SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(856) 751-9000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
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 28,049,528
- --------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of 11/08/99)
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 1999 and December 31, 1998..............................1
Consolidated Statements of Income (unaudited)
Three months ended September 30, 1999 and
September 30, 1998 and nine months ended
September 30, 1999 and September 30, 1998.............................2
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999 and
September 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 6. Exhibits and Reports on Form 8-K.....................................15
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
September 30, December 31,
------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 266,467 $ 267,220
Federal funds sold 10,395
----------- -----------
Cash and cash equivalents 266,467 277,615
Loans held for sale 8,762 22,418
Trading securities 91,321 85,359
Securities available for sale 1,741,290 1,305,004
Securities held to maturity 1,106,248 1,220,874
(market value 9/99-$1,071,559; 12/98-$1,223,667)
Loans 2,741,788 2,280,326
Less allowance for loan losses 35,918 31,265
----------- -----------
2,705,870 2,249,061
Bank premises and equipment, net 178,755 147,448
Other assets 180,967 116,411
----------- -----------
$ 6,279,680 $ 5,424,190
=========== ===========
Liabilities
Deposits:
Demand:
Interest-bearing $ 1,927,121 $ 1,682,958
Noninterest-bearing 1,283,468 1,162,126
Savings 1,032,247 973,324
Time 1,261,898 1,110,400
----------- -----------
Total deposits 5,504,734 4,928,808
Other borrowed money 297,469 27,845
Other liabilities 54,203 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
----------- -----------
5,937,675 5,098,462
Stockholders'
Equity
Common stock, 28,053,249 shares
issued (27,373,983 shares in 1998) 43,833 40,988
Capital in excess of par or stated value 306,944 236,928
Retained earnings 22,968 43,712
Accumulated other comprehensive income (29,347) 7,006
----------- -----------
344,398 328,634
Less commitment to ESOP 769 1,282
Less treasury stock, at cost 1,624 1,624
----------- -----------
Total stockholders' equity 342,005 325,728
----------- -----------
$ 6,279,680 $ 5,424,190
=========== ===========
</TABLE>
See accompanying notes
1
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
(dollars in thousands, except per share amounts) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 55,664 $ 44,074 $156,228 $122,229
Interest on investments 42,949 38,114 122,723 115,663
Other interest 484 968 868 1,824
-------- -------- -------- --------
Total interest income 99,097 83,156 279,819 239,716
-------- -------- -------- --------
Interest expense
Interest on deposits:
Demand 11,914 8,981 31,607 25,872
Savings 5,349 5,324 15,264 15,384
Time 14,999 16,392 44,684 46,763
-------- -------- -------- --------
Total interest on deposits 32,262 30,697 91,555 88,019
Interest on other borrowed money 2,074 604 4,929 3,549
Interest on long-term debt 1,782 1,782 5,345 5,346
-------- -------- -------- --------
Total interest expense 36,118 33,083 101,829 96,914
-------- -------- -------- --------
Net interest income 62,979 50,073 177,990 142,802
Provision for loan losses 1,653 2,053 6,111 5,441
-------- -------- -------- --------
Net interest income after provision for
loan losses 61,326 48,020 171,879 137,361
Noninterest income
Deposit charges and service fees 11,272 8,897 31,824 26,228
Other operating income 16,690 15,468 50,067 41,312
Net investment securities gains 270 991 1,535 1,920
-------- -------- -------- --------
Total noninterest income 28,232 25,356 83,426 69,460
-------- -------- -------- --------
Noninterest expense
Salaries 26,158 20,897 73,458 57,472
Benefits 4,807 4,630 14,704 12,628
Occupancy 5,765 4,769 16,065 13,331
Furniture and equipment 8,336 6,174 22,890 17,921
Office 5,403 4,030 15,554 11,897
Audit and regulatory fees and assessments 738 610 1,942 1,709
Marketing 2,735 2,039 6,901 5,775
Other real estate (net) 454 320 1,423 1,145
Other 10,343 8,655 30,278 23,043
-------- -------- -------- --------
Total noninterest expenses 64,739 52,124 183,215 144,921
-------- -------- -------- --------
Income before income taxes 24,819 21,252 72,090 61,900
Provision for federal and state income taxes 7,979 7,150 23,753 21,466
-------- -------- -------- --------
Net income $ 16,840 $ 14,102 $ 48,337 $ 40,434
======== ======== ======== ========
Net income per common and common
equivalent share:
Basic $ 0.61 $ 0.52 $ 1.75 $ 1.51
-------- -------- -------- --------
Diluted $ 0.58 $ 0.50 $ 1.68 $ 1.44
-------- -------- -------- --------
Average common and common equivalent
shares outstanding:
Basic 27,816 27,016 27,605 26,710
-------- -------- -------- --------
Diluted 28,849 28,218 28,832 28,076
-------- -------- -------- --------
Cash dividends declared, common stock $ 0.22 $ 0.38 $ 0.65 $ 0.73
======== ======== ======== ========
</TABLE>
See accompanying notes
2
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------------------
(dollars in thousands) 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating
activities
Net income $ 48,337 $ 40,434
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,111 5,441
Provision for depreciation, amortization and accretion 21,913 18,837
Gains on sales of securities available for sale (1,535) (1,902)
Proceeds from sales of mortgages held for sale 92,319 56,614
Originations of mortgages held for sale (78,663) (48,734)
Net loan (chargeoffs) (1,458) (1,273)
Net increase in trading securities (5,962) (45,881)
Increase in other assets (44,783) (37,389)
(Decrease) increase in other liabilities (5,824) 25,711
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,455 11,858
Investing
activities
Proceeds from the sales of securities available for sale 250,179 321,960
Proceeds from the maturity of securities available for sale 240,316 319,031
Proceeds from the maturity of securities held to maturity 204,345 226,458
Purchase of securities available for sale (843,644) (546,697)
Purchase of securities held to maturity (103,329) (477,573)
Net increase in loans (599,149) (423,281)
Proceeds from sales of loans 7,919 7,523
Purchases of premises and equipment (47,567) (32,410)
---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (890,930) (604,989)
Financing
activities
Net increase in demand and savings deposits 424,428 525,113
Net increase in time deposits 151,498 296,317
Net increase(decrease) in other borrowed money 269,624 (191,550)
Dividends paid (17,325) (18,245)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 20,886 7,272
Issuance of common stock 9,585
Other 216 59
---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 849,327 628,551
(Decrease) increase in cash and cash equivalents (11,148) 35,420
Cash and cash equivalents at beginning of year 277,615 204,776
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 266,467 $ 240,196
=========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 101,176 $ 93,956
Income taxes 23,568 23,050
Other noncash activities:
Transfer of securities to securities available for sale 91,010
Securitization of loans 129,768
---------------------------------------------------------------------------------------------------------
</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 September 30, 1999 and the nine months
ended September 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 $7.8 million and $19.7 million, respectively, for the three months
ended September 30, 1999 and 1998. For the nine months ended September 30, 1999
and 1998, total comprehensive income was $12.0 million and $43.4 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
September 30, 1999 September 30, 1998
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 64,741 $ (1,762) $ 62,979 $ 51,639 $ (1,566) $ 50,073
Provision for loan losses 1,653 1,653 2,053 2,053
-----------------------------------------------------------------------------------------
Net interest income after provision 63,088 (1,762) 61,326 49,586 (1,566) 48,020
Noninterest income 16,966 11,266 28,232 14,944 10,412 25,356
Noninterest expense 54,397 10,342 64,739 43,469 8,655 52,124
-----------------------------------------------------------------------------------------
Income before income taxes 25,657 (838) 24,819 21,061 191 21,252
Income tax expense 8,094 (115) 7,979 7,204 (54) 7,150
-----------------------------------------------------------------------------------------
Net income $ 17,563 $ (723) $ 16,840 $ 13,857 $ 245 $ 14,102
=========================================================================================
Average assets (in millions) $5,431,034 $ 592,980 $6,024,014 $4,479,574 $ 482,005 $4,961,579
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 183,075 $ (5,085) $ 177,990 $ 147,559 $ (4,757) $ 142,802
Provision for loan losses 6,111 6,111 5,441 5,441
-----------------------------------------------------------------------------------------
Net interest income after provision 176,964 (5,085) 171,879 142,118 (4,757) 137,361
Noninterest income 47,213 36,213 83,426 42,442 27,018 69,460
Noninterest expense 151,719 31,496 183,215 122,197 22,724 144,921
-----------------------------------------------------------------------------------------
Income before income taxes 72,458 (368) 72,090 62,363 (463) 61,900
Income tax expense 23,427 326 23,753 21,792 (326) 21,466
-----------------------------------------------------------------------------------------
Net income $ 49,031 $ (694) $ 48,337 $ 40,571 $ (137) $ 40,434
=========================================================================================
Average assets (in millions) $5,158,501 $ 584,261 $5,742,762 $4,274,188 $ 456,582 $4,730,770
=========================================================================================
</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 Nine Months Ended
September 30, September 30,
-----------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income applicable to common stock $16,840 $14,102 $48,337 $40,434
======= ======= ======= =======
Average common shares outstanding 27,816 27,016 27,605 26,710
======= ======= ======= =======
Net income per common share - basic $ 0.61 $ 0.52 $ 1.75 $ 1.51
======= ======= ======= =======
Diluted:
Net income applicable to common stock
on a diluted basis $16,840 $14,102 $48,337 $40,434
======= ======= ======= =======
Average common shares outstanding 27,816 27,016 27,605 26,710
Additional shares considered in diluted
Computation assuming:
Exercise of stock options 1,033 1,202 1,227 1,226
Conversion of preferred stock 140
------- ------- ------- -------
Average common shares outstanding
on a diluted basis 28,849 28,218 28,832 28,076
======= ======= ======= =======
Net income per common share - diluted $ 0.58 $ 0.50 $ 1.68 $ 1.44
======= ======= ======= =======
</TABLE>
H. Pending Acquisitions
On July 27, 1999, Commerce Insurance, the Company's insurance brokerage
subsidiary, reached an agreement in principle to acquire Mullaney Insurance
Associates, Oakhurst, New Jersey. On October 27, 1999, the Company reached an
agreement in principle to acquire Traber and Vreeland, Inc., Randolph, New
Jersey. The acquisitons of these insurance brokerage agencies will be completed
by the issuance of common stock of the Company totaling approximately 325,000
shares. The Company expects the acquisitions to close in the fourth quarter of
1999. The transactions will be accounted for as poolings of interests. However,
the Company does not expect to restate the financial statements of the periods
prior to the acquisitions, as the changes, in the aggregate, will be immaterial.
6
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Capital Resources
At September 30, 1999, stockholders' equity totaled $342.0 million or 5.45% 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 September 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>
September 30, 1999
Company
Risk based capital ratios:
Tier 1 $424,423 11.48% $147,915 4.00% $221,873 6.00%
Total capital 474,141 12.82 295,830 8.00 369,788 10.00
Leverage ratio 424,423 7.02 242,000 4.00 302,500 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $212,741 10.31% $ 82,527 4.00% $123,791 6.00%
Total capital 232,317 11.26 165,055 8.00 206,319 10.00
Leverage ratio 212,741 6.35 134,007 4.00 167,509 5.00
September 30, 1998
Company
Risk based capital ratios:
Tier 1 $370,401 13.62% $108,753 4.00% $163,130 6.00%
Total capital 417,119 15.34 217,506 8.00 271,883 10.00
Leverage ratio 370,401 7.50 148,190 3.00 246,983 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $190,741 12.74% $ 59,903 4.00% $ 89,854 6.00%
Total capital 206,842 13.81 119,805 8.00 149,756 10.00
Leverage ratio 190,741 6.68 85,702 3.00 142,836 5.00
</TABLE>
At September 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 September 30, 1999, the
Company and its subsidiaries meet all capital adequacy requirements to which
they are subject.
Deposits
Total deposits at September 30, 1999 were $5.50 billion, up $898.7 million, or
20% over total deposits of $4.61 billion at September 30, 1998, and up by $575.9
million, or 12% from year-end 1998. Deposit growth during the first nine 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
17.5% at September 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
September 30, 1999, the Company's income simulation model indicates net income
would increase by 5.71% and 0.66% in the first year and over a two year time
frame, respectively, if rates decreased as described above, as compared to a
decrease of 2.40% and 10.05%, respectively, at September 30, 1998. At September
30, 1999, the model projects that net income would decrease by 8.92% and 6.67%
in the first year and over a two year time frame, respectively, if rates
increased as described above, as compared to a decrease of 6.13% and 5.98%,
respectively, at September 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 September 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 September 30, 1999, short-term borrowings
aggregated $297.5 million and had an average rate of 5.56%, as compared to $27.8
million at an average rate of 4.98% at December 31, 1998.
Interest Earning Assets
For the nine month period ended September 30, 1999, interest earning assets
increased $765.0 million from $4.92 billion to $5.69 billion. This increase was
primarily in investment securities and the loan portfolio as described below.
Loans
During the first nine months of 1999, loans increased $456.8 million from $2.25
billion to $2.71 billion. At September 30, 1999, loans represented 49% of total
deposits and 43% of total assets. All segments of the loan portfolio experienced
growth in the first nine months of 1999, including loans secured by commercial
real estate properties, commercial loans, and consumer loans.
During the third quarter of 1999, the Company securitized $129.8 million of
residential mortgage loans, and included the securities in its held to maturity
investment portfolio.
Investments
In total, for the first nine months of 1999, securities increased $327.6 million
from $2.61 billion to $2.94 billion. Deposit growth and other funding sources
were used to increase the Company's investment portfolio. The available for sale
portfolio increased $436.3 million to $1.74 billion at September 30, 1999 from
$1.31 billion at December 31, 1998, and the securities held to maturity
portfolio decreased $114.6 million to $1.11 billion at September 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 $6.0 million from year-end 1998 to
$91.3 million at September 30, 1999. At September 30, 1999, the average life of
the investment portfolio was approximately 5.5 years, and the duration was
approximately 4.1 years. At September 30, 1999, total securities represented 47%
of total assets.
Net Income
Net income for the third quarter of 1999 was $16.8 million, an increase of $2.7
million or 19% over the $14.1 million recorded for the third quarter of 1998.
Net income for the first nine months of 1999 was $48.3 million, an increase of
$7.9 million or 20% over the $40.4 million recorded in the first nine months of
1998. On a per share basis, diluted net income for the third quarter of 1999 and
the first nine months of 1999 were $0.58 and $1.68 per common share compared to
$0.50 and $1.44 per common share for the respective 1998 periods.
Return on average assets (ROA) and return on average equity (ROE) for the third
quarter of 1999 were 1.12% and 20.32%, respectively, compared to 1.14% and
17.66%, respectively, for the same 1998 period. ROA and ROE for the first nine
months of 1999 were 1.12% and 19.35%, respectively, compared to 1.13% and 17.61%
a year ago.
Net Interest Income
Net interest income totaled $63.0 million for the third quarter of 1999, an
increase of $12.9 million or 26% from $50.1 million in the third quarter of
1998. Net interest income for the first nine months of 1999 totaled $178.0
million, up $35.2 million or 25% from the first nine 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
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COMMERCE BANCORP, INC. AND SUBSIDIARIES
Noninterest Income
Noninterest income totaled $28.2 million for the third quarter of 1999, an
increase of $2.9 million or 11% from $25.4 million in the third quarter of 1998.
The increase was due to increased deposit charges and service fees, which rose
$2.4 million over the third quarter of 1998 primarily due to higher transaction
volumes. In addition, other operating income rose $1.2 million over the prior
year, primarily from increased revenues from Commerce National. The Company also
recorded $270 thousand in net investment securities gains in the third quarter
of 1999, as compared to $991 thousand a year ago.
For the first nine months of 1999, noninterest income totaled $83.4 million, an
increase of $13.9 million or 20% from $69.5 million in the first nine months of
1998. Other operating income rose $8.8 million over the first nine months of
1998, including increased revenues of $6.2 million from Commerce Insurance and
$1.0 million from CCMI. Deposit charges and service fees rose $5.6 million over
the prior year primarily due to higher transaction volumes, and the Company
recorded $1.5 million in net investment securities gains in the first nine
months of 1999 as compared to $1.9 million a year ago.
Noninterest Expense
For the third quarter of 1999, noninterest expense totaled $64.7 million, an
increase of $12.6 million or 24% 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 93 at September 30, 1998 to 111 at September
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 $1.7 million over the third 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 nine months of 1999, noninterest expense totaled $183.2 million,
an increase of $38.3 million or 26% over $144.9 million in the first nine 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 $7.2
million over the first nine 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 69.95% for the first nine months of 1999 as compared to
68.35% 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
September 30, 1999 were $13.1 million, or 0.21% of total assets compared to
$14.7 million or 0.27% of total assets at December 31, 1998 and $13.9 million or
0.27% of total assets at September 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 September 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 $8.5 million or 0.41% of total loans at
September 30, 1998. At September 30, 1999, loans past due 90 days or more and
still accruing interest amounted to $581 thousand compared to $945 thousand at
December 31, 1998 and $2.6 million at September 30, 1998. Additional loans
considered as potential problem loans by the Company's internal loan review
department ($22.1 million at September 30, 1999) have been evaluated as to risk
exposure in determining the adequacy of the allowance for loan losses.
10
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COMMERCE BANCORP, INC. AND SUBSIDIARIES
Other real estate (ORE) at September 30, 1999 totaled $3.8 million compared to
$6.1 million at December 31, 1998 and $5.4 million at September 30, 1998. These
properties have been written down to the lower of cost or fair value less
disposition costs.
The following pages include tabular presentations showing detailed information
about the Company's non-performing loans and assets and an analysis of the
Company's allowance for loan losses and other related data for September 30,
1999, December 31, 1998, and September 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 98% of the remaining
systems are in place and tested. 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 expense savings and revenue enhancements from
11
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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 September 30, 1999 and the preceding four quarters: (dollar amounts
in thousands)
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Commercial $ 2,827 $ 3,104 $ 2,821 $ 2,466 $ 2,417
Consumer 748 787 846 831 782
Real estate:
Construction 55 115 115 189 587
Mortgage 5,539 5,144 4,937 4,849 4,631
----------------------------------------------------------------------------------
Total non-accrual loans 9,169 9,150 8,719 8,335 8,417
----------------------------------------------------------------------------------
Restructured loans:
Commercial 15 16 16 17 17
Consumer
Real estate:
Construction
Mortgage 108 110 117 217 104
----------------------------------------------------------------------------------
Total restructured loans 123 126 133 234 121
----------------------------------------------------------------------------------
Total non-performing loans 9,292 9,276 8,852 8,569 8,538
----------------------------------------------------------------------------------
Other real estate 3,799 4,118 5,645 6,081 5,409
----------------------------------------------------------------------------------
Total non-performing assets 13,091 13,394 14,497 14,650 13,947
----------------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 581 693 696 945 2,622
----------------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $13,672 $14,087 $15,193 $15,595 $16,569
==================================================================================
Total non-performing loans as a
percentage of total period-end loans 0.34% 0.34% 0.36% 0.38% 0.41%
Total non-performing assets as a
percentage of total period-end assets 0.21% 0.23% 0.26% 0.27% 0.27%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.22% 0.24% 0.27% 0.29% 0.33%
Allowance for loan losses as a percentage
of total non-performing loans 387% 376% 374% 365% 332%
Allowance for loan losses as a percentage
of total period-end loans 1.31% 1.30% 1.34% 1.37% 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% 4% 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>
Nine Months Ended Year
--------------------------- Ended
09/30/99 09/30/98 12/31/98
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period $ 31,265 $ 24,150 $ 24,150
Provisions charged to operating expenses 6,111 5,441 8,762
-------- -------- --------
37,376 29,591 32,912
Recoveries on loans charged-off:
Commercial 446 284 418
Consumer 193 240 305
Real estate 72 24 764
-------- -------- --------
Total recoveries 711 548 1,487
Loans charged-off:
Commercial (1,087) (534) (1,281)
Consumer (805) (966) (1,352)
Real estate (277) (321) (501)
-------- -------- --------
Total charge-offs (2,169) (1,821) (3,134)
-------- -------- --------
Net charge-offs (1,458) (1,273) (1,647)
-------- -------- --------
Balance at end of period $ 35,918 $ 28,318 $ 31,265
======== ======== ========
Net charge-offs as a percentage of
average loans outstanding 0.08% 0.09% 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 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended
September 30, 1999.
15
<PAGE>
COMMERCE BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCORP, INC.
-------------------------------------------
(Registrant)
November 15, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 266,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 91,321
<INVESTMENTS-HELD-FOR-SALE> 1,741,290
<INVESTMENTS-CARRYING> 1,106,248
<INVESTMENTS-MARKET> 1,071,559
<LOANS> 2,741,788
<ALLOWANCE> 35,918
<TOTAL-ASSETS> 6,279,680
<DEPOSITS> 5,504,734
<SHORT-TERM> 297,469
<LIABILITIES-OTHER> 54,203
<LONG-TERM> 81,269
0
0
<COMMON> 43,833
<OTHER-SE> 298,172
<TOTAL-LIABILITIES-AND-EQUITY> 6,279,680
<INTEREST-LOAN> 156,228
<INTEREST-INVEST> 122,723
<INTEREST-OTHER> 868
<INTEREST-TOTAL> 279,819
<INTEREST-DEPOSIT> 91,555
<INTEREST-EXPENSE> 101,829
<INTEREST-INCOME-NET> 177,990
<LOAN-LOSSES> 6,111
<SECURITIES-GAINS> 1,535
<EXPENSE-OTHER> 183,215
<INCOME-PRETAX> 72,090
<INCOME-PRE-EXTRAORDINARY> 72,090
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,337
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 4.63
<LOANS-NON> 9,169
<LOANS-PAST> 581
<LOANS-TROUBLED> 123
<LOANS-PROBLEM> 22,138
<ALLOWANCE-OPEN> 31,265
<CHARGE-OFFS> 2,169
<RECOVERIES> 711
<ALLOWANCE-CLOSE> 35,918
<ALLOWANCE-DOMESTIC> 35,918
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
