SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File #0-12874
COMMERCE BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
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(Address of Principal Executive Offices) (Zip Code)
(609) 751-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practical date.
Common Stock 27,785,094
- --------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of 8/06/99)
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 1999 and December 31, 1998........................................................1
Consolidated Statements of Income (unaudited) Three months ended
June 30, 1999 and June 30, 1998 and six months ended
June 30, 1999 and June 30, 1998............................................................2
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1999 and
June 30, 1998..............................................................................3
Notes to Consolidated Financial Statements (unaudited).....................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................................15
Item 6. Exhibits and Reports on Form 8-K..........................................................15
</TABLE>
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
June 30, December 31,
--------------------------------
(dollars in thousands) 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Cash and due from banks $293,453 $267,220
Federal funds sold 0 10,395
------------- --------------
Cash and cash equivalents 293,453 277,615
Loans held for sale 8,701 22,418
Trading securities 105,784 85,359
Securities available for sale 1,525,297 1,305,004
Securities held to maturity 1,022,378 1,220,874
(market value 06/99-$1,000,669; 12/98-$1,223,667)
Loans 2,689,589 2,280,326
Less allowance for loan losses 34,868 31,265
------------- --------------
2,654,721 2,249,061
Bank premises and equipment, net 167,545 147,448
Other assets 142,151 116,411
------------- --------------
$5,920,030 $5,424,190
============= ==============
Liabilities Deposits:
Demand:
Interest-bearing $1,774,850 $1,682,958
Noninterest-bearing 1,244,679 1,162,126
Savings 1,044,425 973,324
Time 1,142,270 1,110,400
------------- --------------
Total deposits 5,206,224 4,928,808
Other borrowed money 244,561 27,845
Other liabilities 57,103 60,027
Obligation to Employee Stock Ownership Plan (ESOP) 769 1,282
Trust Capital Securities - Commerce Capital Trust I 57,500 57,500
Long-term debt 23,000 23,000
------------- --------------
5,589,157 5,098,462
Stockholders' Common stock, 27,809,998 shares
Equity issued (27,373,983 shares in 1998) 43,453 40,988
Capital in excess of par or stated value 297,848 236,928
Retained earnings 12,225 43,712
Accumulated other comprehensive income (20,260) 7,006
------------- --------------
333,266 328,634
Less commitment to ESOP 769 1,282
Less treasury stock, at cost 1,624 1,624
------------- --------------
Total stockholders' equity 330,873 325,728
------------- --------------
$5,920,030 $5,424,190
============= ==============
See accompanying notes
</TABLE>
1
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
(dollars in thousands, except per share amounts) 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Interest and fees on loans $52,561 $40,727 $100,564 $78,155
income Interest on investments 40,767 39,258 79,774 77,549
Other interest 228 329 384 856
------------- ------------ ------------ ------------
Total interest income 93,556 80,314 180,722 156,560
------------- ------------ ------------ ------------
Interest Interest on deposits:
expense Demand 10,068 8,976 19,693 16,891
Savings 5,120 5,057 9,915 10,060
Time 14,678 15,465 29,685 30,371
------------- ------------ ------------ ------------
Total interest on deposits 29,866 29,498 59,293 57,322
Interest on other borrowed money 2,080 943 2,855 2,945
Interest on long-term debt 1,781 1,782 3,563 3,564
------------- ------------ ------------ ------------
Total interest expense 33,727 32,223 65,711 63,831
------------- ------------ ------------ ------------
Net interest income 59,829 48,091 115,011 92,729
Provision for loan losses 2,274 1,951 4,458 3,388
------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 57,555 46,140 110,553 89,341
Noninterest Deposit charges and service fees 10,812 8,845 20,552 17,331
income Other operating income 16,249 12,847 33,377 25,844
Net investment securities gains 400 920 1,265 929
------------- ------------ ------------ ------------
Total noninterest income 27,461 22,612 55,194 44,104
------------- ------------ ------------ ------------
Noninterest Salaries 23,788 18,865 47,300 36,575
expense Benefits 4,841 4,211 9,897 7,998
Occupancy 5,207 4,191 10,300 8,562
Furniture and equipment 7,611 6,010 14,554 11,747
Office 4,853 3,860 10,151 7,867
Audit and regulatory fees and assessments 632 545 1,204 1,099
Marketing 2,503 1,803 4,166 3,736
Other real estate (net) 495 405 969 825
Other 11,069 7,986 19,935 14,388
------------- ------------ ------------ ------------
Total noninterest expenses 60,999 47,876 118,476 92,797
------------- ------------ ------------ ------------
Income before income taxes 24,017 20,876 47,271 40,648
Provision for federal and state income taxes 8,001 7,327 15,774 14,316
------------- ------------ ------------ ------------
Net income 16,016 13,549 31,497 26,332
============= ============ ============ ============
Net income per common and common equivalent share:
Basic $0.58 $0.50 $1.14 $0.99
------------- ------------ ------------ ------------
Diluted $0.56 $0.48 $1.10 $0.94
------------- ------------ ------------ ------------
Average common and common equivalent
shares outstanding:
Basic 27,592 26,841 27,360 26,554
------------- ------------ ------------ ------------
Diluted 28,652 28,123 28,585 27,980
------------- ------------ ------------ ------------
Cash dividends declared, common stock $0.22 $0.18 $0.43 $0.35
============= ============ ============ ============
</TABLE>
See accompanying notes
2
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------------
(dollars in thousands) 1999 1998
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<S> <C> <C>
Operating Net income $31,497 $26,332
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 4,458 3,388
Provision for depreciation, amortization and accretion 15,194 12,092
Gains on sales of securities available for sale (1,265) (911)
Proceeds from sales of mortgages held for sale 67,111 42,429
Originations of mortgages held for sale (53,394) (33,903)
Net loan (chargeoffs) (855) (888)
Net increase in trading securities (20,425) (27,187)
Increase in other assets (10,816) (15,516)
(Decrease) increase in other liabilities (2,924) 20,618
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,581 26,454
Investing Proceeds from the sales of securities available for sale 201,469 266,330
activities Proceeds from the maturity of securities available for sale 180,020 140,210
Proceeds from the maturity of securities held to maturity 153,592 145,930
Purchase of securities available for sale (552,775) (398,057)
Purchase of securities held to maturity (49,759) (312,677)
Net increase in loans (415,169) (298,407)
Proceeds from sales of loans 5,906 6,262
Purchases of premises and equipment (30,560) (24,112)
------------------------------------------------------------------------------------------------------
Net cash used by financing activities (507,276) (474,521)
Financing Net increase in demand and savings deposits 245,546 377,016
activities Net increase in time deposits 31,870 161,113
Net increase(decrease) in other borrowed money 216,716 (33,781)
Dividends paid (11,228) (9,038)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 11,486 4,209
Issuance of common stock 9,432
Other 143 121
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 494,533 509,072
Increase in cash and cash equivalents 15,838 61,005
Cash and cash equivalents at beginning of year 277,615 204,776
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $293,453 $265,781
======================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $65,543 $61,005
Income taxes 12,553 14,350
Other noncash activities:
Transfer of securities to securities available for sale 91,010
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
3
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Consolidated Financial Statements
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature. The accompanying financial
statements include the consolidated accounts of the former Community First
Banking Company (CFBC), Tinton Falls, New Jersey, and the former Prestige
Financial Corp. (PFC), Flemington, New Jersey, for all periods presented.
Effective January 15, 1999, Commerce Bancorp, Inc. (the Company) acquired CFBC,
and CFBC's wholly-owned bank subsidiary, Tinton Falls State Bank, was merged
with and into Commerce Bank/Shore, N.A. Also effective January 15, 1999, the
Company acquired PFC, and PFC's wholly-owned bank subsidiary, Prestige State
Bank, was re-chartered as a national bank and renamed Commerce Bank/Central,
N.A. The transactions were accounted for as poolings of interests. Certain
amounts in prior periods have been reclassified for comparative purposes.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in the
registrant's Annual Report on Form 10-K for the period ended December 31, 1998.
The results for the three months ended June 30, 1999 and the six months ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999.
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. and all of its subsidiaries, including Commerce Bank, N.A. (Commerce NJ),
Commerce Bank/Pennsylvania, N.A., Commerce Bank/Shore, N.A., Commerce
Bank/North, Commerce Bank/Central, N.A., Commerce Capital Trust I, Commerce
National Insurance Services, Inc. (Commerce Insurance), and Commerce Capital
Markets, Inc. (CCMI). All material intercompany transactions have been
eliminated.
B. Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments, which
are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. Comprehensive Income
Total comprehensive income, which for the Company included net income and
unrealized gains and losses on the Company's available for sale securities,
amounted to $(5.4) million and $13.2 million, respectively, for the three months
ended June 30, 1999 and 1998. For the six months ended June 30, 1999 and 1998,
total comprehensive income was $4.2 million and $29.3 million, respectively.
4
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
D. Segment Information
Selected segment information is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $61,535 $(1,706) $59,829 $49,615 $(1,524) $48,091
Provision for loan losses 2,274 -- 2,274 1,951 -- 1,951
-----------------------------------------------------------------------------------
Net interest income after provision 59,261 (1,706) 57,555 47,664 (1,524) 46,140
Noninterest income 15,459 12,002 27,461 14,409 8,203 22,612
Noninterest expense 50,228 10,771 60,999 40,402 7,474 47,876
-----------------------------------------------------------------------------------
Income before income taxes 24,492 (475) 24,017 21,671 (795) 20,876
Income tax expense 8,004 (3) 8,001 7,667 (340) 7,327
-----------------------------------------------------------------------------------
Net income $16,488 $(472) $16,016 $14,004 $(455) $13,549
===================================================================================
Average assets (in millions) $5,166,133 $594,205 $5,760,338 $4,297,344 $462,958 $4,760,302
===================================================================================
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $118,334 $(3,323) $115,011 $95,920 $(3,191) $92,729
Provision for loan losses 4,458 -- 4,458 3,388 -- 3,388
-----------------------------------------------------------------------------------
Net interest income after provision 113,876 (3,323) 110,553 92,532 (3,191) 89,341
Noninterest income 30,247 24,947 55,194 27,498 16,606 44,104
Noninterest expense 97,322 21,154 118,476 78,728 14,069 92,797
-----------------------------------------------------------------------------------
Income before income taxes 46,801 470 47,271 41,302 (654) 40,648
Income tax expense 15,333 441 15,774 14,588 (272) 14,316
-----------------------------------------------------------------------------------
Net income $31,468 $29 $31,497 $26,714 $(382) $26,332
===================================================================================
Average assets (in millions) $4,970,813 $628,795 $5,599,608 $4,173,437 $443,873 $4,617,310
===================================================================================
</TABLE>
E. Recent Accounting Statement
In June 1998, the Financial Accounting Standards Board 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 asset 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, 2001. 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.
5
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
F. Trust Capital Securities
On June 9, 1997, the Company issued $57.5 million of 8.75% Trust Capital
Securities through Commerce Capital Trust I, a newly formed Delaware business
trust subsidiary of the Company. The net proceeds of the offering will be used
for general corporate purposes, which may include contributions to subsidiary
banks to fund their operations, the financing of one or more future
acquisitions, repayment of indebtedness of the Company or of its subsidiary
banks, investments in or extensions of credit to its subsidiaries, or the
repurchase of shares of the Company's outstanding common stock. All $57.5
million of the Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes.
G. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Basic:
<S> <C> <C> <C> <C>
Net income applicable to common stock $ 16,016 $ 13,549 $31,497 $26,332
============== ============== ============== ==============
Average common shares outstanding 27,592 26,841 27,360 26,554
============== ============== ============== ==============
Net income per common share - basic $ 0.58 $ 0.50 $ 1.14 $ 0.99
============== ============== ============== ==============
Diluted:
Net income applicable to common stock
on a diluted basis $ 16,016 $ 13,549 $31,497 $26,332
============== ============== ============== ==============
Average common shares outstanding 27,592 26,841 27,360 26,554
Additional shares considered in diluted
computation assuming:
Exercise of stock options 1,060 1,282 1,225 1,215
Conversion of preferred stock 211
============== ============== ============== ==============
Average common shares outstanding
on a diluted basis 28,652 28,123 28,585 27,980
============== ============== ============== ==============
Net income per common share - diluted $ 0.56 $ 0.48 $ 1.10 $ 0.94
============== ============== ============== ==============
</TABLE>
6
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Capital Resources
At June 30, 1999, stockholders' equity totaled $330.9 million or 5.59% of total
assets, compared to $325.7 million or 6.01% of total assets at December 31,
1998.
The table below presents the Company's and Commerce NJ's risk-based and leverage
ratios at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
---------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999
Company
Risk based capital ratios:
Tier 1 $404,078 11.41% $141,636 4.00% $212,453 6.00%
Total capital 457,346 12.92 283,271 8.00 354,089 10.00
Leverage ratio 404,078 7.01 230,516 4.00 288,146 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $208,291 10.68% $ 77,981 4.00% $116,972 6.00%
Total capital 227,489 11.67 155,962 8.00 194,953 10.00
Leverage ratio 208,291 6.43 129,570 4.00 161,963 5.00
June 30, 1998
Company
Risk based capital ratios:
Tier 1 $361,975 14.22% $ 101,808 4.00% $152,712 6.00%
Total capital 411,625 16.17 203,616 8.00 254,520 10.00
Leverage ratio 361,975 7.63 142,347 3.00 237,245 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $185,102 12.86% $ 57,569 4.00% $ 86,353 6.00%
Total capital 200,314 13.92 115,137 8.00 143,922 10.00
Leverage ratio 185,102 6.50 85,464 3.00 142,441 5.00
</TABLE>
At June 30, 1999, the Company's consolidated capital levels and each of the
Company's bank subsidiaries met the regulatory definition of a "well
capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%,
a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital
ratio exceeding 10%. Management believes that as of June 30, 1999, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject.
Deposits
Total deposits at June 30, 1999 were $5.21 billion, up $883.5 million, or 20%
over total deposits of $4.32 billion at June 30, 1998, and up by $277.4 million,
or 6% from year-end 1998. Deposit growth during the first six months of 1999
included core deposit growth in all categories as well as growth from the public
sector. The Company experienced "same-store core deposit growth" of 20.1% at
June 30, 1999 as compared to deposits a year ago for those branches open for
more than two years.
7
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Interest Rate Sensitivity and Liquidity
The Company's risk of loss arising from adverse changes in the fair market value
of financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income, while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with these
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
Management considers the simulation of net interest income in different interest
rate environments to be the best indicator of the Company's interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate 200 basis point change during the next year, with rates remaining
constant in the second year. The Company's ALCO policy has established that
interest income sensitivity will be considered acceptable if net income in the
above interest rate scenario is within 15% of net income in the flat rate
scenario in the first year and within 30% over the two year time frame. At June
30, 1999, the Company's income simulation model indicates net income would
increase by 0.70% and decrease by 6.04% in the first year and over a two year
time frame, respectively, if rates decreased as described above, as compared to
a decrease of 2.74% and 8.06%, respectively, at June 30, 1998. At June 30, 1999,
the model projects that net income would decrease by 4.38% and 2.76% in the
first year and over a two year time frame, respectively, if rates increased as
described above, as compared to a decrease of 2.85% and 2.81%, respectively, at
June 30, 1998. All of these net income projections are within an acceptable
level of interest rate risk pursuant to the policy established by ALCO.
In the event the Company's interest rate risk models indicate an unacceptable
level of risk, the Company could undertake a number of actions that would reduce
this risk, including the sale of a portion of its available for sale portfolio,
the use of risk management strategies such as interest rate swaps and caps, or
the extension of the maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point change
would result in the loss of 60% or more of the excess of market value over book
value in the current rate scenario. At June 30, 1999, the market value of equity
model indicates an acceptable level of interest rate risk.
Liquidity involves the Company's ability to raise funds to support asset growth
or decrease assets to meet deposit withdrawals and other borrowing needs, to
maintain reserve requirements and to otherwise operate the Company on an ongoing
basis. The Company's liquidity needs are primarily met by growth in core
deposits, its cash and federal funds sold position, cash flow from its
amortizing investment and loan portfolios, as well as the use of short-term
borrowings, as required.
8
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Short-Term Borrowings
Short-term borrowings, or other borrowed money, consist primarily of securities
sold under agreements to repurchase and overnight lines of credit, and are used
to meet short term funding needs. At June 30, 1999, short-term borrowings
aggregated $244.6 million and had an average rate of 5.43%, as compared to $27.8
million at an average rate of 4.98% at December 31, 1998.
Interest Earning Assets
For the six month period ended June 30, 1999, interest earning assets increased
$427.4 million from $4.91 billion to $5.35 billion. This increase was primarily
in investment securities and the loan portfolio as described below.
Loans
During the first six months of 1999, loans increased $405.7 million from $2.25
billion to $2.65 billion. At June 30, 1999, loans represented 51% of total
deposits and 45% of total assets. All segments of the loan portfolio experienced
growth in the first six months of 1999, including loans secured by commercial
real estate properties, commercial loans, and consumer loans.
Investments
In total, for the first six months of 1999, securities increased $42.2 million
from $2.61 billion to $2.65 billion. Deposit growth and other funding sources
were used to increase the Company's investment portfolio. The available for sale
portfolio increased $220.3 million to $1.53 billion at June 30, 1999 from $1.31
billion at December 31, 1998, and the securities held to maturity portfolio
decreased $198.5 million to $1.02 billion at June 30, 1999 from $1.22 billion at
year-end 1998. In connection with the acquisitions of CFBC and PFC, management
reclassified $91.0 million of investment securities from held to maturity to
available for sale during the first quarter of 1999. Unrealized losses on those
securities transferred were approximately $330 thousand. The portfolio of
trading securities increased $20.4 million from year-end 1998 to $105.8 million
at June 30, 1999. At June 30, 1999, the average life of the investment portfolio
was approximately 4.4 years, and the duration was approximately 3.4 years. At
June 30, 1999, total securities represented 45% of total assets.
Net Income
Net income for the second quarter of 1999 was $16.0 million, an increase of $2.5
million or 18% over the $13.5 million recorded for the second quarter of 1998.
Net income for the first six months of 1999 was $31.5 million, an increase of
$5.2 million or 20% over the $26.3 million recorded in the first six months of
1998. On a per share basis, diluted net income for the second quarter of 1999
and the first six months of 1999 were $0.56 and $1.10 per common share compared
to $0.48 and $.94 per common share for the respective 1998 periods.
Return on average assets (ROA) and return on average equity (ROE) for the second
quarter of 1999 were 1.11% and 18.98%, respectively, compared to 1.14% and
17.65%, respectively, for the same 1998 period. ROA and ROE for the first six
months of 1999 were 1.12% and 18.87%, respectively, compared to 1.14% and 17.57%
a year ago.
Net Interest Income
Net interest income totaled $59.8 million for the second quarter of 1999, an
increase of $11.7 million or 24% from $48.1 million in the second quarter of
1998. Net interest income for the first six months of 1998 totaled $115.0
million, up $22.3 million or 24% from the first six months of 1998. The
improvement in net interest income for both periods was due primarily to volume
increases in the loan and investment portfolios.
9
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Noninterest Income
Noninterest income totaled $27.5 million for the second quarter of 1999, an
increase of $4.8 million or 21% from $22.6 million in the second quarter of
1998. The increase was due primarily to increased other operating income, which
rose $3.4 million over the prior year, including increased revenues of $2.4
million from Commerce Insurance, the Company's insurance brokerage subsidiary,
and $800 thousand from CCMI. In addition, deposit charges and service fees
increased $2.0 million over the second quarter of 1998 primarily due to higher
transaction volumes. The Company also recorded $400 thousand in net investment
securities gains in the second quarter of 1999, as compared to $920 thousand a
year ago.
For the first six months of 1999, noninterest income totaled $55.2 million, an
increase of $11.1 million or 25% from $44.1 million in the first six months of
1998. Other operating income rose $7.5 million over the first six months of
1998, including increased revenues of $4.5 million from Commerce Insurance and
$2.3 million from CCMI. Deposit charges and service fees rose $3.2 million over
the prior year primarily due to higher transaction volumes, and the Company
recorded $1.3 million in net investment securities gains in the first six months
of 1999 as compared to $929 thousand a year ago.
Noninterest Expense
For the second quarter of 1999, noninterest expense totaled $61.0 million, an
increase of $13.1 million or 27% over the same period in 1998. Contributing to
this increase was new branch activity over the past twelve months, with the
number of branches increasing from 89 at June 30, 1998 to 104 at June 30, 1999,
and the growth of Commerce Insurance and CCMI. With the addition of these new
offices, staff, facilities, and related expenses rose accordingly. Other
noninterest expenses rose $3.1 million over the second quarter of 1998. This
increase resulted primarily from higher bank card-related service charges,
increased business development expenses, and increased provisions for
non-credit-related losses.
For the first six months of 1999, noninterest expense totaled $118.5 million, an
increase of $25.7 million or 28% over $92.8 million in the first six months of
1998. Contributing to this increase was new branch activity and the growth of
Commerce National and CCMI as noted above. Other noninterest expenses rose $5.5
million over the first six months of 1998. This increase resulted primarily from
higher bank card-related service charges, increased business development
expenses, and increased provisions for non-credit-related losses.
The Company's operating efficiency ratio (noninterest expenses, less other real
estate expense, divided by net interest income plus noninterest income excluding
non-recurring gains) was 69.56% for the first six months of 1999 as compared to
67.67% for the same 1998 period. The Company's efficiency ratio remains above
its peer group primarily due to its aggressive growth expansion activities.
Loan and Asset Quality
Total non-performing assets (non-performing loans and other real estate,
excluding loans past due 90 days or more and still accruing interest) at June
30, 1999 were $13.4 million, or 0.23% of total assets compared to $14.7 million
or 0.27% of total assets at December 31, 1998 and $14.8 million or 0.30% of
total assets at June 30, 1998.
Total non-performing loans (non-accrual loans and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at June 30, 1999
were $9.3 million or 0.34% of total loans compared to $8.6 million or 0.38% of
total loans at December 31, 1998 and $9.1 million or 0.47% of total loans at
June 30, 1998. At June 30, 1999, loans past due 90 days or more and still
accruing interest amounted to $693 thousand compared to $945 thousand at
December 31, 1998 and $1.2 million at June 30, 1998. Additional loans considered
as potential problem loans by the Company's internal loan review department
($20.6 million at June 30, 1999) have been evaluated as to risk exposure in
determining the adequacy of the allowance for loan losses.
10
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Other real estate (ORE) at June 30, 1999 totaled $4.1 million compared to $6.1
million at December 31, 1998 and $5.6 million at June 30, 1998. These properties
have been written down to the lower of cost or fair value less disposition
costs.
On pages 13 and 14 are tabular presentation showing detailed information about
the Company's non-performing loans and assets and an analysis of the Company's
allowance for loan losses and other related data for June 30, 1999, December 31,
1998, and June 30, 1998.
Year 2000
The Company began the process of preparing its computer systems and applications
for the Year 2000 in 1996. The process involves identifying and resolving date
recognition problems in computer systems and software, and to a lesser extent,
other operating equipment, that could be caused by the date change from December
31, 1999 to January 1, 2000.
The Company has completed its assessment of all business processes that could be
affected by the Year 2000 issue. Each business process assessment included a
review of the information systems used in that process, including hardware and
software, involvement of third parties, and any other operating equipment. The
Company licenses substantially all software used in conducting its business from
third party vendors. All vendors have been contacted regarding the Year 2000
issue, and the Company continues to track the progress each vendor is making in
reaching Year 2000 compliance. The Company is also working with significant
customers and counterparties to monitor their Year 2000 efforts. The Company has
all 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). Additionally, the Company has completed certification testing
with all mission critical service providers. Changes for 95% of the remaining
systems are in place and testing has been substantially completed. Contingency
plans have been completed and validated.
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.
Forward-Looking Statements
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 Form 10-Q), 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
11
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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.
12
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
The following summary presents information regarding non-performing loans and
assets as of June 30, 1999 and the preceding four quarters: (dollar amounts in
thousands)
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
1999 1999 1998 1998 1998
--------------------------------------------------------------------------
Non-accrual loans:
<S> <C> <C> <C> <C> <C>
Commercial $3,104 $2,821 $2,466 $2,417 $2,021
Consumer 787 846 831 782 851
Real estate:
Construction 115 115 189 587 603
Mortgage 5,144 4,937 4,849 4,631 5,500
--------------------------------------------------------------------------
Total non-accrual loans 9,150 8,719 8,335 8,417 8,975
--------------------------------------------------------------------------
Restructured loans:
Commercial 16 16 17 17 18
Consumer
Real estate:
Construction
Mortgage 110 117 217 104 109
--------------------------------------------------------------------------
Total restructured loans 126 133 234 121 127
--------------------------------------------------------------------------
Total non-performing loans 9,276 8,852 8,569 8,538 9,102
--------------------------------------------------------------------------
Other real estate 4,118 5,645 6,081 5,409 5,649
--------------------------------------------------------------------------
Total non-performing assets 13,394 14,497 14,650 13,947 14,751
--------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 693 696 945 2,622 1,187
--------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $14,087 $15,193 $15,595 $16,569 $15,938
==========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.34% 0.36% 0.38% 0.41% 0.47%
Total non-performing assets as a
percentage of total period-end assets 0.23% 0.26% 0.27% 0.27% 0.30%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.24% 0.27% 0.29% 0.33% 0.32%
Allowance for loan losses as a percentage
of total non-performing loans 376% 374% 365% 332% 293%
Allowance for loan losses as a percentage
of total period-end loans 1.30% 1.34% 1.37% 1.36% 1.36%
Total non-performing assets and loans
past due 90 days or more as a
percentage of stockholders' equity and
allowance for loan losses 4% 4% 4% 5% 5%
</TABLE>
13
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data: (dollar amounts in thousands)
<TABLE>
<CAPTION>
Year
Six Months Ended Ended
06/30/99 06/30/98 12/31/98
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of period $31,265 $24,150 $24,150
Provisions charged to operating expenses 4,458 3,388 8,762
----------- ----------- ----------
35,723 27,538 32,912
Recoveries on loans charged-off:
Commercial 366 173 418
Consumer 119 191 305
Real estate 68 18 764
----------- ----------- ----------
Total recoveries 553 382 1,487
Loans charged-off:
Commercial (877) (338) (1,281)
Consumer (454) (667) (1,352)
Real estate (77) (265) (501)
----------- ----------- ----------
Total charge-offs (1,408) (1,270) (3,134)
----------- ----------- ----------
Net charge-offs (855) (888) (1,647)
----------- ----------- ----------
Balance at end of period $34,868 $26,650 $31,265
=========== =========== ==========
Net charge-offs as a percentage of
average loans outstanding 0.07% 0.10% 0.08%
</TABLE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
See Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation, Interest Rate Sensitivity and Liquidity.
14
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Registrant's Shareholders was held
on May 25, 1999. The only item of business acted upon at the
Annual Meeting was the election of 12 directors for one year
terms. The number of votes cast for, against, or withheld, was
as follows:
(i) Election of directors:
<TABLE>
<CAPTION>
Name of (Withhold Authority)
Nominee For Against
------- --- -------
<S> <C> <C>
Vernon W. Hill, II 24,050,683 92,791
C. Edward Jordan, Jr. 24,051,565 91,909
David Baird, IV 24,064,076 79,398
Robert C. Beck 23,988,092 155,382
Jack R Bershad 23,981,932 161,542
Joseph M. Buckelew 24,040,529 102,945
Morton N. Kerr 24,044,719 98,755
Steven M. Lewis 24,050,313 93,161
Daniel J. Ragone 24,054,243 89,231
William A. Schwartz, Jr. 24,064,834 78,640
Joseph T. Tarquini, Jr 24,064,939 78,535
Frank C. Videon, Sr. 24,052,008 91,466
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter
ended June 30, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCORP, INC.
(Registrant)
August 12, 1999 /s/ THOMAS J. SUKAY
(Date) THOMAS J. SUKAY
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 293,453
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 105,784
<INVESTMENTS-HELD-FOR-SALE> 1,022,378
<INVESTMENTS-CARRYING> 1,525,297
<INVESTMENTS-MARKET> 1,000,669
<LOANS> 2,689,589
<ALLOWANCE> 34,868
<TOTAL-ASSETS> 5,920,030
<DEPOSITS> 5,206,224
<SHORT-TERM> 224,561
<LIABILITIES-OTHER> 57,103
<LONG-TERM> 81,269
0
0
<COMMON> 43,453
<OTHER-SE> 287,420
<TOTAL-LIABILITIES-AND-EQUITY> 5,920,030
<INTEREST-LOAN> 100,564
<INTEREST-INVEST> 79,774
<INTEREST-OTHER> 384
<INTEREST-TOTAL> 180,722
<INTEREST-DEPOSIT> 59,293
<INTEREST-EXPENSE> 65,711
<INTEREST-INCOME-NET> 115,011
<LOAN-LOSSES> 4,458
<SECURITIES-GAINS> 1,265
<EXPENSE-OTHER> 118,476
<INCOME-PRETAX> 47,271
<INCOME-PRE-EXTRAORDINARY> 47,271
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,497
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 4.59
<LOANS-NON> 9,150
<LOANS-PAST> 693
<LOANS-TROUBLED> 126
<LOANS-PROBLEM> 20,597
<ALLOWANCE-OPEN> 31,265
<CHARGE-OFFS> 1,408
<RECOVERIES> 553
<ALLOWANCE-CLOSE> 34,868
<ALLOWANCE-DOMESTIC> 34,868
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
