,666 146 961
Proceeds from the maturity of securities available for sale ........... 187,120 32,052 45,798
Proceeds from the maturity of securities held to maturity ............. 125,283 113,762 133,924
Purchase of securities available for sale ............................. (497,926) (52,623)
Purchase of securities held to maturity ............................... (192,168) (51,432) (387,579)
Net increase in loans ................................................. (227,331) (124,410) (113,032)
Proceeds from sales of loans .......................................... 9,311 6,720 6,027
Purchases of premises and equipment ................................... (25,766) (24,878) (22,234)
--------- --------- ---------
Net cash used by investing activities ........................ (513,811) (100,663) (336,135)
FINANCING ACTIVITIES:
Net increase in demand and savings deposits ........................... 330,095 242,354 131,962
Net increase (decrease) in time deposits .............................. 60,389 187,585 (22,313)
Net increase (decrease) in other borrowed money ....................... 70,000 (312,895) 177,895
Issuance of common stock .............................................. 6,859 25,774
Dividends paid ........................................................ (9,298) (7,773) (6,355)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans ...................... 4,288 2,728 1,927
Purchase of treasury stock ............................................ (352) (214)
Other ................................................................. (2,370) 189 114
--------- --------- ---------
Net cash provided by financing activities .................... 459,963 137,610 283,016
(Decrease) increase in cash and cash equivalents ...................... (1,024) 55,291 20,928
Cash and cash equivalents at beginning of year ........................ 209,857 154,566 133,638
--------- --------- ---------
Cash and cash equivalents at end of year .............................. $ 208,833 $ 209,857 $ 154,566
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ..................................................... $ 75,731 $ 76,254 $ 60,630
Income taxes ................................................. 14,449 14,165 12,960
Other noncash activities:
Transfer of securities to securities available for sale ...... $ 401,826
</TABLE>
See accompanying notes.
F-4
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Capital in
Excess of
Common Preferred Par or Retained Commitment Treasury
Stock Stock Stated Value Earnings to ESOP Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $12,988 $ 8,956 $86,742 $13,039 $ (7,365) $ (1,550) $112,810
Accounting change adjustment for unrealized
gain on securities available for sale,
net of tax ........................... 954 954
Net income.................................. 22,145 22,145
5% common stock dividend and cash paid
in lieu of fractional shares (348 shares) 543 5,199 (5,752) (10)
Cash dividends, common stock ($0.53 per share) (4,712) (4,712)
Common stock issued in connection with
incentive stock option plan (100 shares) 157 818 (214) 761
Cash dividends, preferred stock............. (1,633) (1,633)
Decrease in obligation to ESOP.............. 673 673
Conversion of Series B preferred stock to
common stock 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................. (5,494) (5,494)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 15,241 8,283 92,967 18,547 (6,692) (1,764) 126,582
Net income.................................. 26,652 26,652
5% common stock dividend and cash paid in
lieu of fractional shares (419 shares). 655 7,244 (7,869) 30
Cash dividends, common stock ($0.58 per share) (6,638) (6,638)
Common stock issued in connection with
incentive stock option plan (108 shares) 169 899 (352) 716
Cash dividends, preferred stock............. (1,122) (1,122)
Decrease in obligation to ESOP.............. 1,139 1,139
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 (89 shares)...... 134 1,525 1,659
Fair value adjustment on available for sale
securities, net of tax................. 4,706 4,706
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 18,894 8,283 125,911 34,276 (5,553) (2,116) 179,695
Acquisition of Commerce National Insurance
Services (713 shares) ................. 1,114 (1,135) (21)
- -----------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1996 20,008 8,283 124,776 34,276 (5,553) (2,116) 179,674
Net income.................................. 28,250 28,250
5% common stock dividend and cash paid
in lieu of fractional shares (534
shares) ............................... 834 10,388 (11,244) (22)
Cash dividends, common stock ($0.66 per
share) ................................ (8,430) (8,430)
Common stock issued in connection with
incentive stock option plan (78 shares). 121 622 743
Cash dividends, preferred stock............. (845) (845)
Decrease in obligation to ESOP.............. 1,150 1,150
Common stock issued pursuant to rights offering
(727 shares)........................... 1,136 5,465 6,601
Tax benefit from ESOP dividends............. 197 197
Proceeds from issuance of common stock under
dividend reinvestment plan (175 shares) 264 3,281 3,545
Conversion and redemption of preferred stock 1,183 (747) (178) 258
Purchase of common stock of former
Independence shareholders.............. (1,236) (1,236)
Fair value adjustment on available for sale
securities, net of tax............................ (5,921) (5,921)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $23,546 $ 7,536 $144,551 $ 36,086 $ (4,403) $ (3,352) $203,964
===================================================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
1. Significant Basis of Presentation
Accounting
Policies 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), Commerce Bank/Shore, N.A. (Commerce
Shore), and Commerce Bank/North (Commerce North). The
former Independence Bancorp, Inc. (Independence) ,
Bergen County, New Jersey, was merged into Commerce
Bancorp, Inc. on January 21, 1997 and its
wholly-owned subsidiary bank, Independence Bank of
New Jersey, was thereafter renamed Commerce
Bank/North. 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
Company's originally reported results of operations
have been restated herein to include Commerce North's
results of operations for all periods presented. 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, Southern
New Jersey and Northern 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
non-interest income.
F-6
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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.
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.
F-7
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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 $34,649,000 and $35,391,000,
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 recognize 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.
2. Mergers On November 15, 1996, two insurance brokerage
and agencies, Keystone National Companies, Inc., Cherry
Acquisitions 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. 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 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.
F-8
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
3. Investment A summary of the amortized cost and market value of
Securities securities available for sale and securities held to
maturity (in thousands) at December 31,1996 and 1995
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government agency and mortgage-
backed obligations............. $717,560 $ 108 $ (10,352) $707,316
Obligations of state and political
subdivisions.................. 15,670 73 15,743
Equity securities................... 2,832 1,162 3,994
Other............................... 40,434 40,434
-------------- ------------- ------------- -----------
Securities available for sale....... $776,496 $ 1,343 $ (10,352) $767,487
============== ============= ============ ===========
U.S. Government agency and mortgage-
backed obligations............... $798,345 $ 218 $ (21,860) $776,703
Obligations of state and political
subdivisions..................... 22,674 19 (1) 22,692
Other............................... 16,493 16,493
-------------- ------------- ------------- -----------
Securities held to maturity......... $837,512 $ 237 $ (21,861) $815,888
============== ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1995
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
U.S. Government agency and mortgage-
backed obligations............. $555,975 $ 2,397 $ (2,559) $555,813
Obligations of state and political
subdivisions..................
Equity securities................... 2,496 400 2,896
Other............................... 12,844 12,844
-------------- ------------- -------------- ------------------
Securities available for sale....... $571,315 $ 2,797 (2,559) $571,553
============== ============= ============= ==================
U.S. Government agency and mortgage-
backed obligations............... $738,511 $ 404 $ (11,551) $727,364
Obligations of state and political
subdivisions..................... 17,597 18 (5) 17,610
Other............................... 16,891 16,891
-------------- ------------- -------------- ------------------
Securities held to maturity......... $772,999 $ 422 $ (11,556) $761,865
============== ============= ============= ==================
</TABLE>
<PAGE>
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............................ $83,863 $83,989 $ 41,523 $ 41,532
Due after one year through five years.............. 44,254 44,039 64,086 63,475
Due after five years through ten years............. 9,516 9,553 4,583 4,494
Due after ten years................................ 21,777 20,730 1,794 1,777
Mortgage-backed securities......................... 614,254 605,182 725,526 704,610
Equity securities.................................. 2,832 3,994
--------------- -------------- ------------- --------------
$776,496 $767,487 $837,512 $815,888
=============== ============== ============= ==============
</TABLE>
F-9
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Proceeds from sales of securities available for sale
during 1996, 1995, and 1994 were $107,666,000,
$146,000, and $961,000, respectively. Gross gains of
$1,675,000, $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 $269,617,000 and
$220,702,000, 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 $401,800,000
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 $861,000.
At December 31, 1996, the unrealized depreciation in
securities available for sale included in retained
earnings totaled $5,755,000, net of tax, compared to
unrealized appreciation of $166,000, net of tax, at
December 31, 1995.
4. Loans The following is a summary of loans outstanding
(in thousands) at December 31, 1996 and 1995:
December 31,
-----------------------------------
1996 1995
--------------- ---------------
Commercial real estate:
Owner-occupied....................... $167,702 $149,258
Other................................ 288,733 250,782
Construction......................... 52,372 52,593
--------------- ---------------
508,807 452,633
Commercial loans:
Term................................. 153,793 126,120
Line of credit....................... 91,418 68,372
Demand............................... 529 407
--------------- ---------------
245,740 194,899
Consumer:
Mortgages (1-4 family residential)... 153,615 133,893
Installment.......................... 54,548 44,781
Home equity.......................... 293,591 212,845
Credit lines......................... 10,554 9,764
--------------- ---------------
512,308 401,283
--------------- ---------------
$1,266,855 $1,048,815
=============== ===============
F-10
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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
$16,288,000 and $15,267,000, 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......................... $ 20,812
New loans.................................. 8,995
Loan payments.............................. 7,671
----------------
Balance, December 31....................... $ 22,136
================
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.
5. Allowance The following is an analysis of changes in the
for Loan allowance for loan losses (in thousands) for 1996,
Losses 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Balance, January 1............................. $16,014 $14,666 $12,515
Provision charged to operating expense......... 4,857 2,774 5,224
Recoveries of loans previously
charged off............................... 655 1,021 605
Loan charge-offs............................... (3,551) (2,447) (3,678)
------------- ------------- --------------
Balance, December 31........................... $17,975 $16,014 $14,666
============= ============= ==============
</TABLE>
6. Nonaccrual The total of non-performing loans (nonaccrual and
and Restruc- restructured loans) was $11,252,000 and $10,218,000
tured Loans at December 31, 1996 and 1995, respectively.
and Other Non-performing loans of $1,758,000, $5,664,000, and
Real Estate $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 ($8,252,000 and $11,862,000 at December 31,
1996 and 1995, respectively) is included in other
assets.
F-11
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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 $9,338,000 and
$8,387,000, 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
$9,213,000 and $9,893,000 respectively. Interest
income of approximately $1,226,000 and $1,079,000
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 A summary of bank premises and equipment (in
Premises, thousands) is as follows:
Equipment,
and Leases
December 31
-------------------------
1996 1995
---------- -----------
Land......................................... $20,291 $16,796
Buildings.................................... 44,230 36,282
Leasehold improvements....................... 9,763 8,707
Furniture, fixtures and equipment............ 49,751 40,761
Leased property under capital leases......... 124 124
---------- ----------
124,159 102,670
Less accumulated depreciation and
amortization.......................... 29,820 22,926
---------- ----------
$94,339 $79,744
========== ==========
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.
F-12
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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.
Commerce North leases one of its branches from a
director and its headquarters facility from a
partnership in which a director has a substantial
interest. The aggregate annual rental under these
related party leases for 1996, 1995, and 1994 was
approximately $503,000, $554,000 and $477,000,
respectively. The leases expire in 2007 and 2017.
Total rent expense charged to operations under
operating leases was approximately $3,706,000 in
1996, $3,834,000 in 1995, and $3,516,000 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 $ 4,275
1998....................................... 12 3,587
1999....................................... 12 3,348
2000....................................... 12 3,050
2001....................................... 12 2,871
Later years................................ 155 16,292
---------- ----------
Net minimum lease payment.................. $215 $33,423
---------- ----------
Less amount representing interest.......... 111
---------- ----------
Present value of net minimum lease
payments.............................. $104
---------- ----------
F-13
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
The Company obtained interior design and general
contractor services for $642,000, $596,000, 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.
8. Deposits The aggregate amount of time certificates of deposits
in denominations of $100,000 or more was $280,323,000
and $235,023,000 at December 31, 1996 and 1995,
respectively.
9. Other Other borrowed money consisted primarily of
Borrowed securities sold under agreements to repurchase, which
Money ranged up to three months maturity. The following
table represents information for securities sold
under agreements to repurchase.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1995 1996
--------------------------- -----------------------------
Average
------------------------------------------------------------
Amount Rate Amount Rate
------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
As of December 31, 1996, the Company had a line of
credit of $366,393,000 available from the Federal
Home Loan Bank of New York.
10. Long-Term On July 15, 1993, the Company issued $23,000,000 of
Debt 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.
F-14
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
11. Income Taxes The provision for income taxes consists of the
following (in thousands):
1996 1995 1994
---------- ------------ -----------
Current:
Federal......................... $15,026 $14,618 $12,511
State........................... 864 985 806
---------- ------------ -----------
Deferred:
Federal......................... 106 (707) (765)
State........................... 55 (116) (67)
---------- ------------ -----------
$16,051 $14,780 $12,485
========== ============ ===========
The above provision includes income taxes related to
securities gains of $586,000, $37,000 and $390,000
for 1996, 1995, and 1994, respectively.
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) (0.5)
Tax-exempt interest on securities..... (1.0) (0.3) (0.1)
Purchase accounting adjustments....... 0.3 0.2 0.2
Other................................. 2.2 1.2 1.5
------ ----- -----
36.2% 35.7% 36.1%
====== ===== =====
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.
F-15
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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........................ $ 5,221 $ 4,855
Other reserves............................ 436 181
Fair value adjustment, available for
sale securities...................... 2,333
Investment valuations..................... 48 48
Net operating losses...................... 181
Other..................................... 865 712
-------------- --------------
Total deferred tax assets................. 8,903 5,977
-------------- --------------
Deferred tax liabilities:
Depreciation.............................. 1,564 828
Intangibles............................... 227 102
Fair value adjustment, available for
sale securities...................... 238
Other..................................... 1,101 506
-------------- --------------
Total deferred tax liabilities............ 2,892 1,674
-------------- --------------
Net deferred assets....................... $ 6,011 $ 4,303
============== ==============
12. Commitments In the normal course of business, there are various
and Letters of outstanding commitments to extend credit, such as
Credit letters of 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 $19,095,000.
In addition, the Banks are committed as of December
31, 1996 to advance $49,867,000 on construction
loans, $119,779,000 on home equity lines of credit
and $60,031,000 on lines of credit. All other
commitments total approximately $133,182,000. 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 resulted in
the issuance of 611,134 additional common shares and
cash of $23,850 in lieu of fractional shares.
F-16
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
14. Common At December 31, 1996 , the Company's common stock had
Stock and a par value of $1.5625. The Company had 20,000,000
Preferred shares authorized as of this date.
Stock
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).
On October 16, 1992, the Company issued 776,875
shares of non-voting Series A 9% cumulative
convertible preferred stock. Each share of the Series
A preferred stock gave the holder thereof the option
to purchase one share of common stock for $9.60 per
share, subject to adjustment in certain events.
During 1996, the Company exercised its option to
redeem all outstanding shares of the Series A
preferred stock. 30,000 of the redeemed shares were
converted into 30,000 shares of non-convertible
non-voting preferred stock, which were held
in treasury by the Company at year-end. The remaining
shares were converted into common stock.
In conjunction with the redemption, approximately
727,000 shares of common stock were issued upon the
exercise of the attached purchase options. Net
proceeds to the Company were approximately $6.6
million.
15. Benefit Plans Employee Stock Option Plan
The Company had 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.
F-17
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Information concerning option activity for 1996 is as
follows:
Weighted
Shares Average Exercise
Under Option Price
------------- ----------------
Balance at January 1, 1996......... 1,210,337 $ 12.24
Options granted.................... 710,663 24.33
Options exercised.................. 90,232 10.99
Options cancelled.................. 27,238 15.82
Balance at December 31, 1996....... 1,797,993 17.06
Information concerning options outstanding as of
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Number Contractual Exercise Number Average
Exercise Prices Outstanding Life Price Exercisable Exercise Price
- --------------------- ------------- -------------- ----------- ------------ ---------------
<C> <C> <C> <C> <C> <C>
$4.44 to $14.99...... 816,571 6.57 $10.75 718,513 $10.66
$15.00 or greater.... 981,422 9.74 22.32 351,170 17.01
</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......................... $ 27,257 $ 26,014
Pro forma earnings per share:
Primary............................. $ 1.81 $ 1.84
Fully diluted....................... 1.70 1.73
F-18
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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.
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.
In addition, Commerce NJ has a loan outstanding to
the Employee Stock Ownership Plan of the former
Independence Bancorp ("Independence ESOP") totaling
$1,070,000 at December 31, 1996. This amount has been
recorded as a deduction from stockholders' equity.
The loan was paid off in May, 1997. The Independence
ESOP has applied to the Internal Revenue Service for
a ruling with regard to its termination. The total
contribution expense associated with the Independence
ESOP for 1996, 1995 and 1994 was $124,000, $134,000,
and $98,000, respectively. The Company does not
anticipate making any further contributions to the
Independence ESOP.
F-19
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Post-employment and Post-retirement Benefits
The Company offers no post-employment and
post-retirement benefits.
16. Fair Value FASB Statement No. 107, "Disclosures about Fair Value
of Financial of Financial Instruments" (FAS 107), requires
Instruments 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....... $ 208,833 $ 208,833 $ 209,857 $ 209,857
Mortgages held for sale......... 1,314 1,314 5,442 5,442
Trading securities.............. 15,327 15,327 8,843 8,843
Investment securities........... 1,604,999 1,583,375 1,344,552 1,333,418
Loans (net)..................... 1,248,880 1,270,178 1,032,801 1,064,199
Financial liabilities:
Deposits........................ 2,919,670 2,931,212 2,529,186 2,537,757
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>
F-20
<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.
F-21
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
17. Quarterly The following represents summarized unaudited
Financial quarterly financial data of the Company which, in the
Data opinion of management, reflects adjustments
(Unaudited) (comprising only normal recurring accruals) necessary
for fair presentation (in thousands, except per share
amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
December September June March
1996 31 30 30 31
- --------------------------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income........................ $ 54,479 $ 51,874 $ 49,093 $ 47,289
Interest expense....................... 20,785 19,695 18,526 18,316
Net interest income.................... 33,694 32,179 30,567 28,973
Provisions for loan losses............. 2,309 980 774 794
Net investment securities gains........ 820 36 48 771
Provision for federal and state income
taxes............................... 4,127 3,877 4,107 3,940
Net income............................. 6,445 7,134 7,510 7,161
Net income applicable to common stock.. 6,305 6,993 7,230 6,880
Net income per common share:
Primary............................ $ 0.40 $ 0.47 $ 0.51 $ 0.49
Fully diluted...................... 0.39 0.44 0.48 0.45
1995
- ---------------------------------------
Interest income........................ $ 47,209 $ 46,806 $ 46,792 $ 45,311
Interest expense....................... 18,731 19,130 19,449 18,909
Net interest income.................... 28,478 27,676 27,343 26,402
Provision for loan losses.............. 661 528 548 1,037
Provision for federal and state income
taxes.............................. 3,784 3,997 3,718 3,281
Net income............................. 7,151 7,137 6,545 5,819
Net income applicable to common stock.. 6,960 6,827 6,236 5,507
Net income per common share:
Primary............................ $ 0.49 $ 0.49 $ 0.46 $ 0.44
Fully diluted...................... 0.47 0.46 0.43 0.41
</TABLE>
F-22
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
18. Condensed Financial Statements of the Parent Company and Other Matters
<TABLE>
<CAPTION>
Balance Sheets
- -----------------------------------------------------------------------
(dollars in thousands) December 31,
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 ................................................... 209,335 190,067
Other assets........................................................... 8,713 8,850
------------- -------------
$234,793 $209,083
============= =============
Liabilities
Other liabilities...................................................... $ 4,496 $ 2,029
Long-term debt......................................................... 23,000 23,000
Obligations to Employee Stock Ownership Plan (ESOP).................... 3,333 4,359
------------- -------------
30,829 29,388
------------- -------------
Stockholders' Equity
Common stock........................................................... 23,546 18,894
Series C preferred stock............................................... 7,506 7,506
Series A preferred stock............................................... 30 777
Capital in excess of par or stated value............................... 144,551 125,911
Retained earnings...................................................... 36,086 34,276
------------- -------------
211,719 187,364
------------- -------------
Less commitment to ESOP................................................ 4,403 5,553
Less treasury stock.................................................... 3,352 2,116
------------- -------------
Total stockholders' equity......................................... 203,964 179,695
============= =============
$ 234,793 $ 209,083
============= =============
</TABLE>
F-23
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
<TABLE>
<CAPTION>
Statements of Income
- ------------------------------------------------------
(dollars in thousands) Years ended December 31,
-----------------------------------------------
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 expense (benefit).......................... (975) (956) (834)
------------ ------------- -------------
9,346 6,187 2,683
Equity in undistributed income of Banks............... 18,904 20,465 19,462
------------ ------------- -------------
Net income............................................ 28,250 26,652 22,145
Dividends on preferred stock.......................... 842 1,122 1,633
------------ ------------- -------------
Net income applicable to common stock................. $ 27,408 $ 25,530 $ 20,512
============ ============= =============
</TABLE>
F-24
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
<TABLE>
<CAPTION>
Statements of Cash Flows
- ------------------------------------------------------
(dollars in thousands) Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net income........................................ $ 28,250 $ 26,652 $ 22,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of Banks................. (18,904) (20,465) (19,462)
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 b operating activities.. 10,911 7,216 2,785
Investing activities:
Investments 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>
F-25
<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, Commerce Shore, and
Commerce North can declare dividends in 1997 without approval
of the Comptroller of the Currency of approximately
$23,259,000, $4,116,000, $7,201,000, and $5,125,000,
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.
F-26
<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
-------------- -------------- -------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
- --------------------------------------------
Company
Risk-based capital ratios:
Tier 1............................ $203,898 12.57% $ 64,908 4.00% $ 97,362 6.00%
Total capital..................... 244,873 15.09 129,816 8.00 162,269 10.00
Leverage ratio......................... 203,898 6.46 94,684 3.00 157,807 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............................ $173,176 12.64% $ 54,808 4.00% $ 82,212 6.00%
Total capital..................... 212,190 15.49 109,616 8.00 137,019 10.00
Leverage ratio......................... 173,176 6.43 80,772 3.00 134,620 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>
F-27
<PAGE>
==============================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained or
incorporated by reference in this Prospectus in connection with the offer made
by this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by Corporation, the Trust or
by the Underwriters. Neither the delivery of this Prospectus nor any sale made
hereunder and thereunder shall, under any circumstances, create an implication
that there has been no change in the affairs of the Corporation or the Trust
since the date hereof. This Prospectus does not constitute an offer or
solicitation by anyone in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
---------------------
TABLE OF CONTENTS
---------------------
Page
Available Information...................................
Incorporation of Certain Documents by Reference.........
Summary.................................................
Selected Consolidated Financial Data....................
Risk Factors............................................
Commerce Bancorp, Inc. .................................
Use of Proceeds. .......................................
Ratios of Earnings to Fixed Charges.....................
Accounting Treatment....................................
Regulatory Treatment....................................
Capitalization..........................................
Commerce Capital Trust I................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......
Description of Capital Securities.......................
Description of Junior Subordinated Debentures...........
Description of Guarantee................................
Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the Guarantee....
Certain Federal Income Tax Consequences.................
ERISA Considerations....................................
Underwriting............................................
Legal Matters...........................................
Independent Auditors....................................
Index to Financial Statements...........................
===============================================================================
<PAGE>
===============================================================================
$50,000,000 Capital Securities
COMMERCE CAPITAL TRUST I
8-3/4% Capital Securities
fully and unconditionally guaranteed,
as described herein, by
COMMERCE BANCORP, INC.
----------
PROSPECTUS
----------
Wheat First Butcher Singer Janney Montgomery Scott Inc.
June 6, 1997
===============================================================================
