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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________.
Commission File #0-12874
COMMERCE BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
(State of other jurisdiction (I.R.S. Employee Identification Number)
of incorporation
or organization)
Commerce Atrium
1701 Route 70 East 08034-5400
Cherry Hill, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 609-751-9000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
- --------------- ------------------------------------------
Title of Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant ( 1 ) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
Indicate by check mark if disclosure of' delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $1,109,133,000.(1)
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Common Stock $1.5625 Par Value 27,438,170
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Title of Class No. of Shares Outstanding
as of 3/5/99
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV incorporate certain information by reference from the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1998 (the "Annual Report"). Part III incorporates certain information by
reference from the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders.
__________
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Registrant's Common Stock outstanding reduced by the amount of
Common Stock held by officers, directors, and shareholders owning in excess of
10% of the Registrant's Common Stock multiplied by the last sale price for the
Registrant's Common Stock on March 5, 1999. The information provided shall in no
way be construed as an admission that the officer, director, or 10% shareholder
in the Registrant may be deemed an affiliate of the Registrant or that he is the
beneficial owner of' the shares reported as being held by him, and any such
inference is hereby disclaimed. The information provided herein is included
solely for the recordkeeping purpose of the Securities and Exchange Commission.
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COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
The preceding Annual Report and Form 10-K incorporates into a single
document the requirements of the accounting profession and the Securities and
Exchange Commission. There has been no action by the Commission, however, to
approve or disapprove or pass upon the accuracy or adequacy of the Annual Report
and Form 10-K.
Page
Part I
Item 1. Business............................................................47
Item 2. Properties..........................................................48
Item 3. Legal Proceedings ..................................................53
Item 4. Submission of Matters to a Vote of Security Holders (This
item is omitted since no matters were submitted for security
vote during the fourth quarter of 1998.)
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters ...............................................15
Item 6. Selected Financial Data .............................................1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................2
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . .......12
Item 8. Financial Statements and Supplementary Financial Data ..............17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
(This item is omitted since it is not applicable)
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
(The information required by the items in this part has been
omitted since it will be contained in the definitive proxy
statement to be filed pursuant to Regulation 14A.)
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....44
(a) (3) - Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as
amended. (I)
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, setting forth the
preferences, limitations and relative rights of the
Company's Series C ESOP Cumulative Convertible Preferred
Stock. (I)
3.3 By-laws of the Company, as amended. (K)
4.1 Form of Trust Indenture, dated July 15, 1993, between the
Company and United Jersey Bank, with respect to the
Company's $23,000,000 8 3/8% Subordinated Notes due July
15, 2003. (I)
4.2 Form of Indenture between the Company and Wilmington Trust
Company, as Debenture Trustee. (M)
4.3 Certificate of Trust of Commerce Capital Trust I. (M)
4.4 Form of Amended and Restated Declaration of Trust of
Commerce Capital Trust I. (M)
4.5 Form of Capital Security Certificate for Commerce Capital
Trust I (included in Exhibit 4.4). (M)
4.6 Form of Guarantee Agreement. (M)
10.1 Ground lease, dated July 1, 1984, between Commerce NJ and
Group Four Equities, relating to the branch office in
Gloucester Township, New Jersey. (A)
10.2 Ground lease, dated April 15, 1986, between Commerce NJ and
Mount Holly Equities, relating to Commerce NJ's branch
office in Mt. Holly, New Jersey. (C)
*10.3 The Company's 1984 Incentive Stock Option Plan. (A)
*10.4 The Company's Employee Stock Ownership Plan. (F)
10.5 Lease, dated March 29, 1985, between Commerce PA and Devon
Properties (Ltd.), and lease dated September 4, 1985,
between Commerce PA and Devon Properties (Ltd.), relating
to Commerce PA's branch office in Devon, Pennsylvania. (B)
10.6 Assignment of Lease and Assumption Agreement dated November
30, 1987, between the Company and Commerce PA, relating to
Commerce PA's branch office in Devon, Pennsylvania. (C)
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10.7 Lease between the Company and Astoria Associates, relating
to the Company's and Commerce NJ's headquarters facilities.
(B)
10.8 Ground lease, dated April 15, 1986, between Commerce NJ and
U.S. Equities, relating to one of Commerce NJ's branch
offices in Washington Township, New Jersey. (D)
10.9 Ground lease, dated February 1, 1988, between Commerce NJ
and Diversified Properties of New Jersey, relating to one
of Commerce NJ's branch offices in Washington Township, New
Jersey. (D)
10.10 Ground lease, dated February 15, 1988, between Commerce NJ
and Diversified Properties of New Jersey, relating to one
of Commerce NJ's branch offices in Cherry Hill, New Jersey.
(D)
*10.11 The Company's 1989 Stock Option Plan for Non-Employee
Directors. (E)
*10.12 A copy of employment contracts with Vernon W. Hill, II, C.
Edward Jordan, Jr., and Peter Musumeci, Jr., dated January
2, 1992. (G)
*10.13 A copy of the Retirement Plan for Outside Directors of
Commerce Bancorp, Inc. (H)
*10.14 The Company's 1994 Employee Stock Option Plan. (J)
10.15 Term Loan Agreement between Commerce Bancorp, Inc. Employee
Stock Ownership Trust and Mellon Bank, N.A. dated as of
November 29, 1994. (J)
*10.16 The Company's 1997 Employee Stock Option Plan. (L)
*10.17 A copy of employment contracts with Dennis M. DiFlorio and
Robert D. Falese dated January 1, 1998. (N)
10.18 Ground lease, dated June 1, 1994, between Commerce NJ and
Absecon Associates, L.L.C., relating to Commerce NJ's
branch office in Absecon, New Jersey. (N)
10.19 Ground lease, dated September 11, 1995, between Commerce
Shore and Whiting Equities, L.L.C., relating to Commerce
Shore's branch office in Manchester Township, New Jersey.
(N)
10.20 Ground lease, dated November 1, 1995, between Commerce NJ
and Evesboro Associates, L.L.C., relating to Commerce NJ's
branch office in Evesham Township, New Jersey. (N)
10.21 Ground lease, dated October 1, 1996, between Commerce NJ
and Triad Equities, L.L.C., relating to one of Commerce
NJ's branch offices in Gloucester Township, New Jersey. (N)
10.22 Ground lease, dated October 11, 1996, between Commerce PA
and Plymouth Equities, L.L.C., relating to Commerce PA's
branch office in Plymouth Township, PA. (N)
10.23 Ground lease, dated January 16, 1998, between Commerce NJ
and Ewing Equities, L.L.C., relating to Commerce NJ's
branch in Ewing, New Jersey.
10.24 The Company's 1998 Stock Option Plan for Non-Employee
Directors (O) 10.25 Ground lease, dated July 31, 1998,
between Commerce NJ and English Creek Properties, L.L.C.,
relating to Commerce NJ's branch in Egg Harbor Township,
New Jersey.
11.1 Computation of Net Income Per Share .....................32
13.1 The Registrant's Annual Report to Shareholders for its
fiscal year ended December 31,1998.
21.1 Subsidiaries of the Company (incorporated by reference from
PART I, Item 1. "BUSINESS" of this Report on Form 10-K.).47
23.1 Consent of Ernst & Young LLP.
27.1 The Registrant's Financial Data Schedule.
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(A) Incorporated by reference from the Company's Registration
Statement on Form S-1, and Amendments Nos. I and 2 thereto
(Registration No. 2-94189).
(B) Incorporated by reference from the Company's Registration
Statement on Form S-2 (Registration No 33-12603).
(C) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(D) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988.
(E) Incorporated by reference from the Company's Registration
Statement on Form S-2 and Amendments Nos. 1 and 2 thereto
(Registration No. 33-31042).
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(F) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989.
(G) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
(H) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
(I) Incorporated by reference from the Company's Registration
Statement on Form S-2 and Amendments Nos. 1 and 2 thereto
(Registration No. 33-62702).
(J) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
(K) Incorporated by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-10771).
(L) Incorporated by reference from the Company's Definitive
Proxy Statement for its 1997 Annual Meeting of
Shareholders, Exhibit A thereto.
(M) Incorporated by reference from the Company's Registration
Statement on Form S-3 (Registration No. 333-28311).
(N) Incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
(O) Incorporated by reference from the Company's Definitive
Proxy Statement for its 1998 Annual Meeting of
Shareholders, Exhibit A thereto. * Management contract or
compensation plan or arrangement.
(b) There were no reports on Form 8-K filed in the fourth quarter of
1998.
(c)(d) Exhibits and Financial Statement Schedules - All other exhibits
and schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instruction or are inapplicable and, therefore, have
been omitted.
Item 15. Signatures..........................................................55
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PART I
Item 1. Business
Forward-Looking Statements
Commerce Bancorp, Inc. (the "Company") may from time to time make written
or oral "forward-looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Annual Report and Form 10-K and the exhibits hereto and thereto), in its reports
to stockholders and in other communications by the Company, which are made in
good faith by the Company pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "FRB"); inflation; interest rates,
market and monetary fluctuations; the timely development of competitive new
products and services by the Company and the acceptance of such products and
services by customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services and vice versa;
the impact of changes in financial services' laws and regulations (including
laws concerning taxes, banking, securities and insurance); technological
changes; future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
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"). On
January 2, 1987, the Company acquired all of the outstanding shares of Commerce
Bank/Pennsylvania, N.A. ("Commerce PA"). On December 31, 1988 the Company
acquired all of the outstanding shares of Citizens State Bank of New Jersey,
Forked River, which was subsequently converted to a national charter and renamed
Commerce Bank/Shore, N.A. ("Commerce Shore"). On September 30, 1993, the Company
acquired all of the outstanding shares of The Coastal Bank, Ocean City, New
Jersey, ("Coastal") which was merged into Commerce NJ. Effective January 21,
1997, the Company acquired Independence Bancorp, Inc., a bank holding company
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").
On November 15, 1996, two insurance brokerage agencies, Keystone National
Companies, Inc., Cherry Hill, New Jersey, and Morales, Potter & Buckelew, Inc.,
t/a Buckelew & Associates, Toms River, New Jersey, were acquired by the Company
and thereafter merged to form Commerce National Insurance Services, Inc.
("Commerce Insurance"). Commerce Insurance is currently a wholly-owned
subsidiary of Commerce North. In December 1996, Chesley & Cline, Inc., Mount
Holly, New Jersey, was merged with and into Commerce Insurance. In January 1997,
Colkate, Inc., t/a The Morrissey Agency, Mt. Laurel, New Jersey, was merged with
and into Commerce Insurance. In December 1997, Joseph J. Reinhart and
Associates, Inc., Cherry Hill, NJ, a risk/loss management and loss investigation
consulting firm, and Associated Insurance Management Inc., Haddonfield, NJ, an
employee and executive benefit consulting firm, were merged with and into
Commerce Insurance. In August 1998, J.A. Montgomery, Inc., Wilmington, DE, an
insurance brokerage agency, was merged with and into Commerce Insurance.
On March 27, 1998, the Company completed the acquisition of A. H. Williams
& Co., Inc., ("Williams") Philadelphia, PA, a public finance investment firm,
and combined Williams with Commerce Capital, the
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bank securities dealer division of Commerce NJ, to form Commerce Capital
Markets, Inc. ("CCMI") a wholly-owned nonbank subsidiary of the Company engaging
in certain securities activities permitted under Section 20 of the
Glass-Steagall Act.
Effective January 15, 1999, the Company acquired Community First Banking
Company ("CFBC"), a one-bank holding company headquartered in Tinton Falls, New
Jersey. CFBC's wholly-owned bank subsidiary, Tinton Falls State Bank, was merged
with and into Commerce Shore. At the time of acquisition, Tinton Falls State
Bank had six branch offices in Monmouth County, New Jersey, and approximately
$201 million in assets.
Also effective January 15, 1999, the Company acquired Prestige Financial
Corp. ("PFC"), a one-bank holding company headquartered in Flemington, New
Jersey. PFC's wholly-owned state-chartered bank subsidiary, Prestige State Bank,
was subsequently re-chartered as a national bank and renamed Commerce
Bank/Central, N.A. At the time of acquisition, Prestige State Bank had seven
branches in Hunterdon and Somerset Counties, New Jersey, and had approximately
$328 million in assets.
In 1998, the Company received regulatory approvals to open Commerce
Bank/Delaware, N.A. It is currently anticipated that the first office will open
in the second quarter of 1999.
On June 9, 1997, the Company issued $57,500,000 of 8 3/4% Trust Capital
Securities through Commerce Capital Trust 1, a newly formed Delaware business
trust subsidiary of the Company.
Except as otherwise indicated, all references herein to the Company include
Commerce NJ, Commerce PA, Commerce Shore, Commerce North, Commerce Capital Trust
I, Commerce Insurance, and CCMI.
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 2,777 as of December 31, 1998. The Company believes that its relationship
with its employees is good.
Commerce NJ
Commerce NJ provides retail and commercial banking services through 43
retail branch offices in Camden, Burlington, Gloucester, Mercer, Atlantic, and
Cape May Counties in New Jersey. Commerce NJ' s deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC").
As of December 31, 1998, Commerce NJ had total assets of $3.026 billion,
total deposits of $2.708 billion, and total stockholders' equity of $194.4
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 services and products,
including free checking accounts (subject to minimum balances) and savings
programs, money market accounts, negotiable orders of withdrawal ("NOW")
accounts, certificates of deposit, safe deposit facilities, consumer loan
programs (including installment loans for home improvement and the purchase of
consumer goods and automobiles), home equity and Visa Gold card revolving lines
of credit, overdraft checking and automated teller facilities. Commerce NJ also
offers construction loans and permanent mortgages for houses.
Trust Activities
Commerce NJ offers trust services primarily focusing on corporate trust
activities, particularly as bond trustee, paying agent, and registrar for
municipal bond offerings.
Commercial Banking Activities
Commerce NJ offers a broad range of commercial banking services, including
free checking accounts (subject to minimum balance), night depository
facilities, money market accounts, certificates of deposit, short-term loans for
seasonal or working capital purposes, term loans for fixed assets and expansion
purposes, revolving credit plans and other commercial loans to fit the needs of
its customers. Commerce NJ also finances the construction of business properties
and makes real estate mortgage loans on completed
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buildings. Where the needs of a customer exceed Commerce NJ's legal lending
limit for any one customer (approximately $31.2 million as of December 31,
1998), Commerce NJ may participate with other banks, including Commerce PA,
Commerce Shore, and Commerce North, in making a loan.
Commerce PA
In 1987, the Company acquired all of the issued and outstanding shares of
capital stock of Commerce PA. As a result of this transaction, Commerce PA
became a wholly-owned subsidiary of the Company.
Commerce PA was organized as a national bank on December 28, 1983 and
commenced operations on June 29, 1984. As of December 31, 1998, Commerce PA had
total assets of $806.9 million, total deposits of $746.4 million and total
stockholders' equity of $54.9 million.
Commerce PA provides retail and commercial banking services through 18
retail branch offices in Philadelphia, Chester, Delaware and Montgomery Counties
in Southeastern Pennsylvania. Commerce PA's deposits are insured by the FDIC.
Commerce PA generally provides the same retail and commercial banking
services and products as Commerce NJ, Commerce Shore, and Commerce North.
Commerce PA offers trust services similar to those offered by 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 December 31, 1998, Commerce Shore had total assets
of $512.1 million, total deposits of $473.8 million and total stockholders'
equity of $33.4 million.
Commerce Shore provides retail and commercial banking services through 13
retail branch offices in Ocean County, New Jersey. Commerce Shore's deposits are
insured by the FDIC.
Commerce Shore generally provides the same retail and commercial banking
services and products as Commerce NJ, Commerce PA, and Commerce North. Commerce
Shore does not offer trust services.
Commerce North
In 1997, the Company acquired Independence Bancorp, Inc. As a result of
this transaction, Independence Bancorp Inc.'s wholly-owned state-chartered bank
subsidiary, Independence Bank of New Jersey, became a wholly-owned subsidiary of
the Company, and was subsequently renamed Commerce North.
Commerce North was organized as a state-chartered bank in 1974 and
commenced operations in 1975. As of December 31, 1998, Commerce North had total
assets of $600.3 million, total deposits of $535.6 million, and total
stockholders' equity of $38.7 million.
Commerce North provides retail and commercial banking services through 10
retail branch offices in Bergen and Passaic Counties, New Jersey. Commerce
North's deposits are insured by the FDIC.
Commerce North generally provides the same retail and commercial banking
services and products as Commerce NJ, Commerce PA, and Commerce Shore. Commerce
North does not offer trust services.
Commerce Insurance
Commerce Insurance operates as a regional insurance brokerage firm
concentrating on commercial property, casualty and surety as well as personal
lines. In addition, Commerce Insurance offers a line of employee benefit
programs including both group as well as individual medical, life, disability
and pension. Commerce Insurance currently operates out of six locations in New
Jersey and three locations in Delaware. Commerce Insurance places insurance for
clients in multiple states, primarily New Jersey, Pennsylvania, and Delaware.
Commerce Capital Markets, Inc.
Commerce Capital Markets, Inc. is a wholly-owned nonbank subsidiary of the
Company engaging in certain securities activities permitted under Section 20 of
the Glass-Steagall Act, including trading, underwriting, and advisory services.
CCMI's principal place of business is Philadelphia, Pennsylvania, with
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branch locations in Pittsburgh, Pennsylvania, Cherry Hill, New Jersey, Boston,
Massachusetts, and Burlingame, California.
Other Activities
NA Asset Management, a Delaware corporation, is a wholly-owned subsidiary
of Commerce NJ which purchases, holds and sells investments of Commerce NJ.
Shore Asset Management Corporation, a Delaware corporation, is a wholly-owned
subsidiary of Commerce Shore which purchases, holds and sells investments of
Commerce Shore. North Asset Management, a Delaware corporation, is a
wholly-owned subsidiary of Commerce North which purchases, holds, and sells
investments of Commerce North.
As part of the Commerce Network, the Company has an equity investment in
Commerce Bank/Harrisburg, Camp Hill, Pennsylvania (15.35% beneficial ownership).
The Commerce Network provides certain marketing support and technical support
services to its members.
Competition
The Company's service area is characterized by intense competition in all
aspects and areas of its business from commercial banks, savings and loan
associations, mutual savings banks and other financial institutions. Other
competitors, including credit unions, consumer finance companies, factors,
insurance companies and money market mutual funds, compete with certain lending
and deposit gathering services offered by the Company. Many competitors have
substantially greater financial resources and larger lending limits and larger
branch systems than those of the Company.
In commercial transactions, Commerce NJ's, Commerce PA's, Commerce Shore's,
and Commerce North's legal lending limit to a single borrower (approximately
$31.2 million, $8.6 million, $5.3 million, and $6.2 million, respectively, as of
December 31, 1998) enables them to compete effectively for the business of
smaller and mid-sized businesses. However, these legal lending limits are
considerably lower than that of various competing institutions and thus may act
as a constraint on Commerce NJ's, Commerce PA's and Commerce Shore's
effectiveness in competing for financing in excess of these limits.
The Company believes that it is able to compete on a substantially equal
basis with larger financial institutions because it offers longer hours of
operation than those offered by most of its competitors, free checking accounts
for customers maintaining certain minimum balances and competitive interest
rates on savings and time accounts with low minimum deposit requirements.
The Company seeks to provide personalized services through management's
knowledge and awareness of its market area, customers and borrowers. The Company
believes this knowledge and awareness provides a business advantage in serving
the retail depositors and the small and mid-sized commercial borrowers that
comprise the Company's customer base.
Supervision and Regulation
THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE
REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING COMPANIES AND THEIR SUBSIDIARIES
AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO THE COMPANY. THE
REGULATORY FRAMEWORK IS INTENDED PRIMARILY FOR THE PROTECTION OF DEPOSITORS,
OTHER CUSTOMERS AND THE FEDERAL DEPOSIT INSURANCE FUNDS AND NOT FOR THE
PROTECTION OF SECURITY HOLDERS. TO THE EXTENT THAT THE FOLLOWING INFORMATION
DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE PARTICULAR STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN
APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL EFFECT
ON THE BUSINESS OF THE COMPANY.
The Company
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("Holding Company Act"), and is therefore
subject to supervision and regulation by the FRB. The Company is also regulated
by the New Jersey and Pennsylvania Departments of Banking.
Under the Holding Company Act, the Company is required to secure the prior
approval of the FRB before it can merge or consolidate with any other bank
holding company or acquire all or substantially all of the assets of any bank or
acquire direct or indirect ownership or control of any voting shares of any bank
that is not already majority owned by it, if after such acquisition it would
directly or indirectly own or control more than 5% of the voting shares of such
bank. See "Interstate Banking."
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The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control or more than
5% of the voting shares of any company engaged in nonbanking activities unless
the FRB, by order or regulation, has found such activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making such a determination, the FRB considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public which outweigh the possible adverse
effects. The FRB has by regulation determined that certain activities are
closely related to banking within the meaning of the Holding Company Act. These
activities include, among others, operating a mortgage, finance, credit card or
factoring company; performing certain data processing operations, providing
investment and financial advice; acting as an insurance agent for certain types
of credit-related insurance; leasing property on a full-payout, non-operating
basis; and certain stock brokerage and investment advisory services.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. All
of the Company's subsidiary banks are currently rated "satisfactory" under the
Community Reinvestment Act.
In addition, under the Holding Company Act, the Company is required to file
periodic reports of its operations with, and is subject to examination by, the
FRB.
The Company is under the jurisdiction of the Securities and Exchange
Commission ("SEC") and various state securities commissions for matters relating
to the offering and sale of its securities and is subject to the SEC's rules and
regulations relating to periodic reporting, reporting to shareholders, proxy
solicitation and insider trading.
There are various legal restrictions on the extent to which the Company and
its nonbank subsidiaries can borrow or otherwise obtain credit from its banking
subsidiaries. In general, these restrictions require that any such extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the Company or such nonbank subsidiaries, to ten
percent of the lending bank's capital stock and surplus, and as to the Company
and all such nonbank subsidiaries in the aggregate, to 20 percent of such
lending bank's capital stock and surplus. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA")
contains a "cross-guarantee" provision that could result in any insured
depository institution owned by the Company being assessed for losses incurred
by the FDIC in connection with assistance provided to, or the failure of, any
other depository institution owned by the Company. Also, under FRB policy, the
Company is expected to act as a source of financial strength to each of its
banking subsidiaries and to commit resources to support each such bank in
circumstances where such bank might not be in a financial position to support
itself.
A discussion of capital guidelines and capital is included in the section
entitled "Stockholders' Equity and Dividends" contained within Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
14 of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1998, which page of the Annual Report appears elsewhere herein.
Commerce NJ, Commerce PA, Commerce Shore and Commerce North
Commerce NJ, Commerce PA and Commerce Shore, as national banks, are subject
to the National Bank Act. Each is also subject to the supervision of, and is
regularly examined by, the Office of the Comptroller of the Currency ("OCC") and
is required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions.
Commerce North, as a New Jersey state-chartered bank, is subject to the New
Jersey Banking Act. Commerce North is also subject to the supervision of, is
regularly examined by, the New Jersey Department of Banking and Insurance
("Department") and the FDIC, and is required to furnish quarterly reports to
each agency. The Approval of the Department and FDIC is necessary for the
establishment of any additional branch offices by any New Jersey state-chartered
bank, subject to applicable state law restrictions.
Under present New Jersey law, Commerce NJ, Commerce Shore and Commerce
North would be permitted to operate offices at any location in New Jersey,
subject to prior regulatory approval. Under present Pennsylvania law, Commerce
PA would be permitted to operate offices within any county in Pennsylvania,
subject to prior regulatory approval.
51
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Under the Community Reinvestment Act, as amended ("CRA"), a bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with CRA. CRA
requires that the applicable regulatory agency to assess an institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
requires public disclosure of an institution's CRA rating and requires that the
applicable regulatory agency provide a written evaluation of an institution's
CRA performance utilizing a four-tiered descriptive rating system. An
institution's CRA rating is considered in determining, whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Performance less than satisfactory may be the
basis for denying an application. In addition, under applicable regulations a
bank having a less than satisfactory rating is not entitled to participate on
the bid list for FDIC offerings. In 1998, Commerce NJ, Commerce PA, Commerce
Shore and Commerce North each received a "satisfactory" rating.
Commerce NJ, Commerce PA, Commerce Shore and Commerce North are also
members of the FDIC and, except for Commerce North, members of the FRB and,
therefore, are subject to additional regulation by these agencies. Some of the
aspects of the lending and deposit business of Commerce NJ, Commerce PA,
Commerce Shore and Commerce North which are regulated by these agencies include
personal lending, mortgage lending and reserve requirements. The operation of
Commerce NJ, Commerce PA, Commerce Shore and Commerce North are also subject to
numerous federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
Commerce NJ, Commerce PA, Commerce Shore and Commerce North are subject to
certain limitations on the amount of cash dividends that they can pay. See Note
18 of the Company's Notes to Consolidated Financial Statements which appears
elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiaries. The FDIC has similar authority
with respect to Commerce North.
Substantially all of the deposits of the banking subsidiaries are insured
up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are
subject to deposit insurance assessments to maintain the BIF. The insurance
assessments are based upon a matrix that takes into account a bank's capital
level and supervisory rating. Effective January 1, 1996, the FDIC reduced the
insurance premiums it charged on bank deposits insured by the BIF to the
statutory minimum of $2,000 annually for "well capitalized" banks. On September
30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and
signed into law. DIFA reduced the amount of FDIC insurance premiums for savings
association deposits acquired by banks to the same levels assessed for deposits
insured by BIF. DIFA further provides for assessments to be imposed on all
insured depository institutions with respect to deposits to pay for the cost of
Financing Corporation bonds; however, banks are assessed for this purpose at
only one-fifth the rate of the assessment on savings associations until December
31, 1999. As a result of these changes, the deposit insurance assessment for
banks and for thrifts has been nearly equalized and will be identical for
comparably rated institutions after January 1, 2000, at which time banks will
share equally in the FICO assessment and the BIF and SAIF funds will be merged.
Interstate Banking
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after September 29, 1995. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997, and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. New Jersey and Pennsylvania have enacted laws
opting in immediately to
52
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interstate merger and interstate branching transactions. Interstate acquisitions
and mergers would both be subject, in general, to certain concentration limits
and state entry rules relating to the age of the bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania and New
Jersey have each passed such a law. However, the New Jersey law does not
authorize establishment of interstate branches other than by means of acquiring
such branches from another institution.
Commerce Insurance/ Commerce Capital Markets
Commerce Insurance, a nonbank subsidiary of Commerce North, is currently
subject to supervision, regulation and examination by the New Jersey Department
of Banking and Insurance. Commerce Capital Markets, a nonbank subsidiary of the
Company, engages in certain securities activities permitted to bank holding
company subsidiaries under Section 20 of the Glass-Steagall Act and is regulated
by the SEC. Commerce Capital Markets is also subject to rules and regulations
promulgated by the National Association of Securities Dealers, Inc., the
Securities Investors Protection Corporation and various state securities
commissions and with respect to public finance activities the Municipal
Securities Rulemaking Board.
Both Commerce Insurance and Commerce Capital Markets are also subject to
various state laws and regulations in which they do business. These laws and
regulations are primarily intended to benefit clients and generally grant
supervisory agencies broad administrative powers, including the power to limit
or restrict the carrying on of business for failure to comply with such laws and
regulations. In such event, the possible sanctions which may be imposed include
the suspension of individual employees, limitations on engaging in business for
specific periods, censures and fines.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Company, Commerce NJ, Commerce PA, Commerce Shore, and
Commerce North are affected by the policies of regulatory authorities, including
the OCC, the FRB and the FDIC. An important function of the FRB, is to regulate
the money supply and credit conditions. Among the instruments used to implement
these objectives are open market operations in U.S. Government securities,
setting the discount rate, and changes in reserve requirements against bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investments and deposits,
and their use may also affect interest rates charged on loans or paid on
deposits.
The monetary policies and regulations of the FRB have bad a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings and growth of the Company, Commerce NJ, Commerce PA, Commerce
Shore, and Commerce North cannot be predicted.
Legal Proceedings
Other than routine litigation incidental to its business, none of the
Company, Commerce NJ, Commerce PA, Commerce Shore, Commerce North, Commerce
Capital Trust 1, Commerce Insurance, or CCMI, or any of their properties is
subject to any material legal proceedings, nor are any such proceedings known to
be contemplated.
Employee Stock Ownership Plan
Effective January 1, 1989, the Company's Board of Directors approved the
restatement of the Company's Stock Bonus Plan to an Employee Stock Ownership
Plan ("ESOP"). The ESOP is intended to be a qualified retirement plan
established and maintained in accordance with the Employee Retirement Income
Security Act of 1974 for the benefit of the Company's and its bank subsidiaries'
eligible employees. The ESOP is intended to invest primarily in "Qualifying
Employer Securities" (i.e., common stock or preferred stock which is convertible
into common stock). The assets of the ESOP are held in a trust fund pursuant to
a Trust Agreement. The trustees under the Trust Agreement are authorized to
invest up to 100% of the trust fund in Qualifying Employer Securities. The
trustees are also authorized to borrow money for the purpose of purchasing
Qualifying Employer Securities.
53
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Generally, each participant in the ESOP is entitled to direct the trustees
with respect to the voting rights, if any, of the Qualifying Employer Securities
allocated to the participant's account. In other cases (i.e., unallocated
shares), the voting of shares held by the ESOP is determined by the trustees.
The current trustees are Vernon W. Hill, II and C. Edward Jordan, Jr., the
trustees under the Company's former Stock Bonus Plan.
The Company is responsible for the operation and administration of the
ESOP. The Company determines investment policies under which the trustees act.
These duties are carried out by a committee appointed by the Board of Directors.
The Board of Directors has the sole responsibility to appoint and remove members
of the committee of trustees, to determine the amount of contributions to the
ESOP by the Company and its subsidiary banks, and to amend or terminate, in
whole or in part, the ESOP or the Trust Agreement.
The Company's Board of Directors approved the creation of a new series of
cumulative convertible preferred stock known as "Series C ESOP Cumulative
Convertible Preferred Stock." On January 31, 1990, the ESOP borrowed $7.5
million from another financial institution to complete the purchase of 417,000
shares of Series C ESOP Cumulative Convertible Preferred Stock from the Company,
at $18.00 per share, with an annual dividend rate of $1.35. This loan was
guaranteed by the Company. During 1994, the loan was refinanced with another
financial institution, also with the guarantee of the Company. The balance of
the loan at December 31, 1998 was $2,308,000. Effective March 1, 1998, the
Trustees of the ESOP exercised their right to convert all 417,000 shares of
Series C ESOP Cumulative Convertible Preferred Stock held by the ESOP into
849,062 shares of the Company's common stock.
The unallocated shares of common stock the ESOP Trust held of record as of'
March 5, 1999 were less than 1% of the Company's outstanding common stock.
54
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Commerce Bancorp, Inc.
By /s/ VERNON W. HILL, II
-----------------------------------
Vernon W. Hill, II
Date: March 26, 1999 Chairman of the Board and President
By /s/ THOMAS J. SUKAY
-----------------------------------
Thomas J. Sukay
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ VERNON W. HILL, II Chairman of the Board March 26, 1999
- ------------------------------- and President
Vernon W. Hill, II (Principal Executive Officer)
/s/ C. EDWARD JORDAN JR. Executive Vice President March 26, 1999
- ------------------------------- and Director
C. Edward Jordan Jr.
/s/ ROBERT C. BECK Secretary and Director March 26, 1999
- -------------------------------
Robert C. Beck
/s/ DAVID BAIRD, IV Director March 26, 1999
- -------------------------------
David Baird, IV
/s/ JACK R BERSHAD Director March 26, 1999
- -------------------------------
Jack R Bershad
/s/ MORTON N. KERR Director March 26, 1999
- -------------------------------
Morton N. Kerr
/s/ STEVEN M. LEWIS Director March 26, 1999
- -------------------------------
Steven M. Lewis
/s/ DANIEL J. RAGONE Director March 26, 1999
- -------------------------------
Daniel J. Ragone
/s/ WILLIAM A. SCHWARTZ JR. Director March 26, 1999
- -------------------------------
William A. Schwartz Jr.
/s/ JOSEPH T. TARQUINI JR. Director March 26, 1999
- -------------------------------
Joseph T. Tarquini Jr.
/s/ JOSEPH BUCKELEW Director March 26, 1999
- -------------------------------
Joseph Buckelew
/s/ FRANK C. VIDEON SR. Director March 26, 1999
- -------------------------------
Frank C. Videon Sr.
55
1/16/98
LEASE
from
EWING EQUITIES, L.L.C.
to
COMMERCE BANK, N.A.
Article 1
Reference Date and Exhibits
1.1 Data
----
DATE : January 16, 1998
LOCATION OF PREMISES : Olden Avenue and Arctic Avenue
Ewing, New Jersey
LANDLORD : EWING EQUITIES, L.L.C.
ORIGINAL ADDRESS OF : 17000 Horizon Way
Suite 200
Mt. Laurel, NJ 08054
TENANT : COMMERCE BANK, N.A.
ORIGINAL ADDRESS OF : c/o Commerce Bancorp, Inc.
1701 Route 70 East
Cherry Hill, NJ 08034
LEASE TERM : Twenty Years
ANNUAL FIXED RENT RATE : Year 1-5 $75,000.00
6-10 $82,500.00
11-15 $90,750.00
16-20 $99,825.00
INSURANCE LIMITS : $2,000,000 Single Action
$4,000,000 Aggregate
1
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1/16/98
1.2 Table of Contents
ARTICLE I - Reference Data and Exhibits Page
1.1 Data 1
1.2 Table of Contents 2
ARTICLE II - Premises and Term
2.1 Premises 4
2.2 Term 4
2.3 Option to Extend 4
ARTICLE III - Improvements
3.1 Construction of Improvements 4
3.2 Contractor 5
3.3 Signs 5
ARTICLE IV - Rent
4.1 The Rent, Minimum Fixed and Percentage 5
ARTICLE V - Real Estate Taxes
5.1 Real Estate Taxes 5
5.2 Taxes 5
5.3 Method of Payment 6
ARTICLE VI - Utilities and Services
6.1 Utilities and Charges Therefore 6
ARTICLE VII - TENANT'S Additional Covenants
7.1 Affirmative Covenants 7
7.1.1 Use 7
7.1.2 Compliance with Law 7
7.1.3 Payment of TENANT'S Work 7
7.1.4 Indemnity and Liability Insurance 8
7.1.5 LANDLORD'S Right to Enter 8
7.1.6 Personal Property at TENANT'S Risk 8
7.1.7 Payment of LANDLORD'S Cost of Enforcement 8
7.1.8 Yield Up 8
7.1.9 Maintenance 9
7.1.10 Insurance 9
7.2 Negative Comments 9
7.2.1 Overloading, Nuisance, etc. 9
7.2.2 Installation, Alteration or Additions 10
ARTICLE VIII - LANDLORD'S Additional Covenants
8.1 Warranty on Use 10
8.2 Competing Use 10
ARTICLE IX - Casualty-or Taking
9.1 TENANT to Repair or Rebuild in the Event of Casualty 10
9.2 Right to Terminate in Event of Casualty 10
9.3 Eminent Domain 11
2
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1/16/98
ARTICLE II
Premises and Term
2.1 Premises - LANDLORD hereby leases to TENANT and TENANT hereby leases
from LANDLORD, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the premises shown on Exhibit "A" and
described in Exhibit "B", both annexed hereto and made a part hereof, together
with any and all improvements, appurtenances, rights, privileges and easements
befitting, belonging or pertaining thereto and a building no greater than 4,000
square feet, so long as such building is within the perimeter of the leased
premises as shown on Exhibit "A".
2.2 Term - TO HAVE AND TO HOLD for a term beginning at the earlier of (a)
Ninety (90) days (inclusive of the time for objectors to appeal for any
approval) after LANDLORD has obtained approval for the construction of the
branch bank as set forth in Article 12 (notwithstanding TENANT may not have
commenced construction) and continuing for the Lease term of twenty (20) years
unless sooner terminated as hereinafter provided. When dates of the beginning
and end of the Lease term have been determined, such dates shall be evidenced by
a document in form for recording, executed by LANDLORD and TENANT and delivered
each to the other.
2.3 Option to Extend - So long as TENANT is not in default hereunder,
TENANT shall have the right to extend this Lease for four (4) five (5) year
terms under the same terms, conditions and provisions as in the original term,
at the following rentals:
Option Years 1 -5 $ 109,807.00
6-10 $ 120,788.00
11-15 $ 132,867.00
16-20 $ 146,153.00
TENANT shall give written notice of its intention to exercise each
extension option not less than Ninety (90) days prior to the expiration of the
then current term. Lack of written notice by TENANT of its intention to exercise
any option prior to ninety (90) days before the expiration of the then current
term shall be deemed to constitute exercise of that option by the TENANT.
ARTICLE III
Improvements
3.1 Construction of Improvements - TENANT agrees to construct, at its sole
cost, a branch banking facility, pursuant to the attached Site Plan, subject to
reasonable approval by the LANDLORD Of the building plans and specifications.
4
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1/16/98
3.2 Contractor - TENANT shall have the right to select and approve the
contractor to complete the construction, which shall be subject to the approval
of the LANDLORD. Approval by LANDLORD shall not be unreasonably withheld.
3.3 Signs - TENANT shall have the right to erect such signs as permitted
by applicable zoning ordinances within the leased area.
ARTICLE IV
Rent
4.1 The Rent, Minimum Fixed - TENANT covenants and agrees to pay rent to
LANDLORD at the original address of LANDLORD or such other place as LANDLORD may
by notice in writing to TENANT from time to time direct, at the following rates
and times.
(a) TENANT agrees to pay to LANDLORD base annual fixed rent for the
Premises in accordance with and in the amount set forth in Paragraph 1.1 "Data".
The base annual fixed rent shall be paid in equal monthly installments in
advance on the first (1st) day of each month beginning on the Commencement Date.
In addition to the base annual fixed rent, TENANT shall pay as and when the same
become due and owing as additional rents, all other monies provided for in the
Lease. It is the parties intention that all charges and assessments charged to
or assessed against the Premises shall be the responsibility of the TENANT, such
that the Lease shall be "net, net, net" to the LANDLORD, excepting only interest
and principal on any mortgage made by the LANDLORD and effecting the Premises.
(b) For purposes of this Lease, the scheduled increases in the base annual
fixed rate shall occur on the first day of the sixth (6th), eleventh (11th) and
sixteenth (16th) years of the Initial Term as same is determined pursuant to
Paragraph 2.2 and on the first day of the sixth (6th), eleventh (11th) and
sixteenth (16th), years of the Option Terms.
(c) If any installment under this Lease is not paid within fifteen (15)
days of the time and at the place and in the manner specified, then LANDLORD
may, at its option, declare TENANT in default.
ARTICLE V
Real Estate Taxes
5.1 Real Estate Taxes - As additional rent, TENANT agrees to pay all real
estate taxes levied upon the Premises, improvements located on the Premises, the
leasehold estate, or any sublease hold estate of any nature including special
assessments. The obligation for payment by TENANT of all real estate taxes shall
commence simultaneously with the payment of rent hereunder.
5.2 Taxes - TENANT agrees to pay all taxes levied upon rents and personal
property, including trade fixtures and inventory, kept on the demised Premises,
covered by Section 5.1 after
5
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1/16/98
presentation to TENANT by LANDLORD of statements from the taxing jurisdiction in
which said property is located. TENANT, however, will pay only the lowest
discounted amount and will not be required to pay any penalty, interest or cost
occurring by reason of LANDLORD'S failure to secure said tax statements in a
timely fashion from the taxing authorities for any tax required to be paid by
TENANT.
LANDLORD may, however, direct the taxing authorities to send the statements
directly to TENANT. "In the event LANDLORD directs the taxing authorities to
send a statement directly to TENANT, TENANT shall make all such payments
directly to the taxing authority at least ten (10) days before any delinquency
and before any fine, interest or penalty shall become due or imposed by
operation of law for their nonpayment. Further, TENANT shall furnish to LANDLORD
within ten (10) days of the date when any tax, assessment or charge would become
delinquent, receipts or other satisfactory evidence establishing the timely
payment of said taxes or charges." LANDLORD further agrees that TENANT, in the
name of LANDLORD, but at TENANT'S sole expense, may protest any assessment
before any taxing authority or board or maintain any necessary legal action in
reference to said assessment or for the recovery of any taxes paid thereon.
Nothing herein contained shall require TENANT to pay any income or excess
profits, taxes assessed against LANDLORD or any corporation, capital stock, or
franchise tax imposed upon LANDLORD.
5.3 Method of Payment - LANDLORD shall give written notice advising TENANT
of the amount of real estate taxes, together with a copy of the tax bill, and
TENANT shall pay such amount to LANDLORD within thirty (30) days after receipt
of such notice. If this Lease shall terminate during a tax year, TENANT shall
pay to LANDLORD, a prorated portion of the amount that would have been due for
the full tax year based on the number of days of said tax year expired on the
date of termination.
ARTICLE VI
Utilities and Services
6.1 Utilities and Changes Therefore - TENANT agrees to pay directly to the
authority charged with the collection thereof, all charges for water, gas,
electricity, sanitary sewer and sprinkler changes, telephone connection and
standby fees and other utilities used or consumed in the Premises and shall make
its own arrangements for such utilities. In the event any such services cannot
be reasonably procured from any public agency, and LANDLORD provides any such
services, TENANT shall reimburse LANDLORD for its proportionate share of any
such services used or consumed in the demised premises as additional rental.
6
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1/16/98
ARTICLE VII
TENANT'S Additional Covenants
7.1 Affirmative Covenants - TENANT covenants at its expense at all times
during the Lease term and such further time as TENANT occupies the Premises or
any part thereof.
7.1.1 Use - TENANT shall use and permit the use of the
Premises and the improvements to be constructed thereon primarily for the
operation of a branch bank, provided that (subject to the other terms and
conditions of this Lease), TENANT may at any time use the Premises and the
building and other improvements to be constructed thereon, for any other lawful
commercial purposes. Neither TENANT nor its subtenants, if any, shall commit any
nuisance, nor permit the emission of any objectionable noise or odor, nor bring
on, deposit or allow to be brought on or deposited on the Premises any asbestos
materials or any other Hazardous Substance or materials as the same may be
defined by Federal, State or local laws, rules, statutes or regulations or in
the Environmental Rider annexed hereto, nor use the property in such a manner
which negatively effects the reversion.
7.1.2 Compliance with Law - To make all repairs, alterations,
additions or replacements to the Premises required by any law or ordinance or
any order or regulation of any public authority because of TENANT'S use of the
Premises, to keep the Premises equipped with all safety appliances so required
because of such use; to pay all municipal, county or state taxes assessed
against the personal property of any kind owned by or placed in, upon or about
the premises by TENANT; and to comply with the orders and regulations of all
governmental authorities, as well as all Insurance Carriers and Underwriters.
7.1.2 (A) TENANT has the right to contest by appropriate
judicial or administrative proceeding, without cost or expense to the LANDLORD,
the validity or application of any law, ordinance, order, rule, regulation or
requirement ("law") which the TENANT legitimately deems unduly burdensome or
inappropriate and TENANT shall not be in default for failure to comply with such
law until the legally permitted time following final determination of TENANT'S
contest expires; provided, however, if LANDLORD gives notice of request, TENANT
shall first furnish LANDLORD with a bond, satisfactory to LANDLORD in form and
insurer, guaranteeing compliance by TENANT with the contested law and
indemnifying LANDLORD against all liability that LANDLORD may sustain by reason
of TENANT'S failure or delay in complying with the law. LANDLORD may, but is not
required to, contest any such law independent of TENANT. On TENANT'S notice of
request, LANDLORD may join in TENANT'S contest.
7.1.3 Payment for TENANT'S Work - To pay promptly when due the
entire cost of any work to the Premises undertaken by TENANT and to bond against
or discharge any liens for labor or materials within ten (10) days after written
request by LANDLORD; to procure all necessary permits
7
<PAGE>
1/16/98
before undertaking such work; and to do all of such work in a good and
workmanlike manner, employing new materials of good quality and complying with
all governmental requirements.
7.1.4 Indemnity and Liability Insurance - To defend with
counsel, save harmless and indemnify LANDLORD from all claims or damage to or of
any person or property while on the premises unless arising from any omission,
fault, negligence or other misconduct of LANDLORD, and from all claims or damage
to or of any person or property occasioned by any omission, fault, neglect or
other misconduct of TENANT; to maintain in responsible companies qualified to do
business in the state in which the premises is located and in good standing
therein, public liability insurance covering the premises insuring LANDLORD, as
well as TENANT, with limits at least equal to those stated in Section 1.1,
workmen's compensation insurance with statutory limits, covering all of TENANT'S
employees working in the premises, and to deposit promptly with LANDLORD
certificates for such insurance and all renewals thereof, bearing the
endorsement that the policies will not be canceled until after ten (10) days
written notice to LANDLORD. TENANT'S obligations hereunder may be satisfied
through a blanket insurance policy covering other interests of the TENANT.
7.1.5 LANDLORD'S Right to Enter - To permit LANDLORD and its
agents to examine the premises at reasonable times and to show the premises to
prospective purchasers and lenders, provided such entry shall not unreasonably
interfere with TENANT'S operation and conduct of its business in the demised
premises or compromise security.
7.1.6 Personal Property at TENANT'S Risk - That all of the
furnishings, fixtures, equipment, effects and property of every kind, nature and
description of TENANT and of all persons claiming under TENANT, may be on the
premises, shall be at the sole risk and hazard of TENANT, and if the whole or
any part thereof shall be destroyed or damaged by fire, water, or otherwise, or
by the leakage or bursting of water pipes, steam pipes or other pipes, by theft
or from any other cause, no part of said loss or damage is to charged to or be
borne by LANDLORD, except that LANDLORD shall in no event be indemnified or held
harmless or exonerated from any liability resulting from its sole negligence,
failure to perform any of its obligations under this Lease or to any extent
prohibited by law.
7.1.7 Payment of LANDLORD'S Cost of Enforcement - To pay on
demand LANDLORD'S expenses, including reasonable attorney's fees, incurred in
enforcing any obligation of TENANT under this Lease or in curing any default by
TENANT under this Lease as provided in Section 10.4, provided LANDLORD shall
prevail in any judicial proceedings in respect to such enforcement.
7.1.8 Yield Up - At the expiration of the Lease term or
earlier termination of this Lease, TENANT shall remove all trade fixtures and
personal property, to repair any damage caused by such removal, to remove all
TENANT'S signs wherever located and to surrender all keys to the premises and
yield up the premises, broom clean and in the same good order and repair in
which TENANT is obligated to keep and maintain the premises by the provisions of
this Lease, reasonable wear and tear and insured
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damage by fire, casualty or taking excepted. Any property not so removed shall
be deemed abandoned and may be removed and disposed of by LANDLORD in such
manner as LANDLORD shall determine without any obligation on the part of
LANDLORD to account to TENANT for any proceeds therefrom, all of which shall
become the property of LANDLORD. Any holdover by TENANT will not be deemed an
extension of this Lease, and TENANT shall indemnify LANDLORD against all losses
and damages from a failure to surrender.
7.1.9 Maintenance - Throughout the term, TENANT shall, at
TENANT'S sole cost and expense maintain the premises and all improvements
thereon in good condition and repair, ordinary wear and tear excepted, and in
accordance with all applicable laws, rules, ordinances, orders and regulations
of (1) federal, state, county, municipal and other governmental agencies and
bodies having or claiming jurisdiction and all of their respective departments,
bureaus and officials; (2) the insurance underwriting board or insurance
inspection bureau having or claiming jurisdiction; and (3) all insurance
companies insuring all or any part of the premises of the improvements located
thereon, or both except as provided below and subject only to the provisions of
Paragraph 9.2, TENANT shall promptly and diligently repair, restore and replace
as required to maintain the premises and the improvements in the condition set
forth above, or to remedy all damage to or destruction of all or any part of
the improvements.
(A) The completed work of maintenance, compliance, repair,
restoration or replacement shall be equal in value, quality and use to the
condition of the improvements before the event giving rise to the work, unless
otherwise provided for in this Lease. LANDLORD shall not be required to furnish
any services or facilities or to make any repairs or alterations of any kind in
or upon or on the premises, LANDLORD'S election to perform any obligations of
the TENANT under this provision on TENANTS failure or refusal to do so shall
not constitute a waiver of any right or remedy for TENANT'S default and TENANT
shall promptly reimburse, defend and indemnify LANDLORD against all liability,
loss, cost and expense arising from it.
7.1.10 Insurance - TENANT shall maintain in full force and
effect, at its own cost, full replacement cost coverage insurance covering the
demised premises (and all improvements for the full insurable value) against
loss or damage by fire or casualty, with the usual extended coverage
endorsements, together will endorsements protecting against loss or damage
resulting from malicious mischief, sprinkler leakage and vandalism all in
amounts not less than replacement parts value above foundation walls. All
insurance policies shall name the LANDLORD as its interest may appear.
7.2 Negative Covenants - TENANT covenants at all times during the Lease
term and such further times as TENANT occupies the premises or any part thereof:
7.2.1 Overloadinq Nuisance, etc. - Not to injure, overload,
deface or otherwise harm the premises; nor commit any nuisance; nor make any
use of the premises which is improper, offensive or contrary to any law or
ordinance.
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7.2.2 Installation, Alteration or Additions - Not to make any
installations, alterations or additions (except only the installation of
fixtures necessary for the conduct of its business), without on each occasion
obtaining prior written consent of LANDLORD, LANDLORD'S consent not be
unreasonable withheld. No consent shall be required for nonstructural
alterations not exceeding $100,000 in cost. No addition will be allowed which
increases the building size to more than 4,000 square feet, or which violates
the terms of Paragraph 2.1 of this Lease.
ARTICLE VIII
LANDLORD'S Additional Covenants
8.1 Warranty on Use - LANDLORD warrants and represents that at the
commencement of construction it will be the Owner in Fee of the Land shown on
Exhibit "A" and described in Exhibit "B". LANDLORD has no knowledge of and
TENANT requires that there be no zoning regulations, restrictive agreements,
leases or other instruments which prevent the use of the premises for the
purpose intended herein, nor otherwise conflict with any of the provisions of
this Lease. TENANT'S sole and conclusive remedy for a breach of this warranty
shall be its right, at its election, to terminate the Lease prior to
commencement of construction.
8.2 Competing Use - During the term of this Lease, provided TENANT is
not in default, LANDLORD agrees not to lease or sell any portion of the project,
of which the leased premises is a part, to a commercial bank, savings bank,
savings and loan or credit union.
ARTICLE IX
Casualty or Taking
9.1 TENANT to Repair or Rebuild in the Event of Casualty - In case the
Premises or any part thereof shall be damaged or destroyed by fire other
casualty, taken (which term or reference to eminent domain action generally, for
the purposes of this Article shall include a sale in lieu of the exercise of the
right of eminent domain) or ordered to be demolished by the action of any public
authority in consequence of a fire or other casualty, this Lease shall, unless
it is terminated as provided below in Section 9.2 or 9.3, remain in full force
and effect and TENANT shall, at its expense, proceed with all reasonable
dispatch, to repair or rebuild the premises and the improvements, or what may
remain thereof, so as to restore them as nearly as practicable to the condition
they were in immediately prior to such damage or destruction.
9.2 Right to Terminate in Event of Casualty - In case of any damage or
destruction occurring in the last five years of the original term of this Lease
or during any extension of the term, to the extent of 50% or more of the
insurable value of the building, TENANT may at its option, to be evidenced by
notice in writing given to the LANDLORD within seven (7) days after the
occurrence of such damage or destruction, in lieu of repairing or replacing the
building, elect to terminate this Lease as of the date of said damage or
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destruction. In the event the TENANT shall so terminate the lease all insurance
proceeds shall become the property of the LANDLORD.
9.3 Eminent Domain - If the whole, or any part of the demised premises
shall be taken or condemned by any competent authority for any public use or
purpose during the term of this Lease. TENANT reserves the unto itself the
right to prosecute its claim for an award based upon its leasehold interest
for such taking, without impairing any rights of LANDLORD for the taking of or
injury to the reversion.
In the event that a part of the demised premises shall be taken or
condemned that (a) the part so taken includes the building on the demised
premises or any part thereof or (b) the part so taken shall remove from the
premises 20% or more of the front depth of the parking areas thereof, or (c) the
part so taken shall consist of 25% or more of the total parking area, or (d)
such partial taking shall result in cutting off direct access from the demised
premises to any adjacent public street or highway, then and in any such event,
the TENANT may at any time either prior to or within a period of sixty (60) days
after the date when possession of the premises shall be required by the
condemning authority elect to terminate this Lease, or if any option to purchase
the premises is conferred upon the TENANT by any other provision of this Lease,
may as an alternative to such termination of this Lease elect to purchase the
demised premises in accordance with such purpose option. In the event that
TENANT shall fail to exercise any such option to terminate this Lease or to
purchase the premises or in the event that a part of the demised premises shall
be taken or condemned under circumstances under which the TENANT will have no
such option, then and in either such event the LANDLORD shall, with reasonable
promptness, make necessary repairs to and alterations of the improvements on the
demised premises for the purpose of restoring the same to an economic
architectural unit, susceptible to the same use as that which was in effect
immediately prior to such taking, to the extent that may have been necessary by
such condemnation, subject to a pro-rata reduction in rental. Any dispute
resulting from Section 9.3 of this Lease shall be submitted to the American
Arbitration Society, whose decision shall be binding on the parties hereto.
ARTICLE X
Defaults
10.1 Events of Default - If (a) Tenant shall default in the performance
of any of its obligations to pay rent or additional rent hereunder and if such
default shall continue for ten (10) days after written notice from LANDLORD
designating such default or if within thirty (30) days after written notice from
LANDLORD to TENANT specifying any other non-monetary default or defaults, TENANT
has not commenced diligently to correct the default or defaults so specified or
has not thereafter diligently pursued such corrective action to completion, or
(b) any assignment shall be made by TENANT for the benefit of credits, or (c) if
TENANT'S leasehold interest shall be taken on execution, attached, levied upon
or (d) if a petition is filed
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by TENANT for adjudication as a bankrupt, or for reorganization or an
arrangement under any provision of the Bankruptcy Act as then in force and
effect, or (e) if an involuntary petition under any of the provisions of said
Bankruptcy Act is filed against TENANT and such involuntary petition is not
dismissed within sixty (60) days thereafter, then, and in any of such cases,
LANDLORD lawfully may exercise all defaults rights available to it under law,
including repossession of the leased property, termination of the lease,
acceleration of all future rental payments, and such other rights as may be
lawfully permitted.
10.2 Remedies - In the event that this Lease is terminated under any of
the provisions contained in Section 10.1 or shall be otherwise terminated for
breach of any obligation of TENANT, TENANT covenants to pay punctually to
LANDLORD all the sums and perform all the obligations which TENANT covenants in
this Lease to pay and to perform in the same manner and to the same extent and
at the same time as if this Lease had not been terminated so long as such
obligations shall have not been rendered unnecessary or impossible of
performance by the subsequent re-letting or other occupancy permitted by
LANDLORD. In calculating the amounts to be paid by TENANT under the foregoing
covenant, TENANT shall be credited with the net proceeds of any rent or the
value of other considerations obtained by LANDLORD by re-letting the premises,
after deducting all LANDLORD'S expenses in connection with such re-letting,
including, without limitation, all repossession costs, brokerage commissions,
reasonable fees for legal services and expenses of preparing the premises for
such reletting, it being agreed by TENANT that LANDLORD may (i) re-let the
premises or any part or parts thereof, for a term or terms which may at
LANDLORD'S option be equal to or less than or exceed the period which would
otherwise have constituted the balance of the Lease term, and (ii) make such
alterations, repairs and decorations in the premises as LANDLORD in its sole
judgment considers advisable or necessary to re-let the same.
Nothing contained in this Lease shall, however, limit or prejudice the
right of LANDLORD to prove for and obtain in proceedings for bankruptcy or
insolvency by reason of the termination of this Lease, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, the damages are to be proved, whether or not
the amount be greater, equal to, or less than the amounts of the loss or damages
referred to above.
10.3 Remedies Cumulative - Any and all rights and remedies which
LANDLORD may have under this Lease, and at law and equity, shall be cumulative
and shall not be deemed inconsistent with each other, and any two or more of all
such rights and remedies may be exercised at the same time insofar as permitted
by law.
10.4 LANDLORD'S and TENANT'S Right to Cure Defaults - LANDLORD may, but
shall not be obligated to, cure at any time, following ten (10) days prior
written notice to TENANT, except in cases of emergency when no notice shall be
required, any default by TENANT under this Lease; and whenever LANDLORD so
elects, all costs and expenses incurred by LANDLORD, including reasonable
attorney's
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fees, in curing a default shall be paid by TENANT to LANDLORD as additional rent
on demand. TENANT shall have a like right to cure any default of LANDLORD, and
TENANT may reimburse itself for the cost thereof out of succeeding rental
payments.
10.5 Effect of Waivers on Default - No consent or waiver, expressed or
implied, by either party to or of any breach of any covenants, conditions or
duty of the other shall be construed as a consent or waiver to or of any other
breach of the same of any other covenant, condition or duty.
ARTICLE XI
Miscellaneous Provisions
11.1 Assignment, Subletting, etc. - LANDLORD'S written consent shall be
required for any assignment, transfer or subletting except to another financial
institution which consent shall not be unreasonably withheld.
11.2 Notice from One Party to the Other - Any notice from LANDLORD to
TENANT or from TENANT to LANDLORD shall be deemed duly served if mailed by
registered or certified mail, return receipt requested, postage pre-paid,
addressed, if to TENANT, at the original address of TENANT or such other
addresses as TENANT shall have last designated by notice in writing to LANDLORD,
and if to LANDLORD, at the original address of LANDLORD or such other address as
LANDLORD shall have last designated by notice in writing to TENANT.
11.3 Quiet Employment - LANDLORD agrees that upon TENANT'S paying the
rent and performing and observing the agreements, conditions and other
provisions on its part to be performed and observed, TENANT shall and may
peaceably and quietly have, hold and enjoy the demised premises during the Lease
term without any manner or hindrance or molestation from LANDLORD or anyone
claiming under LANDLORD, subject to the covenants and conditions of this Lease.
11.4 Recording - TENANT agrees not to record this Lease, but each party
hereto agrees on request of the other, to execute a Notice or Short Form of this
Lease in recordable form in compliance with applicable statutes, and reasonably
satisfactory to LANDLORD'S and TENANT'S attorneys. In no event shall such
document set forth the rental or other charges payable by TENANT under this
Lease; and any such document shall expressly state that it is executed pursuant
to the provisions contained in this Lease, and is not intended to vary the terms
and conditions of this Lease. In the event LANDLORD and/or TENANT believe that
the Lease has been lawfully terminated, abandoned or otherwise of no force and
effect and the other party will not voluntarily execute a Discharge of
Memorandum of Lease, the party seeking the Discharge of Memorandum of Lease may
move summarily before the Superior Court of New Jersey for a determination of
whether or not the Memorandum of Lease should be discharged. The other party
consents to the jurisdiction of the Superior Court of New Jersey and agrees to
proceed in a summary manner. It is expressly understood and agreed that in
addition to the relief provided herein, the
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parties will have such additional cumulative remedies as are available to it at
law or in equity for damages suffered by reason of a wrongful refusal to execute
and deliver a Discharge of Memorandum of Lease.
11.5 Acts of God - In any case where either party hereto is required to do
any act, delays caused by or resulting from Acts of God, war, civil commotion,
fire or other casualty, labor difficulties, shortages of labor, materials or
equipment, government regulations, or other causes beyond such party's
reasonable control shall not be counted in determining the time during which
work shall be completed, whether or such time be designated by a fixed date, a
fixed time or "a reasonable time".
11.6 Waiver of Subrogation - All insurance which is carried by either party
with respect to the demised premises, whether or not required, shall include
provisions which either designates the other party as one of the insured or deny
to the insurer acquisition by subrogation of rights of recovery against the
other party. Each party shall be entitled to have duplicates or certificates of
any policies containing such provisions. Each party hereby waives all rights of
recovery against the other for loss or injury against which the waiving party is
protected by insurance containing such provisions.
11.7 Rights of Mortgagee and Subordination -
11.7.1 This Lease is subject and is hereby subordinated to all
present and future mortgages, deeds of trust, and other encumbrances affecting
the premises or the property of which said premises are a part; provided,
however, that an agreement or instrument affecting such subordination shall be
executed by the mortgagee or other Lender, be recorded with such mortgage or
other security agreement, and a copy delivered to the TENANT and contain
provisions, to the effect that (i) so long as TENANT observes the terms and
provisions of this Lease and notwithstanding the Lease may be foreclosed, TENANT
will not be effected or disturbed by the mortgagee in the exercise of any of its
rights under the mortgage or other security agreement, or the bond, note or debt
secured thereby; (ii) in the event the mortgagee comes into possession or
ownership of the premises by foreclosing or otherwise, TENANT'S use, occupancy
and quiet enjoyment of the premises shall not be disturbed by any such
proceedings; (iii) in the event the premises are sold or otherwise disposed of
pursuant to any right or power contained in the mortgage or other security
agreement, or the bond or note secured thereby, or as a result of proceedings
thereon, the purchaser shall take title subject to this Agreement of Non
Disturbance, and all of the rights of the TENANT hereunder; (iv) in the event
the buildings and improvements upon the premises are damaged by fire and other
casualty, for which loss the proceeds payable under any insurance policy or
policies are payable to the mortgagee, such insurance funds, when paid, shall be
made available for the purpose of repair and restoration as provided in this
Lease; and (v) the agreement shall be binding upon the LANDLORD, mortgagee and
their respective heirs, executors, administrators, successors and assigns. The
TENANT agrees to execute, at no expense to the LANDLORD, any instrument which
may be deemed necessary or desirable by the LANDLORD to further effect the
subordination of this Lease to any such mortgage, deed of trust or encumbrance.
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11.7.2 No Accord and Satisfaction - No acceptance by LANDLORD
of lesser sum than the rent or any other charges then due shall be deemed to be
other than on account of the earliest installment of such rent or charge due,
nor shall any endorsement or statement on any check or any letter accompanying
any check or payment as rent or other charge be deemed an accord and
satisfaction, and LANDLORD may accept such check or payment without prejudice to
LANDLORD'S right to recover and balance of such installments or pursue any other
remedy in this Lease provided.
11.8 Applicable Law and Construction - This Lease shall be governed by and
construed in accordance with the laws of the State of Pennsylvania, and if any
provisions of this Lease shall to any extent be invalid, the remainder of this
Lease shall not be affected thereby. There are no oral or written agreements
between LANDLORD and TENANT affecting this Lease. This Lease may be amended only
by instruments in writing executed by LANDLORD and TENANT. LANDLORD shall not be
deemed in any way or for any purpose, to have become, by the execution of this
Lease or any action taken thereunder, a partner of TENANT in its business or
otherwise a joint venturer or member of any enterprises of TENANT. The titles of
the several Articles and Sections contained herein are for convenience only and
shall not be considered in construing this Lease. Unless repugnant to the
context, the words "LANDLORD and TENANT" appearing in this Lease shall be
construed to mean those names above and their respective heirs, administrators,
successors and assigns, and those claiming through or under them respectively.
ARTICLE XII
Permits and Approvals
12.1 TENANT'S Obligations - The obligations of TENANT hereunder are
contingent upon final approval by the bank's Board of Directors of this
transaction and upon TENANT securing on or before June 30, 1998 the following
unconditional and unappealable approvals:
A. All state and federal regulatory approvals for the construction and
operation of a branch bank on the leased premises.
B. All municipal and governmental approvals required for the construction
of TENANT'S proposed building including the issuance of a building
permit("Permit and Approvals") and approvals for a free standing sign
and other prototype signage as necessary to properly identify the
building.
12.2 Approvals - TENANT shall diligently pursue all required approvals.
12.3 Easements - TENANT shall have absolutely no right to grant any
easement with regard to the premises other than such easements to public
entities or public service corporations for the purpose of serving only the
premises, rights-of-way or easements on or over the premises for poles or
conduits, or both, for telephone, electricity, water, sanitary or storm sewers
or both and for other utilities and municipal or special district services.
LANDLORD shall cooperate with TENANT to permit the creation of all necessary
easements.
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ARTICLE XV
Holdover
15.1 Holdover - In the event that TENANT continues in use and occupancy and
holds over in possession of the premises after the expiration of the Initial
Term or, properly exercised, the Option Term, in addition to all other damages
to which LANDLORD may be entitled, the monthly rent during the period of
holdover shall be in a sum equal to double the amount of the monthly installment
of base annual fixed rent during the last month of the term which has just
expired. Said holdover rent shall be in addition to all additional rents for
which the TENANT shall be responsible during the holdover period.
ARTICLE XVI
Construction Cost
16.1 Construction Cost - TENANT shall construct its own building at its own
costs and bear all construction within its demised premises, as identified in
Exhibit A.
ARTICLE XVII
Environmental
17.1 Environmental Matters -
A. LANDLORD represents and warrants that any handling, transportation,
storage,treatment or usage of hazardous or toxic substances (as defined by any
applicant government authority and hereinafter being referred to as "Hazardous
Materials") that has occurred or will occur on the Demise Premises shall be in
compliance with all applicable federal, state and local laws, regulations and
ordinances. TENANT represents and warrants that any handling, transportation,
storage, treatment or usage of Hazardous Materials by TENANT at the Demised
Premises shall be in compliance with applicable federal, state and local laws.
LANDLORD further represents and warrants that no leak, spill, discharge,
emission or disposal of Hazardous Materials has occurred or will occur on the
Demised Premises and that the soil, groundwater, soil vapor on or under the
Demised Premises is or will be free of Hazardous Materials as of the date
hereof. LANDLORD agrees to indemnify, defend and hold TENANT and its officers,
from any claims, judgments, damages, fines, penalties, costs, liabilities
(including sums paid in settlement of claims) or loss including attorney's fees,
consultants fees, and expert fees which arise during or after the Primary Term
or any Renewal Term, or in connection with the presence of suspected presence of
Hazardous Materials in the soil, groundwater, or soil vapor on or under the
Demised Premises, unless such Hazardous Materials are present solely as the
result of the acts of TENANT, its officers, employees or agents. Without
limiting the generality of the foregoing, this indemnification shall survive the
expiration of this Lease and does specifically cover costs incurred in
connection with any investigation of site conditions or any cleanup, remedial,
removal or restoration work
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required by any federal, state or local governmental agency or political
subdivision because of the presence or suspected presence of Hazardous Materials
in the soil, groundwater or soil vapor odor under the Demised Premises, unless
the hazardous Materials are present solely as the result of the acts of TENANT,
its officers, agents or employees. Without limiting the generality of the
foregoing, this indemnification shall also specifically cover costs in
connection with:
1 Hazardous Materials present or suspected to be present in
the soil, groundwater or soil vapor on or under the Demised
Premises before the date hereof;or
2. Hazardous Materials that migrate, flow, percolate, diffuse
or in any move onto or under the Demised Premises after the
date hereof; or
3 Hazardous Materials present on or under the Demised Premises
as a result of any discharge, dumping, spilling (accidental
or otherwise) onto the Demised Premises during or after the
Primary Term or any Renewal Term by any person or entity.
B. TENANT agrees to indemnify LANDLORD and its officers, employees and
agent harmless from any claims, judgments, damages, fines, penalties, costs,
liabilities (including sums paid in settlement of claims) or loss including
attorney's fees, consultants fees and expert fees which arise during or after
the Primary Term or any Renewal Term in connection with the presence of toxic or
hazardous substances in the soil, groundwater, or soil vapor on or under the
Demised Premises to the extent such presence is caused by the acts of Tenant,
its officers, employees and agents.
C. A condition precedent to this Lease shall be TENANT's satisfactory
review of the report (the "Phase I Environmental Survey") on the environmental
condition of the land on which the Demised Premises is located. LANDLORD agrees
to provide TENANT with a Phase I Environmental Survey of the land on which the
Demised Premises is located. In the event that TENANT shall discover in its
review of the Phase I Environmental Survey that any Hazardous Materials may be
present in the soil, ground water or soil vapor on or under the Demised
Premises, TENANT may, upon written notice to LANDLORD within ten (10) days after
the date TENANT receives the Phase I Environmental Survey, terminate this Lease.
D. If during the term of this Lease any governmental authority requires the
remediation of Hazardous Materials from the Demised Premises or the Shopping
Center and such remediation materially affects TENANT's business operations or
poses a safety threat to TENANT's employees or customers, then TENANT shall be
entitled to an equitable abatement of rent from the date such interference or
safety hazard occurs to the date such interference and safety hazard are no
longer present.
ARTICLE XVIII
18.1 Title - This lease shall be subject and subordinate to the lien of any
bank or institution or other mortgage or mortgages now or hereafter in force
against LANDLORD's property, and to all
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advances made upon the security thereof, provided the holder of any such
mortgage shall execute and deliver to TENANT an agreement, in the form of
Exhibit D attached hereto, or as otherwise agreed to by TENANT, LANDLORD and
such holder, providing that such holder will recognize this lease and not
disturb TENANT's possession of the premises in the event of foreclosure if
TENANT is not then in default hereunder beyond any applicable cure period,
TENANT agrees, upon receipt of such agreement, to execute such further
instrument(s) as may be necessary to subordinate this lease to the lien of any
such mortgage. The term "mortgage" shall include deeds of trust or any other
similar hypothecations.
18.2 Ownership - LANDLORD warrants that it owns in fee the subject premises
subject only to the liens, mortgages and encumbrances listed on the attached
schedule, evidenced by a title report provided by LANDLORD to TENANT within
forty-five (45) days of the execution of this lease, which shall be subject to
TENANT's reasonable approval. TENANT's lease hereunder shall be subordinate only
to such liens where the holder of such liens has executed and delivered to
TENANT in the form attached hereto a Subordination and Non-Disturbance
Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
this day and year first above written.
COMMERCE BANK, N.A.
- ----------------------------- BY:
Attest ---------------------------------
Thomas H. Arasz
Senior Vice President/CRA Officer
EWING EQUITIES L.L.C.
- ----------------------------- BY:
Attest ---------------------------------
John P. Silvestri
President
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7/8/98
LEASE
from
ENGLISH CREEK PROPERTIES, L.L.C.
to
COMMERCE BANK, N.A.
Article I
Reference Date and Exhibits
1.1 Data
DATE : July 31, 1998
LOCATION OF PREMISES : English Creek Rd.
: Egg Harbour twp., New Jersey
LANDLORD : ENGLISH CREEK PROPERTIES, L.L.C.
ORIGINAL ADDRESS OF : 17000 Horizon Way
Suite 200
Mt. Laurel, NJ 08054
TENANT : COMMERCE BANK, N.A.
ORIGINAL ADDRESS OF : c/o Commerce Bancorp, Inc.
1701 Route 70 East
Cherry Hill, NJ 08034
LEASE TERM : Twenty Years
ANNUAL FIXED RENT RATE : Year 1-5 $55,000.00
6-10 $60.500.00
11-15 $66,550.00
16-20 $73,205.00
INSURANCE LIMITS : $2,000,000 Single Action
$4,000,000 Aggregate
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1.2 Table of Contents
ARTICLE I - Reference Data and Exhibits Page
1.1 Data 1
1.2 Table of Contents 2
ARTICLE II - Promises and Term
2.1 Premises 4
2.2 Term 4
2.3 Option to Extend 4
ARTICLE III - Improvements
3.1 Construction of Improvements 4
3.2 Contractor 5
3.3 Signs 5
ARTICLE IV - Rent
4.1 The Rent, Minimum Fixed and Percentage 5
ARTICLE V - Real Estate Taxes
5.1 Real Estate Taxes 5
5.2 Taxes 5
5.3 Method of Payment 6
ARTICLE VI - Utilities and Services
6.1 Utilities and Charges Therefore 6
ARTICLE VII - TENANT'S Additional Covenants
7.1 Affirmative Covenants 7
7.1.1 Use 7
7.1.2 Compliance with Law 7
7.1.3 Payment of TENANT'S Work 7
7.1.4 Indemnity and Liability Insurance 8
7.1.5 LANDLORD'S Right to Enter 8
7.1.6 Personal Property at TENANT'S Risk 8
7.1.7 Payment of LANDLORD'S Cost of Enforcement 8
7.1.8 Yield Up 8
7.1.9 Maintenance 9
7.1.10 Insurance 9
7.2 Negative Comments 9
7.2.1 Overloading, Nuisance, etc. 9
7.2.2 Installation, Alteration or Additions 10
ARTICLE VIII - LANDLORD'S Additional Covenants
8.1 Warranty on Use 10
8.2 Competing Use 10
ARTICLE IX - Casualty or Taking
9.1 TENANT to Repair or Rebuild in the Event of Casualty 10
9.2 Right to Terminate in Event of Casualty 10
9.3 Eminent Domain 11
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ARTICLE X - Defaults Page
10.1 Events of Default 11
10.2 Remedies 12
10.3 Remedies Cumulative 12
10.4 LANDLORD'S and TENANT'S Right to Cure Defaults 12
10.5 Effect of Waivers of Default 13
ARTICLE XI - Miscellaneous Provisions
11.1 Assignment, Subletting, etc. 13
11.2 Notice from One Party to Other 13
11.3 Quiet Employment 13
11.4 Recording 13
11.5 Acts of God 14
11.6 Waiver of Subrogation 14
11.7 Rights of Mortgagee and Subordination 14
11.7.1 14
11.7.2 No Accord and Satisfaction 15
11.8 Applicable Law and Construction 15
ARTICLE XII - Permits and Approvals
12.1 Tenant Obligations 15
12.2 Approvals 15
12.3 Easements 15
ARTICLE XIII - Net, Net, Net Lease
13.1 Net, Net, Net Lease 16
ARTICLE XIV - Right of First Refusal
14.1 Right of First Refusal to Lease 16
14.2 Right of First Refusal to Purchase 16
ARTICLE XV - Holdover
15.1 Holdover 17
ARTICLE XVI - Common Area
16.1 Construction Cost 17
ARTICLE XVII - Environmental
17.1 Environmental Matters 17
ARTICLE XVIII -
18.1 Title 18
18.2 Ownership 19
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ARTICLE 11
Premises and Term
2.1 Premises - LANDLORD hereby leases to TENANT and TENANT hereby leases
from LANDLORD, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the premises shown on Exhibit "A" and
described in Exhibit "B", both annexed hereto and made a part hereof, together
with any and all improvements, appurtenances, rights, privileges and easements
befitting, belonging or pertaining thereto and a building no greater than 4,000
square feet, so long as such building is within the perimeter of the leased
premises as shown on Exhibit W.
2.2 Term - TO HAVE AND TO HOLD for a term beginning at the earlier of (a)
Ninety (90) days (inclusive of the time for objectors to appeal for any
approval) after LANDLORD has obtained approval for the construction of the
branch bank as set forth in Article 12 (notwithstanding TENANT may not have
commenced construction) and continuing for the Lease term of twenty (20) years
unless sooner terminated as hereinafter provided. When dates of the beginning
and end of the Lease term have been determined, such dates shall be evidenced by
a document in form for recording, executed by LANDLORD and TENANT and delivered
each to the other.
2.3 Option to Extend - So long as TENANT is not in default hereunder,
TENANT shall have the right to extend this Lease for four (4) five (5) year
terms under the same terms, conditions and provisions as in the original term,
at the following rentals:
Option Years 1-5 $80,525.00
6-10 $88,578.00
11-15 $97,435.00
16-20 $107,179.00
TENANT shall give written notice of its intention to exercise each
extension option not less than Ninety (90) days prior to the expiration of the
then current term. Lack of written notice by TENANT of its intention to exercise
any option prior to ninety (90) days before the expiration of the then current
term shall be deemed to constitute exercise of that option by the TENANT.
ARTICLE III
Improvements
3.1 Construction of Improvements - TENANT agrees to construct, at its sole
cost, a branch banking facility, pursuant to the attached Site Plan, subject to
reasonable approval by the LANDLORD of the building plans and specifications.
3.2 Contractor - TENANT shall have the right to select and approve the
contractor to complete the construction, which shall be subject to the approval
of the LANDLORD. Approval by LANDLORD shall not be unreasonably withheld.
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3.3 Signs - TENANT shall have the right to erect such signs as permitted by
applicable ordinances within the leased area.
ARTICLE IV
Rent
4.1 The Rent. Minimum Fixed - TENANT covenants and agrees to pay rent to
LANDLORD at the original address of LANDLORD or such other place as LANDLORD may
by notice In writing to TENANT from time to time direct, at the following rates
and times.
(a) TENANT agrees to pay to LANDLORD base annual fixed rent for the
Premises in accordance with and in the amount set forth In Paragraph 1.1 "Data".
The base annual fixed rent shall be paid in equal monthly installments in
advance on the first (1st) day of each month beginning on the Commencement Date.
In addition to the base annual fixed rent, TENANT shall pay as and when the same
become due and owing as additional rents, all other monies provided for in the
Lease. It is the parties intention that all charges and assessments charged to
or assessed against the Premises shall be the responsibility of the TENANT, such
that the Lease shall be "net, net, net" to the LANDLORD, excepting only interest
and principal on any mortgage made by the LANDLORD and effecting the Premises.
(b) For purposes of this Lease, the scheduled increases in the base annual
fixed rate shall occur on the first day of the sixth (6th), eleventh (11th) and
sixteenth (16th) years of the Initial Term as same is determined pursuant to
Paragraph 2.2 and on the first day of the sixth (6th) eleventh (11th) and
sixteenth (16th), years of the Option Terms.
(c) If any installment under this Lease is not paid within fifteen (15)
days of the time and at the place and in the manner specified, then LANDLORD
may, at its option, declare TENANT in default.
ARTICLE V
Real Estate Taxes
5.1 Real Estate Taxes - As additional rent, TENANT agrees to pay all real
estate taxes levied upon the Premises, Improvements located on the Premises, the
leasehold estate, or any sublease hold estate of any nature including special
assessments. The obligation for payment by TENANT of all real estate taxes shall
commence simultaneously with the payment of rent hereunder.
5.2 Taxes - TENANT agrees to pay all taxes levied upon rents and personal
property, including trade fixtures and inventory, kept on the demised Premises,
covered by Section 5.1 after presentation to TENANT by LANDLORD of statements
from the taxing jurisdiction in which said property is located. TENANT, however,
will pay only the lowest discounted amount and will not be required to pay
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any penalty, Interest or cost occurring by reason of LANDLORD'S failure to
secure said tax statements in a timely fashion from the taxing authorities for
any tax required to be paid by TENANT.
LANDLORD may, however, direct the taxing authorities to send the statements
directly to TENANT. "In the event LANDLORD directs the taxing authorities to
send a statement directly to TENANT, TENANT shall make all such payments
directly to the taxing authority at least ten (10) days before any delinquency
and before any fine, interest or penalty shall become due or imposed by
operation of law for their nonpayment. Further, TENANT shall furnish to LANDLORD
within ten (10) days of the date when any tax, assessment or charge would become
delinquent, receipts or other satisfactory evidence establishing the timely
payment of said taxes or charges." LANDLORD further agrees that TENANT, in the
name of LANDLORD, but at TENANT'S sole expense, may protest any assessment
before any taxing authority or board or maintain any necessary legal action in
reference to said assessment or for the recovery of any taxes paid thereon.
Nothing herein contained shall require TENANT to pay any income or excess
profits, taxes assessed against LANDLORD or any corporation, capital stock, or
franchise tax imposed upon LANDLORD.
5.3 Method of Payment - LANDLORD shall give written notice advising TENANT
of the amount of real estate taxes, together with a copy of the tax bill, and
TENANT shall pay such amount to LANDLORD within thirty (30) days after receipt
of such notice. If this Lease shall terminate during a tax year, TENANT shall
pay to LANDLORD, a prorated portion of the amount that would have been due for
the full tax year based on the number of days of said tax year expired on the
date of termination.
ARTICLE VI
Utilities and Services
6.1 Utilities and Charges Therefore - TENANT agrees to pay directly to the
authority charged with the collection thereof, all charges for water, gas,
electricity, sanitary sewer and sprinkler changes, telephone connection and
standby fees and other utilities used or consumed in the Premises and shall make
its own arrangements for such utilities. In the event any such services cannot
be reasonably procured from any public agency, and LANDLORD provides any such
services, TENANT shall reimburse LANDLORD for its proportionate share of any
such services used or consumed in the demised premises as additional rental.
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ARTICLE VII
TENANT'S Additional Covenants
7.1 Affirmative Covenants - TENANT covenants at its expense at all times
during the Lease term and such further time as TENANT occupies the Premises or
any part thereof.
7.1.1 Use - TENANT shall use and permit the use of the Premises and
the improvements to be constructed thereon primarily for the operation of a
branch bank, provided that (subject to the other terms and conditions of this
Lease), TENANT may at any time use the Premises and the building and other
improvements to be constructed thereon, for any other lawful commercial
purposes. Neither TENANT nor its subtenants, if any, shall commit any nuisance,
nor permit the emission of any objectionable noise or odor, nor bring on,
deposit or allow to be brought on or deposited on the Premises any asbestos
materials or any other Hazardous Substance or materials as the same may be
defined by Federal, State or local laws, rules, statutes or regulations or in
the Environmental Rider annexed hereto, nor use the property in such a manner
which negatively effects the reversion.
7.1.2 Compliance with Law - To make all repairs, alterations,
additions or replacements to the Premises required by any law or ordinance or
any order or regulation of any public authority because of TENANT'S use of the
Premises, to keep the Premises equipped with all safety appliances so required
because of such use; to pay all municipal, county or state taxes assessed
against the personal property of any kind owned by or placed in, upon or about
the premises by TENANT; and to comply with the orders and regulations of all
governmental authorities, as well as all Insurance Carriers and Underwriters.
7.1.2 (A) TENANT has the right to contest by appropriate judicial or
administrative proceeding, without cost or expense to the LANDLORD, the validity
or application of any law, ordinance, order, rule, regulation or requirement
("law") which the TENANT legitimately deems unduly burdensome or inappropriate
and TENANT shall not be in default for failure to comply with such law until the
legally permitted time following final determination of TENANT'S contest
expires; provided, however, if LANDLORD gives notice of request, TENANT shall
first furnish LANDLORD with a bond, satisfactory to LANDLORD in form and
insurer, guaranteeing compliance by TENANT with the contested law and
indemnifying LANDLORD against all liability that LANDLORD may sustain by reason
of TENANT'S failure or delay in complying with the law. LANDLORD may, but is not
required to, contest any such law independent of TENANT. On TENANT'S notice of
request, LANDLORD may join in TENANT'S contest.
7.1.3 Payment for TENANT'S Work - To pay promptly when due the entire
cost of any work to the Premises undertaken by TENANT and to bond against or
discharge any liens for labor or materials within ten (10) days after written
request by LANDLORD; to procure all necessary permits
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before undertaking such work; and to do all of such work in a good and
workmanlike manner, employing new materials of good quality and complying with
all governmental requirements.
7.1.4 Indemnity and Liability Insurance - To defend with counsel, save
harmless and indemnify LANDLORD from all claims or damage to or of any person or
property while on the premises unless arising from any omission, fault,
negligence or other misconduct of LANDLORD, and from all claims or damage to or
of any person or property occasioned by any omission, fault, neglect or other
misconduct of TENANT; to maintain in responsible companies qualified to do
business in the state in which the premises is located and in good standing
therein, public liability insurance covering the premises insuring LANDLORD, as
well as TENANT, with limits at least equal to those stated in Section 1.1,
workmen's compensation insurance with statutory limits, covering all of TENANT'S
employees working in the premises, and to deposit promptly with LANDLORD
certificates for such insurance and all renewals thereof, bearing the
endorsement that the policies will not be canceled until after ten (10) days
written notice to LANDLORD. TENANT'S obligations hereunder may be satisfied
through a blanket insurance policy covering other interests of the TENANT.
7.1.5 LANDLORD'S Right to Enter - To permit LANDLORD and its agents to
examine the premises at reasonable times and to show the premises to prospective
purchasers and lenders, provided such entry shall not unreasonably interfere
with TENANT'S operation and conduct of its business in the demised premises or
compromise security.
7.1.6 Personal Property at TENANT'S Risk - That all of the
furnishings, fixtures, equipment, effects and property of every kind, nature and
description of TENANT and of all persons claiming under TENANT, may be on the
premises, shall be at the sole risk and hazard of TENANT, and if the whole or
any part thereof shall be destroyed or damaged by fire, water, or otherwise, or
by the leakage or bursting of water pipes, steam pipes or other pipes, by theft
or from any other cause, no part of said loss or damage is to charged to or be
borne by LANDLORD, except that LANDLORD shall in no event be indemnified or held
harmless or exonerated from any liability resulting from its sole negligence,
failure to perform any of its obligations under this Lease or to any extent
prohibited by law.
7.1.7 Payment of LANDLORD'S Cost of Enforcement - To pay on demand
LANDLORD'S expenses, including reasonable attorney's fees, incurred in enforcing
any obligation of TENANT under this Lease or in curing any default by TENANT
under this Lease as provided in Section 10.4, provided LANDLORD shall prevail in
any judicial proceedings in respect to such enforcement.
7.1.8 Yield Up - At the expiration of the Lease term or earlier
termination of this Lease, TENANT shall remove all trade fixtures and personal
property, to repair any damage caused by such removal, to remove all TENANT'S
signs wherever located and to surrender all keys to the premises and yield up
the premises, broom clean and in the same good order and repair in which TENANT
is obligated to keep and maintain the premises by the provisions of this Lease,
reasonable wear and tear and insured
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damage by fire, casualty or taking excepted. Any property not so removed shall
be deemed abandoned and may be removed and disposed of by LANDLORD in such
manner as LANDLORD shall determine, without any obligation on the part of
LANDLORD to account to TENANT for any proceeds therefrom, all of which shall
become the property of LANDLORD. Any holdover by TENANT will not be deemed an
extension of this Lease, and TENANT shall Indemnify LANDLORD against all losses
and damages from a failure to surrender.
7.1.9 Maintenance -Throughout the term, TENANT shall, at TENANT'S sole
cost and expense maintain the premises and all improvements thereon in good
condition and repair, ordinary wear and tear excepted, and in accordance with
all applicable laws, rules, ordinances, orders and regulations of (1) federal,
state, county, municipal and other governmental agencies and bodies having or
claiming jurisdiction and all of their respective departments, bureaus and
officials; (2) the insurance underwriting board or insurance inspection bureau
having or claiming jurisdiction; and (3) all insurance companies insuring all or
any part of the premises of the improvements located thereon, or both except as
provided below and subject only to the provisions of Paragraph 9.2, TENANT shall
promptly and diligently repair, restore and replace as required to maintain the
premises and the improvements in the condition set forth above, or to remedy all
damage to or destruction of all or any part of the improvements.
(A) The completed work of maintenance, compliance, repair, restoration
or replacement shall be equal in value, quality and use to the condition of the
improvements before the event giving rise to the work, unless otherwise provided
for in this Lease. LANDLORD shall not be required to furnish any services or
facilities or to make any repairs or alterations of any kind in or upon or on
the premises, LANDLORD'S election to perform any obligations of the TENANT under
this provision on TENANTS failure or refusal to do so shall not constitute a
waiver of any right or remedy for TENANTS default and TENANT shall promptly
reimburse, defend and indemnify LANDLORD against all liability, loss, cost and
expense arising from it.
7.1.10 Insurance - TENANT shall maintain in full force and effect, at
its own cost, full replacement cost coverage insurance covering the demised
premises (and all improvements for the full insurable value) against loss or
damage by fire or casualty, with the usual extended coverage endorsements,
together will endorsements protecting against loss or damage resulting from
malicious mischief, sprinkler leakage and vandalism all in amounts not less than
replacement parts value above foundation walls. All insurance policies shall
name the LANDLORD as it interest may appear.
7.2 Negative Covenants - TENANT covenants at all times during the Lease
further times as TENANT occupies the premises or any part thereof:
7.2.1 Overloading Nuisance, etc. - Not to injure, overload, deface or
otherwise harm the premises; nor commit any nuisance; nor make any use of the
premises which is improper, offensive or contrary to any law or ordinance.
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7.2.2 Installation, Alteration or Additions - Not to make any
installations, alterations or additions (except only the installation of
fixtures necessary for the conduct of its business), without on each occasion
obtaining prior written consent of LANDLORD, LANDLORD'S consent not be
unreasonable withheld. No consent shall be required for nonstructural
alterations not exceeding $100,000 in cost. No addition will be allowed which
increases the building size to more than 4,000 square feet, or which violates
the terms of Paragraph 2.1 of this Lease.
ARTICLE VIII
LANDLORD'S Additional Covenants
8.1 Warranty on Use - LANDLORD warrants and represents that at the
commencement of construction it will be the Owner in Fee of the Land shown on
Exhibit "A" and described in Exhibit "B". LANDLORD has no knowledge of and
TENANT requires that there be no zoning regulations, restrictive agreements,
leases or other instruments which prevent the use of the premises for the
purpose intended herein, nor otherwise conflict with any of the provisions of
this Lease. TENANT'S sole and conclusive remedy for a breach of this warranty
shall be its right, at its election, to terminate the Lease prior to
commencement of construction.
8.2 Competing Us - During the term of this Lease, provided TENANT is not in
default, LANDLORD agrees not to lease or sell any portion of the project, of
which the leased premises is a part, to a commercial bank, savings bank, savings
and loan or credit union.
ARTICLE IX
Casualty or Taking
9.1 TENANT to Repair or Rebuild in the Event of Casualty - In case the
Premises or any part thereof shall be damaged or destroyed by fire other
casualty, taken (which term or reference to eminent domain action generally, for
the purposes of this Article shall include a sale in lieu of the exercise of the
right of eminent domain) or ordered to be demolished by the action of any public
authority in consequence of a fire or other casualty, this Lease shall, unless
it is terminated as provided below in Section 9.2 or 9.3, remain in full force
and effect and TENANT shall, at its expense, proceed with all reasonable
dispatch, to repair or rebuild the premises and the improvements, or what may
remain thereof, so as to restore them as nearly as practicable to the condition
they were in immediately prior to such damage or destruction.
9.2 Right to Terminate in Event of Casualty - In case of any damage or
destruction occurring in the last five years of the original term of this Lease
or during any extension of the term, to the extent of 50% or more of the
insurable value of the building, TENANT may at its option, to be evidenced by
notice in writing given to the LANDLORD within seven (7) days after the
occurrence of such damage or destruction, in lieu of repairing or replacing the
building, elect to terminate this Lease as of the date of said damage or
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destruction. In the event the TENANT shall so terminate the lease all insurance
proceeds shall become the property of the LANDLORD.
9.3 Eminent Domain - If the whole, or any part of the demised premises
shall be taken or condemned by any competent authority for any public use or
purpose during the term of this Lease. TENANT reserves the unto itself the right
to prosecute its claim for an award based upon its leasehold interest for such
taking, without impairing any rights of LANDLORD for the taking of or injury to
the reversion.
In the event that a part of the demised premises shall be taken or
condemned that (a) the part so taken includes the building on the demised
premises or any part thereof or (b) the part so taken shall remove from the
premises 20% or more of the front depth of the parking areas thereof, or (c) the
part so taken shall consist of 25% or more of the total parking area, or (d)
such partial taking shall result in cutting off direct access from the demised
premises to any adjacent public street or highway, then and in any such event,
the TENANT may at any time either prior to or within a period of sixty (60) days
after the date when possession of the premises shall be required by the
condemning authority elect to terminate this Lease, or if any option to purchase
the premises is conferred upon the TENANT by any other provision of this Lease,
may as an alternative to such termination of this Lease elect to purchase the
demised premises in accordance with such purpose option. In the event that
TENANT shall fail to exercise any such option to terminate this Lease or to
purchase the premises or in the event that a part of the demised premises shall
be taken or condemned under circumstances under which the TENANT will have no
such option, then and in either such event the LANDLORD shall, with reasonable
promptness, make necessary repairs to and alterations of the improvements on the
demised premises for the purpose of restoring the same to an economic
architectural unit, susceptible to the same use as that which was in effect
immediately prior to such taking, to the extent that may have been necessary by
such condemnation, subject to a pro-rata reduction in rental. Any dispute
resulting from Section 9.3 of this Lease shall be submitted to the American
Arbitration Society, whose decision shall be binding on the parties hereto.
ARTICLE X
Defaults
10.1 Events of Default - If (a) Tenant shall default in the performance of
any of its obligations to pay rent or additional rent hereunder and if such
default shall continue for ten (10) days after written notice from LANDLORD
designating such default or if within thirty (30) days after written notice from
LANDLORD to TENANT specifying any other non-monetary default or defaults, TENANT
has not commenced diligently to correct the default or defaults so specified or
has not thereafter diligently pursued such corrective action to completion, or
(b) any assignment shall be made by TENANT for the benefit of credits, or (c) if
TENANT'S leasehold interest shall be taken on execution, attached, levied upon
or (d) if a petition is filed
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by TENANT for adjudication as a bankrupt, or for reorganization or an
arrangement under any provision of the Bankruptcy Act as then in force and
effect, or (e) if an involuntary petition under any of the provisions of said
Bankruptcy Act is filed against TENANT and such involuntary petition is not
dismissed within sixty (60) days thereafter, then, and in any of such cases,
LANDLORD lawfully may exercise all defaults rights available to it under law,
including repossession of the leased property, termination of the lease,
acceleration of all future rental payments, and such other rights as may be
lawfully permitted.
10.2 Remedies - In the event that this Lease is terminated under any of the
provisions contained in Section 10.1 or shall be otherwise terminated for breach
of any obligation of TENANT, TENANT covenants to pay punctually to LANDLORD all
the sums and perform all the obligations which TENANT covenants in this Lease to
pay and to perform in the same manner and to the same extent and at the same
time as if this Lease had not been terminated so long as such obligations shall
have not been rendered unnecessary or impossible of performance by the
subsequent re-letting or other occupancy permitted by LANDLORD. In calculating
the amounts to be paid by TENANT under the foregoing covenant, TENANT shall be
credited with the net proceeds of any rent or the value of other considerations
obtained by LANDLORD by re-letting the premises, after deducting all LANDLORD'S
expenses in connection with such re-letting, including, without limitation, all
repossession costs, brokerage commissions, reasonable fees for legal services
and expenses of preparing the premises for such reletting, it being agreed by
TENANT that LANDLORD may (i) re-let the premises or any part or parts thereof,
for a term or terms which may at LANDLORD'S option be equal to or less than or
exceed the period which would otherwise have constituted the balance of the
Lease term, and (ii) make such alterations, repairs and decorations in the
premises as LANDLORD in its sole judgment considers advisable or necessary to
re-let the same.
Nothing contained in this Lease shall, however, limit or prejudice the
right of LANDLORD to prove for and obtain in proceedings for bankruptcy or
insolvency by reason of the termination of this Lease, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, the damages are to be proved, whether or not
the amount be greater, equal to, or less than the amounts of the loss or damages
referred to above.
10.3 Remedies Cumulative - Any and all rights and remedies which LANDLORD
may have under this Lease, and at law and equity, shall be cumulative and shall
not be deemed inconsistent with each other, and any two or more of all such
rights and remedies may be exercised at the same time insofar as permitted by
law.
10.4 LANDLORD'S and TENANT'S Right to Cure Defaults - LANDLORD may, but
shall not be obligated to, cure at any time, following ten (10) days prior
written notice to TENANT, except in cases of emergency when no notice shall be
required, any default by TENANT under this Lease; and whenever LANDLORD so
elects, all costs and expenses incurred by LANDLORD, including reasonable
attorney's
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fees, in curing a default shall be paid by TENANT to LANDLORD as additional rent
on demand. TENANT shall have a like right to cure any default of LANDLORD, and
TENANT may reimburse itself for the cost thereof out of succeeding rental
payments.
10.5 Effect of Waivers on Default - No consent or waiver, expressed or
implied, by either party to or of any breach of any covenants, conditions or
duty of the other shall be construed as a consent or waiver to or of any other
breach of the same of any other covenant, condition or duty.
ARTICLE XI
Miscellaneous Provisions
11.1 Assignment, Subletting, etc. - LANDLORD'S written consent shall be
required for any assignment, transfer or subletting except to another financial
institution which consent shall not be unreasonably withheld.
11.2 Notice from One Party to the Other - Any notice from LANDLORD to
TENANT or from TENANT to LANDLORD shall be deemed duly served if mailed by
registered or certified mail, return receipt requested, postage pre-paid,
addressed, if to TENANT, at the original address of TENANT or such other
addresses as TENANT shall have last designated by notice in writing to LANDLORD,
and if to LANDLORD, at the original address of LANDLORD or such other address as
LANDLORD shall have last designated by notice in writing to TENANT.
11.3 Quiet Employment - LANDLORD agrees that upon TENANT'S paying the rent
and performing and observing the agreements, conditions and other provisions on
its part to be performed and observed, TENANT shall and may peaceably and
quietly have, hold and enjoy the demised premises during the Lease term without
any manner or hindrance or molestation from LANDLORD or anyone claiming under
LANDLORD, subject to the covenants and conditions of this Lease.
11.4 Recording - TENANT agrees not to record this Lease, but each party
hereto agrees on request of the other, to execute a Notice or Short Form of this
Lease in recordable form in compliance with applicable statutes, and reasonably
satisfactory to LANDLORD'S and TENANTS attorneys. In no event shall such
document set forth the rental or other charges payable by TENANT under this
Lease; and any such document shall expressly state that it is executed pursuant
to the provisions contained in this Lease, and is not intended to vary the terms
and conditions of this Lease. In the event LANDLORD and/or TENANT believe that
the Lease has been lawfully terminated, abandoned or otherwise of no force and
effect and the other party will not voluntarily execute a Discharge of
Memorandum of Lease, the party seeking the Discharge of Memorandum of Lease may
move summarily before the Superior Court of New Jersey for a determination of
whether or not the Memorandum of Lease should be discharged. The other party
consents to the jurisdiction of the Superior Court of New Jersey and agrees to
proceed in a summary manner. It is expressly understood and agreed that in
addition to the relief provided herein, the
13
<PAGE>
7/8/98
parties will have such additional cumulative remedies as are available to it at
law or in equity for damages suffered by reason of a wrongful refusal to execute
and deliver a Discharge of Memorandum of Lease.
11.5 Acts of God - In any case where either party hereto is required to do
any act, delays caused by or resulting from Acts of God, war, civil commotion,
fire or other casualty, labor difficulties, shortages of labor, materials or
equipment, government regulations, or other causes beyond such party's
reasonable control shall not be counted in determining the time during which
work shall be completed, whether or such time be designated by a fixed date, a
fixed time or "a reasonable time*.
11.6 Waiver of Subrogation - All insurance which is carried by either party
with respect to the demised premises, whether or not required, shall include
provisions which either designates the other party as one of the insured or deny
to the insurer acquisition by subrogation of rights of recovery against the
other party. Each party shall be entitled to have duplicates or certificates of
any policies containing such provisions. Each party hereby waives all rights of
recovery against the other for loss or injury against which the waiving party is
protected by insurance containing such provisions.
11.7 Rights of Mortgagee and Subordination -
11.7.1 This Lease is subject and is hereby subordinated to all present
and future mortgages, deeds of trust, and other encumbrances affecting the
premises or the property of which said premises are a part; provided, however,
that an agreement or instrument affecting such subordination shall be executed
by the mortgagee or other Lender, be recorded with such mortgage or other
security agreement, and a copy delivered to the TENANT and contain provisions,
to the effect that (i) so long as TENANT observes the terms and provisions of
this Lease and notwithstanding the Lease may be foreclosed, TENANT will not be
effected or disturbed by the mortgagee in the exercise of any of its rights
under the mortgage or other security agreement, or the bond, note or debt
secured thereby, (ii) in the event the mortgagee comes into possession or
ownership of the premises by foreclosing or otherwise, TENANT'S use, occupancy
and quiet enjoyment of the premises shall not be disturbed by any such
proceedings; (iii) in the event the premises are sold or otherwise disposed of
pursuant to any right or power contained in the mortgage or other security
agreement, or the bond or note secured thereby, or as a result of proceedings
thereon, the purchaser shall take title subject to this Agreement of Non
Disturbance, and all of the rights of the TENANT hereunder; (iv) in the event
the buildings and Improvements upon the premises are damaged by fire and other
casualty, for which loss the proceeds payable under any insurance policy or
policies are payable to the mortgagee, such insurance funds, when paid, shall be
made available for the purpose of repair and restoration as provided in this
Lease; and (v) the agreement shall be binding upon the LANDLORD, mortgagee and
their respective heirs, executors, administrators, successors and assigns. The
TENANT agrees to execute, at no expense to the LANDLORD, any instrument which
may be deemed necessary or desirable by the LANDLORD to further effect the
subordination of this Lease to any such mortgage, deed of trust or encumbrance.
14
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8/6/98
11.7.2 No Accord and Satisfaction - No acceptance by LANDLORD of
lesser sum than the rent or any other charges then due shall be deemed to be
other than on account of the earliest installment of such rent or charge due,
nor shall any endorsement or statement on any check or any letter accompanying
any check or payment as rent or other charge be deemed an accord and
satisfaction, and LANDLORD may accept such check or payment without prejudice to
LANDLORD'S right to recover and balance of such installments or pursue any other
remedy in this Lease provided.
11.8 Applicable Law and Construction - This Lease shall be governed by and
construed in accordance with the laws of the State of New Jersey, and if any
provisions of this Lease shall to any extent be invalid, the remainder of this
Lease shall not be affected thereby. There are no oral or written agreements
between LANDLORD and TENANT affecting this Lease. This Lease may be amended only
by instruments in writing executed by LANDLORD and TENANT. LANDLORD shall not be
deemed in any way or for any purpose, to have become, by the execution of this
Lease or any action taken thereunder, a partner of TENANT in its business or
otherwise a joint venturer or member of any enterprises of TENANT. The titles of
the several Articles and Sections contained herein are for convenience only and
shall not be considered in construing this Lease. Unless repugnant to the
context, the words "LANDLORD and TENANT" appearing in this Lease shall be
construed to mean those names above and their respective heirs, administrators,
successors and assigns, and those claiming through or under them respectively.
ARTICLE XII
Permits and Approvals
12.1 TENANT'S Obligations - The obligations of TENANT hereunder are
contingent upon final approval by the bank's Board of Directors of this
transaction and upon TENANT securing on or before July 30, 1998 the following
unconditional and unappealable approvals:
A. All state and federal regulatory approvals for the construction and
operation of a branch bank on the leased premises.
B. All municipal and governmental approvals required for the construction
of TENANT'S proposed building including the issuance of a building
permit("Permit and Approvals") and approvals for a free standing sign
and other prototype signage as necessary to properly identify the
building.
12.2 Approvals - TENANT shall diligently pursue all required approvals.
12.3 Easements - TENANT shall have absolutely no right to grant any
easement with regard to the premises other than such easements to public
entities or public service corporations for the purpose of serving only the
premises, rights-of-way or easements on or over the premises for poles or
conduits, or both, for telephone, electricity, water, sanitary or storm sewers
or both and for other utilities and municipal or special district services.
LANDLORD shall cooperate with TENANT to permit the creation of all necessary
easements.
15
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7/8/98
ARTICLE XIII
Net, Net, Net Lease
13.1 Net, Net, Net Lease - It is the intention of LANDLORD and TENANT that
the rental herein specified shall be net to LANDLORD in each lease year, that
all costs, expenses, and obligations of every kind relating to the TENANT'S use
and occupancy of the premises which may arise during the term of this Lease
shall be paid by TENANT, and that LANDLORD shall be indemnified by TENANT
against any such costs, expenses and obligations.
ARTICLE XIV
Right of First Refusal
14.1 Right of First Refusal to Lease - If within one hundred eighty (180)
days prior to the conclusion of this Lease and all options to extend the term
thereof, LANDLORD shall desire to accept a bona fide offer received by it to
lease any part of the Premises, LANDLORD shall notify TENANT of such a desire in
the manner provided in this Lease for the giving of notice, and TENANT shall
have the right of first refusal to lease said premises exercisable within ten
(10) days of said written notice upon the terms contained in the notice. This
provision shall only be effective after the termination, expiration or
conclusion of the original lease term and all options to extend the Lease, and
shall not affect the premises during the term of this Lease or any option to
extend the term thereof.
14.2 Right of First Refusal to Purchase - TENANT shall have the right of
first refusal to purchase the demised premises as hereinafter set forth. If at
any time during the term as extended, LANDLORD shall receive a bona fide offer
from a third person for the purchase of the demised premises, which offer
LANDLORD shall desire to accept, LANDLORD shall promptly deliver to TENANT a
copy of such offer, and TENANT may, within fifteen (15) days thereafter, elect
to purchase the demised premises on the same terms as those set forth in such
offer, excepting that TENANT shall be credited against the purchase price to be
paid by TENANT, with a sum equal to the amount of any brokerage commissions, if
any, which LANDLORD shall save by a sale to TENANT. If LANDLORD shall receive an
offer for the purchase of the demised premises, which is not consummated by
delivering a deed to the offerer, the TENANT'S right of first refusal to
purchase shall remain applicable to subsequent offers. If LANDLORD shall sell
the demised premises after a failure of TENANT to exercise its right of first
refusal, such shall be subject to the Lease and shall continue to be applicable
to subsequent sales of the demised premises. Notwithstanding the foregoing,
TENANT'S right of first refusal shall not apply or extend to any sales or
transfers between LANDLORD and any affiliates in which the principals of the
LANDLORD are the majority shareholders to any family trusts or to the heirs of
the principals of LANDLORD. LANDLORD shall be entitled to net the same amount
under any right of first refusal exercise.
16
<PAGE>
7/8/98
ARTICLE XV
Holdover
15.1 Holdover - In the event that TENANT continues in use and occupancy and
holds over in possession of the promises after the expiration of the Initial
Term or, properly exercised, the Option Term, in addition to all other damages
to which LANDLORD may be entitled, the monthly rent during the period of
holdover shall be in a sum equal to double the amount of the monthly installment
of base annual fixed rent during the last month of the term which has just
expired. Said holdover rent shall be in addition to all additional rents for
which the TENANT shall be responsible during the holdover period.
ARTICLE XVI
Construction Cost
16.1 Construction Cost - TENANT shall construct its own building at its own
costs and construction within its demised premises, as identified in Exhibit A.
ARTICLE XVII
Environmental
17.1 Environmental Matters -
A. LANDLORD represents and warrants that any handling, transportation,
storage, treatment or usage of hazardous or toxic substances (as defined by any
applicant government authority and hereinafter being referred to as "Hazardous
Materials") that has occurred or will occur on the Demised Premises shall be in
compliance with all applicable federal, state and local laws, regulations and
ordinances. TENANT represents and warrants that any handling, transportation,
storage, treatment or usage of Hazardous Materials by TENANT at the Demised
Premises shall be in compliance with applicable federal, state and local laws.
LANDLORD further represents and warrants that no leak, spill, discharge,
emission or disposal of Hazardous Materials has occurred or will occur on the
Demised Premises and that the soil, groundwater, soil vapor on or under the
Demised Premises is or will be free of Hazardous Materials as of the date
hereof. LANDLORD agrees to indemnify, defend and hold TENANT and its officers,
from any claims, judgments, damages, fines, penalties, costs, liabilities
(including sums paid in settlement of claims) or loss including attorney's fees,
consultants fees, and expert fees which arise during or after the Primary Term
or any Renewal Term, or in connection with the presence of suspected presence of
Hazardous Materials in the soil, groundwater, or soil vapor on or under the
Demised Premises, unless such Hazardous Materials are present solely as the
result of the acts of TENANT, its officers, employees or agents. Without
limiting the generality of the foregoing, this indemnification shall survive the
expiration of this Lease and does specifically cover costs incurred in
connection with any investigation of site conditions or any cleanup, remedial,
removal or restoration work
17
<PAGE>
7/8/98
required by any federal, state or local governmental agency or political
subdivision because of the presence or suspected presence of Hazardous Materials
in the soil, groundwater or soil vapor odor under the Demised Premises, unless
the hazardous Materials are present solely as the result of the acts of TENANT,
its officers, agents or employees. Without limiting the generality of the
foregoing, this indemnification shall also specifically cover costs in
connection with:
1. Hazardous Materials present or suspected to be present in the soil,
groundwater or soil vapor on or under the Demised Premises before the
date hereof; or
2. Hazardous Materials that migrate, flow, percolate, diffuse or in any
move onto or under the Demised Premises after the date hereof; or
3. Hazardous Materials present on or under the Demised Premises as a
result of any discharge, dumping, spilling (accidental or otherwise)
onto the Demised Premises during or after the Primary Term or any
Renewal Term by any person or entity.
B. TENANT agrees to indemnify LANDLORD and its officers, employees and
agents harmless from any claims, judgments, damages, fines, penalties, costs,
liabilities (including sums paid in settlement of claims) or loss including
attorney's fees, consultants fees and expert fees which arise during or after
the Primary Term or any Renewal Term in connection with the presence of toxic or
hazardous substances in the soil, groundwater, or soil vapor on or under the
Demised Premises to the extent such presence is caused by the acts of Tenant,
its officers, employees and agents.
C. A condition precedent to this Lease shall be TENANT's satisfactory
review of the report (the "Phase I Environmental Survey") on the environmental
condition of the land on which the Demised Premises is located. LANDLORD agrees
to provide TENANT with a Phase I Environmental Survey of the land on which the
Demised Premises is located. In the event that TENANT shall discover in its
review of the Phase I Environmental Survey that any Hazardous Materials may be
present in the soil. ground water or soil vapor on or under the Demised
Premises, TENANT may, upon written notice to LANDLORD within ten (10) days after
the date TENANT receives the Phase I Environmental Survey, terminate this Lease.
D. If during the term of this Lease any governmental authority requires the
remediation of Hazardous Materials from the Demised Premises or the Shopping
Center and such remediation materially affects TENANT's business operations or
poses a safety threat to TENANT's employees or customers, then TENANT shall be
entitled to an equitable abatement of rent from the date such interference or
safety hazard occurs to the date such interference and safety hazard are no
longer present.
ARTICLE XVIII
18.1 Title - This lease shall be subject and subordinate to the lien of any
bank or institution or other mortgage or mortgages now or hereafter in force
against LANDLORD'S property, and to all
18
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7/8/98
advances made upon the security thereof, provided the holder of any such
mortgage shall execute and deliver to TENANT an agreement, in the form of
Exhibit D attached hereto, or as otherwise agreed to by TENANT, LANDLORD and
such holder, providing that such holder will recognize this lease and not
disturb TENANT's possession of the promises in the event of foreclosure if
TENANT is not then in default hereunder beyond any applicable cure period.
TENANT agrees, upon receipt of such agreement, to execute such further
instrument(s) as may be necessary to subordinate this lease to the lien of any
such mortgage. The term "mortgage" shall include deeds of trust or any other
similar hypothecation's.
18.2 Ownership - LANDLORD warrants that it owns in fee the subject premises
subject only to the liens, mortgages and encumbrances listed on the attached
schedule, evidenced by a title report provided by LANDLORD to TENANT within
forty-five (45) days of the execution of this lease, which shall be subject to
TENANT's reasonable approval. TENANT's lease hereunder shall be subordinate only
to such liens where the holder of such liens has executed and delivered to
TENANT in the form attached hereto a Subordination and Non-Disturbance
Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
this day and year first above written.
COMMERCE BANK, N.A.
- ----------------------------- BY:
Attest -------------------------------
Thomas H. Arasz
Senior Vice President/Real Estate Officer
ENGLISH CREEK PROPERTIES, L.L.C.
- ----------------------------- BY:
Attest -------------------------------
John P. Silvestri
Managing Member
19
Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income $ 173,727 $ 147,140 $ 125,413 $ 109,899 $ 102,997
Provision for loan losses 5,867 4,668 4,857 2,774 5,224
Noninterest income 88,947 57,374 32,776 23,623 19,591
Noninterest expense 181,967 137,929 109,031 89,316 82,734
Income before income taxes 74,840 61,917 44,301 41,432 34,630
Net income 49,318 40,325 28,250 26,652 22,145
Balance Sheet Data:
Total assets $ 4,894,065 $ 3,938,967 $ 3,232,152 $ 2,738,587 $ 2,571,704
Loans (net) 1,904,954 1,390,028 1,248,880 1,032,801 916,437
Securities available for sale 1,283,504 1,315,120 767,487 571,553 126,437
Securities held to maturity 1,127,658 874,032 837,512 772,999 1,257,551
Trading securities 85,359 7,911 15,327 8,843
Federal funds sold 26,975 42,370 18,300
Deposits 4,435,115 3,369,404 2,919,670 2,529,186 2,099,247
Long-term debt 24,282 25,308 26,333 27,359 28,385
Trust preferred securities 57,500 57,500
Stockholders' equity 300,716 250,760 203,964 179,695 126,582
Per Share Data:
Net income-basic $ 2.08 $ 1.79 $ 1.37 $ 1.30 $ 1.18
Net income-diluted 1.98 1.69 1.26 1.23 1.11
Cash dividends 0.92 0.57 0.48 0.42 0.39
Book value 12.50 10.89 9.17 8.81 6.82
Average shares outstanding:
Basic 23,668 22,197 20,017 19,653 17,357
Diluted 24,951 23,786 22,372 21,536 19,753
Selected Ratios:
Performance
Return on average assets 1.13% 1.13% 0.96% 1.01% 0.89%
Return on average equity 17.67 18.18 15.43 16.57 18.54
Net interest margin 4.38 4.55 4.72 4.58 4.51
Liquidity and Capital
Average loans to average deposits 41.81% 42.42% 42.84% 41.92% 43.24%
Dividend payout 44.04 32.04 34.89 32.52 32.82
Stockholders' equity to total assets 6.14 6.37 6.31 6.56 4.92
Risk-based capital:
Tier 1 12.98 15.66 12.57 12.64 10.04
Total 14.66 17.97 15.09 15.49 13.08
Leverage capital 7.36 7.81 6.46 6.43 4.93
Asset Quality
Non-performing assets to total
year-end assets 0.27% 0.44% 0.60% 0.81% 1.05%
Net charge-offs to average loans
outstanding 0.04 0.10 0.25 0.14 0.35
Non-performing loans to total
year-end loans 0.37 0.82 0.89 0.97 1.64
Allowance for loan losses to total
end of year loans 1.37 1.51 1.42 1.53 1.58
Allowance for loan losses to non-
performing loans 371.28 183.46 159.88 156.72 96.26
</TABLE>
1
<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.
1998 Overview
In 1998, 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, which offset increased noninterest expenses. Loan growth
totaled 37% for 1998, and deposit growth totaled 32%. At December 31, 1998, the
Company had total assets of $4.9 billion, total loans of $1.9 billion, total
investment securities of $2.5 billion, and total deposits of $4.4 billion.
Segment Reporting
The Company operates one reportable segment of business, Community Banks, as
more fully described in Note 19 to the Consolidated Financial Statements on page
41. The following table summarizes net income by segment for each of the last
three years:
- ------------------------------------------------------------
Net Income
- ------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------
Community Banks $ 50,378 $ 41,429 $ 30,133
Parent/Other (1,060) (1,104) (1,883)
- ------------------------------------------------------------
Consolidated total $ 49,318 $ 40,325 $ 28,250
- ------------------------------------------------------------
Average Balances and Net Interest Income
The table on page 4 sets forth balance sheet items on a daily average basis for
the years ended December 31, 1998, 1997, and 1996 and presents the daily average
interest rates earned on assets and the daily average interest rates paid on
liabilities for such periods. During 1998, average interest earning assets
totaled $4.0 billion, an increase of $754.5 million, or 23% over 1997. This
increase resulted primarily from the increase in the average balance of loans,
which rose $286.9 million, and the average balance of investment securities,
which rose $459.7 million during 1998. The growth in the average balance of
interest earning assets was funded primarily by an increase in the average
balance of deposits (including noninterest-bearing demand deposits) of $733.0
million.
Net Interest Income and Net Interest Margin
Net interest margin on a tax-equivalent basis was 4.38% for 1998, a decrease of
17 basis points from 1997.
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 1998 was $176.1 million, an increase of $27.6
million, or 19%, over 1997. Interest income on a tax-equivalent basis increased
to $291.7 million from $245.5 million, or 19%. This increase was primarily
related to volume increases in the loan and investment portfolios. Interest
expense for 1998 rose $18.5 million to $115.6 million from $97.0 million in
1997. This increase was primarily related to increases in the Company's levels
of deposits.
The tax-equivalent yield on interest earning assets during 1998 was 7.25%, a
decrease of 27 basis points from 7.52% in 1997. The decrease resulted primarily
from decreased yields in the loan and investment portfolios due to the level and
timing of changes in general market interest rates during 1998 as compared to
1997.
The cost of interest-bearing liabilities decreased six basis points in 1998 to
3.57% from 3.63% in 1997. The decrease resulted primarily from lower market
interest rates in 1998 as compared to 1997. The cost of total funding sources
decreased 10 basis points in 1998 to 2.87% from 2.97%.
2
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the major factors that contributed to the changes
in net interest income for the years ended December 31, 1998 and 1997 as
compared to the respective previous periods.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
- ---------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest on
investments:
Taxable $27,766 $(4,909) $22,857 $26,681 $ 610 $27,291
Tax-exempt (342) 750 408 983 (416) 567
Trading 1,562 82 1,644 49 (91) (42)
Federal
funds sold 412 (57) 355 (1,577) 197 (1,380)
Interest on loans:
Commercial
real estate 8,222 (1,614) 6,608 5,198 (516) 4,682
Commercial 4,884 (836) 4,048 3,233 53 3,286
Consumer 10,654 (1,347) 9,307 7,842 (811) 7,031
Tax-exempt 935 (31) 904 297 (3) 294
- ---------------------------------------------------------------------------------------------------
Total interest
income 54,093 (7,962) 46,131 42,706 (977) 41,729
- ---------------------------------------------------------------------------------------------------
Interest expense:
Regular
savings 2,759 (922) 1,837 2,260 1,252 3,512
N.O.W.
accounts 1,472 (77) 1,395 (5,843) 535 (5,308)
Money
market plus 6,082 407 6,489 10,796 (506) 10,290
Time
deposits 3,422 431 3,853 1,404 192 1,596
Public funds 4,027 (194) 3,833 3,388 (415) 2,973
Other
borrowed
money (1,338) 207 (1,131) 3,735 55 3,790
Long-term
debt 2,218 22 2,240 2,860 2 2,862
- ---------------------------------------------------------------------------------------------------
Total interest
expense 18,642 (126) 18,516 18,600 1,115 19,715
- ---------------------------------------------------------------------------------------------------
Net increase $35,451 $(7,836) $27,615 $24,106 $(2,092) $22,014
- ---------------------------------------------------------------------------------------------------
<FN>
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change in
each.
</FN>
</TABLE>
Noninterest Income
For 1998, noninterest income totaled $88.9 million, an increase of $31.6 million
or 55% from 1997. The increase was due primarily to increased other operating
income, which rose $24.4 million from 1997, including an increase of $8.7
million in revenues from Commerce National Insurance Services, Inc. (Commerce
Insurance), the Company's insurance brokerage subsidiary, and an increase of
$10.8 million in revenues from Commerce Capital Markets, Inc. (CCMI). CCMI, a
wholly-owned nonbank subsidiary of the Company engaging in certain securities
activities permitted under Section 20 of the Glass-Steagall Act, was formed in
the first quarter of 1998 by the combination of Commerce Capital, the bank
securities dealer division of Commerce NJ, and the former A. H. Williams & Co.,
Philadelphia, PA, a public finance firm acquired by the Company. In addition,
deposit charges and service fees increased $6.6 million over 1997 due primarily
to higher transaction volumes, and net investment securities gains were $648
thousand higher in 1998 than the prior year.
Noninterest Expenses
Noninterest expenses totaled $182.0 million for 1998, an increase of $44.0
million, or 32% over 1997. Contributing to this increase was the addition of
eight new branches, the expansion of Commerce Insurance, and the formation of
CCMI. With the addition of these new offices and CCMI, staff, facilities,
marketing, and related expenses rose accordingly. Other noninterest expenses
rose $8.3 million to $27.2 million in 1998. This increase resulted primarily
from higher bank-card related service charges, increased business development
expenses, and increased provisions for non-credit-related losses.
A key industry productivity measure is the oper-ating efficiency ratio. This
ratio expresses the relationship of noninterest expenses (excluding other real
estate expenses) to net interest income plus noninterest income (excluding
non-recurring gains). Over the last three years, this ratio equaled 69.54%,
67.31% and 66.95% in 1998, 1997 and 1996, respectively. The Company's efficiency
ratio remains above its peer group primarily due to its aggressive growth
expansion activities and investments in technology.
3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<TABLE>
<CAPTION>
Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------------
(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
Taxable $2,270,569 $143,649 6.33% $1,831,692 $120,792 6.59% $1,427,098 $ 93,501 6.55%
Tax-exempt 45,633 2,940 6.44 50,940 2,532 4.97 31,163 1,965 6.31
Trading 32,921 1,965 5.97 6,766 321 4.74 5,740 363 6.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,349,123 148,554 6.32 1,889,398 123,645 6.54 1,464,001 95,829 6.55
Federal funds sold 35,045 1,842 5.26 27,206 1,487 5.47 56,050 2,867 5.12
Loans
Commercial real estate 620,582 56,349 9.08 530,467 49,741 9.38 475,038 45,060 9.49
Commercial 302,775 27,480 9.08 248,958 23,432 9.41 214,604 20,146 9.39
Consumer 693,213 55,490 8.00 559,707 46,183 8.25 465,147 39,152 8.42
Tax-exempt 19,678 1,939 9.85 10,193 1,035 10.15 7,269 740 10.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 1,636,248 141,258 8.63 1,349,325 120,391 8.92 1,162,058 105,098 9.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $4,020,416 $291,654 7.25% $3,265,929 $245,523 7.52% $2,682,109 $203,794 7.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Regular savings $ 789,389 $18,256 2.31% $ 670,074 $16,419 2.45% $ 577,824 $12,907 2.23%
N.O.W. accounts 178,805 3,964 2.22 112,421 2,569 2.29 368,120 7,877 2.14
Money market plus 1,116,628 28,744 2.57 880,357 22,255 2.53 453,284 11,965 2.64
Time deposits 656,051 34,440 5.25 590,866 30,587 5.18 563,752 28,991 5.14
Public funds 346,866 19,027 5.49 273,445 15,194 5.56 212,468 12,221 5.75
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,087,739 104,431 3.38 2,527,163 87,024 3.44 2,175,448 73,961 3.40
Other borrowed money 68,400 3,995 5.84 91,308 5,126 5.61 24,782 1,336 5.39
Long-term debt 80,500 7,127 8.85 55,452 4,887 8.81 23,000 2,025 8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and interest-bearing
liabilities 3,236,639 115,553 3.57 2,673,923 97,037 3.63 2,223,230 77,322 3.48
Noninterest-bearing funds
(net) 783,777 592,006 458,879
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $4,020,416 115,553 2.87 $3,265,929 97,037 2.97 $2,682,109 77,322 2.88
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
margin tax-equivalent
basis 176,101 4.38 148,486 4.55 126,472 4.72
Tax-exempt adjustment 2,374 1,345 1,059
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
margin $173,727 4.33% $147,141 4.51% $125,413 4.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Other Balances
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $177,570 $ 154,375 $ 147,768
Other assets 204,634 168,818 141,848
Total assets 4,370,097 3,568,566 2,954,851
Demand deposits
(noninterest-bearing) 826,099 653,626 537,079
Other liabilities 37,077 19,153 11,488
Stockholders' equity 279,097 221,864 183,055
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes --Weighted average yields on tax-exempt obligations have been computed
on a tax-equivalent basis assuming a federal tax rate of 35%.
--Non-accrual loans have been included in the average loan balance.
--Investment securities includes investments available for sale.
--Consumer loans include mortgage loans held for sale.
</FN>
</TABLE>
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Income Taxes
The provision for federal and state income taxes for 1998 was $25.5 million
compared to $21.6 million in 1997 and $16.1 million in 1996.
The increase in 1998 total tax expense was the result of an increase in income
before income taxes. The effective tax rate was 34.1%, 34.9% and 36.2% in 1998,
1997, and 1996, respectively.
Net Income
Net income for 1998 was $49.3 million, an increase of $9.0 million, or 22% over
the $40.3 million recorded for 1997. The increase in net income was due to
increases in net interest income and noninterest income, which offset increased
noninterest expenses.
Diluted net income per share of common stock for 1998 was $1.98 compared to
$1.69 per common share for 1997.
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 1998 and 1997, the
Company's ROA was 1.13%. 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 1998, the Company's ROE was 17.67% compared to 18.18% for
1997.
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 1994 through 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial real estate:
Owner-occupied $ 250,059 $ 221,788 $ 167,702 $ 149,258 $151,420
Other 358,600 287,510 288,733 250,782 215,063
Construction 111,972 57,182 52,372 52,593 53,792
- -------------------------------------------------------------------------------------------------
720,631 566,480 508,807 452,633 420,275
Commercial:
Term 200,060 152,115 153,793 126,120 106,536
Line of credit 166,920 101,134 91,418 68,372 54,379
Demand 309 442 529 407 766
- -------------------------------------------------------------------------------------------------
367,289 253,691 245,740 194,899 161,681
Consumer:
Mortgages
(1-4 family
residential) 304,622 167,979 153,615 133,893 111,689
Installment 68,032 63,448 54,548 44,781 32,447
Home equity 458,401 347,903 293,591 212,845 195,362
Credit lines 12,388 11,788 10,554 9,764 9,649
- -------------------------------------------------------------------------------------------------
843,443 591,118 512,308 401,283 349,147
- -------------------------------------------------------------------------------------------------
Total loans $1,931,363 $1,411,289 $1,266,855 $1,048,815 $931,103
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company manages risk associated with its loan portfolio through
diversification, underwriting policies and procedures which are reviewed and
updated on at least an annual basis, and ongoing loan monitoring efforts. The
commercial real estate portfolio includes owner-occupied (owner occupies greater
than 50% of the property), other commercial real estate, and construction loans.
Owner-occupied and other commercial real estate loans generally have five year
call provisions and bear the personal guarantees of the principals involved.
Construction loans are primarily used for single family residential properties.
Financing is provided against firm agreements of sale, with speculative
construction limited to one sample per project. The commercial loan portfolio is
comprised primarily of amortizing loans to small businesses in the 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 90% of consumer loans at December 31, 1998.
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range, as of
December 31, 1998, are summarized in the following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31, 1998
- -------------------------------------------------------------------------------------------------
Due in One
Due in One to Five Due in Over
Year or Less Years Five Years Total
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial real
estate:
Owner
occupied/other $116,872 $411,584 $80,203 $608,659
Construction 81,145 30,793 34 111,972
- -------------------------------------------------------------------------------------------------
198,017 442,377 80,237 720,631
Commercial:
Term 69,472 112,612 17,976 200,060
Line of credit 163,921 2,999 0 166,920
Demand 271 38 0 309
- -------------------------------------------------------------------------------------------------
233,664 115,649 17,976 367,289
Consumer:
Mortgages
(1-4 family
residential) 13,512 38,647 252,463 304,622
Installment 30,939 36,008 1,085 68,032
Home equity 53,087 194,601 210,713 458,401
Credit lines 4,253 8,135 0 12,388
- -------------------------------------------------------------------------------------------------
101,791 277,391 464,261 843,443
- -------------------------------------------------------------------------------------------------
Total loans $533,472 $835,417 $562,474 $1,931,363
- -------------------------------------------------------------------------------------------------
Interest rates:
Predetermined $203,882 $636,278 $442,515 $1,282,675
Floating 329,590 199,139 119,959 648,688
- -------------------------------------------------------------------------------------------------
Total loans $533,472 $835,417 $562,474 $1,931,363
- -------------------------------------------------------------------------------------------------
</TABLE>
During 1998, loans increased $520.1 million, or 37% from $1.4 billion to $1.9
billion. At December 31, 1998, loans represented 43% of total deposits and 39%
of total assets. All segments of the loan portfolio experienced growth in 1998,
including loans secured by commercial real estate, commercial loans, and
consumer loans.
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, 1998, $250.1 million,
or 41%, of commercial real estate loans (other than construction) were secured
by owner-occupied properties. Commercial loan growth was led by activity in the
middle market and healthcare sectors. 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 increased $54.8 million to $112.0
million in 1998. At December 31, 1998, construction loans for 1-4 family
residential dwellings totaled $1.7 million and construction loans secured by
commercial properties amounted to $28.1 million. The balance of $82.2 million
was for land development, of which $56.6 million was residential. As of December
31, 1998, 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, 1998
were $13.2 million or .27% of total assets, as compared to $17.4 million or .44%
of total assets at December 31, 1997.
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, 1998
were $7.1 million as compared to $11.6 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, 1998, loans past due 90 days or more
and still accruing interest amounted to $249 thousand, compared to $226 thousand
at December 31, 1997. Additional loans considered as potential problem loans
($17.7 million at December 31, 1998) 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 $6.1 million at December 31, 1998 as compared to
$5.8 million at December 31, 1997. 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
6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
need, if any, for possible writedowns or appropriate additions to the allowance
for loan losses.
The following summary presents information regarding non-performing loans and
assets as of December 31, 1994 through 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Commercial $ 1,484 $ 1,816 $ 1,263 $ 1,623 $ 3,925
Consumer 831 703 1,145 978 1,755
Real estate
Construction 1,345 2,156 1,787 955
Mortgage 4,564 7,706 6,157 5,308 8,025
- -------------------------------------------------------------------------------------------------
Total non-accrual
loans 6,879 11,570 10,721 9,696 14,660
- -------------------------------------------------------------------------------------------------
Restructured loans (1):
Commercial 17 19 21 161 143
Consumer 29 60 29
Real estate
Construction
Mortgage 217 481 301 404
- -------------------------------------------------------------------------------------------------
Total restructured
loans 234 19 531 522 576
- -------------------------------------------------------------------------------------------------
Total non-performing
loans 7,113 11,589 11,252 10,218 15,236
- -------------------------------------------------------------------------------------------------
Other real estate 6,081 5,845 8,252 11,862 11,739
- -------------------------------------------------------------------------------------------------
Total non-performing
assets $13,194 $17,434 $19,504 $22,080 $26,975
- -------------------------------------------------------------------------------------------------
Non-performing
assets as a percent
of total assets 0.27% 0.44% 0.60% 0.81% 1.05%
- -------------------------------------------------------------------------------------------------
Loans past due 90
days or more and still
accruing interest $249 $226 $259 $159 $400
- -------------------------------------------------------------------------------------------------
<FN>
(1) Interest income of approximately $897,000, $1,361,000, $1,226,000,
$1,079,000, and $1,496,000 would have been recorded in 1998, 1997, 1996,
1995 and 1994 respectively, on non-performing loans in accordance with
their original terms. Actual interest recorded on these loans amounted
to $266,000 in 1998, $323,000 in 1997, $262,000 in 1996, $299,000 in
1995, and $317,000 in 1994.
</FN>
</TABLE>
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. 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.
Through an internal loan review function that operates independently of the
lending function, management employs several methodologies to measure the
appropriate level of loan loss reserves. Those methodologies include migration
analyses based on historical experience and the related internal ratings of
loans charged off, and an allocation methodology based on the review of
individual loans, individual loan classifications, and collateral values. When
utilizing the allocation methodology, an unallocated portion of the reserve is
determined based on management's assessment of general national, regional, and
local economic conditions. This determination inherently involves a higher
degree of subjectivity, and considers risk factors that may not have yet
manifested themselves in the Company's historical loss experience or other
methodology criteria.
During 1998, net charge-offs amounted to $719 thousand, or .04% of average loans
outstanding for the year, compared to $1.4 million or .10% of average loans
outstanding for 1997. During 1998, the Company recorded provisions of $5.9
million to the allowance for loan losses compared to $4.7 million for 1997. At
December 31, 1998, the allowance aggregated $26.4 million or 1.37% of total
loans and provided coverage of 371% of non-performing loans.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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,
- -------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $21,261 $17,975 $16,014 $14,666 $12,515
Provisions charged to
operating expenses 5,867 4,668 4,857 2,774 5,224
- -------------------------------------------------------------------------------------------------
27,128 22,643 20,871 17,440 17,739
- -------------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 332 348 286 486 335
Consumer 280 406 274 243 247
Commercial real
estate 756 144 95 292 23
- -------------------------------------------------------------------------------------------------
Total recoveries 1,368 898 655 1,021 605
- -------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial (572) (964) (1,202) (1,253) (2,608)
Consumer (1,211) (1,170) (1,046) (771) (683)
Commercial real
estate (304) (146) (1,303) (423) (387)
- -------------------------------------------------------------------------------------------------
Total charged-off (2,087) (2,280) (3,551) (2,447) (3,678)
- -------------------------------------------------------------------------------------------------
Net charge-offs (719) (1,382) (2,896) (1,426) (3,073)
- -------------------------------------------------------------------------------------------------
Balance at end of period $26,409 $21,261 $17,975 $16,014 $14,666
- -------------------------------------------------------------------------------------------------
Net charge-offs as a
percentage of average
loans outstanding 0.04% 0.10% 0.25% 0.14% 0.35%
- -------------------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
year-end loans 1.37% 1.51% 1.42% 1.53% 1.58%
- -------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses at December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,224 19% $ 4,054 18% $ 3,375 19% $ 3,364 19% $ 3,105 18%
Consumer 13,520 44 11,628 42 4,081 41 3,321 38 2,707 37
Commercial real
estate 6,665 37 5,579 40 10,519 40 9,329 43 8,854 45
- ------------------------------------------------------------------------------------------------------------------------------------
$26,409 100% $21,261 100% $17,975 100% $16,014 100% $14,666 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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,
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government agency
and mortgage-backed
obligations $1,134,852 $1,252,693 $707,316
Obligations of state and
political subdivisions 26,041 23,515 15,743
Equity securities 15,397 11,364 3,994
Other 107,214 27,548 40,434
- ------------------------------------------------------------------------------------------------
Securities available
for sale $1,283,504 $1,315,120 $767,487
- ------------------------------------------------------------------------------------------------
U.S. Government agency
and mortgage-backed
obligations $1,081,895 $ 834,228 $798,345
Obligations of state and
political subdivisions 20,982 20,940 22,674
Other 24,781 18,864 16,493
- ------------------------------------------------------------------------------------------------
Securities held to
maturity $1,127,658 $ 874,032 $837,512
- ------------------------------------------------------------------------------------------------
</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. Trading securities are
carried at market value, with gains and losses, both realized and unrealized,
included in other operating income.
In total, investment securities increased $299.5 million from $2.2 billion to
$2.5 billion at December 31, 1998. Deposit growth and other funding sources were
used to increase the Company's investment portfolio. The available for sale
portfolio decreased $31.6 million to $1.3 billion, and the securities held to
maturity portfolio increased $253.6 million to $1.1 billion from $874.0 million
at year-end 1997. The portfolio of trading securities increased $77.4 million
from year-end 1997 to $85.4 million at year-end 1998, primarily due to the
formation of CCMI. At December 31, 1998, the average life and duration of the
investment portfolio were approximately 4.4 years and 3.2 years, respectively,
as compared to 5.4 years and 4.2 years, respectively, at December 31, 1997. At
December 31, 1998 the yield on the portfolio was 6.23%, down from 6.57% at
December 31, 1997.
The Company's investment portfolio consists primarily 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 are guaranteed by an agency of the U.S. Government, or are AAA
rated. 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, 1998,
the yield on the investment portfolio was 6.32%, a decrease of 22 basis points
from 6.54% in fiscal 1997.
At December 31, 1998, the unrealized appreciation in securities available for
sale included in stockholders' equity totaled $7.0 million, net of tax, compared
to unrealized appreciation of $3.8 million, net of tax, at December 31, 1997.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The contractual maturity distribution and weighted average yield of the
Company's investment portfolio (excluding equity and trading securities) at
December 31, 1998, are summarized in the following table. Weighted average yield
is calculated by dividing income within each maturity range by the outstanding
amount of the related investment and has been tax effected on tax-exempt
obligations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government agency and
mortgage-backed obligations $ 8,915 5.31% $ 27,269 5.74% $ 56,449 6.15% $1,042,219 6.36% $1,134,852 6.33%
Obligations of state and
political subdivisions 1,296 7.83 9,764 7.48 13,415 7.47 1,566 7.27 26,041 7.48
Other securities 100,164 4.50 7,050 8.19 107,214 4.74
- ------------------------------------------------------------------------------------------------------------------------------------
$110,375 4.60% $ 37,033 6.20% $69,864 6.40% $1,050,835 6.38% $1,268,107 6.22%
- ------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government agency and
mortgage-backed obligations $ 8,662 6.64% $109,549 6.08% $ 963,684 6.21% $1,081,895 6.20%
Obligations of state and
political subdivisions $ 18,327 5.69% 2,655 7.08 20,982 5.87
Other securities 23,786 5.98 995 9.50 24,781 6.12
- ------------------------------------------------------------------------------------------------------------------------------------
$ 42,113 5.85% $ 12,312 6.96% $109,549 6.08% $963,684 6.21% $1,127,658 6.19%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Deposits
Total deposits at December 31, 1998 were $4.4 billion, an increase of $1.1
billion or 32% above total deposits of $3.4 billion at December 31, 1997. 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. All but
$55.2 million of the 1998 increase in deposits was in the various core
categories.
Total deposits averaged $3.9 billion for 1998, an increase of $733.0 million or
23% above the 1997 average. The average balance of noninterest-bearing demand
deposits in 1998 was $826.1 million, an $172.5 million or 26% increase over the
average balance for 1997. The average total balance of passbook and statement
savings accounts increased $119.3 million, or 18% compared to the prior year.
The average balance of interest-bearing demand accounts (money market and N.O.W.
accounts) for 1998 was $1.3 billion, a $302.7 million or 30% increase over the
average balance for the prior year. The average balance of time deposits for
1998 was $1.0 billion, a $138.7 million or 16% increase over the average balance
for 1997. For 1998, the cost of total deposits was 2.67% as compared to 2.74% in
1997.
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 1998, 1997, and 1996 are presented below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest-bearing $ 826,099 $ 653,626 $ 537,079
Interest-bearing (money market and 1,295,433 2.52% 992,778 2.50% 821,404 2.42%
N.O.W. accounts)
Savings deposits 789,389 2.31 670,074 2.45 577,824 2.23
Time deposits/public funds 1,002,917 5.33 864,311 5.29 776,220 5.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $3,913,838 $3,180,789 $2,712,527
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The remaining maturity of certificates of deposit for $100,000 or more as of
December 31, 1998, 1997, and 1996 is presented below:
- -----------------------------------------------------------------------------
Maturity 1998 1997 1996
- -----------------------------------------------------------------------------
(dollars in thousands)
3 months or less $313,613 $271,765 $240,188
3 to 6 months 37,572 32,017 30,767
6 to 12 months 19,876 12,249 7,297
Over 12 months 1,319 1,153 2,071
- -----------------------------------------------------------------------------
Total $372,380 $317,184 $280,323
- -----------------------------------------------------------------------------
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest Rate Sensitivity and Liquidity
The Company's risk of loss arising from adverse changes in the fair 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 those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
The following table illustrates the GAP position of the Company as of December
31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gaps
December 31, 1998
- ---------------------------------------------------------------------------------------------------
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 $ 720.2 $ 55.8 $ 73.9 $ 631.5 $442.9 $1,924.3
Investment
securities 285.2 173.7 325.6 1,277.9 434.1 2,496.5
- ---------------------------------------------------------------------------------------------------
Total interest-
earning assets 1,005.4 229.5 399.5 1,909.4 877.0 4,420.8
- ---------------------------------------------------------------------------------------------------
Interest-bearing
liabilities
Transaction
accounts 784.5 1,674.6 2,459.1
Time deposits 453.2 155.4 165.4 165.2 0.1 939.3
Other borrowed
money 21.8 21.8
Long-term debt 23.0 57.5 80.5
- ---------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 1,259.5 155.4 165.4 188.2 1,732.2 3,500.7
- ---------------------------------------------------------------------------------------------------
Period gap (254.1) 74.1 234.1 1,721.2 (855.2) $ 920.1
- ---------------------------------------------------------------------------------------------------
Cumulative gap $(254.1) $(180.0) $54.1 $1,775.3 $920.1
- ---------------------------------------------------------------------------------------
Cumulative gap as a
percentage of total
interest-earning
assets (5.7)% (4.1)% 1.2% 40.2% 20.8%
- -------------------------------------------------------------------------------------------
</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.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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, 1998, the Company's income simulation model indicates net income
would decrease by 1.0% and 6.3% in the first year and over a two year time
frame, respectively, if rates decreased as described above, as compared to an
increase of 0.7% and a decrease of 2.7%, respectively, at December 31, 1997. The
model projects that net income would decrease by 2.9% and 2.0% in the first year
and over a two year time frame, respectively, if rates increased as described
above, as compared to a decrease of 6.7% and 8.8%, respectively, at December 31,
1997. All of these forecasts are within an acceptable level of interest rate
risk per the policies established by ALCO.
In the event the model indicates an unacceptable level of risk, the Company
could undertake a number of actions that would reduce this risk, including the
sale of a portion of its available for sale portfolio, the use of risk
management strategies such as interest rate swaps and caps, or the extension of
the maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point 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 December 31, 1998, 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. The Company has completed a comprehensive core deposit
study in order to assign its own core deposit premiums as permitted by
regulation. 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. The data utilized in the core deposit
study is updated on a quarterly basis. Management believes the core deposit
premiums produced by its core deposit study and utilized in its market value of
equity model at December 31, 1998 provide an 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 1998, deposit
growth was used to fund growth in the loan portfolio and purchase additional
investment securities.
Short-Term Borrowings
Short-term borrowings, or other borrowed money, which consists of securities
sold under agreement to repurchase, federal funds purchased, and overnight lines
of credit, were used in 1998 to meet short-term liquidity needs. For 1998,
short-term borrowings averaged $68.4 million as compared to $91.3 million in
1997. The average rate on the Company's short-term borrowings was 5.84% and
5.61% during 1998 and 1997, respectively. As of December 31, 1998, short-term
borrowings included $21.9 million of borrowings under overnight lines of credit
at an average rate of 4.82%.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Long-Term Debt
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. All $57.5 million of the Trust Capital
Securities qualify as Tier I capital for regulatory capital purposes. Proceeds
of this offering were earmarked for general corporate purposes, including
additional capitalization of existing banking subsidiaries.
Stockholders' Equity and Dividends
At December 31, 1998, stockholders' equity totaled $300.7 million, up $50.0
million or 20% over stockholders' equity of $250.8 million at December 31, 1997.
This increase was primarily due to the Company's net income for the year.
Stockholders' equity as a percent of total assets was 6.14% at December 31,
1998, as compared to 6.37% at December 31, 1997.
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
stockholders' equity (adjusted for goodwill, other intangibles, and the
unrealized appreciation/depreciation in securities available for sale) plus the
Trust Capital Securities. Total capital is comprised of all of the components of
Tier 1 capital plus 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
December 31, Regulatory Requirements
- -------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital ratios:
Tier 1 12.98% 15.66% 4.00% 4.00%
Total capital 14.66 17.97 8.00 8.00
Leverage ratio 7.36 7.81 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, 1998, 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%.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company's common stock is listed for trading on the New York Stock Exchange
under the symbol CBH. 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 7, 1999, January 7, 1998, and
January 8, 1997, as well as the 5-for-4 stock split in the form of a 25% stock
dividend with a record date of July 13, 1998. As of February 28, 1999, there
were approximately 18,000 holders of record of the Company's common stock.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Common Share Data
- -------------------------------------------------------------------------------------------------
Market Prices
---------------------- Cash Dividends
High Low Per Share
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 Quarter Ended
December 31 $50.36 $33.22 $0.1857
September 30 45.19 33.45 0.3733
June 30 46.38 40.58 0.1829
March 31 41.95 32.81 0.1742
1997 Quarter Ended
December 31 $37.38 $27.25 $0.1451
September 30 29.44 26.13 0.1451
June 30 28.13 20.05 0.1451
March 31 23.22 19.95 0.1382
- -------------------------------------------------------------------------------------------------
</TABLE>
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 month (subject to change) may be invested in Common Stock at a 3%
discount (subject to change) to the market price and without payment of
brokerage commissions.
Results of Operations - 1997 versus 1996
Net income for 1997 was $40.3 million compared to $28.3 million in 1996. Diluted
net income per common share was $1.69 compared to $1.26 per common share for the
prior year. Net income and net income per share for 1996 were impacted by 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.
Net interest income on a tax-equivalent basis for 1997 amounted to $148.5
million, an increase of $22.0 million, or 17% over 1996.
Interest income on a tax-equivalent basis increased $41.7 million or 20% to
$245.5 million in 1997. This increase was primarily related to volume increases
in the loan and investment portfolios. Interest expense for 1997 rose $19.7
million to $97.0 million from $77.3 million in 1996. This increase was primarily
related to increases in the Company's levels of deposits.
The provision for loan losses was $4.7 million in 1997 compared to $4.9 million
in the prior year.
For 1997, noninterest income totaled $57.4 million, an increase of $24.6 million
or 75% from 1996. The increase was due primarily to increased other operating
income, which rose $18.7 million from 1996, including an increase of $15.3
million in revenues (to $16.5 million in 1997) from Commerce Insurance, the
insurance brokerage subsidiary formed in the fourth quarter of 1996. In
addition, deposit charges and service fees increased $5.3 million over 1996 due
to higher transaction volumes, and net investment securities gains were $610
thousand higher in 1997 than the prior year.
Noninterest expenses totaled $137.9 million for 1997, an increase of $28.9
million, or 27% over 1996. Contributing to this increase was the addition of
nine new branches during 1997, and the formation of Commerce Insurance. With the
addition of these new offices and the insurance business, staff, facilities,
marketing and related expenses rose accordingly. Audit and regulatory fees and
assessments were $1.6 million lower in 1997 than the prior year, which resulted
primarily from 1996 reflecting the SAIF assessment. Other noninterest expenses
rose $3.5 million to $17.8 million in 1997. Higher bank- card related service
charges, increased legal fees, and higher provisions for non-credit-related
losses contributed to the increase.
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
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 had 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) by the end of 1998. Additionally,
the Company has completed certification testing with several mission critical
service providers. Changes for all remaining systems should be substantially in
place by the end of the first quarter of 1999, with testing completed by the end
of the second 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 the Year 2000 issue 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.
Mergers and Acquisitions
Effective January 15, 1999, the Company acquired Community First Banking Company
(CFBC), a one-bank holding company headquartered in Tinton Falls, New Jersey,
and Prestige Financial Corp. (PFC), a one-bank holding company headquartered in
Flemington, New Jersey. CFBC had approximately $201 million in assets and $181
million in deposits, and PFC had approximately $328 million in assets and $313
in deposits. The Company issued approximately 1,360,000 shares of common stock
to shareholders of CFBC based on an exchange ratio of .644 of a share of the
Company's common stock for each share of CFBC common stock. The Company issued
approximately 1,857,000 shares of common stock to shareholders of PFC based on
an exchange ratio of .397 of a share of the Company's common stock for each
share of PFC common stock. The transactions were accounted for as poolings of
interests. The combined organization will have approximately $5.4 billion in
assets, $4.9 billion in deposits, and 96 branch offices throughout New Jersey
and Metropolitan Philadelphia, Pennsylvania.
16
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31,
----------------------------------
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 245,352 $ 167,900
Federal funds sold
------------------------------------------------------------------------------------------------
Cash and cash equivalents 245,352 167,900
Mortgages held for sale 7,260
Trading securities 85,359 7,911
Securities available for sale 1,283,504 1,315,120
Securities held to maturity 1,127,658 874,032
(market value 1998-$1,130,777; 1997-$869,815)
Loans 1,931,363 1,411,289
Less allowance for loan losses 26,409 21,261
------------------------------------------------------------------------------------------------
1,904,954 1,390,028
Bank premises and equipment, net 141,848 111,759
Other assets 105,390 64,957
------------------------------------------------------------------------------------------------
$4,894,065 $3,938,967
- -------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand:
Interest-bearing $1,568,042 $1,111,302
Noninterest-bearing 1,036,798 762,843
Savings 891,002 705,906
Time 939,273 789,353
------------------------------------------------------------------------------------------------
Total deposits 4,435,115 3,369,404
Other borrowed money 21,845 223,300
Other liabilities 54,607 12,695
Obligation to Employee Stock Ownership Plan (ESOP) 1,282 2,308
Trust Capital Securities - Commerce Capital Trust I 57,500 57,500
Long-term debt 23,000 23,000
------------------------------------------------------------------------------------------------
4,593,349 3,688,207
- -------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, 24,155,166 shares issued 35,958 25,309
(22,643,051 shares in 1997)
Series C preferred stock, 417,000 shares in 1997 7,506
Capital in excess of par or stated value 211,737 167,529
Retained earnings 48,916 50,592
Accumulated other comprehensive income 7,011 3,756
------------------------------------------------------------------------------------------------
303,622 254,692
Less commitment to ESOP 1,282 2,308
Less treasury stock, at cost, 100,159 shares 1,624 1,624
------------------------------------------------------------------------------------------------
Total stockholders' equity 300,716 250,760
------------------------------------------------------------------------------------------------
$4,894,065 $3,938,967
------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
17
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------
(dollars in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $140,580 $120,028 $104,842
Interest on investment securities 146,859 122,662 95,026
Other interest 1,841 1,487 2,867
---------------------------------------------------------------------------------------------------------------
Total interest income 289,280 244,177 202,735
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits:
Demand 32,708 24,824 19,842
Savings 18,257 16,419 12,907
Time 53,466 45,781 41,212
---------------------------------------------------------------------------------------------------------------
Total interest on deposits 104,431 87,024 73,961
Interest on other borrowed money 3,995 5,126 1,336
Interest on long-term debt 7,127 4,887 2,025
---------------------------------------------------------------------------------------------------------------
Total interest expense 115,553 97,037 77,322
---------------------------------------------------------------------------------------------------------------
Net interest income 173,727 147,140 125,413
Provision for loan losses 5,867 4,668 4,857
---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 167,860 142,472 120,556
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Deposit charges and service fees 33,685 27,110 21,850
Other operating income 52,329 27,979 9,251
Net investment securities gains 2,933 2,285 1,675
---------------------------------------------------------------------------------------------------------------
Total noninterest income 88,947 57,374 32,776
---------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries 72,501 52,166 37,668
Benefits 15,186 12,161 9,389
Occupancy 16,440 14,223 12,418
Furniture and equipment 23,013 18,374 14,336
Office 16,145 12,632 9,760
Audit and regulatory fees and assessments 2,086 1,611 3,173
Marketing 8,078 6,069 4,777
Other real estate (net) 1,348 1,814 2,329
Other 27,170 18,879 15,181
---------------------------------------------------------------------------------------------------------------
Total noninterest expenses 181,967 137,929 109,031
---------------------------------------------------------------------------------------------------------------
Income before income taxes 74,840 61,917 44,301
Provision for federal and state income taxes 25,522 21,592 16,051
---------------------------------------------------------------------------------------------------------------
Net income 49,318 40,325 28,250
Dividends on preferred stocks 563 842
---------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 49,318 $ 39,762 $ 27,408
---------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share:
Basic $ 2.08 $ 1.79 $ 1.37
---------------------------------------------------------------------------------------------------------------
Diluted $ 1.98 $ 1.69 $ 1.26
---------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding:
Basic 23,668 22,197 20,017
---------------------------------------------------------------------------------------------------------------
Diluted 24,951 23,786 22,372
---------------------------------------------------------------------------------------------------------------
Cash dividends declared, common stock $ 0.92 $ 0.57 $ 0.48
---------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
18
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 49,318 $ 40,325 $ 28,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,867 4,668 4,857
Provision for depreciation, amortization
and accretion 24,053 17,438 16,156
Gains on sales of securities available for sale (2,933) (2,285) (1,675)
Proceeds from sales of mortgages held for sale 25,093 22,626 23,683
Originations of mortgages held for sale (17,833) (28,572) (19,555)
Net loan (chargeoffs) (719) (1,382) (2,896)
Net (increase) decrease in trading securities (77,448) 7,416 (6,484)
(Increase) decrease in other assets (43,073) (12,575) 524
Increase in other liabilities 44,200 2,551 9,823
Deferred income tax expense (benefit) (2,288) (2,041) 161
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,237 48,169 52,844
Investing Activities
Proceeds from the sales of securities available for sale 428,483 223,217 107,666
Proceeds from the maturity of securities available for
sale 395,108 162,892 187,120
Proceeds from the maturity of securities held to
maturity 299,706 123,496 125,283
Purchase of securities available for sale (786,226) (835,005) (497,926)
Purchase of securities held to maturity (557,455) (244,503) (192,168)
Net increase in loans (529,040) (154,454) (227,331)
Proceeds from sales of loans 8,966 10,020 9,291
Purchases of premises and equipment (46,939) (31,235) (25,766)
------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (787,397) (745,572) (513,831)
Financing Activities
Net increase in demand and savings deposits 915,791 430,417 330,095
Net increase in time deposits 149,920 19,317 60,389
Net (decrease) increase in other borrowed money (201,455) 153,300 70,000
Issuance of common stock 6,859
Dividends paid (21,563) (12,484) (9,298)
Proceeds from issuance of Trust Capital Securities 57,500
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 9,428 6,876 4,288
Other 8,491 1,544 (2,370)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 860,612 656,470 459,963
Increase (decrease) in cash and cash equivalents 77,452 (40,933) (1,024)
Cash and cash equivalents at beginning of year 167,900 208,833 209,857
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 245,352 $ 167,900 $ 208,833
------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information: Cash paid during the year for:
Interest $ 114,064 $ 98,217 $ 75,731
Income taxes 28,808 23,632 14,449
Other noncash activities:
Transfer of securities to securities available for sale 83,773
------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
19
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996 Capital in Accumulated
Excess Other
of Par Commitment Compre-
Common Preferred or Stated Retained to Treasury hensive
(in thousands, except per share amounts) Stock Stock Value Earnings ESOP Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $18,894 $8,283 $125,911 $34,110 $(5,553) $(2,116) $166 $179,695
Acquisition of Commerce National
Insurance Services (983 shares) 1,114 (1,135) (21)
- ------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1996 20,008 8,283 124,776 34,110 (5,553) (2,116) 166 179,674
Net income 28,250 28,250
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
(pre-tax ($7,992) (6,434) (6,434)
Reclassification adjustment (pre-tax $790) 514 514
--------
Other comprehensive income (5,920)
--------
Total comprehensive income 22,330
5% common stock dividend and cash paid in lieu of
fractional shares (534 shares) 834 10,388 (11,244) (22)
Cash dividends, common stock ($0.48 per share) (8,431) (8,431)
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 (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)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $23,546 $7,536 $144,551 $41,840 $(4,403) $(3,352) $(5,754)$203,964
Acquisition of insurance brokerage agencies (293 shares)
332 (55) 277
- ------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1997 23,878 7,536 144,496 41,840 (4,403) (3,352) (5,754) 204,241
Net income 40,325 40,325
Other comprehensive income, net of tax
Unrealized gain (loss) on securities (pre-tax $12,838) 10,475 10,475
Reclassification adjustment (pre-tax $(1,484)) (965) (965)
--------
Other comprehensive income 9,510
--------
Total comprehensive income 49,835
5% common stock dividend and cash paid in lieu of
fractional shares (611 shares) 955 18,134 (19,113) (24)
Cash dividends, common stock ($0.57 per share) (11,897) (11,897)
Common stock issued in connection with
incentive stock option plan (306 shares) 478 2,139 2,617
Cash dividends, preferred stock (563) (563)
Decrease in obligation to ESOP 2,095 2,095
Tax benefit from ESOP dividends 197 197
Proceeds from issuance of common stock under
dividend reinvestment plan (128 shares) 201 4,058 4,259
Retirement of treasury shares (203) (30) (1,495) 1,728 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $25,309 $7,506 $167,529 $50,592 $(2,308) $(1,624) $3,756 $250,760
Acquisition of investment firm/insurance brokerage
agency (616 shares) 794 (300) 7,997 8,491
- ------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1998 26,103 7,506 167,229 58,589 (2,308) (1,624) 3,756 259,251
Net income 49,318 49,318
Other comprehensive income, net of tax
Unrealized gain (loss) on securities (pre-tax $5,831) 3,153 3,153
Reclassification adjustment (pre-tax $156) 102 102
--------
Other comprehensive income 3,255
--------
Total comprehensive income 52,573
5% common stock dividend and cash paid in lieu of
fractional shares (809 shares) 1,264 36,164 (37,467) (39)
25% common stock dividend and cash paid in lieu of
fractional shares (4,501 shares) 7,033 (7,033) (47) (47)
Cash dividends, common stock ($0.92 per share) (21,477) (21,477)
Common stock issued in connection with
incentive stock option plan (185 shares) 289 1,713 2,002
Convert preferred C stock to common stock (647 shares) 1,011 (7,506) 6,495 0
Decrease in obligation to ESOP 1,026 1,026
Proceeds from issuance of common stock under
dividend reinvestment plan (165 shares) 258 7,169 7,427
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $35,958 $0 $211,737 $48,916 $(1,282) $(1,624) $7,011 $300,716
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. (the Company) and its wholly-owned subsidiaries, Commerce Bank, N.A.
(Commerce NJ), Commerce Bank/Pennsylvania, N.A. (Commerce PA), Commerce
Bank/Shore, N.A. (Commerce Shore), Commerce Bank/North (Commerce North),
Commerce Capital Trust I, and Commerce Capital Markets, Inc. (CCMI). All
material intercompany transactions have been eliminated. Certain amounts from
prior years have been reclassified to conform with 1998 presentation. All common
stock and per share information has been adjusted for the 5-for-4 stock split in
the form of a 25% common stock dividend declared on June 29, 1998, and the 5%
common stock dividend declared on December 15, 1998.
The Company is a multi-bank holding company headquartered in Cherry Hill, New
Jersey, operating primarily in the metropolitan Philadelphia and New Jersey
markets. Through its subsidiaries, the Company provides retail and commercial
banking services, corporate trust services, municipal bond underwriting
services, and insurance brokerage services.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Investment Securities
Trading account securities are carried at market value. Gains and losses, both
realized and unrealized, are included in other operating income.
Investment securities are classified as held to maturity when the Company has
the intent and ability to hold those securities to maturity. Securities held to
maturity are stated at cost and adjusted for accretion of discounts and
amortization of premiums.
Those securities that might be sold in response to changes in market interest
rates, prepayment risk, the Company's income tax position, the need to increase
regulatory capital, or similar other factors are classified as available for
sale. Available for sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported as a component of stockholders' equity.
The amortized cost of debt securities in this category is adjusted for accretion
of discounts and amortization of premiums. Realized gains and losses are
determined on the specific certificate method and are included in noninterest
income.
Loans
Loans are stated at principal amounts outstanding, net of deferred loan
origination fees and costs. Interest income on loans is accrued and credited to
interest income monthly as earned. Loan origination fees are generally
considered as adjustments of interest rate yields and are amortized into
interest income on loans over the terms of the related loans.
Loans are placed on a non-accrual status and cease accruing interest when loan
payment performance is deemed unsatisfactory. However, all loans past due 90
days are placed on non-accrual status, unless the loan is both well secured and
in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Based upon management's
evaluation of the loan portfolio, the allowance is maintained at a level
considered adequate to absorb estimated inherent losses in the loan portfolio.
The level of the allowance is based on an evaluation of
21
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
the risk characteristics included in the loan portfolio, including such factors
as the volume and composition of the portfolio, historical loan loss experience,
present and prospective financial condition of borrowers, general national and
local economic conditions, and other relevant factors.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation.
Depreciation and amortization are 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
$2,788,000 and $3,082,000 at December 31, 1998 and 1997, respectively. Other
intangible assets are amortized on a straight-line basis over 10 to 15 year
lives. Other intangibles amounted to $2,019,000 and $2,471,000 at December 31,
1998 and 1997, respectively.
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 1998 and 1997 were
approximately $4,956,000 and $12,355,000, respectively.
Recent Accounting Statements
The Financial Accounting Standards Board (FASB) in June 1997 issued 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 in equity during the period. FAS
130 requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
adopted FAS 130 in 1998. The disclosure standards of FAS 130 had no impact on
the Company's financial position or results of operations.
Also in June 1997, the FASB issued Statement 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. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally and the performance of which is subject to
evaluation by the chief operating decision maker, as
22
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
defined, in determining resource allocation. The Company adopted FAS 131 for
1998 annual reporting. The disclosure standards of FAS 131 had no impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged assets or liability through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. FAS 133 becomes effective for the Company beginning
January 1, 2000. Although early adoption is allowed in any quarterly period
after June 1998, the Company has no plans to adopt FAS 133 prior to the
effective date. Based on the Company's minimal use of derivatives at the current
time, management does not expect the adoption of FAS 133 to have a significant
effect on results of operations or the financial position of the Company.
However, the impact from adopting FAS 133 will depend on the nature and purpose
of the derivative instruments in use by the Company at that time.
2. Mergers and Acquisitions
In November 1996, two insurance brokerage agencies, Keystone National Companies,
Inc., Cherry Hill, New Jersey, and Morales, Potter & Buckelew, Inc., t/a
Buckelew & Associates, Toms River, New Jersey, were acquired by the Company and
thereafter merged to form Commerce National Insurance Services, Inc. ("Commerce
Insurance"). In December 1996, Chesley & Cline, Inc., Mount Holly, New Jersey,
was merged with and into Commerce Insurance. The Company issued approximately
983,000 shares of common stock in exchange for all of the outstanding shares of
these agencies acquired in 1996. In January 1997, Colkate, Inc., t/a The
Morrissey Agency, Mt. Laurel, New Jersey, was merged with and into Commerce
Insurance. In December 1997, Joseph J. Reinhart and Associates, Inc., Cherry
Hill, NJ, a risk/loss management and loss investigation consulting firm, and
Associated Insurance Management, Inc., Haddonfield, NJ, an employee and
executive benefit consulting firm, were merged with and into Commerce Insurance.
The Company issued approximately 293,000 shares of common stock in exchange for
all of the outstanding shares of the agencies acquired in 1997. In August 1998,
J.A. Montgomery, Inc., Wilmington, DE, an insurance brokerage agency, was merged
with and into Commerce Insurance. The Company issued approximately 201,000
shares of common stock in exchange for all of the outstanding shares of this
agency. All of these 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, in the aggregate, would be immaterial.
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 3,666,000 shares
of common stock to effect the merger. The transaction was accounted for as a
pooling of interests. The Company's originally reported results of operations
for 1996 have been restated herein to include Commerce North's results of
operations for 1996.
In the first quarter of 1998, the Company completed the acquisition of A. H.
Williams & Co., Inc., (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
23
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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 415,000 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.
Effective January 15, 1999, the Company acquired Community First Banking Company
(CFBC), a one-bank holding company headquartered in Tinton Falls, New Jersey,
and Prestige Financial Corp. (PFC), a one-bank holding company headquartered in
Flemington, New Jersey. CFBC had approximately $201 million in assets and $181
million in deposits, and PFC had approximately $328 million in assets and $313
million in deposits. The Company issued approximately 1,360,000 shares of common
stock to shareholders of CFBC based on an exchange ratio of .644 of a share of
the Company's common stock for each share of CFBC common stock. The Company
issued approximately 1,857,000 shares of common stock to shareholders of PFC
based on an exchange ratio of .397 of a share of the Company's common stock for
each share of PFC common stock. The transactions were accounted for as poolings
of interests.
A summary of unaudited pro forma combined financial information for the Company,
CFBC, and PFC follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating results (in thousands, except per share data):
Net interest income $ 194,647 $ 166,617 $ 140,813
Noninterest income 96,288 61,124 35,275
Net income 42,567 44,844 31,561
Net income per common share - diluted 1.51 1.65 1.22
Average common shares outstanding
on a diluted basis 28,281 27,116 25,702
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Balance sheet at year-end (dollars in thousands):
Assets $5,423,379 $4,387,851
Loans 2,249,328 1,639,352
Deposits 4,928,808 3,784,576
Stockholders' equity 325,728 281,664
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
3. Investment Securities
A summary of the amortized cost and market value of securities available for
sale and securities held to maturity (in thousands) at December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency and
mortgage-backed obligations $1,128,033 $9,196 $(2,377) $1,134,852 $1,250,977 $5,028 $(3,312) $1,252,693
Obligations of state and
political subdivisions 25,338 703 26,041 23,085 430 23,515
Equity securities 11,988 3,584 (175) 15,397 7,679 3,685 11,364
Other 107,164 50 107,214 27,548 27,548
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale $1,272,523 $13,533 $(2,552) $1,283,504 $1,309,289 $9,143 $(3,312) $1,315,120
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency and
mortgage-backed obligations $1,081,895 $8,398 $(5,426) $1,084,867 $834,228 $3,976 $(8,198) $830,006
Obligations of state and
political subdivisions 20,982 153 21,135 20,940 20,940
Other 24,781 (6) 24,775 18,864 5 18,869
- ------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity $1,127,658 $8,551 $(5,432) $1,130,777 $874,032 $3,981 $(8,198) $869,815
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of investment securities (in
thousands) at December 31, 1998, 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 $ 108,455 $ 108,481 $ 41,877 $ 41,877
Due after one year through five years 11,552 11,816 3,650 3,803
Due after five years through ten years 13,443 13,915 25,000 25,000
Due after ten years 8,551 8,616 1,600 1,644
Mortgage backed securities 1,118,534 1,125,279 1,055,531 1,058,453
Equity securities 11,988 15,397
- ------------------------------------------------------------------------------------------------------
$1,272,523 $1,283,504 $1,127,658 $1,130,777
- ------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale during 1998, 1997 and 1996
were $428,483,000, $223,217,000 and $107,666,000, respectively. Gross gains of
$3,259,000, $2,669,000 and $1,675,000 were realized on the sales in 1998, 1997
and 1996, respectively, and gross losses of $326,000 and $384,000 were realized
in 1998 and 1997, respectively.
At December 31, 1998 and 1997, investment securities with a carrying value of
$597,554,000 and $324,717,000, respectively, were pledged to secure deposits of
public funds.
In connection with the acquisition of Independence, management reclassified
$83.8 million of investment securities from held to maturity to available for
sale in the first quarter of 1997. Unrealized losses on those securities
transferred were $840,000.
25
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
4. Loans
The following is a summary of loans outstanding (in thousands) at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Commercial real estate:
Owner-occupied $ 250,059 $ 221,788
Other 358,600 287,510
Construction 111,972 57,182
- --------------------------------------------------------------------------------------
720,631 566,480
Commercial loans:
Term 200,060 152,115
Line of credit 166,920 101,134
Demand 309 442
- --------------------------------------------------------------------------------------
367,289 253,691
Consumer:
Mortgages (1-4 family residential) 304,622 167,979
Installment 68,032 63,448
Home equity 458,401 347,903
Credit lines 12,388 11,788
- --------------------------------------------------------------------------------------
843,443 591,118
- --------------------------------------------------------------------------------------
$1,931,363 $1,411,289
- --------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, loans of approximately $9,489,000 and $8,772,000,
respectively, were outstanding to certain of the Company's and its subsidiaries'
directors and officers, and approximately $25,684,000 and $25,584,000,
respectively, of loans were outstanding from companies with which certain of the
Company's and its subsidiaries' 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, 1998 is as
follows:
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Balance, January 1 $34,356
New loans 13,717
Loan payments 12,900
- --------------------------------------------------------------------------------
Balance, December 31 $35,173
- --------------------------------------------------------------------------------
The Company engaged in certain activities with entities 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 $304,000 in 1998, $183,000 in 1997, and $195,000 in 1996.
The Company received legal services from two law firms of which two directors of
the Company are partners. Such aggregate legal services amounted to $1,554,000
in 1998, $1,439,000 in 1997, and $1,243,000 in 1996.
26
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
5. Allowance for Loan Losses
The following is an analysis of changes in the allowance for loan losses (in
thousands) for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 21,261 $ 17,975 $ 16,014
Provision charged to operating expense 5,867 4,668 4,857
Recoveries of loans previously charged off 1,368 898 655
Loan charge-offs (2,087) (2,280) (3,551)
- -----------------------------------------------------------------------------------------------------
Balance, December 31 $ 26,409 $ 21,261 $ 17,975
- -----------------------------------------------------------------------------------------------------
</TABLE>
6. Non-accrual and Restructured Loans and Other Real Estate
The total of non-performing loans (non-accrual and restructured loans) was
$7,113,000 and $11,589,000 at December 31, 1998 and 1997, respectively.
Non-performing loans of $3,361,000, $2,320,000, and $1,758,000 net of charge
offs of $0, $47,000, and $250,000 were transferred to other real estate during
1998, 1997, and 1996, respectively. Other real estate ($6,081,000 and $5,845,000
at December 31, 1998 and 1997, respectively) is included in other assets.
At December 31, 1998 and 1997, the recorded investment in loans considered to be
impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of
a Loan" totaled $3,682,000 and $9,700,000, 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
value of collateral. No portion of the allowance for loan losses for 1998 or
1997 was allocated to these loans. During 1998 and 1997, impaired loans averaged
approximately $6,691,000 and $9,126,000, respectively. Interest income of
approximately $897,000 and $1,361,000 would have been recorded on non-performing
loans (including impaired loans) in accordance with their original terms in 1998
and 1997, respectively. Actual interest income recorded on these loans amounted
to $266,000 and $323,000 during 1998 and 1997, respectively.
7. Bank Premises, Equipment, and Leases
A summary of bank premises and equipment (in thousands) is as follows:
- ---------------------------------------------------------------------------
December 31,
------------------------------
1998 1997
- ---------------------------------------------------------------------------
Land $ 28,578 $ 22,707
Buildings 67,833 49,101
Leasehold improvements 5,687 9,293
Furniture, fixtures and equipment 86,872 68,238
Leased property under capital leases 124 124
- ---------------------------------------------------------------------------
189,094 149,463
Less accumulated depreciation
and amortization 47,246 37,704
- ---------------------------------------------------------------------------
$141,848 $111,759
- ---------------------------------------------------------------------------
At December 31, 1998, 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.
27
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
The Company leases its operations facility from a limited partnership in which
the Company is a limited partner at December 31, 1998. The lease is accounted
for as an operating lease with an annual rent of $584,000. The lease expires in
2004 and is renewable for two additional terms of five years each.
At December 31, 1998, the Company leased from related parties under separate
operating lease agreements the land on which it has constructed ten branch
offices. The aggregate annual rental under these related party leases for 1998
was approximately $440,000, and was approximately $375,000 and $250,000 in 1997
and 1996, respectively. These leases expire periodically through 2018 but are
renewable through 2038. Aggregate annual rentals escalate to $575,000 in 2007.
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, 1998, the total future
minimum lease payments to be received by the Company amount to approximately
$432,000 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 1998, 1997, and 1996 was approximately $434,000, $432,000, and
$503,000, respectively. The leases expire in 2007 and 2017.
Total rent expense charged to operations under operating leases was
approximately $5,011,000 in 1998, $4,334,000 in 1997, and $3,706,000 in 1996.
The future minimum rental commitments, by year, under the non-cancelable leases
are as follows (in thousands) at December 31, 1998:
- -------------------------------------------------------------------------
Capital Operating
- -------------------------------------------------------------------------
1999 $ 12 $ 5,396
2000 12 5,339
2001 12 4,858
2002 12 4,320
2003 12 4,322
Later years 132 37,039
- -------------------------------------------------------------------------
Net minimum lease payment $192 $61,274
- -------------------------------------------------------------------------
Less amount representing interest 93
- -------------------------------------------------------------------------
Present value of net minimum
lease payments $ 99
- -------------------------------------------------------------------------
The Company obtained interior design and general contractor services for
$1,313,000, $916,000, and $642,000 in 1998, 1997, and 1996, respectively, from a
business owned by the spouse of the Chairman of the Board of the Company.
Additionally, the business received commissions of approximately $814,000,
$1,464,000, and $990,000 in 1998, 1997 and 1996, respectively, on furniture and
facility purchases made directly by the Company.
28
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
8. Deposits
The aggregate amount of time certificates of deposits in denominations of
$100,000 or more was $372,380,000 and $317,184,000 at December 31, 1998 and
1997, respectively.
9. Other Borrowed Money
Other borrowed money consisted primarily of securities sold under agreements to
repurchase, which ranged up to two months in maturity, federal funds purchased,
and overnight lines of credit. The following table represents information for
other borrowed money.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------
Average Average
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under
agreements to repurchase $178,300 6.22%
Federal funds purchased 45,000 6.00
Lines of credit $ 21,845 4.82%
- ------------------------------------------------------------------------------------------------------
$ 21,845 $223,300
- ------------------------------------------------------------------------------------------------------
Average amount outstanding $ 68,400 5.84% $ 91,308 5.61%
Maximum month-end balance 228,950 223,300
- ------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had a line of credit of $493,234,000
available from the Federal Home Loan Bank of New York, and CCMI had a line of
credit of $30,000,000 from another bank, of which $8,155,000 was available.
10. Long-Term Debt
On July 15, 1993, the Company issued $23,000,000 of 8 3/8% subordinated notes
due 2003. Interest on the debt is payable semi-annually on January 15 and July
15 of each year. The notes may be redeemed in whole or in part at the option of
the Company after July 15, 2000 at a price from 102% to 100% of the principal
plus accrued interest, if any, to the date fixed for redemption, subject to
certain conditions. A portion of the notes qualify for total risk-based capital
for regulatory purposes, subject to certain limitations.
On June 9, 1997, the Company issued $57,500,000 of 8 3/4% Trust Capital
Securities through Commerce Capital Trust 1, a newly formed Delaware business
trust subsidiary. The Trust Capital Securities evidence a preferred ownership
interest in the Trust, of which 100% of the common equity is owned by the
Company. The proceeds from the issuance of the Trust Capital Securities were
invested in substantially similar Junior Subordinated Debt of the Company. The
Trust Capital Securities are unconditionally guaranteed by the Company. Interest
on the debt is payable quarterly in arrears on March 31, June 30, September 30,
and December 31 of each year. The Trust Capital Securities are scheduled to
mature on June 30, 2027. The Trust Capital Securities may be redeemed in whole
or in part at the option of the Company on or after June 30, 2002 at 100% of the
principal plus accrued interest, if any, to the date fixed for redemption,
subject to certain conditions. All $57,500,000 of the Trust Capital Securities
qualify as Tier I capital for regulatory capital purposes.
29
<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):
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
Current:
Federal $ 26,954 $ 21,980 $ 15,026
State 856 1,653 864
Deferred:
Federal (2,341) (1,733) 106
State 53 (308) 55
- -------------------------------------------------------------------------
$ 25,522 $ 21,592 $ 16,051
- -------------------------------------------------------------------------
The above provision includes income taxes related to securities gains of
$1,026,000, $800,000 and $586,000 for 1998, 1997 and 1996, respectively.
The provision for income taxes differs from the expected statutory provision as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected provision at statutory rate: 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt interest on loans (0.4) (0.3) (0.3)
Tax-exempt interest on securities (1.2) (0.8) (1.0)
Purchase accounting adjustments 0.1 0.2 0.3
Other 0.6 0.8 2.2
- --------------------------------------------------------------------------------------------
34.1% 34.9% 36.2%
- --------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows (in thousands):
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves $ 9,411 $ 7,525
Other reserves (50) 651
Other 1,260 1,775
- -------------------------------------------------------------------------------
Total deferred tax assets 10,621 9,951
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 527 1,252
Intangibles 92 167
Fair value adjustment, available
for sale securities 3,970 2,075
Other 1,729 1,924
- -------------------------------------------------------------------------------
Total deferred tax liabilities 6,318 5,418
- -------------------------------------------------------------------------------
Net deferred assets $ 4,303 $ 4,533
- -------------------------------------------------------------------------------
30
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
12. Commitments and Letters of Credit
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit, which are not reflected in the
accompanying financial statements. These arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Company's normal credit policies. Collateral is obtained based on
management's credit assessment of the borrower. At December 31, 1998, the Banks
had outstanding standby letters of credit in the amount of $45,606,000.
In addition, the Banks are committed as of December 31, 1998 to advance
$161,830,000 on construction loans, $115,899,000 on home equity lines of credit
and $52,023,000 on lines of credit. All other commitments total approximately
$192,876,000. The Company anticipates no material losses as a result of these
transactions.
13. Common Stock and Preferred Stock
At December 31, 1998, the Company's common stock had a par value of $1.5625. The
Company had 50,000,000 shares authorized as of this date.
At December 31, 1997, 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 were converted to the Company's common stock
effective March 1, 1998 (see Note 14).
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 December 31, 1996, and then retired in 1997.
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 $6,600,000.
On December 15, 1998, the Board of Directors declared a cash dividend of $0.22
for each share of common stock outstanding and a 5% stock dividend payable
January 21, 1999 to stockholders of record on January 7, 1999. Payment of the
stock dividend resulted in the issuance of 1,142,247 additional common shares
and cash of $112,284 in lieu of fractional shares.
31
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
14. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Net income $49,318 $40,325 $28,250
Preferred stock dividends 563 842
- -------------------------------------------------------------------------------------------------
Net income applicable to common stock $49,318 $39,762 $27,408
- -------------------------------------------------------------------------------------------------
Average common shares outstanding 23,668 22,197 20,017
- -------------------------------------------------------------------------------------------------
Net income per common share $ 2.08 $ 1.79 $ 1.37
- -------------------------------------------------------------------------------------------------
Diluted:
Net income $49,318 $40,325 $28,250
Additional ESOP contribution
under the if-converted method 50 103
- -------------------------------------------------------------------------------------------------
Net income applicable to common stock
on a diluted basis $49,318 $40,275 $28,147
- -------------------------------------------------------------------------------------------------
Average common shares outstanding 23,668 22,197 20,017
Additional shares considered in diluted
computation assuming:
Exercise of stock options/rights 1,179 942 1,708
Conversion of preferred stock 104 647 647
- -------------------------------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 24,951 23,786 22,372
- -------------------------------------------------------------------------------------------------
Net income per common and common
equivalent share $ 1.98 $ 1.69 $ 1.26
- -------------------------------------------------------------------------------------------------
</TABLE>
Effective March 1, 1998, the Trustees of the Company's Employee Stock Ownership
Plan exercised their right to convert all 417,000 shares of Series C ESOP
Cumulative Convertible Preferred Stock held by the ESOP into 849,062 shares of
the Company's common stock.
15. Benefit Plans
Employee Stock Option Plan
The Company has the 1997 Employee Stock Option Plan (the Plan) for the officers
and employees of the Company and its subsidiaries as well as a plan for its
non-employee directors. The Plan authorizes the issuance of up to 3,445,000
shares of common stock (as adjusted for stock dividends) upon the exercise of
options. 2,401,000 options have been issued under the Plan. 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.
32
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Information concerning option activity for the periods indicated is as follows:
- -------------------------------------------------------------------------
Shares Under Weighted Average
Option Exercise Price
- -------------------------------------------------------------------------
Balance at January 1, 1997 2,323,796 $ 12.67
Options granted 825,209 33.09
Options exercised 261,099 7.88
Options canceled 7,372 20.36
Balance at December 31, 1997 2,880,534 18.93
- -------------------------------------------------------------------------
Balance at January 1, 1998 2,880,534 $ 18.93
Options granted 1,792,322 43.54
Options exercised 236,668 10.66
Options canceled 100,957 38.92
Balance at December 31, 1998 4,335,231 29.09
- -------------------------------------------------------------------------
Information concerning options outstanding as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Exercisable Weighted
Range of Number Remaining Average as of Average
exercise prices Outstanding Contractual Life Exercise Price 12/31/1998 Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 to $18.50 1,341,512 5.50 $ 11.22 1,276,789 $ 11.09
$18.51 and greater 2,993,719 8.60 37.11 1,026,754 27.47
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 1998, 1997, and 1996 under the fair value provisions of
FAS 123, net income and net income per share would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 43,672 $ 38,558 $ 27,257
Pro forma net income per share:
Basic $ 1.85 $ 1.71 $ 1.32
Diluted 1.76 1.62 1.22
- -----------------------------------------------------------------------------------------------
</TABLE>
Due to the inclusion of only options granted after 1994, the pro forma effects
of applying FAS 123 in 1998, 1997 and 1996 may not be representative of the pro
forma impact in future years.
33
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
The fair value of options granted in 1998, 1997, and 1996 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 5.47% to 6.35%,
dividend yields of' 3% to 4%, volatility factors of the expected market price of
the Company's common stock of .215 to .309, and a weighted average expected life
of the options of' four 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, 1998, the Company maintains an Employee Stock Ownership Plan
(ESOP) for the benefit of its officers and employees who meet age and service
requirements. At December 31, 1997, 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 was pledged as security for the loan and paid an annual dividend
of $1.35 per share, which the ESOP applied to its obligations under the loan.
Effective March 1, 1998, the Trustees of the ESOP exercised their right to
convert all 417,000 shares of the preferred stock into 849,062 shares of the
Company's common stock, a portion of which is pledged as security for 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 1998, 1997 and 1996 was $1,134,000, $1,177,000 and
$885,000, respectively.
Post-employment or Post-retirement Benefits
The Company offers no post-employment or post-retirement benefits.
16. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
(FAS 107), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
34
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
The following table represents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 245,352 $ 245,352 $ 167,900 $ 167,900
Mortgages held for sale 7,260 7,260
Trading securities 85,359 85,359 7,911 7,911
Investment securities 2,411,162 2,414,281 2,189,152 2,184,935
Loans (net) 1,904,954 1,946,031 1,390,028 1,416,151
Financial liabilities:
Deposits 4,435,115 4,447,757 3,369,404 3,375,949
Other borrowed money 21,845 21,845 223,300 223,300
Obligation to ESOP 1,282 1,282 2,308 2,308
Long-term debt 80,500 84,939 80,500 85,266
- -----------------------------------------------------------------------------------------------------------------------
Off-balance sheet liabilities:
Standby letters of credit $ 456 $ 186
Commitments to extend credit 749 520
</TABLE>
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.
35
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
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 liabilities: Off-balance sheet liabilities of the Company
consist of letters of credit, loan commitments and unfunded lines of credit.
Fair values for the Company's off'-balance sheet liabilities 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.
17. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentation (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest income $76,002 $73,833 $71,554 $67,891
Interest expense 29,453 29,317 28,652 28,131
Net interest income 46,549 44,516 42,902 39,760
Provision for loan losses 1,419 1,669 1,569 1,210
Net investment securities gains 1,022 991 920
Provision for federal and state
income taxes 6,331 6,311 6,584 6,296
Net income 13,165 12,559 12,147 11,447
Net income applicable to
common stock 13,165 12,559 12,147 11,447
Net income per common share:
Basic $ 0.55 $ 0.53 $ 0.51 $ 0.49
Diluted 0.52 0.50 0.49 0.47
1997
Interest income $65,375 $64,315 $59,148 $55,339
Interest expense 26,735 26,735 22,694 20,873
Net interest income 38,640 37,580 36,454 34,466
Provision for loan losses 574 1,142 1,326 1,626
Net investment securities gains 568 1,717
Provision for federal and state
income taxes 5,166 5,719 5,558 5,149
Net income 10,480 10,377 10,034 9,434
Net income applicable to
common stock 10,339 10,236 9,894 9,293
Net income per common share:
Basic $ 0.46 $ 0.46 $ 0.45 $ 0.42
Diluted 0.44 0.43 0.42 0.40
</TABLE>
36
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
18. Condensed Financial Statements of the Parent Company and Other Matters
Balance Sheets
- --------------------------------------------------------------------------------
December 31,
-------------------------------
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash $ 20,840 $ 62,457
Securities available for sale 14,575 11,451
Securities held to maturity 41
Investment in subsidiaries 342,949 254,407
Other assets 10,253 10,042
- --------------------------------------------------------------------------------
$388,617 $338,398
- --------------------------------------------------------------------------------
Liabilities
Other liabilities $ 6,119 $ 4,830
Trust Capital Securities 57,500 57,500
Long-term debt 23,000 23,000
Obligation to Employee Stock
Ownership Plan (ESOP) 1,282 2,308
- --------------------------------------------------------------------------------
87,901 87,638
- --------------------------------------------------------------------------------
Stockholders' equity
Common stock 35,958 25,309
Series C preferred stock 7,506
Capital in excess of par or stated value 211,737 167,529
Retained earnings 55,927 54,348
- --------------------------------------------------------------------------------
303,622 254,692
Less commitment to ESOP 1,282 2,308
Less treasury stock 1,624 1,624
- --------------------------------------------------------------------------------
Total stockholders' equity 300,716 250,760
- --------------------------------------------------------------------------------
$388,617 $338,398
- --------------------------------------------------------------------------------
Statements of Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 18,357 $ 14,448 $ 11,406
Interest income 293 248 728
Other 2,098 491 173
- -------------------------------------------------------------------------------------------
20,748 15,187 12,307
- -------------------------------------------------------------------------------------------
Expenses:
Interest expense 7,259 4,961 2,025
Operating expenses 2,428 2,426 1,911
- -------------------------------------------------------------------------------------------
9,687 7,387 3,936
Income before income taxes and equity
in undistributed income of subsidiaries 11,061 7,800 8,371
Income tax benefit (2,479) (2,141) (975)
- -------------------------------------------------------------------------------------------
13,540 9,941 9,346
Equity in undistributed income of subsidiaries 35,778 30,384 18,904
- -------------------------------------------------------------------------------------------
Net income 49,318 40,325 28,250
Dividends on preferred stock 563 842
- -------------------------------------------------------------------------------------------
Net income applicable to common stock $ 49,318 $ 39,762 $ 27,408
- -------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
Statements of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 49,318 $ 40,325 $ 28,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (35,778) (30,384) (18,904)
Gains on sales of securities available for sale (301)
(Increase) decrease in other assets (211) (1,329) 137
Increase in other liabilities 1,699 359 1,428
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,028 8,670 10,911
Investing activities:
Investment in subsidiaries (40,253) (2,000) (3,000)
Proceeds from sale of securities available for sale 1,090
Purchase of equity securities (4,308) (5,636) (1,572)
Other 51 (50) 69
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (44,510) (6,596) (4,503)
Financing activities:
Tax benefit from ESOP dividends 197 197
Proceeds from issuance of common stock
under dividend reinvestment plan 7,427 4,259 3,397
Cash dividends (21,563) (12,484) (8,430)
Proceeds from exercise of stock options 2,001 2,617 743
Proceeds from issuance of long-term debt 57,500
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing (12,135) 52,089 (4,093)
activities
(Decrease) increase in cash and cash equivalents (41,617) 54,163 2,315
Cash and cash equivalents at beginning of year 62,457 8,294 5,979
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,840 $ 62,457 $ 8,294
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,089 $ 4,809 $ 1,926
Income taxes 27,626 21,377 11,905
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<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. New Jersey state banks are subject
to similar dividend restrictions. Commerce NJ, Commerce PA, Commerce Shore, and
Commerce North can declare dividends in 1999 without additional approval of
approximately $36,352,000, $9,322,000, $8,178,000, and $8,552,000, respectively,
plus an additional amount equal to each bank's net profit for 1999 up to the
date of any such dividend declaration.
The Federal Reserve Act requires the extension of credit by Commerce NJ,
Commerce PA, Commerce Shore, and Commerce North 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, 1998 and 1997, 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, 1998, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
39
<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, 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>
December 31, 1998
Company
Risk based capital ratios:
Tier I $346,397 12.98% $106,717 4.00% $160,075 6.00%
Total capital 391,206 14.66 213,433 8.00 266,791 10.00
Leverage ratio 346,397 7.36 141,127 3.00 235,211 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $190,578 11.44% $ 66,657 4.00% $ 99,985 6.00%
Total capital 207,908 12.48 133,314 8.00 166,642 10.00
Leverage ratio 190,578 6.51 87,889 3.00 146,481 5.00
December 31, 1997
Company
Risk based capital ratios:
Tier I $299,191 15.66% $ 76,439 4.00% $114,658 6.00%
Total capital 343,452 17.97 152,878 8.00 191,097 10.00
Leverage ratio 299,191 7.81 114,971 3.00 191,619 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $161,621 12.55% $ 51,494 4.00% $ 77,241 6.00%
Total capital 175,617 13.64 102,988 8.00 128,735 10.00
Leverage ratio 161,621 6.27 77,270 3.00 128,784 5.00
</TABLE>
40
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements
19. Segment Reporting
The Company operates one reportable segment of business, Community Banks, which
includes Commerce NJ, Commerce PA, Commerce Shore, and Commerce North. Through
its Community Banks, the Company provides a broad range of retail and commercial
banking services, and corporate trust services. Parent/Other and other includes
the holding company, Commerce Insurance, CCMI, and Commerce Capital Trust I.
Selected segment information for each of the three years ended December 31 is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/ Community Parent/
Banks Other Total Banks Other Total Banks Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 180,064 $ (6,337) $ 173,727 $ 151,853 $ (4,713) $ 147,140 $ 126,711 $ (1,298) $ 125,413
Provision for loan
losses 5,867 5,867 4,668 4,668 4,857 4,857
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income
after provision 174,197 (6,337) 167,860 147,185 (4,713) 142,472 121,854 (1,298) 120,556
Noninterest income 51,096 37,851 88,947 40,354 17,020 57,374 31,403 1,373 32,776
Noninterest expense 149,378 32,589 181,967 123,724 14,205 137,929 106,217 2,814 109,031
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 75,915 (1,075) 74,840 63,815 (1,898) 61,917 47,040 (2,739) 44,301
Income tax expense
(benefit) 25,537 (15) 25,522 22,386 (794) 21,592 16,907 (856) 16,051
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 50,378 $ (1,060) $ 49,318 $ 41,429 $ (1,104) $ 40,325 $ 30,133 $ (1,883) $ 28,250
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets
(in millions) $3,899,219 $470,878 $4,370,097 $3,240,260 $328,307 $3,568,567 $2,759,209 $195,642 $2,954,851
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial information for each segment is reported on the basis used
internally by the Company's management to evaluate performance. Measurement of
the performance of each segment is based on the management structure of the
Company and is not necessarily comparable with financial information from other
entities. The information presented is not necessarily indicative of the
segment's results of operations if each of the Community Banks were independent
entities.
41
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Report of Independent Auditors
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, 1998 and 1997 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, 1998. 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 net interest income in
1996 constituting 13.6% of the related consolidated total. 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 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, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 26, 1999
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements and
related Prospectuses (Form S-3 No. 333-73421 and No. 33-40465, and Form S-4 No.
333-10771) of Commerce Bancorp, Inc. and in the Registration Statements (Forms
S-8 No. 33-82742, No. 333-57497, and No. 33-82740) pertaining to the Stock
Option Plans and Employee Stock Purchase Plan of Commerce Bancorp, Inc. of our
report dated January 26, 1999 with respect to the consolidated financial
statements of Commerce Bancorp, Inc. and Subsidiaries included in this Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 245,352
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 85,359
<INVESTMENTS-HELD-FOR-SALE> 1,127,658
<INVESTMENTS-CARRYING> 1,283,504
<INVESTMENTS-MARKET> 1,130,777
<LOANS> 1,931,363
<ALLOWANCE> 26,409
<TOTAL-ASSETS> 4,894,065
<DEPOSITS> 4,435,115
<SHORT-TERM> 21,845
<LIABILITIES-OTHER> 54,607
<LONG-TERM> 81,782
0
0
<COMMON> 35,958
<OTHER-SE> 264,758
<TOTAL-LIABILITIES-AND-EQUITY> 4,894,065
<INTEREST-LOAN> 140,580
<INTEREST-INVEST> 146,859
<INTEREST-OTHER> 1,841
<INTEREST-TOTAL> 289,280
<INTEREST-DEPOSIT> 140,431
<INTEREST-EXPENSE> 115,553
<INTEREST-INCOME-NET> 173,727
<LOAN-LOSSES> 5,867
<SECURITIES-GAINS> 2,933
<EXPENSE-OTHER> 181,967
<INCOME-PRETAX> 74,840
<INCOME-PRE-EXTRAORDINARY> 74,840
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,318
<EPS-PRIMARY> 2.08<F1>
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 4.38
<LOANS-NON> 6,879
<LOANS-PAST> 249
<LOANS-TROUBLED> 234
<LOANS-PROBLEM> 17,707
<ALLOWANCE-OPEN> 21,261
<CHARGE-OFFS> 2,087
<RECOVERIES> 1,368
<ALLOWANCE-CLOSE> 26,409
<ALLOWANCE-DOMESTIC> 26,409
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Represents Earnings Per Share - Basic
</FN>
</TABLE>
