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 September 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 22,894,982
(Title of Class) (No. of Shares Outstanding
as of 11/05/98)
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 1998 and December 31, 1997
Consolidated Statements of Income (unaudited) Three months
ended September 30, 1998 and September 30, 1997, and
nine months ended September 30, 1998 and September
30, 1997
Consolidated Statements of Cash Flows (unaudited) Nine months
ended September 30, 1998 and September 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 6. Exhibits and Reports on Form 8-K
-1-
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
September 30, December 31,
---------------------------
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Cash and due from banks $206,903 $167,900
Federal funds sold 0 0
---------------------------
Cash and cash equivalents 206,903 167,900
Mortgages held for sale 206 7,260
Trading securities 53,792 7,911
Securities available for sale 1,216,686 1,315,120
Securities held to maturity 1,138,265 874,032
(market value 1998-$1,147,150; 1997-$869,815)
Loans 1,760,722 1,411,289
Less allowance for loan losses 24,725 21,261
---------------------------
1,735,997 1,390,028
Bank premises and equipment, net 130,507 111,759
Other assets 97,538 64,957
---------------------------
$4,579,894 $3,938,967
===========================
Liabilities Deposits:
Demand:
Interest-bearing $1,373,414 $1,111,302
Noninterest-bearing 878,355 762,843
Savings 834,180 705,906
Time 1,047,546 789,353
---------------------------
Total deposits 4,133,495 3,369,404
Other borrowed money 31,750 223,300
Other liabilities 38,024 12,695
Obligation to Employee Stock Ownership Plan (ESOP) 1,538 2,308
Trust Capital Securities - Commerce Capital Trust I 57,500 57,500
Long-term debt 23,000 23,000
---------------------------
4,285,307 3,688,207
Stockholders' Common stock, 22,906,654 shares issued
Equity (21,500,804 shares in 1997) 35,791 25,309
Series C preferred stock, 417,000 shares in 1997 7,506
Capital in excess of par or stated value 209,511 167,529
Retained earnings 40,208 50,592
Accumulated other comprehensive income 12,239 3,756
---------------------------
297,749 254,692
Less commitment to ESOP 1,538 2,308
Less treasury stock, at cost, 100,159 shares in
1998 and 1997 1,624 1,624
---------------------------
Total stockholders' equity 294,587 250,760
---------------------------
$4,579,894 $3,938,967
===========================
</TABLE>
See accompanying notes
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<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(dollars in thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C>
Interest Interest and fees on loans $36,989 $30,798 $102,191 $88,730
income Interest on investments 36,080 33,086 109,825 88,910
Other interest 764 431 1,262 1,162
------------------------ ------------------------
Total interest income 73,833 64,315 213,278 178,802
------------------------ ------------------------
Interest Interest on deposits:
expense Demand 8,256 6,337 23,792 17,646
Savings 4,680 4,247 13,525 12,125
Time 13,997 12,636 39,892 34,228
------------------------ ------------------------
Total interest on deposits 26,933 23,220 77,209 63,999
Interest on other borrowed money 602 1,735 3,545 3,199
Interest on long-term debt 1,782 1,780 5,346 3,104
------------------------ ------------------------
Total interest expense 29,317 26,735 86,100 70,302
------------------------ ------------------------
Net interest income 44,516 37,580 127,178 108,500
Provision for loan losses 1,669 1,142 4,448 4,094
------------------------ ------------------------
Net interest income after provision for
loan losses 42,847 36,438 122,730 104,406
Noninterest Deposit charges and service fees 8,472 6,977 24,970 19,638
income Other operating income 13,950 6,685 37,132 20,544
Net investment securities gains 991 1,717 1,911 1,717
------------------------ ------------------------
Total noninterest income 23,413 15,379 64,013 41,899
------------------------ ------------------------
Noninterest Salaries 18,908 13,673 51,904 38,244
expense Benefits 4,146 3,205 11,124 8,900
Occupancy 4,264 3,767 11,912 10,361
Furniture and equipment 5,754 4,714 16,740 13,195
Office 4,534 3,732 12,850 10,126
Audit and regulatory fees and assessments 570 428 1,566 1,182
Marketing 1,933 1,315 5,498 3,975
Other real estate (net) 320 407 1,145 1,368
Other 6,961 4,480 18,660 12,683
------------------------ ------------------------
Total noninterest expenses 47,390 35,721 131,399 100,034
------------------------ ------------------------
Income before income taxes 18,870 16,096 55,344 46,271
Provision for federal and state income taxes 6,311 5,719 19,191 16,426
------------------------ ------------------------
Net income 12,559 10,377 36,153 29,845
Dividends on preferred stocks 141 422
======================== ========================
Net income applicable to common stock $12,559 $10,236 $36,153 $29,423
======================== ========================
Net income per common and common equivalent share:
Basic $0.55 $0.48 $1.61 $1.40
------------------------ ------------------------
Diluted $0.53 $0.46 $1.53 $1.32
------------------------ ------------------------
Average common and common equivalent shares
outstanding:
Basic 22,689 21,105 22,405 20,988
------------------------ ------------------------
Diluted 23,737 22,643 23,644 22,507
------------------------ ------------------------
Cash dividends declared, common stock $0.19 $0.15 $0.56 $0.46
======================== ========================
See accompanying notes
</TABLE>
-3-
<PAGE>
Commerce Bancorp, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities Net income $36,153 29,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 4,448 4,094
Provision for depreciation, amortization and accretion 17,357 12,719
Gains on securities available for sale (1,911) (1,717)
Proceeds from sales of mortgages held for sale 24,803 16,539
Originations of mortgages held for sale (17,749) (19,150)
Net loan (chargeoffs) (984) (1,135)
Net (increase) decrease in trading securities (45,881) 6,562
Increase in other assets (37,882) (8,958)
Increase in other liabilities 25,329 1,175
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,683 39,974
Investing activities Proceeds from the sales of securities available for sale 319,936 134,141
Proceeds from the maturity of securities available for sale 313,587 92,816
Proceeds from the maturity of securities held to maturity 162,477 91,055
Purchase of securities available for sale (521,574) (589,643)
Purchase of securities held to maturity (429,551) (238,424)
Net increase in loans (356,956) (132,974)
Proceeds from sales of loans 7,523 8,441
Purchases of premises and equipment (31,085) (20,161)
------------------------------------------------------------------------------------------------
Net cash used by investing activities (535,643) (654,749)
Financing activities Net increase in demand and savings deposits 505,898 282,660
Net increase in time deposits 258,193 122,884
Net (decrease) increase in other borrowed money (191,550) 116,711
Dividends paid (17,107) (9,152)
Proceeds from issuance of Trust Capital Securities 57,500
Issuance of common stock 8,492
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 7,037 5,119
Other 1,179
------------------------------------------------------------------------------------------------
Net cash provided by financing activities 570,963 576,901
Increase (decrease) in cash and cash equivalents 39,003 (37,874)
Cash and cash equivalents at beginning of year 167,900 208,833
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $206,903 $170,959
------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $83,234 $70,336
Income taxes 22,129 18,112
</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 on Form 10-K, as
amended, for the period ended December 31, 1997. The results for the
three months ended September 30, 1998 and the nine months ended
September 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 $1,538,000 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 third 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
$18.1 million and $16.3 million, respectively. For the nine months
ended September 30, 1998 and 1997, total comprehensive income was $44.6
million and $34.9 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 Nine months Ended
September 30 September 30
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
Net income $12,559 $10,377 $36,153 $29,845
Preferred stock dividends 141 422
------- ------- ------- -------
Net income applicable to common stock $12,559 $10,236 $36,153 $29,423
======= ======= ======= =======
Average common shares outstanding 22,689 21,105 22,405 20,988
======= ======= ======= =======
Net income per common share - basic $ 0.55 $ 0.48 $ 1.61 $ 1.40
======= ======= ======= =======
-7-
<PAGE>
Diluted:
Net income $12,559 $10,377 $36,153 $29,845
Additional ESOP contribution under the
if-converted method 11 34
------- ------- ------- -------
Net income applicable to common stock
on a diluted basis $12,559 $10,366 $36,153 $29,811
======= ======= ======= =======
Average common shares outstanding 22,689 21,105 22,405 20,988
Additional shares considered in diluted
computation assuming:
Exercise of stock options 1,048 891 1,099 872
Conversion of preferred stock 647 140 647
------- ------- ------- -------
Average common shares outstanding
on a diluted basis 23,737 22,643 23,644 22,507
======= ======= ======= =======
Net income per common share - diluted $ 0.53 $ 0.46 $ 1.53 $ 1.32
======= ======= ======= =======
</TABLE>
H. Bank Acquisitions
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 $189
million in assets and $174 million in deposits at September 30, 1998,
serves Monmouth County, New Jersey through the operation of seven
branch offices. The Company will issue approximately 1.5 million shares
to complete the acquisition, which is expected to close in the first
quarter of 1999. The transaction will be accounted for as a pooling of
interests.
On September 17, 1998, the Company reached an agreement to acquire
Prestige State Bank through the acquisition of its parent company,
Prestige Financial Corp. (NASDAQ Symbol: PRFN). Prestige State Bank,
headquartered in Raritan Township, New Jersey, with $322 million in
assets and $298 million in deposits at September 30, 1998, serves
Hunterdon County and portions of Warren County and Somerset County, New
Jersey, through the operation of eight branch offices. The Company will
issue approximately 1.9 million shares to complete the acquisition,
which is expected to close in the first quarter of 1999. The
transaction will be accounted for as a pooling of interests.
Unaudited pro forma combined financial information for the Company,
Tinton Falls State Bank, and Prestige State Bank at or for the year
ended December 31, 1997 includes the following (dollars in thousands):
Assets $4,388,000
Deposits 3,784,000
Stockholders' equity 282,000
Net interest income 167,000
Net income 45,000
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 September 30, 1998, stockholders' equity totaled $294.6
million or 6.43% 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 September 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>
September 30, 1998
Company
Risk based capital ratios:
Tier 1 $334,914 14.15% $ 94,706 4.00% $142,058 6.00%
Total capital 378,038 15.97 189,411 8.00 236,764 10.00
Leverage ratio 334,914 7.56 132,907 3.00 221,511 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $190,741 12.74% $ 59,903 4.00% $ 89,854 6.00%
Total capital 206,842 13.81 119,805 8.00 149,756 10.00
Leverage ratio 190,741 6.68 85,702 3.00 142,836 5.00
September 30, 1997
Company
Risk based capital ratios:
Tier 1 $289,539 15.47% $ 74,860 4.00% $112,290 6.00%
Total capital 333,473 17.82 149,720 8.00 187,150 10.00
Leverage ratio 289,539 7.72 112,554 3.00 187,589 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $156,643 12.60% $ 49,723 4.00% $ 74,584 6.00%
Total capital 170,294 13.70 99,445 8.00 124,307 10.00
Leverage ratio 156,643 6.29 74,742 3.00 124,570 5.00
</TABLE>
-9-
<PAGE>
At September 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 that as of September 30, 1998, the Company and its
subsidiaries meet all capital adequacy requirements to which they are
subject.
Deposits
Total deposits at September 30, 1998 were $4.13 billion, up
$808.3 million, or 24% over total deposits of $3.33 billion at
September 30, 1997, and up by $764.1 million, or 23% from year-end
1997. Deposit growth during the first nine 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
20.1% at September 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 September 30, 1998, the Company's income simulation model
indicates net income would decrease by 2.40% and 10.05% 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 6.13% and 5.98% 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 September
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 September 30, 1998,
short-term borrowings aggregated $31.8 million and had an average rate
of 6.63%.
Interest Earning Assets
For the nine month period ended September 30, 1998, interest
earning assets increased $554.1 million from $3.62 billion to $4.17
billion. This increase was primarily in investment securities and the
loan portfolio as described below.
Loans
During the first nine months of 1998, loans increased $349.4
million from $1.41 billion to $1.76 billion. At September 30, 1998,
loans represented 43% of total deposits and 38% of total assets. All
segments of the loan portfolio experienced growth in the first nine
months of 1998, including loans secured by commercial real estate
properties, commercial loans, and consumer loans.
-11-
<PAGE>
Investments
In total, for the first nine months of 1998, securities
increased $211.7 million from $2.20 billion to $2.41 billion. Deposit
growth and other funding sources were used to increase the Company's
investment portfolio. The available for sale portfolio decreased $98.4
million to $1.22 billion from $1.32 billion at December 31, 1997, and
the securities held to maturity portfolio increased $264.2 million to
$1.14 billion at September 30, 1998 from $874.0 million at year-end
1997. The portfolio of trading securities increased $45.9 million from
year-end 1997 to $53.8 million at September 30, 1998, primarily due to
the formation of CCMI. At September 30, 1998, the average life of the
investment portfolio was approximately 5.1 years, and the duration was
approximately 3.9 years. At September 30, 1998, total securities
represented 53% of total assets.
Net Income
Net income for the third quarter of 1998 was $12.6 million, an
increase of $2.2 million or 21% over the $10.4 million recorded for the
third quarter of 1997. Net income for the first nine months of 1998 was
$36.2 million, an increase of $6.3 million or 21% over the $29.8
million recorded in the first nine months of 1997. On a per share
basis, diluted net income for the third quarter of 1998 and the first
nine months of 1998 were $0.53 and $1.53 per common share compared to
$0.46 and $1.32 per common share for the respective 1997 periods.
Return on average assets (ROA) and return on average equity
(ROE) for the third quarter of 1998 were 1.13% and 17.69%,
respectively, compared to 1.11% and 18.18%, respectively, for the same
1997 period. ROA and ROE for the first nine months of 1998 were 1.13%
and 17.61%, respectively, compared to 1.14% and 18.51% a year ago.
Net Interest Income
Net interest income totaled $44.5 million for the third quarter
of 1998, an increase of $6.9 million or 18% from $37.6 million in the
third quarter of 1997. Net interest income for the first nine months of
1998 totaled $127.2 million, up $18.7 million or 17% from the first
nine 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 $23.4 million for the third quarter
of 1998, an increase of $8.0 million or 52% from $15.4 million in the
third quarter of 1997. The increase was due primarily to increased
other operating income, which rose $7.3 million over the prior year,
including increased revenues of $2.5 million from Commerce National
Insurance Services, Inc. (Commerce Insurance), the Company's insurance
brokerage subsidiary, and $3.5 million from CCMI. In addition, deposit
charges and service fees increased $1.5 million from the third quarter
of 1997 primarily due to higher transaction volumes. The Company
recorded $991 thousand in net investment securities gains in the third
quarter of 1998, as compared to $1.7 million in the third quarter of
1997.
For the first nine months of 1998, noninterest income totaled
$64.0 million, an increase of $22.1 million or 53% from $41.9 million
in the first nine months of 1997. Other operating
-12-
<PAGE>
income rose $16.6 million over the first nine months of 1997, including
increased revenues of $5.8 million from Commerce Insurance and $7.9
million from CCMI, respectively. Deposit charges and service fees rose
$5.3 million over the prior year primarily due to higher transaction
volumes, and the Company recorded $1.9 million in net investment
securities gains during the first nine months of 1998, as compared to
$1.7 million in the first nine months of 1997.
Noninterest Expense
For the third quarter of 1998, noninterest expense totaled
$47.4 million, an increase of $11.7 million or 33% 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 70 at
September 30, 1997 to 80 at September 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 $2.5 million over the third 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 nine months of 1998, noninterest expense totaled $131.4
million, an increase of $31.4 million or 31% over $100.0 million in the
first nine 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 $6.0 million over
the first nine 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
68.82% for the first nine months of 1998 as compared to 66.36% 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 September 30, 1998 were $12.3 million, or 0.27%
of total assets compared to $17.4 million or 0.44% of total assets at
December 31, 1997 and $19.0 million or 0.50% of total assets at
September 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 September 30, 1998 were $6.9 million or 0.39% of total
loans compared to $11.6 million or 0.82% of total loans at December 31,
1997 and $12.4 million or 0.89% of total loans at September 30, 1997.
At September 30, 1998, loans past due 90 days or more and still
accruing interest amounted to $1.1 million compared to $226 thousand at
December 31, 1997 and $423 thousand at September 30, 1997. Additional
loans considered as potential problem loans by the Company's internal
loan review department ($13.2 million at September 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 September 30, 1998 totaled $5.4
million compared to $5.8 million at December 31, 1997 and $6.7 million
at September 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 September 30, 1998, December 31, 1997, and September 30, 1997.
Year 2000
The Company began the process of preparing its computer
systems and applications for the Year 2000 in 1996. The process
involves identifying and resolving date recognition problems in
computer systems and software, and to a lesser extent, other operating
equipment, that could be caused by the date change from December 31,
1999 to January 1, 2000.
The Company has completed its assessment of all business
processes that could be affected by the Year 2000 issue. Each business
process assessment included a review of the information systems used in
that process, including hardware and software, involvement of third
parties, and any other operating equipment. The Company licenses
substantially all software used in conducting its business from third
party vendors. All vendors have been contacted regarding the Year 2000
issue, and the Company continues to track the progress each vendor is
making in reaching Year 2000 compliance. The Company is also working
with significant customers and counterparties to monitor their Year
2000 efforts. The Company expects to have substantially all of the
necessary changes in place and tested for all mission critical systems
(those systems defined as absolutely essential to the daily business
operation of the Company) before the end of 1998. Additionally, changes
for all remaining critical systems should be in place and tested by the
end of the first quarter of 1999.
The Company believes it is taking the appropriate steps to
address all Year 2000 issues. Despite the Company's efforts to address
the Year 2000 problem and develop contingency plans in the event of
Year 2000 failures, including non-compliance by third parties
(including loan customers), there can be no assurance that Year 2000
issues (both internal and external) will not materially adversely
impact the Company's financial position, results of operations, or
relationships with customers, vendors, or others.
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.
Forward-Looking Statements
The discussion regarding the Company's interest rate risk
position in the section entitled "Interest Rate Sensitivity and
Liquidity" and the section entitled "Year 2000" contain statements that
may be forward-looking (as defined in the Private Securities Litigation
Reform Act of 1995). These forward looking statements involve risks and
uncertainties, including changes in general economic conditions and the
Company's ability (as well as third party ability) to effectively
address the Year 2000 issue. Although the Company believes such
forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking
statements.
-14-
<PAGE>
The following summary presents information regarding non-performing loans and
assets as of September 30, 1998 and the preceding four quarters: (dollar amounts
in thousands)
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1998 1998 1998 1997 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Commercial $ 1,301 $ 1,070 $ 1,764 $ 1,816 $ 1,920
Consumer 763 835 944 703 893
Real estate:
Construction 393 394 393 1,345 2,006
Mortgage 4,346 5,215 7,742 7,706 7,533
------- ------- ------- ------- -------
Total non-accrual loans 6,803 7,514 10,843 11,570 12,352
------- ------- ------- ------- -------
Restructured loans:
Commercial 17 18 19 19 20
Consumer
Real estate:
Construction
Mortgage 104 109 114
------- ------- ------- ------- -------
Total restructured loans 121 127 133 19 20
------- ------- ------- ------- -------
Total non-performing loans 6,924 7,641 10,976 11,589 12,372
------- ------- ------- ------- -------
Other real estate 5,409 5,649 6,029 5,845 6,673
------- ------- ------- ------- -------
Total non-performing assets 12,333 13,290 17,005 17,434 19,045
------- ------- ------- ------- -------
Loans past due 90 days or more
and still accruing 1,099 259 308 226 423
------- ------- ------- ------- -------
Total non-performing assets and
loans past due 90 days or more $13,432 $13,549 $17,313 $17,660 $19,468
======= ======= ======= ======= =======
Total non-performing loans as a
percentage of total period-end
loans 0.39% 0.46% 0.75% 0.82% 0.89%
Total non-performing assets as a
percentage of total period-end assets 0.27% 0.30% 0.41% 0.44% 0.50%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.29% 0.30% 0.42% 0.45% 0.51%
Allowance for loan losses as a
percentage of total non-performing
loans 357% 305% 200% 183% 169%
Allowance for loan losses as a percentage
of total period-end loans 1.40% 1.40% 1.50% 1.51% 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% 4% 6% 6% 8%
</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
Nine Months Ended Ended
09/30/98 09/30/97 12/31/97
----------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $21,261 $17,975 $17,975
Provisions charged to operating expenses 4,448 4,094 4,668
----------- ------------ ------------
25,709 22,069 22,643
Recoveries on loans charged-off:
Commercial 253 150 348
Consumer 223 267 406
Real estate 18 121 144
----------- ------------ ------------
Total recoveries 494 538 898
Loans charged-off:
Commercial (280) (783) (964)
Consumer (901) (846) (1,170)
Real estate (297) (44) (146)
----------- ------------ ------------
Total charge-offs (1,478) (1,673) (2,280)
----------- ------------ ------------
Net charge-offs (984) (1,135) (1,382)
----------- ------------ ------------
Balance at end of period $24,725 $20,934 $21,261
=========== ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.08% 0.11% 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 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended
September 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)
November 13, 1998
(Date) C. EDWARD JORDAN, JR.
EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
-18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 206,903
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 53,792
<INVESTMENTS-HELD-FOR-SALE> 1,216,686
<INVESTMENTS-CARRYING> 1,138,265
<INVESTMENTS-MARKET> 1,147,150
<LOANS> 1,760,722
<ALLOWANCE> 24,725
<TOTAL-ASSETS> 4,579,894
<DEPOSITS> 4,133,495
<SHORT-TERM> 31,750
<LIABILITIES-OTHER> 38,024
<LONG-TERM> 82,038
0
0
<COMMON> 35,791
<OTHER-SE> 258,796
<TOTAL-LIABILITIES-AND-EQUITY> 4,579,894
<INTEREST-LOAN> 102,191
<INTEREST-INVEST> 109,825
<INTEREST-OTHER> 1,262
<INTEREST-TOTAL> 213,278
<INTEREST-DEPOSIT> 77,209
<INTEREST-EXPENSE> 86,100
<INTEREST-INCOME-NET> 127,178
<LOAN-LOSSES> 4,448
<SECURITIES-GAINS> 1,911
<EXPENSE-OTHER> 131,399
<INCOME-PRETAX> 55,344
<INCOME-PRE-EXTRAORDINARY> 55,344
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,153
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.53
<YIELD-ACTUAL> 4.43
<LOANS-NON> 6,803
<LOANS-PAST> 1,099
<LOANS-TROUBLED> 121
<LOANS-PROBLEM> 13,202
<ALLOWANCE-OPEN> 21,261
<CHARGE-OFFS> 1,478
<RECOVERIES> 494
<ALLOWANCE-CLOSE> 24,725
<ALLOWANCE-DOMESTIC> 24,725
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
