EX-13 2 0002.txt Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------- Income Statement Data: Net interest income $ 296,930 $ 244,367 $ 194,661 $ 165,322 $ 139,959 Provision for loan losses 13,931 9,175 8,762 5,805 5,798 Noninterest income 150,760 114,596 96,277 62,410 36,129 Noninterest expense 315,357 252,523 213,950 153,804 121,285 Income before income taxes 118,402 97,265 68,226 68,123 49,005 Net income 80,047 65,960 42,155 44,432 31,149 Balance Sheet Data: Total assets $8,296,516 $6,635,793 $5,424,190 $4,387,851 $3,592,972 Loans (net) 3,638,580 2,922,706 2,249,061 1,638,836 1,463,933 Securities available for sale 2,021,326 1,664,257 1,305,004 1,330,684 779,630 Securities held to maturity 1,513,456 1,201,892 1,220,874 985,676 919,149 Trading securities 109,306 117,837 85,359 7,911 15,327 Federal funds sold 52,000 5,300 10,395 15,813 36,625 Deposits 7,387,594 5,608,920 4,928,808 3,784,576 3,251,865 Long-term debt 23,000 23,000 24,282 25,308 26,333 Trust preferred securities 57,500 57,500 57,500 57,500 Stockholders' equity 492,224 356,756 323,552 279,900 228,543 Per Share Data: Net income-basic $ 2.59 $ 2.26 $ 1.49 $ 1.64 $ 1.24 Net income-diluted 2.49 2.17 1.42 1.56 1.16 Cash dividends 0.97 0.83 0.87 0.55 0.46 Book value 15.55 11.99 11.28 10.27 8.54 Average shares outstanding: Basic 30,878 29,155 28,254 26,715 24,450 Diluted 32,111 30,465 29,662 28,386 26,850 Selected Ratios: Performance Return on average assets 1.09% 1.12% 0.87% 1.12% 0.95% Return on average equity 19.81 19.63 13.57 17.87 15.17 Net interest margin 4.62 4.65 4.42 4.59 4.65 Liquidity and Capital Average loans to average deposits 52.17% 50.31% 44.71% 45.07% 45.64% Dividend payout 37.45 36.64 58.55 33.31 36.71 Stockholders' equity to total assets 5.93 5.38 5.96 6.38 6.36 Risk-based capital: Tier 1 10.79 11.40 12.09 14.91 12.36 Total 11.92 12.72 13.71 17.06 14.71 Leverage capital 6.92 7.02 7.05 7.69 6.53 Asset Quality Non-performing assets to total year-end assets 0.20% 0.18% 0.27% 0.43% 0.56% Net charge-offs to average loans outstanding 0.11 0.08 0.08 0.13 0.24 Non-performing loans to total year-end loans 0.37 0.29 0.38 0.78 0.80 Allowance for loan losses to total end of year loans 1.32 1.30 1.37 1.45 1.37 Allowance for loan losses to non- performing loans 356.84 442.09 364.86 187.35 170.74 43
Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's consolidated balance sheets and statements of income. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes. 2000 Overview In 2000, the Company posted increases in net income, deposits, loans, and assets. The increase in net income was due to increases in net interest income and noninterest income, which offset increased noninterest expenses. Loan growth totaled 24% for 2000, and deposit growth totaled 32%. At December 31, 2000, the Company had total assets of $8.3 billion, total loans of $3.7 billion, total investment securities of $3.6 billion, and total deposits of $7.4 billion. Segment Reporting The Company operates one reportable segment of business, Community Banks, as more fully described in Note 19 to the Consolidated Financial Statements on page 80. The following table summarizes net income by segment for each of the last three years: ------------------------------------------------------------ Net Income ------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------ Community Banks $77,262 $66,313 $43,627 Parent/Other 2,785 (353) (1,472) ------------------------------------------------------------ Consolidated total $80,047 $65,960 $42,155 ------------------------------------------------------------ Average Balances and Net Interest Income The table on page 46 sets forth balance sheet items on a daily average basis for the years ended December 31, 2000, 1999 and 1998 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods. During 2000, average interest earning assets totaled $6.6 billion, an increase of $1.3 billion, or 23% over 1999. This increase resulted primarily from the increase in the average balance of loans, which rose $761.8 million, and the average balance of investment securities, which rose $446.3 million during 2000. The growth in the average balance of interest earning assets was funded primarily by an increase in the average balance of deposits (including noninterest-bearing demand deposits) of $1.3 billion. The growth in interest earning assets was also partly funded by an increase in other borrowed money, which rose $84.8 million to an average balance of $268.3 million during 2000. Net Interest Income and Net Interest Margin Net interest margin on a tax-equivalent basis was 4.62% for 2000, a decrease of three basis points from 1999. Net interest income on a tax-equivalent basis (which adjusts for the tax-exempt status of income earned on certain loans and investments to express such income as if it were taxable) for 2000 was $306.1 million, an increase of $56.6 million, or 23%, over 1999. Interest income on a tax-equivalent basis increased to $514.5 million from $391.6 million, or 31%. This increase was primarily related to volume increases in the loan and investment portfolios. Interest expense for 2000 rose $66.3 million to $208.4 million from $142.1 million in 1999. This increase was primarily related to increases in the Company's levels of deposits and other borrowed money. The tax-equivalent yield on interest earning assets during 2000 was 7.76%, an increase of 47 basis points from 7.29% in 1999. 44 Management's Discussion and Analysis of Financial Condition and Results of Operations The cost of interest-bearing liabilities increased 60 basis points in 2000 to 3.89% from 3.29% in 1999. The increase resulted primarily from increased general market interest rates during 2000 as compared to 1999. The cost of total funding sources increased 50 basis points in 2000 to 3.14% from 2.64%. The following table presents the major factors that contributed to the changes in net interest income for the years ended December 31, 2000 and 1999 as compared to the respective previous periods.
-------------------------------------------------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 Increase (Decrease) Increase (Decrease) Due to Changes in (1) Due to Changes in (1) -------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total -------------------------------------------------------------------------------------------------- (dollars in thousands) Interest on investments: Taxable $25,664 $9,371 $35,035 $12,294 $1,724 $14,018 Tax-exempt 1,029 54 1,083 387 99 486 Trading 3,708 492 4,200 2,552 253 2,805 Federal funds sold 3,224 263 3,487 (1,474) (114) (1,588) Interest on loans: Commercial real estate 23,976 2,956 26,932 18,805 (3,994) 14,811 Commercial 18,348 4,111 22,459 10,824 (1,869) 8,955 Consumer 19,198 4,261 23,459 23,752 (2,315) 21,437 Tax-exempt 5,676 551 6,227 3,279 (121) 3,158 -------------------------------------------------------------------------------------------------- Total interest 100,823 22,059 122,882 70,419 (6,337) 64,082 income -------------------------------------------------------------------------------------------------- Interest expense: Regular savings 9,306 6,795 16,101 2,952 (2,900) 52 N.O.W accounts (2,445) 2,293 (152) 285 808 1,093 Money market plus 17,307 10,546 27,853 10,487 (1,671) 8,816 Time deposits 565 3,621 4,186 3,414 (3,479) (65) Public funds 7,550 4,289 11,839 (1,843) (1,765) (3,608) Other borrowed money 5,352 1,711 7,063 6,177 (311) 5,866 Long-term debt (600) (600) (56) (56) -------------------------------------------------------------------------------------------------- Total interest 37,635 28,655 66,290 21,472 (9,374) 12,098 expense -------------------------------------------------------------------------------------------------- Net increase $63,188 $(6,596) $56,592 $48,947 $3,037 $51,984 -------------------------------------------------------------------------------------------------- (1) Changes due to both volume and rate have been allocated to volume or rate changes in proportion to the absolute dollar amounts of the change in each.
Noninterest Income For 2000, noninterest income totaled $150.8 million, an increase of $36.2 million or 32% from 1999. The increase was due primarily to increased other operating income, which rose $23.4 million from 1999, including an increase of $13.2 million in revenues from Commerce National Insurance Services, Inc. (Commerce National Insurance), the Company's insurance brokerage subsidiary. In addition, deposit charges and service fees increased $12.1 million over 1999 due primarily to higher transaction volumes, and net investment securities gains increased $631 thousand over the prior year. Noninterest Expenses Noninterest expenses totaled $315.4 million for 2000, an increase of $62.8 million, or 25% over 1999. Contributing to this increase was the addition of 30 new branches. With the addition of these new offices, staff, facilities, marketing, and related expenses rose accordingly. Other noninterest expenses rose $14.5 million to $55.2 million in 2000. This increase resulted primarily from increased bank-card related service charges, increased business development expenses, and increased provisions for non-credit-related losses. A key industry productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (excluding other real estate expenses) to net interest income plus noninterest income (excluding non-recurring gains). Over the last three years, this ratio equaled 70.72%, 70.36% and 73.81% in 2000, 1999 and 1998, respectively. The Company's efficiency ratio remains above its peer group primarily due to its aggressive expansion activities. 45 Management's Discussion and Analysis of Financial Condition and Results of Operations
Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income --------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Average Average Average Average Average Average Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------- Investment securities Taxable $2,964,401 $199,747 6.74 % $2,583,530 $164,712 6.38 % $2,390,688 $150,693 6.30 % Tax-exempt 74,001 4,911 6.64 58,503 3,828 6.54 52,592 3,342 6.35 Trading 120,702 8,969 7.43 70,800 4,769 6.74 32,921 1,965 5.97 ------------------------------------------------------------------------------------------------------------------------- Total investment securities 3,159,104 213,627 6.76 2,712,833 173,309 6.39 2,476,201 156,000 6.30 Federal funds sold 69,841 4,465 6.39 19,419 978 5.04 48,691 2,566 5.27 Loans Commercial real estate 1,235,690 108,917 8.81 963,679 81,985 8.51 742,644 67,174 9.05 Commercial 711,826 68,074 9.56 519,963 45,615 8.77 396,578 36,660 9.24 Consumer 1,323,795 106,984 8.08 1,086,487 83,525 7.69 777,518 62,088 7.99 Tax-exempt 132,507 12,449 9.40 71,926 6,222 8.65 34,018 3,064 9.01 ------------------------------------------------------------------------------------------------------------------------- Total loans 3,403,818 296,424 8.71 2,642,055 217,347 8.23 1,950,758 168,986 8.66 ------------------------------------------------------------------------------------------------------------------------- Total earning assets $6,632,763 $514,516 7.76 % $5,374,307 $391,634 7.29 % $4,475,650 $327,552 7.32 % ------------------------------------------------------------------------------------------------------------------------- Sources of Funds ------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Regular savings $1,352,364 $ 36,935 2.73 % $1,011,642 $ 20,834 2.06 % $ 868,311 $ 20,782 2.39 % N.O.W. accounts 170,118 5,918 3.48 240,409 6,070 2.52 229,109 4,977 2.17 Money market plus 2,149,329 67,057 3.12 1,594,602 39,204 2.46 1,168,045 30,388 2.60 Time deposits 892,780 47,181 5.28 882,081 42,995 4.87 812,028 43,060 5.30 Public funds 439,972 27,865 6.33 320,768 16,026 5.00 357,663 19,634 5.49 ------------------------------------------------------------------------------------------------------------------------- Total deposits 5,004,563 184,956 3.70 4,049,502 125,129 3.09 3,435,156 118,841 3.46 Other borrowed money 268,304 16,943 6.31 183,554 9,880 5.38 68,795 4,014 5.83 Long-term debt 80,500 6,471 8.04 80,500 7,071 8.78 80,500 7,127 8.85 ------------------------------------------------------------------------------------------------------------------------- Total deposits and interest- bearing liabilities 5,353,367 208,370 3.89 4,313,556 142,080 3.29 3,584,451 129,982 3.63 Noninterest-bearing funds (net) 1,279,396 1,060,751 891,199 ------------------------------------------------------------------------------------------------------------------------- Total sources to fund earning assets $6,632,763 208,370 3.14 $5,374,307 142,080 2.64 $4,475,650 129,982 2.90 ------------------------------------------------------------------------------------------------------------------------- Net interest income and margin tax-equivalent basis 306,146 4.62 249,554 4.65 197,570 4.42 Tax-exempt adjustment 9,216 5,187 2,909 ------------------------------------------------------------------------------------------------------------------------- Net interest income and margin $296,930 4.48 % $244,367 4.55 % $194,661 4.35 % ------------------------------------------------------------------------------------------------------------------------- Other Balances ------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 328,390 $ 251,438 $ 197,282 Other assets 431,884 312,652 220,142 Total assets 7,348,963 5,903,869 4,866,005 Demand deposits (noninterest-bearing) 1,519,313 1,202,412 927,601 Other liabilities 72,162 51,921 43,248 Stockholders' equity 404,121 335,982 310,705 -------------------------------------------------------------------------------------------------------------------------
Notes--Weighted average yields on tax-exempt obligations have been computed on a tax-equivalent basis assuming a federal tax rate of 35%. --Non-accrual loans have been included in the average loan balance. --Investment securities includes investments available for sale. --Consumer loans include loans held for sale. 46 Management's Discussion and Analysis of Financial Condition and Results of Operations Income Taxes The provision for federal and state income taxes for 2000 was $38.4 million compared to $31.3 million in 1999 and $26.1 million in 1998. The effective tax rate was 32.4%, 32.2% and 38.2% in 2000, 1999 and 1998, respectively. Net Income Net income for 2000 was $80.0 million, an increase of $14.0 million, or 21% over the $66.0 million recorded for 1999. The increase in net income was due to increases in net interest income and noninterest income, which offset increased noninterest expenses. Diluted net income per share of common stock for 2000 was $2.49 compared to $2.17 per common share for 1999. Return on Average Equity and Average Assets Two industry measures of the performance by a banking institution are its return on average assets and return on average equity. Return on average assets ("ROA") measures net income in relation to total average assets and indicates a company's ability to employ its resources profitably. For 2000, the Company's ROA was 1.09% compared to 1.12% for 1999. Return on average equity ("ROE") is determined by dividing annual net income by average stockholders' equity and indicates how effectively a company can generate net income on the capital invested by its stockholders. For 2000, the Company's ROE was 19.81% compared to 19.63% for 1999. Loan Portfolio The following table summarizes the loan portfolio of the Company by type of loan as of December 31, for each of the years 1996 through 2000.
--------------------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------- (dollars in thousands) Commercial real estate: Owner-occupied $685,916 $512,087 $425,764 $332,745 $252,629 Investor/developer 471,604 395,086 330,769 270,822 281,099 Construction 380,804 185,712 122,797 64,948 60,434 --------------------------------------------------------------------------------------------- 1,538,324 1,092,885 879,330 668,515 594,162 Commercial: Term 469,564 393,953 282,556 211,827 205,990 Line of credit 430,811 277,917 192,485 118,631 106,326 Demand 1,400 1,328 417 617 708 --------------------------------------------------------------------------------------------- 901,775 673,198 475,458 331,075 313,024 Consumer: Mortgages (1-4 family residential) 351,644 428,453 322,310 184,479 171,102 Installment 154,415 125,856 96,188 89,150 83,953 Home equity 710,848 621,597 494,047 377,437 311,122 Credit lines 30,254 19,099 12,993 12,330 10,967 --------------------------------------------------------------------------------------------- 1,247,161 1,195,005 925,538 663,396 577,144 --------------------------------------------------------------------------------------------- Total loans $3,687,260 $2,961,088 $2,280,326 $1,662,986 $1,484,330 ---------------------------------------------------------------------------------------------
The Company manages risk associated with its loan portfolio through diversification, underwriting policies and procedures, and ongoing loan monitoring efforts. The commercial real estate portfolio includes owner-occupied (owner occupies greater than 50% of the property), investor/developer loans, and construction loans. Owner-occupied and other investor/developer loans generally have five year call provisions and bear the personal guarantees of the principals involved. Construction loans are primarily used for single family residential properties. Financing is provided against firm agreements of sale, with speculative construction limited to one sample per project. The commercial loan portfolio is comprised primarily of amortizing loans to small businesses in the New Jersey/Southeastern Pennsylvania/Delaware market area. These loans are generally secured by business assets, personal guarantees, and/or personal assets of the borrower. The consumer loan portfolio is comprised primarily of loans secured by first and second mortgage liens on residential real estate. 47 Management's Discussion and Analysis of Financial Condition and Results of Operations The maturity ranges of the loan portfolio and the amount of loans with predetermined interest rates and floating rates in each maturity range, as of December 31, 2000, are summarized in the following table. ------------------------------------------------------------------------------- December 31, 2000 ------------------------------------------------------------------------------- Due in Due in Due in One Year One to Over Total or Less Five Years Five Years ------------------------------------------------------------------------------- (dollars in thousands) Commercial real estate: Owner-occupied and investor/ developer $145,278 $882,280 $129,962 $1,157,520 Construction 231,526 145,585 3,693 380,804 ------------------------------------------------------------------------------- 376,804 1,027,865 133,655 1,538,324 Commercial: Term 135,222 277,303 57,039 469,564 Line of credit 416,876 13,935 430,811 Demand 920 480 1,400 ------------------------------------------------------------------------------- 553,018 291,718 57,039 901,775 Consumer: Mortgages (1-4 family Residential) 7,890 35,493 308,261 351,644 Installment 71,723 73,206 9,486 154,415 Home equity 83,776 285,968 341,104 710,848 Credit lines 11,510 18,744 30,254 ------------------------------------------------------------------------------- 174,899 413,411 658,851 1,247,161 ------------------------------------------------------------------------------- Total loans $1,104,721 $1,732,994 $849,545 $3,687,260 ------------------------------------------------------------------------------- Interest rates: Predetermined $368,168 $1,373,070 $641,422 $2,382,660 Floating 736,553 359,924 208,123 1,304,600 ------------------------------------------------------------------------------- Total loans $1,104,721 $1,732,994 $849,545 $3,687,260 ------------------------------------------------------------------------------- During 2000, loans increased $726.2 million, or 24% from $3.0 billion to $3.7 billion. At December 31, 2000, loans represented 50% of total deposits and 44% of total assets. All segments of the loan portfolio experienced growth in 2000, including loans secured by commercial real estate, commercial loans, and consumer loans. The Company has traditionally been an active provider of commercial real estate loans to creditworthy local borrowers, with such loans secured by properties within the Company's primary trade area. At December 31, 2000, $685.9 million, or 45%, of commercial real estate loans (other than construction) were secured by owner-occupied properties. Commercial loan growth was led by activity in the middle market and healthcare sectors. Growth in consumer loans was due primarily to home equity loans and home equity lines of credit. The Company securitized $106.5 million and $252.4 million of residential mortgage loans during the third and fourth quarter, respectively, and included the securities in its held to maturity investment portfolio. Commercial real estate construction loans increased $195.1 million to $380.8 million in 2000. At December 31, 2000, construction loans for 1-4 family residential dwellings totaled $13.7 million and construction loans secured by commercial properties amounted to $146.6 million. The balance of $220.5 million was for land development, of which $131.0 million was residential. As of December 31, 2000, there were no concentrations of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions. Non-Performing Loans and Assets Non-performing assets (non-performing loans and other real estate, excluding loans past due 90 days or more and still accruing interest) at December 31, 2000 were $16.6 million or .20% of total assets, as compared to $12.2 million or .18% of total assets at December 31, 1999. Total non-performing loans (non-accrual loans, and restructured loans excluding loans past due 90 days or more and still accruing interest) at December 31, 2000 were $13.6 million as compared to $8.7 million a year ago. The Company generally places a loan on non-accrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. Generally loans past due 90 days are placed on non-accrual status, unless the loan is both well secured and in the process of collection. At December 31, 2000, loans past due 90 days or more and still accruing interest amounted to $489 thousand, compared to $499 thousand at December 31, 1999. Additional loans considered as potential problem loans ($36.3 million at December 31, 2000) by the Company's internal loan review department have been evaluated as to risk exposure in determining the adequacy of the allowance for loan losses. Other real estate (ORE) totaled $3.0 million at December 31, 2000 as compared to $3.5 million at December 31, 1999. These properties have been written down to the lower of cost or fair value less disposition costs. The Company has on an ongoing basis updated appraisals on loans secured by real estate, particularly those categorized as non-performing loans and potential problem loans. In those instances where updated appraisals reflect reduced collateral values, an evaluation of the borrowers' overall financial condition is made to determine the need, if any, for possible writedowns or appropriate additions to the allowance for loan losses. 48 Management's Discussion and Analysis of Financial Condition and Results of Operations The following summary presents information regarding non-performing loans and assets as of December 31, 1996 through 2000.
----------------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------- (dollars in thousands) Non-accrual loans (1): Commercial $4,955 $2,254 $2,655 $2,937 $1,746 Consumer 1,295 674 831 703 1,164 Real estate Construction 1,459 55 1,345 2,156 Mortgage 5,840 5,230 4,849 7,886 6,378 ----------------------------------------------------------------------------------------- Total non-accrual loans 13,549 8,213 8,335 12,871 11,444 ----------------------------------------------------------------------------------------- Restructured loans (1): Commercial 11 277 17 19 21 Real estate mortgage 82 192 217 481 ----------------------------------------------------------------------------------------- Total restructured loans 93 469 234 19 502 ----------------------------------------------------------------------------------------- Total non-performing loans 13,642 8,682 8,569 12,890 11,946 ----------------------------------------------------------------------------------------- Other real estate 2,959 3,523 6,081 5,845 8,252 ----------------------------------------------------------------------------------------- Total non-performing assets $16,601 $12,205 $14,650 $18,735 $20,198 ----------------------------------------------------------------------------------------- Non-performing assets as a percent of total assets 0.20% 0.18% 0.27% 0.43% 0.56% ----------------------------------------------------------------------------------------- Loans past due 90 days or more and still accruing interest $489 $499 $1,029 $818 $948 ----------------------------------------------------------------------------------------- (1) Interest income of approximately $1,731,000, $986,000, $1,030,000, $1,434,000 and $1,263,000 would have been recorded in 2000, 1999, 1998, 1997 and 1996 respectively, on non-performing loans in accordance with their original terms. Actual interest recorded on these loans amounted to $525,000 in 2000, $255,000 in 1999, $266,000 in 1998, $323,000 in 1997, and $262,000 in 1996.
Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Management has established a loan loss reserve which it believes is adequate for estimated losses in its loan portfolio. Based on an evaluation of the loan portfolio, management presents a quarterly review of the loan loss reserve to the Board of Directors, indicating any changes in the reserve since the last review and any recommendations as to adjustments in the reserve. In making its evaluation, management considers the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of non-performing loans and related collateral security, the evaluation of its loan portfolio by the internal loan review department and the annual examination of the Company's financial statements by its independent auditors. Charge-offs occur when loans are deemed to be uncollectible. Through an internal loan review function that operates independently of the lending function, management employs several methodologies to measure the appropriate level of loan loss reserves. Those methodologies include migration analyses based on historical experience and the related internal ratings of loans charged off, and an allocation methodology based on the review of individual loans, individual loan classifications, and collateral values. When utilizing the allocation methodology, an unallocated portion of the reserve is determined based on management's assessment of general national, regional, and local economic conditions. This determination inherently involves a higher degree of subjectivity, and considers risk factors that may not have yet manifested themselves in the Company's historical loss experience or other methodology criteria. During 2000, net charge-offs amounted to $3.6 million, or .11% of average loans outstanding for the year, compared to $2.1 million or .08% of average loans outstanding for 1999. During 2000, the Company recorded provisions of $13.9 million to the allowance for loan losses compared to $9.2 million for 1999. At December 31, 2000, the allowance aggregated $48.7 million or 1.32% of total loans and provided coverage of 357% of non-performing loans. The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
---------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------- (dollars in thousands) Balance at beginning of period $38,382 $31,265 $24,150 $20,397 $17,919 Provisions charged to operating expenses 13,931 9,175 8,762 5,805 5,798 ---------------------------------------------------------------------------------------------------- 52,313 40,440 32,912 26,202 23,717 ---------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 313 551 418 360 378 Consumer 249 286 305 415 276 Commercial real estate 14 132 764 144 95 ---------------------------------------------------------------------------------------------------- Total recoveries 576 969 1,487 919 749 ---------------------------------------------------------------------------------------------------- Loans charged-off: Commercial (2,936) (1,599) (1,281) (1,481) (1,647) Consumer (1,220) (1,078) (1,352) (1,344) (1,119) Commercial real estate (53) (350) (501) (146) (1,303) ---------------------------------------------------------------------------------------------------- Total charged-off (4,209) (3,027) (3,134) (2,971) (4,069) ---------------------------------------------------------------------------------------------------- Net charge-offs (3,633) (2,058) (1,647) (2,052) (3,320) ---------------------------------------------------------------------------------------------------- Balance at end of period $48,680 $38,382 $31,265 $24,150 $20,397 ---------------------------------------------------------------------------------------------------- Net charge-offs as a percentage of average loans outstanding 0.11% 0.08% 0.08% 0.13% 0.24% ---------------------------------------------------------------------------------------------------- Allowance for loan losses as a percentage of year-end loans 1.32% 1.30% 1.37% 1.45% 1.37% ----------------------------------------------------------------------------------------------------
49 Management's Discussion and Analysis of Financial Condition and Results of Operations Allocation of the Allowance for Loan Losses The following table details the allocation of the allowance for loan losses to the various categories. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any segment of loans.
------------------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses at December 31, ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------- % Gross % Gross % Gross % Gross % Gross Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Commercial $20,396 24% $14,268 23% $ 7,738 21% $ 5,236 20% $ 4,108 21% Consumer 4,632 34 4,120 40 7,800 41 6,406 40 4,808 39 Commercial real estate 23,652 42 19,994 37 15,727 38 12,508 40 11,481 40 ------------------------------------------------------------------------------------------------------------------------- $48,680 100% $38,382 100% $31,265 100% $24,150 100% $20,397 100% -------------------------------------------------------------------------------------------------------------------------
Investment Securities The following table summarizes the book value of securities available for sale and securities held to maturity by the Company as of the dates shown. ----------------------------------------------------------------- December 31, ----------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------- (dollars in thousands) U.S. Government agency and mortgage-backed obligations $1,900,912 $1,582,933 $1,154,765 Obligations of state and political subdivisions 46,544 42,182 26,041 Equity securities 16,825 9,107 15,397 Other 57,045 30,035 108,801 ----------------------------------------------------------------- Securities available for sale $2,021,326 $1,664,257 $1,305,004 ----------------------------------------------------------------- U.S. Government agency and mortgage-backed obligations $1,437,993 $1,134,115 $1,165,290 Obligations of state and political subdivisions 42,938 35,667 30,654 Other 32,525 32,110 24,930 ----------------------------------------------------------------- Securities held to maturity $1,513,456 $1,201,892 $1,220,874 ----------------------------------------------------------------- Consistent with accounting and regulatory pronouncements, the Company has segregated a portion of its investment portfolio as securities available for sale. The balance of the investment portfolio (excluding trading securities) is categorized as securities held to maturity. Investment securities are classified as available for sale if they might be sold in response to changes in interest rates, prepayment risk, the Company's income tax position, the need to increase regulatory capital, liquidity needs or other similar factors. These securities are carried at fair market value. Investment securities are classified as held to maturity when the Company has the intent and ability to hold those securities to maturity. Securities held to maturity are carried at cost and adjusted for accretion of discounts and amortization of premiums. Trading securities are carried at market value, with gains and losses, both realized and unrealized, included in other operating income. In total, investment securities increased $660.1 million from $3.0 billion to $3.6 billion at December 31, 2000. Deposit growth and other funding sources were used to increase the Company's investment portfolio. The available for sale portfolio increased $357.1 million to $2.0 billion, and the securities held to maturity portfolio increased $311.6 million to $1.5 billion at year-end 2000. The portfolio of trading securities decreased $8.5 million from year-end 1999 to $109.3 million at year-end 2000. At December 31, 2000, the average life and duration of the investment portfolio were approximately 6.9 years and 4.9 years, respectively, as compared to 6.3 years and 4.5 years, respectively, at December 31, 1999. At December 31, 2000 the yield on the portfolio was 6.80%, up from 6.53% at December 31, 1999. The Company's investment portfolio consists primarily of U.S. Government agency and mortgage-backed obligations. These securities have little, if any, credit risk since they are either backed by the full faith and credit of the U.S. Government, or are guaranteed by an agency of the U.S. Government, or are AAA rated. These investment securities carry fixed coupons whose rate does not change over the life of the securities. Certain securities are purchased at premiums or discounts. Their yield will change depending on any change in the estimated rate of prepayments. The Company amortizes premiums and accretes discounts over the estimated average life of the securities. Changes in the estimated average 50 Management's Discussion and Analysis of Financial Condition and Results of Operations life of the investment portfolio will lengthen or shorten the period in which the premium or discount must be amortized or accreted, thus affecting the Company's investment yields. For the year ended December 31, 2000, the yield on the investment portfolio was 6.76%, an increase of 37 basis points from 6.39% in fiscal 1999. At December 31, 2000, the net unrealized depreciation in securities available for sale included in stockholders' equity totaled $5.2 million, net of tax, compared to net unrealized depreciation of $39.7 million, net of tax, at December 31, 1999. The contractual maturity distribution and weighted average yield of the Company's investment portfolio (excluding equity and trading securities) at December 31, 2000, are summarized in the following table. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment and has been tax effected on tax-exempt obligations.
--------------------------------------------------------------------------------------------------------------------------- December 31, 2000 --------------------------------------------------------------------------------------------------------------------------- Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total --------------------------------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Securities available for sale: U.S. Government agency and mortgage-backed obligations $34,683 6.29% $47,817 6.05% $26,490 6.33% $1,791,922 6.82% $1,900,912 6.79% Obligations of state and political subdivisions 4,796 7.20 17,440 6.97 20,509 6.50 3,799 6.56 46,544 6.75 Other securities 2,882 5.56 7,230 9.04 33,864 7.31 13,069 9.51 57,045 7.95 --------------------------------------------------------------------------------------------------------------------------- $42,361 6.39% $72,487 6.57% $80,863 6.78% $1,808,790 6.84% $2,004,501 6.82% --------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Government agency and mortgage-backed obligations $89,000 7.21% $37,872 6.42% $45,343 6.44% $1,265,778 6.78% $1,437,993 6.79% Obligations of state and political subdivisions 42,103 7.01 835 7.31 42,938 7.02 Other securities 31,716 6.00 650 9.50 159 6.81 32,525 6.07 --------------------------------------------------------------------------------------------------------------------------- $162,819 6.92% $38,522 6.48% $46,178 6.46% $1,265,937 6.78% $1,513,456 6.78% ---------------------------------------------------------------------------------------------------------------------------
51 Management's Discussion and Analysis of Financial Condition and Results of Operations Deposits Total deposits at December 31, 2000 were $7.4 billion, an increase of $1.8 billion or 32% above total deposits of $5.6 billion at December 31, 1999. The Company remains a deposit-driven financial institution with emphasis on core deposit accumulation and retention as a basis for sound growth and profitability. The Company regards core deposits as all deposits other than certificates of deposit, retail and public, in excess of $100 thousand. Deposits in the various core categories increased $1.4 billion from year-end 1999 to year-end 2000. Certificates of deposit in excess of $100 thousand, retail and public, increased $403.6 million from year-end 1999. Total deposits averaged $6.5 billion for 2000, an increase of $1.3 billion or 24% above the 1999 average. The average balance of noninterest-bearing demand deposits in 2000 was $1.5 billion, a $316.9 million or 26% increase over the average balance for 1999. The average total balance of passbook and statement savings accounts increased $340.7 million, or 34% compared to the prior year. The average balance of interest-bearing demand accounts (money market and N.O.W. accounts) for 2000 was $2.3 billion, a $484.4 million or 26% increase over the average balance for the prior year. The average balance of time deposits for 2000 was $1.3 billion, a $129.9 million increase over the average balance for 1999. For 2000, the cost of total deposits was 2.84% as compared to 2.38% in 1999. The Company believes that its record of sustaining core deposit growth is reflective of the Company's retail approach to banking which emphasizes a combination of free checking accounts (subject to a small minimum balance requirement), convenient branch locations, extended hours of operation, quality service, and active marketing. The average balances and weighted average rates of deposits for each of the years 2000, 1999 and 1998 are presented below.
------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Demand deposits: Noninterest-bearing $1,519,313 $1,202,412 $ 927,601 Interest-bearing (money market and N.O.W. accounts) 2,319,447 3.15% 1,835,011 2.47% 1,397,154 2.53% Savings deposits 1,352,364 2.73 1,011,642 2.06 868,311 2.39 Time deposits/public funds 1,332,752 5.63 1,202,849 4.91 1,169,691 5.36 ------------------------------------------------------------------------------------------------------------------------- Total deposits $6,523,876 $5,251,914 $4,362,757 -------------------------------------------------------------------------------------------------------------------------
The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 2000, 1999 and 1998 is presented below:
------------------------------------------------------------------------------------------------------------------------- Maturity 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 3 months or less $641,342 $323,029 $332,300 3 to 6 months 98,763 49,983 47,123 6 to 12 months 54,489 22,733 33,077 Over 12 months 12,420 7,628 9,172 ------------------------------------------------------------------------------------------------------------------------- Total $807,014 $403,373 $421,672 -------------------------------------------------------------------------------------------------------------------------
52 Management's Discussion and Analysis of Financial Condition and Results of Operations Interest Rate Sensitivity and Liquidity The Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The guidelines established by ALCO are reviewed by the Company's Board of Directors. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time ("GAP"), typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. As a result, the Company's GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. The following table illustrates the GAP position of the Company as of December 31, 2000.
--------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Gaps December 31, 2000 --------------------------------------------------------------------------------------------------------------- 1-90 91-180 181-365 1-5 Beyond Days Days Days Years 5 Years Total --------------------------------------------------------------------------------------------------------------- (dollars in millions) Rate sensitive: Interest-earning assets Loans $1,511.9 $70.7 $149.9 $1,342.3 $640.7 $3,715.5 Investment securities 192.9 179.7 341.5 1,798.8 1,131.2 3,644.1 Federal funds sold 52.0 52.0 --------------------------------------------------------------------------------------------------------------- Total interest- earning assets 1,756.8 250.4 491.4 3,141.1 1,771.9 7,411.6 --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Transaction accounts 1,265.9 2,799.3 4,065.2 Time deposits 783.2 246.1 322.3 181.5 1,533.1 Other borrowed money 283.7 283.7 Long-term debt 23.0 57.5 80.5 --------------------------------------------------------------------------------------------------------------- Total interest- bearing liabilities 2,332.8 246.1 322.3 204.5 2,856.8 5,962.5 --------------------------------------------------------------------------------------------------------------- Period gap (576.0) 4.3 169.1 2,936.6 (1,084.9) $1,449.1 --------------------------------------------------------------------------------------------------------------- Cumulative gap $(576.0) $(571.7) $(402.6) $2,534.0 $1,449.1 --------------------------------------------------------------------------------------------------------------- Cumulative gap as a percentage of total interest-earning assets (7.8)% (7.7)% (5.4)% 34.2% 19.6% ---------------------------------------------------------------------------------------------------------------
Management believes that the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. The Company's income simulation model analyzes interest rate sensitivity by projecting net income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a proportionate 200 basis point change during the next year, with rates remaining constant in the second year. 53 Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's Asset/Liability Committee (ALCO) policy has established that interest income sensitivity will be considered acceptable if net income in the above interest rate scenario is within 15% of net income in the flat rate scenario in the first year and within 30% over the two year time frame. At December 31, 2000, the Company's income simulation model indicates net income would increase by 5.0% and 2.6% in the first year and over a two year time frame, respectively, if rates decreased as described above, as compared to an increase of 4.8% and 1.0%, respectively, at December 31, 1999. The model projects that net income would decrease by 7.9% and 8.1% in the first year and over a two year time frame, respectively, if rates increased as described above, as compared to a decrease of 6.7% and 5.6%, respectively, at December 31, 1999. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. In the event the model indicates an unacceptable level of risk, the Company could undertake a number of actions that would reduce this risk, including the sale of a portion of its available for sale investment portfolio, the use of risk management strategies such as interest rate swaps and caps, or the extension of the maturities of its short-term borrowings. Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all the Company's assets and liabilities, as well as any off balance sheet items. The model calculates the market value of the Company's assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point change in rates. The Company's ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate 200 basis point change would result in the loss of 60% or more of the excess of market value over book value in the current rate scenario. At December 31, 2000, the market value of equity indicates an acceptable level of interest rate risk. The market value of equity model reflects certain estimates and assumptions regarding the impact on the market value of the Company's assets and liabilities given an immediate 200 basis point change in interest rates. One of the key assumptions is the market value assigned to the Company's core deposits, or the core deposit premium. The Company has completed and updated comprehensive core deposit studies in order to assign its own core deposit premiums as permitted by regulation. The studies have consistently confirmed management's assertion that the Company's core deposits have stable balances over long periods of time, and are generally insensitive to changes in interest rates. Thus, these core deposit balances provide an internal hedge to market value fluctuations in the Company's fixed rate assets. Management believes the core deposit premiums produced by its core deposit study and utilized in its market value of equity model at December 31, 2000 provide an accurate assessment of the Company's interest rate risk. Liquidity involves the Company's ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other borrowing needs, to maintain reserve requirements and to otherwise operate the Company on an ongoing basis. The Company's liquidity needs are primarily met by growth in core deposits, its cash and federal funds sold position, and cash flow from its amortizing investment and loan portfolios. If necessary, the Company has the ability to raise liquidity through collateralized borrowings, FHLB advances, or the sale of its available for sale investment portfolio. During 2000, deposit growth and short-term borrowings were used to fund growth in the loan portfolio and purchase additional investment securities. Short-Term Borrowings Short-term borrowings, or other borrowed money, which consist primarily of securities sold under agreement to repurchase, federal funds purchased, and lines of credit, including Federal Home Loan Bank advances, were used in 2000 to meet short-term liquidity needs. For 2000, short-term borrowings averaged $268.3 million as compared to $183.6 million in 1999. The average rate on the Company's short-term borrowings was 6.31% and 5.38% during 2000 and 1999, respectively. As of December 31, 2000, short-term borrowings included $283.7 million of securities sold under agreements to repurchase at an average rate of 6.70%. Long-Term Debt On June 9, 1997, the Company issued $57.5 million of 8.75% Trust Capital Securities through Commerce Capital Trust I, a newly formed Delaware business trust subsidiary of the Company. All $57.5 million of the Trust Capital Securities qualify as Tier I capital for regulatory capital purposes. Proceeds of this offering were earmarked for general corporate purposes, including additional capitalization of existing banking subsidiaries. 54 Management's Discussion and Analysis of Financial Condition and Results of Operations Stockholders' Equity and Dividends At December 31, 2000, stockholders' equity totaled $492.2 million, up $135.4 million or 38% over stockholders' equity of $356.8 million at December 31, 1999. This increase was due to the Company's net income for the year, shares issued under dividend reinvestment and compensation and benefit plans, and unrealized appreciation on securities available for sale. Stockholders' equity as a percent of total assets was 5.93% at December 31, 2000, as compared to 5.38% at December 31, 1999. Risk-based capital standards issued by bank regulatory authorities in the United States attempt to relate a banking company's capital to the risk profile of its assets and provide the basis for which all banking companies and banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes stockholders' equity (adjusted for goodwill, other intangibles, and the unrealized appreciation/depreciation in securities available for sale) plus the Trust Capital Securities. Total capital is comprised of all of the components of Tier 1 capital plus qualifying subordinated debt instruments and the reserve for possible loan losses. Banking regulators have also issued leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted average assets. The following table provides a comparison of the Company's risk-based capital ratios and leverage ratio to the minimum regulatory requirements for the periods indicated. ------------------------------------------------------------------ Minimum December 31, Regulatory Requirements ------------------------------------------------------------------ 2000 1999 2000 1999 ------------------------------------------------------------------ Risk based capital ratios: Tier 1 10.79% 11.40% 4.00% 4.00% Total capital 11.92 12.72 8.00 8.00 Leverage ratio 6.92 7.02 4.00 4.00 ------------------------------------------------------------------ The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which became law in December of 1991, required each federal banking agency including the Board of Governors of the Federal Reserve System ("FRB"), to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. This law also requires each federal banking agency, including the FRB, to specify, by regulation, the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." At December 31, 2000, the Company's consolidated capital levels and each of the Company's banking subsidiaries met the regulatory definition of a "well capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%. The Company's common stock is listed for trading on the New York Stock Exchange under the symbol CBH. The quarterly market price ranges and dividends declared per common share for each of the last two years are shown in the table below. As of February 1, 2001, there were approximately 20,000 holders of record of the Company's common stock. ------------------------------------------------------------ Common Share Data ------------------------------------------------------------ Market Prices Cash Dividends ---------------- High Low Per Share ------------------------------------------------------------ 2000 Quarter Ended December 31 $70.00 $50.69 $0.24500 September 30 58.50 46.63 0.24500 June 30 48.94 37.88 0.24500 March 31 39.63 31.31 0.23333 1999 Quarter Ended December 31 $44.34 $38.16 $0.20952 September 30 43.63 38.45 0.20952 June 30 43.58 37.80 0.20952 March 31 47.50 39.28 0.19955 ------------------------------------------------------------ The Company offers a Dividend Reinvestment and Stock Purchase Plan by which dividends on the Company's Common Stock and optional monthly cash payments may be invested in Common Stock at a 3% discount (subject to change) to the market price and without payment of brokerage commissions. Results of Operations - 1999 versus 1998 Net income for 1999 was $66.0 million compared to $42.2 million in 1998. Diluted net income per common share was $2.17 compared to $1.42 per common share for the prior year. Net interest income on a tax-equivalent basis for 1999 amounted to $249.6 million, an increase of $52.0 million, or 26% over 1998. Interest income on a tax-equivalent basis increased $64.1 million or 20% to $391.6 million in 1999. This increase was primarily related to volume increases in the loan and investment portfolios. Interest expense for 1999 rose $12.1 million to $142.1 million from $130.0 million in 1998. This 55 Management's Discussion and Analysis of Financial Condition and Results of Operations increase was primarily related to increases in the Company's levels of deposits. The provision for loan losses was $9.2 million in 1999 compared to $8.8 million in the prior year. For 1999, noninterest income totaled $114.6 million, an increase of $18.3 million or 19% from 1998. The increase was due primarily to increased other operating income, which rose $9.8 million from 1998, including an increase of $7.1 million in revenues from Commerce National Insurance. In addition, deposit charges and service fees increased $8.8 million over 1998 due primarily to higher transaction volumes, and net investment securities gains were $310 thousand lower in 1999 than the prior year. Noninterest expenses totaled $252.5 million for 1999, an increase of $38.6 million, or 18% over 1998. Contributing to this increase was the addition of 24 new branches during 1999 and the expansion of Commerce National Insurance. With the addition of these new offices, staff, facilities, marketing and related expenses rose accordingly. Other noninterest expenses rose $4.8 million to $40.7 million in 1999. This increase resulted primarily from higher bank-card related service charges, increased business development expenses, and higher provisions for non-credit-related losses. Mergers and Acquisitions During 2000, the Company acquired Traber and Vreeland, Inc. and Guarantee Service Agency, Inc. t/a Maywood Agency, insurance brokerage agencies, which were merged with and into Commerce National Insurance. The Company issued approximately 301,000 shares of common stock in exchange for all of the outstanding shares of these agencies. The transactions were accounted for as poolings of interests. However, the Company did not restate the financial statements of the periods prior to the acquisitions as the changes, in the aggregate, were immaterial. 56 Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets
================================================================================================================================ December 31, -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 443,918 $ 317,624 Federal funds sold 52,000 5,300 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents 495,918 322,924 Loans held for sale 41,791 5,704 Trading securities 109,306 117,837 Securities available for sale 2,021,326 1,664,257 Securities held to maturity 1,513,456 1,201,892 (market value 2000-$1,503,202; 1999-$1,155,447) Loans 3,687,260 2,961,088 Less allowance for loan losses 48,680 38,382 ----------------------------------------------------------------------------------------------------------- 3,638,580 2,922,706 Bank premises and equipment, net 276,097 198,515 Other assets 200,042 201,958 ----------------------------------------------------------------------------------------------------------- $8,296,516 $6,635,793 -------------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits: Demand: Interest-bearing $2,628,358 $2,063,899 Noninterest-bearing 1,789,371 1,420,865 Savings 1,436,800 1,054,791 Time 1,533,065 1,069,365 ----------------------------------------------------------------------------------------------------------- Total deposits 7,387,594 5,608,920 Other borrowed money 283,714 558,092 Other liabilities 52,484 31,525 Trust Capital Securities - Commerce Capital Trust I 57,500 57,500 Long-term debt 23,000 23,000 ----------------------------------------------------------------------------------------------------------- 7,804,292 6,279,037 -------------------------------------------------------------------------------------------------------------------------------- Stockholders' Common stock, 31,761,453 shares issued 49,627 44,418 Equity (29,844,314 shares in 1999) Capital in excess of par or stated value 422,375 321,443 Retained earnings 27,083 32,263 Accumulated other comprehensive income (5,239) (39,744) ----------------------------------------------------------------------------------------------------------- 493,846 358,380 Less treasury stock, at cost 1,622 1,624 ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 492,224 356,756 ----------------------------------------------------------------------------------------------------------- $8,296,516 $6,635,793 ----------------------------------------------------------------------------------------------------------- See accompanying notes. 57
Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income
================================================================================================================================ Year Ended December 31, -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------------- Interest Interest and fees on loans $292,066 $215,170 $167,914 Income Interest on investment securities 208,769 170,300 154,164 Other interest 4,465 978 2,565 ------------------------------------------------------------------------------------------------------------- Total interest income 505,300 386,448 324,643 ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Interest Interest on deposits: Expense Demand 72,975 45,274 35,477 Savings 36,935 20,835 20,672 Time 75,046 59,021 62,692 ------------------------------------------------------------------------------------------------------------- Total interest on deposits 184,956 125,130 118,841 Interest on other borrowed money 16,943 9,880 4,014 Interest on long-term debt 6,471 7,071 7,127 ------------------------------------------------------------------------------------------------------------- Total interest expense 208,370 142,081 129,982 ------------------------------------------------------------------------------------------------------------- Net interest income 296,930 244,367 194,661 Provision for loan losses 13,931 9,175 8,762 ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 282,999 235,192 185,899 -------------------------------------------------------------------------------------------------------------------------------- Noninterest Deposit charges and service fees 56,306 44,196 35,343 Income Other operating income 91,241 67,818 58,042 Net investment securities gains 3,213 2,582 2,892 ------------------------------------------------------------------------------------------------------------- Total noninterest income 150,760 114,596 96,277 ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Noninterest Salaries 123,476 101,650 87,078 Expense Benefits 25,323 20,232 18,475 Occupancy 31,419 22,407 18,565 Furniture and equipment 40,436 31,659 24,995 Office 23,548 21,356 16,974 Audit and regulatory fees and assessments 3,256 2,623 2,246 Marketing 11,706 10,155 8,451 Other real estate (net) 1,042 1,786 1,348 Other 55,151 40,655 35,818 ------------------------------------------------------------------------------------------------------------- Total noninterest expenses 315,357 252,523 213,950 ------------------------------------------------------------------------------------------------------------- Income before income taxes 118,402 97,265 68,226 Provision for federal and state income taxes 38,355 31,305 26,071 ------------------------------------------------------------------------------------------------------------- Net income $ 80,047 $ 65,960 $ 42,155 ------------------------------------------------------------------------------------------------------------- Net income per common and common equivalent share: Basic $ 2.59 $ 2.26 $ 1.49 ------------------------------------------------------------------------------------------------------------- Diluted $ 2.49 $ 2.17 $ 1.42 ------------------------------------------------------------------------------------------------------------- Average common and common equivalent shares outstanding: Basic 30,878 29,155 28,254 ------------------------------------------------------------------------------------------------------------- Diluted 32,111 30,465 29,662 ------------------------------------------------------------------------------------------------------------- Cash dividends declared, common stock $ 0.97 $ 0.83 $ 0.87 ------------------------------------------------------------------------------------------------------------- See accompanying notes.
58 Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
============================================================================================================================== Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------ Operating Net income $80,047 $ 65,960 $ 42,155 Activities Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 13,931 9,175 8,762 Provision for depreciation, amortization and accretion 32,596 28,186 26,640 Gains on sales of securities available for sale (3,213) (2,582) (2,892) Proceeds from sales of mortgages held for sale 56,101 111,055 67,125 Originations of mortgages held for sale (92,188) (94,341) (61,629) Net loan (chargeoffs) (3,633) (2,058) (1,647) Net decrease (increase) in trading securities 8,531 (32,478) (77,448) Increase in other assets (17,494) (60,142) (44,022) Increase (decrease) in other liabilities 26,271 (23,064) 48,226 Deferred income tax benefit (2,812) (3,468) (3,115) ----------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating 98,137 (3,757) 2,155 activities Investing Proceeds from the sales of securities available for sale 410,541 398,274 435,488 Activities Proceeds from the maturity of securities available for sale 345,160 313,373 404,927 Proceeds from the maturity of securities held to maturity 174,124 241,690 374,540 Purchase of securities available for sale (1,055,694) (1,002,738) (807,276) Purchase of securities held to maturity (127,194) (236,623) (616,780) Net increase in loans (1,085,090) (810,530) (617,341) Purchases of premises and equipment (109,701) (73,303) (48,320) ----------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,447,854) (1,169,857) (874,762) Financing Net increase in demand and savings deposits 1,314,974 721,147 976,959 Activities Net increase (decrease) in time deposits 463,700 (41,035) 167,272 Net (decrease) increase in other borrowed money (274,378) 530,247 (195,455) Issuance of common stock 1,795 Dividends paid (29,761) (23,476) (23,062) Proceeds from issuance of common stock under dividend reinvestment and other stock plans 53,670 31,428 9,428 Other (5,494) 612 8,509 ----------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,522,711 1,218,923 945,446 Increase in cash and cash equivalents 172,994 45,309 72,839 Cash and cash equivalents at beginning of year 322,924 277,615 204,776 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $495,918 $ 322,924 $ 277,615 ----------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $206,144 $ 141,810 $ 124,535 Income taxes 36,373 26,753 29,755 Other noncash activities: Transfer of securities to securities available for sale 91,010 Securitization of loans 358,918 129,768 ----------------------------------------------------------------------------------------------------------- See accompanying notes. 59
Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
==================================================================================================================================== Years ended December 31, 2000, 1999 and 1998 Capital in Accumulated Excess of Other Par or Compre- (in thousands, except per share amounts) Common Preferred Stated Retained Commitment Treasury hensive Stock Stock Value Earnings to ESOP Stock Income Total ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1997 $29,652 $7,506 $190,166 $52,755 $(2,308) $(1,624) $ 3,753 $279,900 Acquisition of investment firm/insurance brokerage agency (735 shares) 794 (552) 7,997 8,239 ------------------------------------------------------------------------------------------------------------------------------------ As adjusted balance at January 1, 1998 30,446 7,506 189,614 60,752 (2,308) (1,624) 3,753 288,139 Net income 42,155 42,155 Other comprehensive income, net of tax Unrealized gain on securities (pre-tax $5,005) 3,157 3,157 Reclassification adjustment (pre-tax $147) 96 96 ---------- Other comprehensive income 3,253 ---------- Total comprehensive income 45,408 Common stock dividends and cash paid in lieu of fractional shares (5,671 shares) 8,860 29,449 (38,395) (86) Cash dividends paid (22,976) (22,976) Shares issued under dividend reinvestment and compensation and benefit plans (429 shares) 671 10,629 11,300 Convert preferred C stock to common stock (647 shares) 1,011 (7,506) 6,495 0 Other 741 1,026 1,767 ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1998 $40,988 $ 0 $236,928 $41,536 $(1,282) $(1,624) $ 7,006 $323,552 Acquisition of insurance brokerage agencies (74 shares) 110 212 322 ------------------------------------------------------------------------------------------------------------------------------------ As adjusted balance at January 1, 1999 41,098 0 237,140 41,536 (1,282) (1,624) 7,006 323,874 Net income 65,960 65,960 Other comprehensive income, net of tax Unrealized loss on securities (pre-tax ($71,923)) (45,431) (45,431) Reclassification adjustment (pre-tax ($1,919)) (1,319) (1,319) ---------- Other comprehensive income (46,750) ---------- Total comprehensive income 19,210 Common stock dividend and cash paid in lieu of fractional shares (1,145 shares) 1,790 49,968 (51,890) (132) Cash dividends paid (23,343) (23,343) Shares issued under dividend reinvestment and compensation and benefit plans (980 shares) 1,530 29,897 31,427 Other 4,438 1,282 5,720 ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1999 $44,418 $ 0 $321,443 $32,263 $ 0 $(1,624) $(39,744) $356,756 Acquisition of insurance brokerage agencies (301 shares) 470 (450) (5,519) (5,499) ------------------------------------------------------------------------------------------------------------------------------------ As adjusted balance at January 1, 2000 44,888 0 320,993 26,744 0 (1,624) (39,744) 351,257 Net income 80,047 80,047 Other comprehensive income, net of tax Unrealized gain on securities (pre-tax $52,382) 33,837 33,837 Reclassification adjustment (pre-tax $1,027) 668 668 ---------- Other comprehensive income 34,505 ---------- Total comprehensive income 114,552 Common stock dividend and cash paid in lieu of fractional shares (1,417 shares) 2,214 47,734 (50,031) (83) Cash dividends paid (29,678) (29,678) Shares issued under dividend reinvestment and compensation and benefit plans (1,615 shares) 2,523 51,147 53,670 Other 2 2,501 1 2 2,506 ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2000 $49,627 $ 0 $422,375 $27,083 $ 0 $(1,622) $ (5,239) $492,224 ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes.
60 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Commerce Bancorp, Inc. (the Company) and its wholly-owned subsidiaries, Commerce Bank, N.A. (Commerce NJ), Commerce Bank/Pennsylvania, N.A. (Commerce PA), Commerce Bank/Shore, N.A. (Commerce Shore), Commerce Bank/North (Commerce North), Commerce Bank/Central, N.A. (Commerce Central), Commerce Bank/Delaware, N.A. (Commerce Delaware), Commerce National Insurance Services, Inc. (Commerce National Insurance), Commerce Capital Trust I, and Commerce Capital Markets, Inc. (CCMI). All material intercompany transactions have been eliminated. Certain amounts from prior years have been reclassified to conform with 2000 presentation. The Company is a multi-bank holding company headquartered in Cherry Hill, New Jersey, operating primarily in the metropolitan Philadelphia, New Jersey, and Delaware markets. Through its subsidiaries, the Company provides retail and commercial banking services, corporate trust services, municipal bond underwriting services, and insurance brokerage services. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investment Securities Trading account securities are carried at market value. Gains and losses, both realized and unrealized, are included in other operating income. Trading gains were $8.4 million, $7.8 million, and $5.6 million in 2000, 1999 and 1998, respectively. Investment securities are classified as held to maturity when the Company has the intent and ability to hold those securities to maturity. Securities held to maturity are stated at cost and adjusted for accretion of discounts and amortization of premiums. Those securities that might be sold in response to changes in market interest rates, prepayment risk, the Company's income tax position, the need to increase regulatory capital, or similar other factors are classified as available for sale. Available for sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for accretion of discounts and amortization of premiums. Realized gains and losses are determined on the specific certificate method and are included in noninterest income. Loans Loans are stated at principal amounts outstanding, net of deferred loan origination fees and costs. Interest income on loans is accrued and credited to interest income monthly as earned. Loan origination fees are generally considered as adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Loans are placed on a non-accrual status and cease accruing interest when loan payment performance is deemed unsatisfactory. However, all loans past due 90 days are placed on non-accrual status, unless the loan is both well secured and in the process of collection. Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Based upon management's evaluation of the loan portfolio, the allowance is maintained at 61 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements a level considered adequate to absorb estimated inherent losses in the loan portfolio. The level of the allowance is based on an evaluation of the risk characteristics included in the loan portfolio, including such factors as the volume and composition of the portfolio, historical loan loss experience, present and prospective financial condition of borrowers, general national and local economic conditions, and other relevant factors. Bank Premises and Equipment Bank premises and equipment are carried at cost less accumulated depreciation. Depreciation and amortization are determined on the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. Other Real Estate (ORE) Real estate acquired in satisfaction of a loan is reported in other assets at the lower of cost or fair value less disposition costs. Properties acquired by foreclosure or deed in lieu of' foreclosure are transferred to ORE and recorded at the lower of cost or fair value less disposition costs based on their appraised value at the date actually or constructively received. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent adjustments to the carrying values of ORE properties are charged to operating expense. Intangible Assets The excess of cost over fair value of net assets acquired (goodwill) is included in other assets and is being amortized on a straight-line basis over the period of expected benefit, which approximates 15 years. Goodwill amounted to $2.2 million and $2.5 million at December 31, 2000 and 1999, respectively. Other intangible assets are amortized on a straight-line basis over 10 to 15 year lives. Other intangibles amounted to $1.6 million and $1.8 million at December 31, 2000 and 1999, respectively. Income Taxes The provision for income taxes is based on current taxable income. When income and expenses are recognized in different periods for book purposes, deferred taxes are provided. Restriction on Cash and Due From Banks The Banks are required to maintain reserve balances with the Federal Reserve Bank. The weighted average amount of the reserve balances for 2000 and 1999 were approximately $7.1 million and $13.6 million, respectively. Derivative Financial Instruments The Company utilizes an interest rate swap to manage interest rate risk associated with its Commerce Capital Trust Securities. Net amounts payable or receivable from this contract are accrued as an adjustment to interest expense. Unrealized gains or losses on this contract are not recognized on the balance sheet. As part of CCMI's broker-dealer activities, the Company maintains a trading securities portfolio for distribution to customers in order to meet those customers' needs. Derivative instruments, primarily interest rate futures and options, are used in order to reduce the exposure to interest rate risk relating to the trading portfolio. These contracts are carried at fair value with changes in fair value included in other operating income. Recent Accounting Statements SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended (FAS 133), requires the Company to recognize all derivatives on the balance sheet at fair value. FAS 133 allows for hedge 62 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements accounting treatment and sets forth specific criteria to be used to determine when hedge accounting is appropriate. Hedge accounting allows for changes in fair value of both the derivative and hedged item to be recognized in earnings in the same period. Changes in fair value of derivatives not considered an effective hedge are recognized in earnings immediately. Derivatives for which hedge accounting does not apply must also be adjusted to fair value through income. The Company adopted FAS 133 on January 1, 2001. Due to the Company's minimal use of derivatives, adoption did not have a significant effect on the results of operations or the financial position of the Company. Future impact of FAS 133 will depend on the nature and purpose of the derivative instruments in use by the Company at that time. In September 2000, the FASB issued Statement No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 140). FAS 140 revises the standards for existing accounting for securitizations and will require the Company to disclose additional information related to securitizations. Certain provisions of FAS 140, including disclosure requirements, became effective on December 15, 2000. Other provisions relating to the transfer and servicing of financial assets and extinguishments of liabilities become effective after March 31, 2001. Management does not expect the adoption of FAS 140 to have a significant effect on results of operations or the financial position of the Company. The Company securitized $358.9 million and $129.8 million of residential mortgage loans during 2000 and 1999, respectively, and included the securitized assets in its held to maturity investment portfolio. No gains or losses were recognized on these transactions. 2. Mergers and Acquisitions In August 1998, J.A. Montgomery, Inc., Wilmington, DE, an insurance brokerage agency, was merged with and into Commerce National Insurance. The Company issued approximately 211,000 shares of common stock in exchange for all of the outstanding shares of this agency. In November, 1999, Mullaney Insurance Associates, Oakhurst, NJ, an insurance brokerage agency was merged with and into Commerce National Insurance. The Company issued approximately 67,000 shares of common stock in exchange for all of the outstanding shares of this agency. In January 2000, Traber and Vreeland, Inc., Randolph, NJ, and in October 2000, Guarantee Service Agency, Inc. t/a Maywood Agency, Maywood, NJ, insurance brokerage agencies, were merged with and into Commerce National Insurance. The Company issued approximately 301,000 shares of common stock in exchange for all the outstanding shares of these agencies. All of these transactions were accounted for as poolings of interests. However, financial statements of the periods prior to the acquisitions have not been restated, as the changes, in the aggregate, would be immaterial. In the first quarter of 1998, the Company completed the acquisition of A. H. Williams & Co., Inc., (Williams) Philadelphia, PA, a public finance investment firm, and combined Williams with Commerce Capital, the bank securities dealer division of Commerce NJ, to form Commerce Capital Markets, Inc., a wholly-owned nonbank subsidiary of the Company. The acquisition was completed by the issuance of common stock of the Company totaling approximately 436,000 shares. The transaction was accounted for as a pooling of interests, however, financial statements of the periods prior to the acquisition have not been restated, as the changes, in the aggregate, would be immaterial. Effective January 15, 1999, the Company acquired Community First Banking Company (CFBC), and CFBC's wholly-owned bank subsidiary, Tinton Falls State Bank, was merged with and into Commerce Shore. The Company issued approximately 1,428,000 shares of common stock to effect the merger. Also effective January 15, 1999, the Company acquired Prestige Financial Corp. (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 Company issued approximately 1,950,000 shares of common stock to effect the merger. The transactions were accounted for as poolings of interests. The Company's originally reported financial position and results of operations have been restated herein to include CFBC's and PFC's results of operations for all periods presented. 63 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. Investment Securities A summary of the amortized cost and market value of securities available for sale and securities held to maturity (in thousands) at December 31, 2000 and 1999 follows:
--------------------------------------------------------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------------------------------------------------------------------------------------------------------------------------------- U.S. Government agency and mortgage-backed obligations $1,912,261 $ 6,562 $(17,911) $1,900,912 $1,644,698 $ 7 $(61,772) $1,582,933 Obligations of state and political subdivisions 46,528 436 (420) 46,544 43,379 87 (1,284) 42,182 Equity securities 13,823 3,170 (168) 16,825 7,655 2,206 (754) 9,107 Other 56,989 1,083 (1,027) 57,045 30,209 71 (245) 30,035 --------------------------------------------------------------------------------------------------------------------------------- Securities available for sale $2,029,601 $11,251 $(19,526) $2,021,326 $1,725,941 $2,371 $(64,055) $1,664,257 --------------------------------------------------------------------------------------------------------------------------------- U.S. Government agency and mortgage-backed obligations $1,437,993 $ 5,111 $(15,365) $1,427,739 $1,134,115 $ 87 $(46,527) $1,087,675 Obligations of state and political subdivisions 42,938 42,938 35,667 35,667 Other 32,525 32,525 32,110 (5) 32,105 --------------------------------------------------------------------------------------------------------------------------------- Securities held to maturity $1,513,456 $ 5,111 $(15,365) $1,503,202 $1,201,892 $ 87 $(46,532) $1,155,447 ---------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities (in thousands) at December 31, 2000, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because obligors have the right to repay obligations without prepayment penalties.
---------------------------------------------------------------------------------------------------------- Available for Sale Held to Maturity ---------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ---------------------------------------------------------------------------------------------------------- Due in one year or less $ 37,716 $ 37,361 $ 162,819 $ 162,677 Due after one year through five years 44,687 44,406 650 650 Due after five years through ten years 53,168 54,373 835 835 Due after ten years 18,962 18,660 159 159 Mortgage backed securities 1,861,245 1,849,701 1,348,993 1,338,881 Equity securities 13,823 16,825 ---------------------------------------------------------------------------------------------------------- $2,029,601 $2,021,326 $1,513,456 $1,503,202 ----------------------------------------------------------------------------------------------------------
64 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Proceeds from sales of securities available for sale during 2000, 1999 and 1998 were $410.5 million, $398.3 million and $435.5 million, respectively. Gross gains of $3.2 million, $2.6 million and $3.3 million were realized on the sales in 2000, 1999 and 1998, respectively, and gross losses of $0, $27,000 and $376,000 were realized in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, investment securities with a carrying value of $998.9 million and $564.8 million, respectively, were pledged to secure deposits of public funds. In connection with the acquisition of CFBC and PFC, management reclassified $91.0 million of investment securities from held to maturity to available for sale in the first quarter of 1999. Unrealized losses on those securities transferred were approximately $330,000. 4. Loans The following is a summary of loans outstanding (in thousands) at December 31, 2000 and 1999: ------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------- Commercial real estate: Owner-occupied $ 685,916 $ 512,087 Investor/developer 471,604 395,086 Construction 380,804 185,712 ------------------------------------------------------------------------------- 1,538,324 1,092,885 Commercial loans: Term 469,564 393,953 Line of credit 430,811 277,917 Demand 1,400 1,328 ------------------------------------------------------------------------------- 901,775 673,198 Consumer: Mortgages (1-4 family residential) 351,644 428,453 Installment 154,415 125,856 Home equity 710,848 621,597 Credit lines 30,254 19,099 ------------------------------------------------------------------------------- 1,247,161 1,195,005 ------------------------------------------------------------------------------- $3,687,260 $2,961,088 ------------------------------------------------------------------------------- At December 31, 2000 and 1999, loans of approximately $14.4 million and $11.3 million, respectively, were outstanding to certain of the Company's and its subsidiaries' directors and officers, and approximately $44.0 million and $21.2 million, respectively, of loans were outstanding from companies with which certain of the Company's and its subsidiaries' directors and officers are associated, exclusive of loans to any such person and associated companies which in aggregate did not exceed $60,000. The terms of these loans are substantially the same as those prevailing at the time for comparable unrelated transactions. A summary (in thousands) of the related party loans outstanding at December 31, 2000 is as follows: ---------------------------------------------------------- 2000 ---------------------------------------------------------- Balance, January 1 $32,503 New loans 39,041 Loan payments 13,138 ---------------------------------------------------------- Balance, December 31 $58,406 ---------------------------------------------------------- 65 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Company engaged in certain activities with entities affiliated with directors of the Company. The Company received real estate appraisal services from a company owned by a director of the Company. Such real estate appraisal services amounted to $202,000 in 2000, $334,000 in 1999 and $304,000 in 1998. The Company received legal services from two law firms of which two directors of the Company are partners. Such aggregate legal services amounted to $1.7 million in 2000 and $1.6 million in 1999 and 1998. 5. Allowance for Loan Losses The following is an analysis of changes in the allowance for loan losses (in thousands) for 2000, 1999 and 1998: ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- Balance, January 1 $38,382 $31,265 $24,150 Provision charged to operating expense 13,931 9,175 8,762 Recoveries of loans previously charged off 576 969 1,487 Loan charge-offs (4,209) (3,027) (3,134) ------------------------------------------------------------------------------- Balance, December 31 $48,680 $38,382 $31,265 ------------------------------------------------------------------------------- 6. Non-accrual and Restructured Loans and Other Real Estate The total of non-performing loans (non-accrual and restructured loans) was $13.6 million and $8.7 million at December 31, 2000 and 1999, respectively. Non-performing loans of $1.3 million, $1.6 million and $3.4 million net of charge offs of $26,000, $39,000 and $0 were transferred to other real estate during 2000, 1999 and 1998, respectively. Other real estate ($3.0 million and $3.5 million at December 31, 2000 and 1999, respectively) is included in other assets. At December 31, 2000 and 1999, the recorded investment in loans considered to be impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan" totaled $9.1 million and $5.5 million, respectively, all of which are included in non-performing loans. As permitted, all homogenous smaller balance consumer and residential mortgage loans are excluded from individual review for impairment. The majority of impaired loans were measured using the fair market value of collateral. No portion of the allowance for loan losses for 2000 or 1999 was allocated to these loans. During 2000 and 1999, impaired loans averaged approximately $7.3 million and $4.6 million, respectively. Interest income of approximately $1.7 million and $1.0 million would have been recorded on non-performing loans (including impaired loans) in accordance with their original terms in 2000 and 1999, respectively. Actual interest income recorded on these loans amounted to $525,000 and $255,000 during 2000 and 1999, respectively. 66 7. Bank Premises, Equipment, and Leases A summary of bank premises and equipment (in thousands) is as follows: -------------------------------------------------------------------------- December 31, --------------------------------- 2000 1999 -------------------------------------------------------------------------- Land $ 54,066 $ 40,952 Buildings 121,908 88,427 Leasehold improvements 20,979 9,657 Furniture, fixtures and equipment 177,708 128,642 Leased property under capital leases 124 124 -------------------------------------------------------------------------- 374,785 267,802 Less accumulated depreciation and amortization 98,688 69,287 -------------------------------------------------------------------------- $276,097 $198,515 -------------------------------------------------------------------------- At December 31, 2000, Commerce NJ leased one of its branches under a capital lease with an unrelated party. All other branch leases are accounted for as operating leases with the related rental payments being expensed ratably over the life of the lease. The Company leases its operations facilities from two limited partnerships in which the Company is a limited partner at December 31, 2000. The leases are accounted for as operating leases with an aggregate annual rent of $1.5 million, which escalates to $1.8 million in 2011. One lease expires in 2014, and the other expires in 2014 and is renewable for five additional terms of five years each. At December 31, 2000, the Company leased from related parties under separate operating lease agreements the land on which it has constructed 20 branch offices. The aggregate annual rental under these related party leases for 2000 was approximately $1.1 million, and was approximately $723,000 and $440,000 in 1999 and 1998, respectively. These leases expire periodically through 2020 but are renewable through 2040. Aggregate annual rentals escalate to $1.2 million in 2006. The Company leases land to a limited partnership partially comprised of the directors of Commerce PA and Commerce NJ. The initial lease term is 25 years, with two successive 10-year options. As of December 31, 2000, the total future minimum lease payments to be received by the Company amount to approximately $315,000 for the remainder of the initial lease term. In accordance with the provision of the land lease, the limited partnership constructed and owns the office building located on the land. Commerce PA leases the building as a branch facility through 2010. Commerce North leases one of its branches from a director and its headquarters facility from a partnership in which a director has a substantial interest. The aggregate annual rental under these related party leases was approximately $486,000 for 2000 and $432,000 for 1999 and 1998. The leases expire in 2007 and 2017. Commerce Central leases one of its branches and its headquarters facility from partnerships in which two directors have substantial interests. The aggregate annual rental under these related party leases was approximately $550,000 in 2000, $484,000 in 1999 and $474,000 in 1998. The leases expire in 2004 and 2015. Total rent expense charged to operations under operating leases was approximately $10.4 million in 2000, $7.8 million in 1999 and $6.3 million in 1998. 67 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements The future minimum rental commitments, by year, under the non-cancelable leases are as follows (in thousands) at December 31, 2000: -------------------------------------------------------------------------------- Capital Operating -------------------------------------------------------------------------------- 2001 $12 $9,596 2002 12 8,922 2003 12 8,744 2004 12 8,289 2005 12 8,050 Later years 111 74,998 -------------------------------------------------------------------------------- Net minimum lease payment $171 $118,599 -------------------------------------------------------------------------------- Less amount representing interest 75 -------------------------------------------------------------------------------- Present value of net minimum lease payments $96 -------------------------------------------------------------------------------- The Company obtained interior design and general contractor services for $2.0 million, $2.5 million and $1.3 million in 2000, 1999 and 1998, respectively, from a business owned by the spouse of the Chairman of the Board of the Company. Additionally, the business received commissions of approximately $1.6 million, $1.4 million and $814,000 in 2000, 1999 and 1998, respectively, on furniture and facility purchases made directly by the Company. 8. Deposits The aggregate amount of time certificates of deposits in denominations of $100,000 or more was $807.0 million and $403.4 million at December 31, 2000 and 1999, respectively. 9. Other Borrowed Money Other borrowed money consists primarily of securities sold under agreements to repurchase, federal funds purchased, and lines of credit, including Federal Home Loan Bank advances. The following table represents information for other borrowed money:
-------------------------------------------------------------------------------------- December 31, ---------------------------------------------------- 2000 1999 ---------------------------------------------------- Average Average Amount Rate Amount Rate -------------------------------------------------------------------------------------- Securities sold under agreements to repurchase $283,714 6.70% $292,266 5.88% Federal funds purchased 20,000 4.50 Lines of credit 245,826 5.67 -------------------------------------------------------------------------------------- $283,714 $558,092 -------------------------------------------------------------------------------------- Average amount outstanding $268,304 6.31% $183,554 5.38% Maximum month-end balance 583,208 558,092 --------------------------------------------------------------------------------------
As of December 31, 2000, the Company had a line of credit of $414.1 million from the Federal Home Loan Bank of New York, all of which was available, a line of credit of $100.0 million from the Federal Home Loan Bank of Pittsburgh, all of which was available, and a line of credit of $30.0 million from another bank, all of which was available. In addition, CCMI had a line of credit of $10.0 million from another bank, all of which was available. 68 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 10. Long-Term Debt On July 15, 1993, the Company issued $23.0 million of 8 3/8% subordinated notes due 2003. Interest on the debt is payable semi-annually on January 15 and July 15 of each year. The notes may be redeemed in whole or in part at the option of the Company after July 15, 2000 at a price from 102% to 100% of the principal plus accrued interest, if any, to the date fixed for redemption, subject to certain conditions. A portion of the notes qualify for total risk-based capital for regulatory purposes, subject to certain limitations. On June 9, 1997, the Company issued $57.5 million of 8 3/4% Trust Capital Securities through Commerce Capital Trust 1, a newly formed Delaware business trust subsidiary. The Trust Capital Securities evidence a preferred ownership interest in the Trust, of which 100% of the common equity is owned by the Company. The proceeds from the issuance of the Trust Capital Securities were invested in substantially similar Junior Subordinated Debt of the Company. The Trust Capital Securities are unconditionally guaranteed by the Company. Interest on the debt is payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year. The Trust Capital Securities are scheduled to mature on June 30, 2027. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after June 30, 2002 at 100% of the principal plus accrued interest, if any, to the date fixed for redemption, subject to certain conditions. All $57.5 million of the Trust Capital Securities qualify as Tier I capital for regulatory capital purposes. 11. Income Taxes The provision for income taxes consists of the following (in thousands): --------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------- Current: Federal $40,563 $34,339 $28,012 State 604 434 1,174 Deferred: Federal (2,812) (2,368) (3,060) State (1,100) (55) --------------------------------------------------------------------- $38,355 $31,305 $26,071 --------------------------------------------------------------------- The above provision includes income taxes related to securities gains of $1.1 million, $900 thousand and $1.0 million for 2000, 1999 and 1998, respectively. The provision for income taxes differs from the expected statutory provision as follows: ----------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------- Expected provision at statutory rate: 35.0% 35.0% 35.0% Difference resulting from: Tax-exempt interest on loans (1.4) (0.7) (0.4) Tax-exempt interest on securities (2.1) (1.0) (1.8) Purchase accounting adjustments 0.1 0.1 0.1 Other, including acquisition costs 0.8 (1.2) 5.3 ----------------------------------------------------------------------------- 32.4% 32.2% 38.2% ----------------------------------------------------------------------------- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 69 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements The significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows (in thousands): -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Deferred tax assets: Loan loss reserves $15,577 $11,797 Fair value adjustment, available for sale securities 3,036 21,940 Intangibles 2,901 336 Other reserves 2,597 1,546 Other 1,738 1,026 -------------------------------------------------------------------------------- Total deferred tax assets 25,849 36,645 -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation 1,440 677 Other 1,326 2,053 -------------------------------------------------------------------------------- Total deferred tax liabilities 2,766 2,730 -------------------------------------------------------------------------------- Net deferred assets $23,083 $33,915 -------------------------------------------------------------------------------- 12. Commitments and Letters of Credit In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit, which are not reflected in the accompanying financial statements. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral is obtained based on management's credit assessment of the borrower. At December 31, 2000, the Banks had outstanding standby letters of credit in the amount of $169.3 million. In addition, the Banks are committed as of December 31, 2000 to advance $303.7 million on construction loans, $234.2 million on home equity lines of credit and $570.0 million on lines of credit. All other commitments total approximately $256.3 million. The Company anticipates no material losses as a result of these transactions. 13. Common Stock and Preferred Stock At December 31, 2000, the Company's common stock had a par value of $1.5625. The Company had 50,000,000 shares authorized as of this date. On December 19, 2000, the Board of Directors declared a cash dividend of $0.275 for each share of common stock outstanding payable January 18, 2001 to stockholders of record on January 4, 2001. 70 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 14. Earnings Per Share The calculation of earnings per share follows (in thousands, except for per share amounts):
----------------------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------- (dollars in thousands) 2000 1999 1998 ----------------------------------------------------------------------------------------------- Basic: Net income applicable to common stock $80,047 $65,960 $42,155 ----------------------------------------------------------------------------------------------- Average common shares outstanding 30,878 29,155 28,254 ----------------------------------------------------------------------------------------------- Net income per common share $ 2.59 $ 2.26 $ 1.49 ----------------------------------------------------------------------------------------------- Diluted: Net income applicable to common stock on a diluted basis $80,047 $65,960 $42,155 ----------------------------------------------------------------------------------------------- Average common shares outstanding 30,878 29,155 28,254 Additional shares considered in diluted computation assuming: Exercise of stock options 1,233 1,310 1,303 Conversion of preferred stock 105 ----------------------------------------------------------------------------------------------- Average common and common equivalent shares outstanding 32,111 30,465 29,662 ----------------------------------------------------------------------------------------------- Net income per common and common equivalent share $ 2.49 $ 2.17 $ 1.42 -----------------------------------------------------------------------------------------------
15. Benefit Plans Employee Stock Option Plan The Company has the 1997 Employee Stock Option Plan (the Plan) for the officers and employees of the Company and its subsidiaries as well as a plan for its non-employee directors. The Plan authorizes the issuance of up to 8,617,000 shares of common stock (as adjusted for stock dividends) upon the exercise of options. 3,649,000 options have been issued under the Plan. The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the Company's common stock as of the date the option is granted. These options generally become exercisable to the extent of 25% annually beginning one year from the date of grant, although the amount exercisable beginning one year from the date of grant may be greater depending on the employees' length of service. The options expire not later than 10 years from the date of grant. In addition, there are options outstanding from prior stock option plans of the Company which were granted under similar terms. No additional options may be issued under these plans. 71 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Information concerning option activity for the periods indicated is as follows: ------------------------------------------------------------------------------ Shares Under Weighted Average Option Exercise Price ------------------------------------------------------------------------------ Balance at January 1, 1999 4,541,606 $27.67 Options granted 1,129,991 38.82 Options exercised 345,472 12.55 Options canceled 130,294 39.87 Balance at December 31, 1999 5,195,831 30.79 ------------------------------------------------------------------------------ Balance at January 1, 2000 5,195,831 $30.79 Options granted 48,825 36.51 Options exercised 760,612 23.89 Options canceled 157,131 40.42 Balance at December 31, 2000 4,326,913 31.72 ------------------------------------------------------------------------------ Information concerning options outstanding as of December 31, 2000 is as follows:
-------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------------------------------------------------- Weighted-Average Weighted- Exercisable Weighted Range of Number Remaining Average as of Average exercise prices Outstanding Contractual Life Exercise Price 12/31/2000 Exercise Price -------------------------------------------------------------------------------------------------------- $3.00 to $32.50 1,888,375 5.4 $20.28 1,838,302 $19.98 $32.51 and greater 2,438,538 7.9 40.58 1,895,592 40.86 --------------------------------------------------------------------------------------------------------
The Company has elected not to adopt the recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which requires a fair value based method of accounting for all employee stock compensation plans. The Company will continue to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations to account for its stock-based compensation plans. If the Company had accounted for stock options under the fair value provisions of FAS 123, net income and net income per share would have been as follows (in thousands, except per share amounts): -------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------- Pro forma net income $70,706 $57,619 $36,251 Pro forma net income per share: Basic $ 2.29 $ 1.98 $ 1.28 Diluted 2.22 1.91 1.23 -------------------------------------------------------------------------- The fair value of options granted in 2000, 1999 and 1998 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 4.54% to 6.54%, dividend yields of 3%, volatility factors of the expected market price of the Company's common stock of .288 to .332, and weighted average expected lives of the options of 4 to 4.75 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in 72 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Employee Stock Ownership Plan As of December 31, 2000, the Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of its officers and employees who meet age and service requirements. The ESOP holds 890,000 shares of the Company's common stock, all of which are allocated to participant accounts. Employer contributions are determined at the discretion of the Board of Directors. The total contribution expense associated with the Plan for 2000, 1999 and 1998 was $100,000, $547,000 and $1.1 million, respectively. Post-employment or Post-retirement Benefits The Company offers no post-employment or post-retirement benefits. 16. Fair Value of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" (FAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following table represents the carrying amounts and fair values of the Company's financial instruments at December 31, 2000 and 1999:
--------------------------------------------------------------------------------------------- December 31, -------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 495,918 $ 495,918 $ 322,924 $ 322,924 Loans held for sale 41,791 41,791 5,704 5,704 Trading securities 109,306 109,306 117,837 117,837 Investment securities 3,534,782 3,524,528 2,866,149 2,819,704 Loans (net) 3,638,580 3,652,000 2,922,706 2,960,855 Financial liabilities: Deposits 7,387,594 7,400,507 5,608,920 5,618,204 Other borrowed money 283,714 283,714 558,092 558,092 Long-term debt 80,500 81,475 80,500 76,820 --------------------------------------------------------------------------------------------- Off-balance sheet liabilities: Standby letters of credit $ 1,693 $ 1,080 Commitments to extend credit 932 906
73 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, loans held for sale and trading securities: The carrying amounts reported approximate those assets' fair value. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans receivable were estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loans with significant collectibility concerns were fair valued on a loan-by-loan basis utilizing a discounted cash flow method. The carrying amount of accrued interest approximates its fair value. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits. Other borrowed money: The carrying amounts reported approximate fair value. Long-term debt: Current quoted market prices were used to estimate fair value. Off-balance sheet liabilities: Off-balance sheet liabilities of the Company consist of letters of credit, loan commitments and unfunded lines of credit. Fair values for the Company's off-balance sheet liabilities are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 74 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 17. Quarterly Financial Data (unaudited) The following represents summarized unaudited quarterly financial data of the Company which, in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentation (in thousands, except per share amounts):
------------------------------------------------------------------------------------------------------- Three Months Ended ------------------------------------------------------------------------------------------------------- December 31 September 30 June 30 March 31 ------------------------------------------------------------------------------------------------------- 2000 Interest income $138,606 $131,185 $123,283 $112,226 Interest expense 58,861 55,621 49,861 44,027 Net interest income 79,745 75,564 73,422 68,199 Provision for loan losses 3,128 3,668 3,642 3,493 Net investment securities gains 2,393 820 Provision for federal and state income taxes 9,588 10,092 9,459 9,216 Net income 21,384 20,991 19,377 18,295 Net income per common share: Basic $ 0.68 $ 0.68 $ 0.63 $ 0.60 Diluted 0.65 0.64 0.61 0.59 1999 Interest income $106,629 $99,097 $93,556 $87,166 Interest expense 40,252 36,118 33,727 31,984 Net interest income 66,377 62,979 59,829 55,182 Provision for loan losses 3,064 1,653 2,274 2,184 Net investment securities gains 1,047 270 400 865 Provision for federal and state income taxes 8,377 7,704 7,726 7,498 Net income 17,623 16,840 16,016 15,481 Net income per common share: Basic $ 0.59 $ 0.58 $ 0.55 $ 0.54 Diluted 0.57 0.56 0.53 0.51
75 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 18. Condensed Financial Statements of the Parent Company and Other Matters Balance Sheets
--------------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 --------------------------------------------------------------------------------------- Assets Cash $ 1,090 $ 381 Securities available for sale 36,392 36,137 Investment in subsidiaries 536,324 406,485 Other assets 16,018 11,588 --------------------------------------------------------------------------------------- $589,824 $454,591 --------------------------------------------------------------------------------------- Liabilities Other liabilities $ 17,100 $ 17,335 Trust Capital Securities 57,500 57,500 Long-term debt 23,000 23,000 --------------------------------------------------------------------------------------- 97,600 97,835 --------------------------------------------------------------------------------------- Stockholders' equity Common stock 49,627 44,418 Capital in excess of par or stated value 422,375 321,443 Retained earnings 27,083 32,263 Accumulated other comprehensive income (5,239) (39,744) --------------------------------------------------------------------------------------- 493,846 358,380 Less treasury stock 1,622 1,624 --------------------------------------------------------------------------------------- Total stockholders' equity 492,224 356,756 --------------------------------------------------------------------------------------- $589,824 $454,591 ---------------------------------------------------------------------------------------
Statements of Income ------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------------ (dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------ Income: Dividends from subsidiaries $ 9,150 $15,750 $18,357 Interest income 497 507 293 Other 5,652 3,690 2,098 ------------------------------------------------------------------------------------ 15,299 19,947 20,748 ------------------------------------------------------------------------------------ Expenses: Interest expense 7,244 7,375 7,259 Operating expenses 2,352 2,508 3,053 ------------------------------------------------------------------------------------ 9,596 9,883 10,312 Income before income taxes and equity in undistributed income of subsidiaries 5,703 10,064 10,436 Income tax benefit (1,274) (2,636) (2,692) ------------------------------------------------------------------------------------ 6,977 12,700 13,128 Equity in undistributed income of subsidiaries 73,070 53,260 29,027 ------------------------------------------------------------------------------------ Net income $80,047 $65,960 $42,155 ------------------------------------------------------------------------------------
76 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Statements of Cash Flows -------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Operating activities: Net income $80,047 $65,960 $42,155 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries (73,070) (53,260) (29,027) Gains on sales of securities available for sale (639) Increase in other assets (4,430) (1,335) (211) Increase in other liabilities 1,723 13,846 2,111 -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,270 24,572 15,028 Investing activities: Investment in subsidiaries (28,770) (31,000) (40,253) Proceeds from sale of securities available for sale 9,997 5,733 Proceeds from the maturity of securities available for sale 117,863 26,980 Purchase of securities available for sale (126,522) (54,723) (4,308) Other (38) 27 51 -------------------------------------------------------------------------------------------------------- Net cash used by investing activities (27,470) (52,983) (44,510) Financing activities: Proceeds from issuance of common stock under dividend reinvestment plan 36,110 27,830 7,427 Cash dividends (29,761) (23,476) (21,563) Proceeds from exercise of stock options 17,560 3,598 2,001 -------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing 23,909 7,952 (12,135) activities Increase (decrease) in cash and cash equivalents 709 (20,459) (41,617) Cash and cash equivalents at beginning of year 381 20,840 62,457 -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,090 $ 381 $20,840 -------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,089 $ 7,089 $ 7,089 Income taxes 36,135 26,056 27,626 --------------------------------------------------------------------------------------------------------
77 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Holders of common stock of the Company are entitled to receive dividends when declared by the Board of Directors out of funds legally available. Under the New Jersey Business Corporation Act, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment and only to the extent of surplus (the excess of the net assets of the Company over its stated capital). The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. New Jersey state banks are subject to similar dividend restrictions. Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Central can declare dividends in 2001 without additional approval of approximately $74.9 million, $6.1 million, $23.7 million, $18.9 million and $1.1 million, respectively, plus an additional amount equal to each bank's net profit for 2001 up to the date of any such dividend declaration. The Federal Reserve Act requires the extension of credit by any of the Company's banking subsidiaries to certain affiliates, including Commerce Bancorp, Inc. (parent), be secured by readily marketable securities, that extension of credit to any one affiliate be limited to 10% of the capital and capital in excess of par or stated value, as defined, and that extensions of credit to all such affiliates be limited to 20% of capital and capital in excess of par or stated value. At December 31, 2000 and 1999, the Company complies with these guidelines. The Company and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-based assets (as defined) and of Tier I capital to average assets (as defined), or leverage. Management believes, as of December 31, 2000, that the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. 78 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the Company's and Commerce NJ's risk-based and leverage capital ratios at December 31, 2000 and 1999:
---------------------------------------------------------------------------------------------------------- Per Regulatory Guidelines ---------------------------------------------------------------------------------------------------------- Actual Minimum "Well Capitalized" ---------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------------------------------------- December 31, 2000 Company Risk based capital ratios: Tier I $551,167 10.79% $204,316 4.00% $306,474 6.00% Total capital 609,047 11.92 408,633 8.00 510,791 10.00 Leverage ratio 551,167 6.92 318,444 4.00 398,055 5.00 Commerce NJ Risk based capital ratios: Tier 1 $288,630 9.80% $117,775 4.00% $176,663 6.00% Total capital 317,052 10.77 235,550 8.00 294,438 10.00 Leverage ratio 288,630 6.51 177,474 4.00 221,843 5.00 December 31, 1999 Company Risk based capital ratios: Tier I $449,698 11.40% $157,847 4.00% $236,771 6.00% Total capital 501,879 12.72 315,694 8.00 394,618 10.00 Leverage ratio 449,698 7.02 256,362 4.00 320,453 5.00 Commerce NJ Risk based capital ratios: Tier 1 $225,189 10.35% $ 87,054 4.00% $130,582 6.00% Total capital 246,263 11.32 174,109 8.00 217,636 10.00 Leverage ratio 225,189 6.33 142,233 4.00 177,791 5.00
79 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 19. Segment Reporting The Company operates one reportable segment of business, Community Banks, which includes Commerce NJ, Commerce PA, Commerce Shore, Commerce North, Commerce Central, and Commerce Delaware. Through its Community Banks, the Company provides a broad range of retail and commercial banking services, and corporate trust services. Parent/Other includes the holding company, Commerce National Insurance (whose revenues of $45.6 million, $32.4 million and $25.2 million in 2000, 1999 and 1998, respectively, were reported in other operating income), CCMI, and Commerce Capital Trust I. Selected segment information for each of the three years ended December 31 is as follows:
----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- Community Parent/ Community Parent/ Community Parent/ Banks Other Total Banks Other Total Banks Other Total ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $298,985 $(2,055) $296,930 $251,132 $(6,765) $244,367 $200,998 $(6,337) $194,661 Provision for loan losses 13,931 13,931 9,175 9,175 8,762 8,762 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 285,054 (2,055) 282,999 241,957 (6,765) 235,192 192,236 (6,337) 185,899 after provision Noninterest income 90,464 60,296 150,760 66,127 48,469 114,596 58,426 37,851 96,277 Noninterest expense 263,001 52,356 315,357 209,808 42,715 252,523 180,736 33,214 213,950 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 112,517 5,885 118,402 98,276 (1,011) 97,265 69,926 (1,700) 68,226 Income tax expense (benefit) 35,255 3,100 38,355 31,963 (658) 31,305 26,299 (228) 26,071 ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $77,262 $2,785 $80,047 $66,313 $(353) $65,960 $43,627 $(1,472) $42,155 ----------------------------------------------------------------------------------------------------------------------------------- Average assets (in millions) $6,626,429 $722,534 $7,348,963 $5,301,844 $602,025 $5,903,869 $4,395,127 $470,878 $4,866,005 -----------------------------------------------------------------------------------------------------------------------------------
The financial information for each segment is reported on the basis used internally by the Company's management to evaluate performance. Measurement of the performance of each segment is based on the management structure of the Company and is not necessarily comparable with financial information from other entities. The information presented is not necessarily indicative of the segment's results of operations if each of the Community Banks were independent entities. 80 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 20. Derivative Financial Instruments As part of CCMI's broker-dealer activities, the Company maintains a trading securities portfolio for distribution to its customers in order to meet those customers' needs. In order to reduce the exposure to market risk relating to the inventory, the Company buys and sells a variety of derivative financial instruments including futures and option contracts. Market risk includes changes in interest rates or value fluctuations in the underlying financial instruments. The Company uses notional (contract) amounts to measure derivative activity. Notional amounts are not included on the balance sheet, as those amounts are not actually paid or received at settlement. The following table reflects the open commitments for futures and options and the associated unrealized gains (losses) for the year ended December 31, 2000: ----------------------------------------------------------------- Notional Unrealized Amount Gain (Loss) ----------------------------------------------------------------- Municipal bond futures $44,100 $(664) Treasury bond futures 9,200 (372) Treasury bond put options 2,210 (7) Treasury bond call options 9,400 (250) Treasury bond call options 3,100 (9) ----------------------------------------------------------------- Total $68,010 $(1,302) ----------------------------------------------------------------- The average notional amount for futures and options contracts for the year ended December 31, 2000 was $67.5 million and $6.7 million, respectively. Realized and unrealized gains and losses related to derivative financial instruments are included in other operating income in the statement of income. 81 Commerce Bancorp, Inc. and Subsidiaries Report of Independent Auditors The Board of Directors and Stockholders Commerce Bancorp, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Commerce Bancorp, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of two wholly-owned subsidiaries, which statements reflect net interest income constituting 12.3% of the related consolidated totals in 1998. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for the two subsidiaries, is based solely on the reports of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commerce Bancorp, Inc. and Subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Philadelphia, Pennsylvania January 30, 2001 82