SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File #0-12874
COMMERCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
(Address of Principal Executive Offices) (Zip Code)
(609) 751-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ______
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock 22,592,854
(Title of Class) (No. of Shares Outstanding
as of 8/07/98)
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 1998 and December 31, 1997
Consolidated Statements of Income (unaudited)
Three months ended June 30, 1998 and
June 30, 1997, and six months ended June
30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1998 and
June 30, 1997
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
1
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
June 30, December 31,
----------------------------
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Cash and due from banks $223,172 $167,900
Federal funds sold 0 0
----------------------------
Cash and cash equivalents 223,172 167,900
Mortgages held for sale 3,348 7,260
Trading securities 35,098 7,911
Securities available for sale 1,304,742 1,315,120
Securities held to maturity 1,039,730 874,032
(market value 1998-$1,037,962; 1997-$869,815)
Loans 1,661,607 1,411,289
Less allowance for loan losses 23,331 21,261
----------------------------
1,638,276 1,390,028
Bank premises and equipment, net 127,031 111,759
Other assets 78,300 64,957
----------------------------
$4,449,697 $3,938,967
============================
Liabilities Deposits:
Demand:
Interest-bearing $1,225,937 $1,111,302
Noninterest-bearing 874,714 762,843
Savings 833,697 705,906
Time 928,242 789,353
----------------------------
Total deposits 3,862,590 3,369,404
Other borrowed money 189,519 223,300
Other liabilities 33,270 12,695
Obligation to Employee Stock Ownership Plan (ESOP) 1,795 2,308
Trust Capital Securities - Commerce Capital Trust I 57,500 57,500
Long-term debt 23,000 23,000
----------------------------
4,167,674 3,688,207
Stockholders' Common stock, 22,629,161 shares issued (21,500,804 shares in 1997) 28,325 25,309
Equity Series C preferred stock, 417,000 shares in 1997 7,506
Capital in excess of par or stated value 213,915 167,529
Retained earnings 36,528 50,592
Accumulated other comprehensive income 6,674 3,756
----------------------------
285,442 254,692
Less commitment to ESOP 1,795 2,308
Less treasury stock, at cost, 100,159 shares in 1998
(100,159 in 1997) 1,624 1,624
----------------------------
Total stockholders' equity 282,023 250,760
----------------------------
$4,449,697 $3,938,967
============================
</TABLE>
See accompanying notes
2
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(dollars in thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Interest and fees on loans $34,061 $29,819 $65,202 $57,932
income Interest on investments 37,349 29,010 73,745 55,824
Other interest 144 319 498 731
------------------------ ------------------------
Total interest income 71,554 59,148 139,445 114,487
------------------------ ------------------------
Interest Interest on deposits:
expense Demand 8,272 5,838 15,536 11,309
Savings 4,431 4,108 8,845 7,878
Time 13,225 10,926 25,895 21,592
------------------------ ------------------------
Total interest on deposits 25,928 20,872 50,276 40,779
Interest on other borrowed money 942 1,004 2,943 1,464
Interest on long-term debt 1,782 818 3,564 1,324
------------------------ ------------------------
Total interest expense 28,652 22,694 56,783 43,567
------------------------ ------------------------
Net interest income 42,902 36,454 82,662 70,920
Provision for loan losses 1,569 1,326 2,779 2,952
------------------------ ------------------------
Net interest income after provision for
loan losses 41,333 35,128 79,883 67,968
Noninterest Deposit charges and service fees 8,415 6,463 16,498 12,661
income Other operating income 11,377 7,108 23,182 13,859
Net investment securities gains 920 0 920 0
------------------------ ------------------------
Total noninterest income 20,712 13,571 40,600 26,520
------------------------ ------------------------
Noninterest Salaries 16,985 12,669 32,996 24,571
expense Benefits 3,697 2,949 6,978 5,695
Occupancy 3,726 3,260 7,648 6,594
Furniture and equipment 5,620 4,440 10,986 8,481
Office 4,210 3,305 8,316 6,394
Audit and regulatory fees and assessments 494 379 996 754
Marketing 1,717 1,421 3,565 2,660
Other real estate (net) 405 492 825 961
Other 6,460 4,192 11,699 8,203
------------------------ ------------------------
Total noninterest expenses 43,314 33,107 84,009 64,313
------------------------ ------------------------
Income before income taxes 18,731 15,592 36,474 30,175
Provision for federal and state income taxes 6,584 5,558 12,880 10,707
------------------------ ------------------------
Net income 12,147 10,034 23,594 19,468
Dividends on preferred stocks 140 281
======================== ========================
Net income applicable to common stock $12,147 $9,894 $23,594 $19,187
======================== ========================
Net income per common and common equivalent share:
Basic $0.54 $0.47 $1.06 $0.92
------------------------ ------------------------
Diluted $0.51 $0.44 $1.00 $0.86
------------------------ ------------------------
Average common and common equivalent shares outstanding:
Basic 22,508 20,992 22,260 20,929
------------------------ ------------------------
Diluted 23,690 22,482 23,574 22,422
------------------------ ------------------------
Cash dividends declared, common stock $0.19 $0.15 $0.38 $0.30
======================== ========================
</TABLE>
See accompanying notes
3
<PAGE>
Commerce Bancorp, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------------
(dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities Net income $23,594 19,468
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,779 2,952
Provision for depreciation, amortization and accretion 11,079 8,124
Gains on securities available for sale (920)
Proceeds from sales of mortgages held for sale 21,373 10,598
Originations of mortgages held for sale (17,461) (11,959)
Net loan (chargeoffs) (709) (556)
Net increase in trading securities (27,187) (10,350)
Increase in other assets (15,334) (11,145)
Increase in other liabilities 20,575 3,542
----------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,789 10,674
Investing activities Proceeds from the sales of securities available for sale 264,306
Proceeds from the maturity of securities available for sale 136,369 60,692
Proceeds from the maturity of securities held to maturity 103,311 53,481
Purchase of securities available for sale (385,823) (151,963)
Purchase of securities held to maturity (270,638) (234,236)
Net increase in loans (256,580) (101,598)
Proceeds from sales of loans 6,262 6,569
Purchases of premises and equipment (23,367) (12,141)
----------------------------------------------------------------------------------------------
Net cash used by investing activies (426,160) (379,196)
Financing activities Net increase in demand and savings deposits 354,297 216,506
Net increase in time deposits 138,889 51,103
Net decrease in other borrowed money (33,781) 20,000
Dividends paid (8,228) (5,730)
Proceeds from issuance of Trust Capital Securities 57,500
Issuance of common stock 8,257
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 4,209 3,103
Other 1,144
----------------------------------------------------------------------------------------------
Net cash provided by financing activities 463,643 343,626
Increase (decrease) in cash and cash equivalents 55,272 (24,896)
Cash and cash equivalents at beginning of year 167,900 208,833
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $223,172 $183,937
----------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash
paid during the period for:
Interest $54,996 $44,088
Income taxes 13,789 11,547
Other noncash activities:
Transfer of securities to securities available for sale 83,773
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Consolidated Financial Statements
The consolidated financial statements included herein have
been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The
accompanying condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature. Certain amounts in prior
periods have been reclassified for comparative purposes. All common
stock per share information has been adjusted for the 5-for-4 stock
split in the form of a 25% stock dividend declared on June 29, 1998,
and payable July 24, 1998 to shareholders of record July 13, 1998.
These condensed consolidated financial statements should be
read in conjunction with the audited financial statements and the notes
thereto included in the registrant's Annual Report for the period ended
December 31, 1997. The results for the three months ended June 30, 1998
and the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31,
1998.
The consolidated financial statements include the accounts of
Commerce Bancorp, Inc. (the Company) and all of its subsidiaries,
including Commerce Bank, N.A. (Commerce NJ), Commerce
Bank/Pennsylvania, N.A., Commerce Bank/Shore, N.A., Commerce
Bank/North, Commerce Capital Trust I, and Commerce Capital Markets,
Inc. (CCMI). All material intercompany transactions have been
eliminated.
B. Commitments
In the normal course of business, there are various
outstanding commitments to extend credit, such as letters of credit and
unadvanced loan commitments, which are not reflected in the
accompanying consolidated financial statements. Management does not
anticipate any material losses as a result of these transactions.
5
<PAGE>
C. Employee Stock Ownership Plan (ESOP) Debt Guarantee
The Company has guaranteed a debt obligation of its Employee
Stock Ownership Plan (ESOP) which originated at $7,500,000 and has been
reduced to $1,795,000 through principal reductions. Accordingly, the
loan amount is reflected in the Company's consolidated balance sheet as
a liability and an equal amount, representing deferred employee
benefits, has been recorded as a deduction from stockholders' equity.
The ESOP obtained the loan in 1990 to acquire a new class of Company
Cumulative Convertible Preferred Stock (Series C) at a price of $18.00
per share. The loan was refinanced in 1994, and is payable in quarterly
installments with the final payment due January 28, 2000. The loan
bears interest at a variable rate, although the rate can be fixed at
future repricing dates in accordance with the loan agreement. Effective
March 1, 1998, the Trustees of the ESOP exercised their right to
convert all 417,000 shares of the Series C stock into 808,630 shares of
the Company's common stock, a portion of which is pledged as security
for the loan. As the Company makes annual contributions to the ESOP,
these contributions, plus dividends from the Company's common stock
held by the ESOP, will be used to repay the loan.
D. Recent Accounting Statements
As of January 1, 1998, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 130 "Reporting
Comprehensive Income" (FAS 130). FAS 130 establishes new standards for
reporting comprehensive income, which includes net income as well as
certain other items which result in a change to equity during the
period. Prior period financial statements have been reclassified to
conform to the requirements of FAS 130. The adoption of FAS 130 had no
impact on the Company's financial position or results of operations.
During the second quarter of 1998 and 1997, total comprehensive income,
which for the Company included net income and unrealized gains and
losses on the Company's available for sale securities, amounted to
$11.7 million and $17.8 million, respectively. For the six months ended
June 30, 1998 and 1997, total comprehensive income was $26.5 million
and $18.7 million, respectively.
In June, 1997, the FASB issued Statement No. 131 "Disclosures
About Segments of an Enterprise and Related Information" (FAS 131). FAS
131 requires disclosure of financial and descriptive information about
an enterprise's operating segments that meet certain quantitative
thresholds. This statement is effective for fiscal years beginning
after December 15, 1997, but is not required to be applied for interim
reporting in the initial year of application. The Company is currently
evaluating the impact of FAS 131 on the disclosures included in its
annual financial statements.
In June, 1998, the FASB issued Statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
is required to be adopted in years beginning after June 15, 1999.
Management does not anticipate the adoption of FAS 133 will have a
significant effect on earnings or the financial position of the
Company.
6
<PAGE>
E. Trust Capital Securities
On June 9, 1997, the Company issued $57.5 million of 8.75%
Trust Capital Securities through Commerce Capital Trust I, a newly
formed Delaware business trust subsidiary of the Company. The net
proceeds of the offering will be used for general corporate purposes,
which may include contributions to subsidiary banks to fund their
operations, the financing of one or more future acquisitions, repayment
of indebtedness of the Company or of its subsidiary banks, investments
in or extensions of credit to its subsidiaries, or the repurchase of
shares of the Company's outstanding common stock. All $57.5 million of
the Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes.
F. Commerce Capital Markets, Inc.
In the first quarter of 1998, the Company completed the
acquisition of A. H. Williams & Co. (Williams), Philadelphia, PA, a
public finance investment firm, and combined Williams with Commerce
Capital, the bank securities dealer division of Commerce NJ, to form
Commerce Capital Markets, Inc., a wholly-owned nonbank subsidiary of
the Company engaging in certain securities activities permitted under
Section 20 of the Glass-Steagall Act. The acquisition was completed by
the issuance of common stock of the Company totaling approximately
395,000 shares. The transaction was accounted for as a pooling of
interests. However, financial statements of the periods prior to the
acquisition have not been restated, as the changes, in the aggregate,
would be immaterial.
G. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic:
Net income $12,147 $10,034 $23,594 $19,468
Preferred stock dividends 140 281
------- ------- ------- -------
Net income applicable to common stock $12,147 $9,894 $23,594 $19,187
======= ======= ======= =======
Average common shares outstanding 22,508 20,992 22,260 20,929
======= ======= ======= =======
Net income per common share - basic $0.54 $0.47 $1.06 $0.92
======= ======= ======= =======
7
<PAGE>
Diluted:
Net income $12,147 $10,034 $23,594 $19,468
Additional ESOP contribution under the
if-converted method 12 23
------- ------- ------- -------
Net income applicable to common stock
on a diluted basis $12,147 $10,022 $23,594 $19,445
======= ======= ======= =======
Average common shares outstanding 22,508 20,992 22,260 20,929
Additional shares considered in diluted
computation assuming:
Exercise of stock options 1,182 843 1,103 846
Conversion of preferred stock 647 211 647
------- ------- ------- -------
Average common shares outstanding
on a diluted basis 23,690 22,482 23,574 22,422
======= ======= ======= =======
Net income per common share - diluted $0.51 $0.44 $1.00 $0.86
======= ======= ======= =======
</TABLE>
H. Subsequent Event
On August 12, 1998, the Company reached an agreement to
acquire Tinton Falls State Bank through the acquisition of its parent
company, Community First Banking Company (OTCBB Symbol: CFST). Tinton
Falls State Bank, headquartered in Tinton Falls, New Jersey, with $192
million in assets and $180 million in deposits, serves Monmouth County,
New Jersey through the operation of seven branch offices. The Company
will issue approximately 1.3 million shares to complete the
acquisition, which is expected to close in the fourth quarter of 1998.
The transaction will be accounted for as a pooling of interests.
Unaudited pro forma combined financial information for the
Company and Tinton Falls State Bank at or for the year ended December
31, 1997 includes the following (dollars in thousands):
Assets $4,104,000
Deposits 3,521,000
Stockholders' equity 263,000
Net interest income 156,000
Net income 42,000
Diluted net income per common share will not differ materially
from the $1.78 reported by the Company for 1997 after adjusting for the
5-for-4 stock split in the form of a 25% stock dividend declared on
June 29, 1998.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Capital Resources
At June 30, 1998, stockholders' equity totaled $282.0 million
or 6.34% of total assets, compared to $250.8 million or 6.37% of total
assets at December 31, 1997.
On June 9, 1997, the Company issued $57.5 million of 8.75%
Trust Capital Securities through Commerce Capital Trust I, a newly
formed Delaware business trust subsidiary of the Company. The net
proceeds of the offering will be used for general corporate purposes,
which may include contributions to subsidiary banks to fund their
operations, the financing of one or more future acquisitions, repayment
of indebtedness of the Company or of its subsidiary banks, investments
in or extensions of credit to its subsidiaries, or the repurchase of
shares of the Company's outstanding common stock. All $57.5 million of
the Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes.
The table below presents the Company's and Commerce NJ's
risk-based and leverage ratios at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Company
Risk based capital ratios:
Tier 1 $327,788 14.83% $88,414 4.00% $132,621 6.00%
Total capital 374,119 16.93 176,828 8.00 221,035 10.00
Leverage ratio 327,788 7.68 128,115 3.00 213,525 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $185,102 12.86% $57,569 4.00% $86,353 6.00%
Total capital 200,314 13.92 115,137 8.00 143,922 10.00
Leverage ratio 185,102 6.50 85,464 3.00 142,441 5.00
June 30, 1997
Company
Risk based capital ratios:
Tier 1 $280,148 15.58% $71,914 4.00% $107,872 6.00%
Total capital 323,519 17.99 143,829 8.00 179,786 10.00
Leverage ratio 280,148 8.14 103,237 3.00 172,062 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $152,428 12.70% $48,020 4.00% $72,030 6.00%
Total capital 165,604 13.79 96,040 8.00 120,051 10.00
Leverage ratio 152,428 6.74 67,878 3.00 113,130 5.00
</TABLE>
9
<PAGE>
At June 30, 1998, the Company's consolidated capital levels and
each of the Company's bank 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%. Management believes as
of June 30, 1998, that the Company and its subsidiaries meet all
capital adequacy requirements to which they are subject.
Deposits
Total deposits at June 30, 1998 were $3.86 billion, up $675.3
million, or 21% over total deposits of $3.19 billion at June 30, 1997,
and up by $493.2 million, or 15% from year-end 1997. Deposit growth
during the first six months of 1998 included core deposit growth in all
categories as well as growth from the public sector. The Company
experienced "same-store core deposit growth" of 15.8% at June 30, 1998
as compared to deposits a year ago for those branches open for more
than two years.
Interest Rate Sensitivity and Liquidity
The Company's risk of loss arising from adverse changes in the
fair market value of financial instruments, or market risk, is composed
primarily of interest rate risk. The primary objective of the Company's
asset/liability management activities is to maximize net interest
income, while maintaining acceptable levels of interest rate risk. The
Company's Asset/Liability Committee (ALCO) is responsible for
establishing policies to limit exposure to interest rate risk, and to
ensure procedures are established to monitor compliance with these
policies. The guidelines established by ALCO are reviewed by the
Company's Board of Directors.
Management considers the simulation of net interest income in
different interest rate environments to be the best indicator of the
Company's 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 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 June 30, 1998, the Company's income simulation model
indicates net income would decrease by 2.74% and 8.06% in the first
year and over a two year time frame, respectively, if rates decreased
as described above. The model projects that net income would decrease
by 2.85% and 2.81% in the first year and over a two year time frame,
respectively, if rates increased as described above. All of these net
income projections are within an acceptable level of interest rate risk
pursuant to the policy established by ALCO.
10
<PAGE>
In the event the Company's interest rate risk models indicate
an unacceptable level of risk, the Company could undertake a number of
actions that would reduce this risk, including the sale of a portion of
its available for sale portfolio, the use of risk management strategies
such as interest rate swaps and caps, or the extension of the
maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a
market value of equity model. The model assesses the impact of a change
in interest rates on the market value of all the Company's assets and
liabilities, as well as any off balance sheet items. The model
calculates the market value of the Company's assets and liabilities in
excess of book value in the current rate scenario, and then compares
the excess of market value over book value given an immediate 200 basis
point change in rates. The Company's ALCO policy indicates that the
level of interest rate risk is unacceptable if the immediate 200 basis
point change would result in the loss of 60% or more of the excess of
market value over book value in the current rate scenario. At June 30,
1998, the market value of equity model indicates an acceptable level of
interest rate risk.
Liquidity involves the Company's ability to raise funds to
support asset growth or decrease 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, cash flow from its amortizing
investment and loan portfolios, as well as the use of short-term
borrowings, as required.
Short-Term Borrowings
Short-term borrowings, or other borrowed money, consist
primarily of securities sold under agreements to repurchase, and are
used to meet short term funding needs. At June 30, 1998, short-term
borrowings aggregated $189.5 million and had an average rate of 6.38%.
Interest Earning Assets
For the six month period ended June 30, 1998, interest earning
assets increased $428.9 million from $3.62 billion to $4.04 billion.
This increase was primarily in investment securities and the loan
portfolio as described below.
Loans
During the first six months of 1998, loans increased $250.3
million from $1.41 billion to $1.66 billion. At June 30, 1998, loans
represented 43% of total deposits and 37% of total assets. All segments
of the loan portfolio experienced growth in the first six months of
1998, including loans secured by commercial real estate properties,
commercial loans, and consumer loans.
11
<PAGE>
Investments
In total, for the first six months of 1998, securities increased
$182.5 million from $2.20 billion to $2.38 billion. Deposit growth and
other funding sources were used to increase the Company's investment
portfolio. The available for sale portfolio decreased $10.4 million to
$1.30 billion from $1.32 billion at December 31, 1997, the securities
held to maturity portfolio increased $165.7 million to $1.04 billion at
June 30, 1998 from $874.0 million at year-end 1997, and the portfolio
of trading securities increased $27.2 million from year-end 1997 to
$35.1 million at June 30, 1998. At June 30, 1998, the average life of
the investment portfolio was approximately 5.0 years, and the duration
was approximately 3.9 years. At June 30, 1998, total securities
represented 53% of total assets.
Net Income
Net income for the second quarter of 1998 was $12.1 million, an
increase of $2.1 million or 21% over the $10.0 million recorded for the
second quarter of 1997. Net income for the first six months of 1998 was
$23.6 million, an increase of $4.1 million or 21% over the $19.5
million recorded in the first six months of 1997. On a per share basis,
diluted net income for the second quarter of 1998 and the first six
months of 1998 were $0.51 and $1.00 per common share compared to $0.44
and $0.86 per common share for the respective 1997 periods.
Return on average assets (ROA) and return on average equity
(ROE) for the second quarter of 1998 were 1.13% and 17.58%,
respectively, compared to 1.17% and 19.15%, respectively, for the same
1997 period. ROA and ROE for the first six months of 1998 were 1.14%
and 17.57%, respectively, compared to 1.17% and 18.71% a year ago.
Net Interest Income
Net interest income totaled $42.9 million for the second quarter
of 1998, an increase of $6.4 million or 18% from $36.5 million in the
second quarter of 1997. Net interest income for the first six months of
1998 totaled $82.7 million, up $11.7 million or 17% from the first six
months of 1997. The improvement in net interest income for both periods
was due primarily to volume increases in the loan and investment
portfolios.
Noninterest Income
Noninterest income totaled $20.7 million for the second quarter
of 1998, an increase of $7.1 million or 53% from $13.6 million in the
second quarter of 1997. The increase was due primarily to increased
other operating income, which rose $4.3 million over the prior year,
including increased revenues of $1.8 million from both Commerce
National Insurance Services, Inc. (Commerce Insurance), the Company's
insurance brokerage subsidiary, and CCMI. In addition, deposit charges
and service fees increased $2.0 million from the second quarter of 1997
primarily due to higher transaction volumes, and the Company recorded
$920 thousand in net investment securities gains in the second quarter
of 1998.
For the first six months of 1998, noninterest income totaled
$40.6 million, an increase of $14.1 million or 53% from $26.5 million in
the first six months of 1997. Other operating income rose $9.3 million
over the first six months of 1997, including increased revenues of $3.3
12
<PAGE>
million from Commerce Insurance and $4.4 million from CCMI,
respectively. Deposit charges and service fees rose $3.8 million over
the prior year primarily due to higher transaction volumes, and the
Company recorded $920 thousand in net investment securities gains in
1998.
Noninterest Expense
For the second quarter of 1998, noninterest expense totaled
$43.3 million, an increase of $10.2 million or 31% over the same period
in 1997. Contributing to this increase was new branch activity over the
past twelve months, with the number of branches increasing from 69 at
June 30, 1997 to 76 at June 30, 1998, the expansion of Commerce
Insurance, and the formation of CCMI in the first quarter of 1998. With
the addition of these new offices and CCMI, staff, facilities,
marketing, and related expenses rose accordingly. Other noninterest
expenses rose $2.3 million over the second quarter of 1997. This
increase resulted primarily from higher bank card-related service
charges, increased business development expenses, and increased
provisions for non-credit-related losses.
For the first six months of 1998, noninterest expense totaled $84.0
million, an increase of $19.7 million or 31% over $64.3 million in the
first six months of 1997. Contributing to this increase was new branch
activity, the expansion of Commerce Insurance, and the formation of
CCMI as noted above. Other noninterest expenses rose $3.5 million over
the first six months of 1997. This increase resulted primarily from
higher bank card-related service charges, increased business
development expenses, higher legal fees, and increased provisions for
non-credit-related losses.
The Company's operating efficiency ratio (noninterest
expenses, less other real estate expense, divided by net interest
income plus noninterest income excluding non-recurring gains) was
67.99% for the first six months of 1998 as compared to 65.02% for the
same 1997 period. The Company's efficiency ratio remains above its peer
group primarily due to its aggressive growth expansion activities.
Loan and Asset Quality
Total non-performing assets (non-performing loans and other
real estate, excluding loans past due 90 days or more and still
accruing interest) at June 30, 1998 were $13.3 million, or 0.30% of
total assets compared to $17.4 million or 0.44% of total assets at
December 31, 1997 and $17.3 million or 0.48% of total assets at June
30, 1997.
Total non-performing loans (non-accrual loans and restructured
loans, excluding loans past due 90 days or more and still accruing
interest) at June 30, 1998 were $7.6 million or 0.46% of total loans
compared to $11.6 million or 0.82% of total loans at December 31, 1997
and $10.3 million or 0.76% of total loans at June 30, 1997. At June 30,
1998, loans past due 90 days or more and still accruing interest
amounted to $259 thousand compared to $226 thousand at December 31,
1997 and $458 thousand at June 30, 1997. Additional loans considered as
potential problem loans by the Company's internal loan review
department ($12.3 million at June 30, 1998) have been evaluated as to
risk exposure in determining the adequacy of the allowance for loan
losses.
13
<PAGE>
Other real estate (ORE) at June 30, 1998 totaled $5.6 million
compared to $5.8 million at December 31, 1997 and $7.0 million at June
30, 1997. These properties have been written down to the lower of cost
or fair value less disposition costs.
On pages 15 and 16 are tabular presentation showing detailed
information about the Company's non-performing loans and assets and an
analysis of the Company's allowance for loan losses and other related
data for June 30, 1998, December 31, 1997, and June 30, 1997.
Year 2000
The Company began the process of preparing its computer
systems and applications for the Year 2000 in 1996. The process
includes directing its external service providers to take the
appropriate action to ensure Year 2000 compliance, as well as, to a
lesser extent, modifying or replacing certain hardware and software
maintained by the Company. The Company expects to have substantially
all of the necessary changes in place before the end of 1998, and
believes it is taking the appropriate steps to address all Year 2000
issues. The Company estimates the total cost of the Year 2000
compliance process, including internal and external personnel and any
required hardware and software modifications, will not exceed $1.0
million.
14
<PAGE>
The following summary presents information regarding non-performing loans and
assets as of June 30, 1998 and the preceding four quarters: (dollar amounts in
thousands)
<TABLE>
<CAPTION>
June 30 March 31, December 31, September 30, June 30,
1998 1998 1997 1997 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Commercial $1,070 $1,764 $1,816 $1,920 $1,057
Consumer 835 944 703 893 1,254
Real Estate:
Construction 394 393 1,345 2,006 2,155
Mortgage 5,215 7,742 7,706 7,533 5,818
------- ------- ------- ------- -------
Total non-accrual loans 7,514 10,843 11,570 12,352 10,284
------- ------- ------- ------- -------
Restructured loans
Commercial 18 19 19 20 20
Consumer
Real Estate:
Construction
Mortgage 109 114
------- ------- ------- ------- -------
Total restructured loans 127 133 19 20 20
------- ------- ------- ------- -------
Total non-performing loans 7,641 10,976 11,589 12,372 10,304
------- ------- ------- ------- -------
Other real estate 5,649 6,029 5,845 6,673 7,035
------- ------- ------- ------- -------
Total non-performing assets 13,290 17,005 17,434 19,045 17,339
------- ------- ------- ------- -------
Loans past due 90 days or more
and still accruing 259 308 226 423 458
------- ------- ------- ------- -------
Total non-performing assets and
loans past due 90 days or more $13,549 $17,313 $17,660 $19,468 $17,797
======= ======= ======= ======= =======
Total non-performing loans as a
percentage of total period-end
loans 0.46% 0.75% 0.82% 0.89% 0.76%
Total non-performing assets as a
percentage of total period-end assets 0.30% 0.41% 0.44% 0.50% 0.48%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.30% 0.42% 0.45% 0.51% 0.49%
Allowance for loan losses as a
percentage of total non-performing
loans 305% 200% 183% 169% 198%
Allowance for loan losses as a percentage
of total period-end loans 1.40% 1.50% 1.51% 1.50% 1.50%
Total non-performing assets and loans
past due 90 days or more as a
percentage of stockholders' equity and
allowance for loan losses 4% 6% 6% 8% 7%
</TABLE>
15
<PAGE>
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data: (dollar amounts in thousands)
<TABLE>
<CAPTION>
Year
Six Months Ended Ended
------------------------------
06/30/98 06/30/97 12/31/97
------------ ------------- ------------
<S> <C> <C> <C>
Balance at beginning of period $21,261 $17,975 $17,975
Provisions charged to operating expenses 2,779 2,952 4,668
------------ ------------- ------------
24,040 20,927 22,643
Recoveries on loans charged-off:
Commercial 165 104 348
Consumer 182 134 406
Real estate 14 42 144
------------ ------------- ------------
Total recoveries 361 280 898
Loans charged-off:
Commercial (191) (369) (964)
Consumer (633) (432) (1,170)
Real estate (246) (35) (146)
------------ ------------- ------------
Total charged-off (1,070) (836) (2,280)
------------ ------------- ------------
Net charge-offs (709) (556) (1,382)
------------ ------------- ------------
Balance at end of period $23,331 $20,371 $21,261
============ ============= ============
Net charge-offs as a percentage of
average loans outstanding 0.09% 0.08% 0.10%
</TABLE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
See Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operation, Interest Rate Sensitivity and
Liquidity.
16
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Registrant's Shareholders was held
on June 29, 1998. The only items of business acted upon at the
Annual Meeting were (i) the election of 12 directors for one
year terms; and (ii) approval of the Commerce Bancorp, Inc.
1998 Stock Option Plan for Non-Employee Directors. The number
of votes cast for, against, or withheld, as well as the number
of abstentions and broker non-votes was as follows:
(i) Election of directors:
Name of (Withhold Authority)
Nominee For Against
----------- ------ ------
Vernon W. Hill II 15,617,255 94,973
C. Edward Jordan, Jr 15,618,944 93,284
David Baird, IV 15,629,483 82,745
Robert C. Beck 15,617,390 94,838
Jack R Bershad 15,565,736 146,492
Joseph M. Buckelew 15,611,321 100,907
Steven M. Lewis 15,621,542 90,686
Morton N. Kerr 15,607,084 105,269
Daniel J. Ragone 15,620,651 91,577
Joseph T. Tarquini, Jr 15,629,786 82,442
Frank C. Videon, Sr 15,619,321 92,907
William A. Schwartz, Jr 15,629,750 82,478
(ii) Approval of the Commerce Bancorp, Inc. 1998 Stock Option
Plan for Non-Employee Directors:
Broker
For Against Abstain Non-Vote
13,949,042 1,247,049 190,849 325,288
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the
Securities Exchange Act of 1934, as amended, the Company's
stockholders are notified that the deadline for providing the
Company timely notice of any stockholder proposal to be
submitted outside of the Rule 14a-8 process for consideration
at the Company's 1999 Annual Meeting of Stockholders (the
"Annual Meeting") will be April 3, 1999. As to all such
matters which the Company does not have notice on or prior to
April 3, 1999, discretionary authority shall be granted to the
designated persons in the proxy solicited on behalf of the
Company's Board of Directors in the Company's proxy statement
for the Annual Meeting.
Proposals from stockholders intended to be presented at the
1999 Annual Meeting within the Rule 14a-8 process must still
be received by the Company for inclusion in the Company's
proxy statement by February 1, 1999.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter
ended June 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCORP, INC.
(Registrant)
August 13, 1998
(Date) C. EDWARD JORDAN, JR.
EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 223,172
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 35,098
<INVESTMENTS-HELD-FOR-SALE> 1,304,742
<INVESTMENTS-CARRYING> 1,039,730
<INVESTMENTS-MARKET> 1,037,962
<LOANS> 1,661,607
<ALLOWANCE> 23,331
<TOTAL-ASSETS> 4,449,697
<DEPOSITS> 3,862,590
<SHORT-TERM> 189,519
<LIABILITIES-OTHER> 33,270
<LONG-TERM> 82,295
0
0
<COMMON> 28,325
<OTHER-SE> 253,698
<TOTAL-LIABILITIES-AND-EQUITY> 4,449,697
<INTEREST-LOAN> 65,202
<INTEREST-INVEST> 73,745
<INTEREST-OTHER> 498
<INTEREST-TOTAL> 139,445
<INTEREST-DEPOSIT> 50,276
<INTEREST-EXPENSE> 56,783
<INTEREST-INCOME-NET> 82,662
<LOAN-LOSSES> 2,779
<SECURITIES-GAINS> 920
<EXPENSE-OTHER> 84,009
<INCOME-PRETAX> 36,474
<INCOME-PRE-EXTRAORDINARY> 36,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,594
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 4.41
<LOANS-NON> 7,514
<LOANS-PAST> 259
<LOANS-TROUBLED> 127
<LOANS-PROBLEM> 12,334
<ALLOWANCE-OPEN> 21,261
<CHARGE-OFFS> 1,070
<RECOVERIES> 361
<ALLOWANCE-CLOSE> 23,331
<ALLOWANCE-DOMESTIC> 23,331
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
