10-K405 1 cbc10k2001.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to ________________. Commission File #0-12874 COMMERCE BANCORP, INC. (Exact name of registrant as specified in its charter) New Jersey 22-2433468 (State of other jurisdiction (I.R.S. Employee of incorporation or organization) Identification Number) Commerce Atrium 1701 Route 70 East 08034-5400 Cherry Hill, New Jersey (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 856-751-9000 Securities registered pursuant to Section 12(b) of the Act: Common Stock New York Stock Exchange --------------------- ----------------------------------------------- Title of Class Name of Each Exchange on Which Registered Securities registered pursuant to Section 12(g) of the Act: None ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____. Indicate by check mark if disclosure of' delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant is $2,580,539,000. (1) ---------------------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock $1.00 Par Value 66,145,263 ------------------------------- --------------------------------------------- Title of Class No. of Shares Outstanding as of 2/28/02 ---------------------------- DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders. ---------------------------- (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the Registrant's Common Stock outstanding reduced by the amount of Common Stock held by officers, directors, and shareholders owning in excess of 10% of the Registrant's Common Stock multiplied by the last sale price for the Registrant's Common Stock on February 28, 2002. The information provided shall in no way be construed as an admission that the officer, director, or 10% shareholder in the Registrant may be deemed an affiliate of the Registrant or that he is the beneficial owner of' the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for the recordkeeping purpose of the Securities and Exchange Commission. ================================================================================ COMMERCE BANCORP, INC. FORM 10-K CROSS-REFERENCE INDEX Page Part I Item 1. Business.......................................................... Item 2. Properties........................................................ Item 3. Legal Proceedings ................................................ Item 4. Submission of Matters to a Vote of Security Holders............... Part II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters ............................................. Item 6. Selected Financial Data .......................................... Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... Item 8. Financial Statements and Supplementary Financial Data ............ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (This item is omitted since it is not applicable) Part III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions (The information required by Part III has been omitted since it will be contained in the definitive proxy statement to be filed pursuant to Regulation 14A.) Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................................................... Item 15. Signatures........................................................ PART I Item 1. Business Forward-Looking Statements The Company may from time to time make various written or oral "forward looking statements" including statements contained in the Company's filings with the Securities and Exchange Commission ("SEC") (including this Annual Report on Form 10-K and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the Company , which are made in good faith by the Company pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors that are sometimes beyond the Company's control. You will generally be able to recognize a forward-looking statement because it contains the words "anticipate," "believe," "estimate," "expect," "project," "objective," "may," "could," "should," "would," "intend," "plan" or similar expressions to identify it as a forward-looking statement. The following factors, among others, could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation; interest rates, market and monetary fluctuations; the Company's timely development of competitive new products and services and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa; the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities and insurance; technological changes; future acquisitions; the expense savings and revenue enhancements from acquisitions being less than expected; the growth and profitability of the Company's noninterest or fee income being less than expected; the ability to maintain the growth and further development of the Company's community-based retail branching network; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the Company's success at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company cautions you that any such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the Company's actual results, performance or achievements to differ materially from the future results, performance or achievements the Company has anticipated in such forward-looking statements. You should note that many factors, some of which are discussed in this Annual Report and Form 10-k could affect the Company's future financial results and could cause those results to differ materially from those expressed or implied in the Company's forward-looking statements contained or incorporated by reference in this document. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. General The Company is a New Jersey business corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("Holding Company Act"). The Company was incorporated on December 9, 1982 and became an active bank holding company on June 30, 1983 through the acquisition of Commerce Bank, N.A., referred to as Commerce NJ. As of December 31, 2001, the Company had total assets of $11.4 billion, total loans of $4.5 billion, and total deposits of $10.2 billion. The address of the Company's principal executive office is Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey, 08034-5400 and the telephone number is (856) 751-9000. The Company operates: o four nationally chartered bank subsidiaries: o Commerce Bank, N.A., Cherry Hill, New Jersey, o Commerce Bank/Pennsylvania, N.A., Devon, Pennsylvania, o Commerce Bank/Shore, N.A., Toms River, New Jersey, o Commerce Bank/Delaware, N.A., Wilmington Delaware; and o one New Jersey state chartered bank subsidiary: o Commerce Bank/North, Ramsey, New Jersey These five bank subsidiaries, referred to collectively as the banks, as of December 31, 2001 have over 180 full service retail branch offices located in the states of New Jersey, Pennsylvania, Delaware and New York. These banks provide a full range of retail and commercial banking services for consumers and small and mid-sized companies. Lending services are focused on commercial real estate and commercial and consumer loans to local borrowers. These banks' lending and investment activities are funded principally by retail deposits gathered through each bank's retail branch office network. In addition to the opening of new full service branch offices, the Company has acquired and developed its bank subsidiaries through the following transactions: o on January 2, 1987, the Company acquired all of the outstanding shares of Commerce Bank/Pennsylvania, N.A., referred to as Commerce PA; o on December 31, 1988 the Company acquired all of the outstanding shares of Citizens State Bank of New Jersey, Forked River, which was subsequently converted to a national charter and renamed Commerce Bank/Shore, N.A., referred to as Commerce Shore; o on September 30, 1993, the Company acquired all of the outstanding shares of The Coastal Bank, Ocean City, New Jersey, which was merged into Commerce NJ; o on January 21, 1997, the Company acquired Independence Bancorp, Inc., a bank holding company headquartered in Bergen County, New Jersey. Independence Bancorp, Inc.'s wholly-owned state-chartered bank subsidiary, Independence Bank of New Jersey, was subsequently renamed Commerce Bank/North, referred to as Commerce North; o on January 15, 1999, the Company acquired Community First Banking Company, referred to as CFBC, a one-bank holding company headquartered in Tinton Falls, New Jersey. CFBC's wholly-owned bank subsidiary, Tinton Falls State Bank, was merged with and into Commerce Shore; o on January 15, 1999, the Company acquired Prestige Financial Corp., referred to as PFC, a one-bank holding company headquartered in Flemington, New Jersey. PFC's wholly-owned state-chartered bank subsidiary, Prestige State Bank, was subsequently re-chartered as a national bank and renamed Commerce Bank/Central, N.A., referred to as Commerce Central. Commerce Central was merged with and into Commerce NJ in 2001; and o in 1998, the Company received regulatory approvals to open Commerce Bank/Delaware, N.A., referred to as Commerce Delaware. Commerce Delaware's first branch opened in New Castle County, Delaware, on December 18, 1999. Commerce NJ operates a nonbank subsidiary, Commerce Capital Markets, Inc., Philadelphia, Pennsylvania which engages in various securities, investment banking and brokerage activities. On March 27, 1998, the Company completed the acquisition of A.H. Williams & Co., Inc., Philadelphia, Pennsylvania, a public finance investment firm, and combined A.H. Williams & Co., Inc. with Commerce Capital, the bank securities dealer division of Commerce NJ, to form Commerce Capital Markets, Inc. In addition, the Company, through Commerce National Insurance Services, Inc., a nonbank subsidiary of Commerce Bank/North, referred to as Commerce National Insurance, operates an insurance brokerage agency concentrating on commercial property, casualty and surety as well as personal lines of insurance for clients in multiple states, primarily Delaware, New Jersey, New York and Pennsylvania. Since 1996, Commerce National Insurance has completed several acquisitions including the following mergers: o in December 1996, Chesley & Cline, Inc., Mount Holly, New Jersey, was merged with and into Commerce National Insurance; o in January 1997, Colkate, Inc., t/a The Morrissey Agency, Mt. Laurel, New Jersey, was merged with and into Commerce National Insurance. o in December 1997, Joseph J. Reinhart and Associates, Inc., Cherry Hill, NJ, a risk/loss management and loss investigation consulting firm, and Associated Insurance Management Inc., Haddonfield, NJ, an employee and executive benefit consulting firm, were merged with and into Commerce National Insurance; o in August 1998, J.A. Montgomery, Inc., Wilmington, DE, an insurance brokerage agency, was merged with and into Commerce National Insurance; o in November 1999, Mullaney Insurance Associates, Oakhurst, NJ, an insurance brokerage agency, was merged with and into Commerce National Insurance; and o 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. o in 2001, Fitzsimmons Insurance and Financial Services, Inc., Business Training Systems, Inc. and Brettler Financial Group, Inc., insurance brokerage agencies, which were merged with and into Commerce National Insurance. As a legal entity separate and distinct from its bank and non-bank subsidiaries, the Company's principal sources of revenues are dividends and fees from its bank and non-bank subsidiaries. The subsidiaries that operate in the banking, insurance and securities business can pay dividends only if they are in compliance with the applicable regulatory requirements imposed on them by federal and state regulatory authorities. Commerce NJ Commerce NJ provides retail and commercial banking services through 83 retail branch offices in Central and Southern New Jersey, and Metropolitan New York City. As of December 31, 2001, Commerce NJ had total assets of $6.8 billion, total deposits of $5.3 billion, and total shareholders' equity of $382.0 million. Service Area Commerce NJ's primary service area includes Central and Southern New Jersey and Metropolitan New York City. Commerce NJ has attempted to locate its branches in the fastest growing communities within its service area. Retail deposits gathered through these focused branching activities are used to support lending throughout the Company. Retail Banking Activities Commerce NJ provides a broad range of retail banking services and products, including free checking accounts, subject to minimum balances, and savings programs, money market accounts, negotiable orders of withdrawal accounts, certificates of deposit, safe deposit facilities, consumer loan programs, including installment loans for home improvement and the purchase of consumer goods and automobiles, home equity and Visa Gold card revolving lines of credit, overdraft checking and automated teller facilities. Commerce NJ also offers construction loans and permanent mortgages for houses. Trust Activities Commerce NJ offers trust services primarily focusing on corporate trust activities, particularly as bond trustee, paying agent, and registrar for municipal bond offerings. Commercial Banking Activities Commerce NJ offers a broad range of commercial banking services, including free checking accounts, subject to minimum balance, night depository facilities, money market accounts, certificates of deposit, short-term loans for seasonal or working capital purposes, term loans for fixed assets and expansion purposes, revolving credit plans and other commercial loans to fit the needs of its customers. Commerce NJ also finances the construction of business properties and makes real estate mortgage loans on completed buildings. Where the needs of a customer exceed Commerce NJ's legal lending limit for any one customer, approximately $63.1 million as of December 31, 2001, Commerce NJ may participate with other banks, including Commerce PA, Commerce Shore, Commerce North and Commerce Delaware in making a loan. Commerce PA As of December 31, 2001, Commerce PA had total assets of $2.3 billion, total deposits of $2.0 billion and total shareholders' equity of $126.1 million. Commerce PA provides retail and commercial banking services through 47 retail branch offices in Philadelphia, Bucks, Chester, Delaware and Montgomery Counties in Southeastern Pennsylvania. Commerce PA generally provides the same retail and commercial banking services and products as Commerce NJ, Commerce Shore, Commerce North, and Commerce Delaware. Commerce PA offers trust services similar to those offered by Commerce NJ. Commerce Shore As of December 31, 2001, Commerce Shore had total assets of $1.6 billion, total deposits of $1.5 billion and total shareholders' equity of $97.8 million. Commerce Shore provides retail and commercial banking services through 27 retail branch offices in Ocean and Monmouth Counties, New Jersey. Commerce Shore generally provides the same retail and commercial banking services and products as Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware. Commerce Shore does not offer trust services. Commerce North As of December 31, 2001, Commerce North had total assets of $1.4 billion, total deposits of $1.3 billion, and total shareholders' equity of $84.0 million. Commerce North provides retail and commercial banking services through 22 retail branch offices in Bergen and Passaic Counties, New Jersey. Commerce North generally provides the same retail and commercial banking services and products as Commerce NJ, Commerce PA, Commerce Shore, and Commerce Delaware. Commerce North does not offer trust services. Commerce Delaware As of December 31, 2001, Commerce Delaware had total assets of $158.0 million, total deposits of $147.5 million, and total shareholders' equity of $10.7 million. Commerce Delaware generally provides the same retail and commercial banking services and products as Commerce NJ, Commerce PA, Commerce Shore, and Commerce North. Commerce Delaware offers trust services similar to those offered by Commerce NJ. Commerce Delaware provides retail and commercial banking services through 5 retail branch offices in New Castle County, Delaware. Commerce National Insurance Commerce National Insurance operates as a regional insurance brokerage firm concentrating on commercial property, casualty and surety as well as personal lines. In addition, Commerce National Insurance offers a line of employee benefit programs including both group as well as individual medical, life, disability, pension, and risk management services. Commerce National Insurance currently operates out of 16 locations in New Jersey and 2 locations in Delaware. Commerce National Insurance places insurance for clients in multiple states, primarily New Jersey, Pennsylvania, New York, and Delaware. Commerce Capital Markets Commerce Capital Markets is a wholly-owned subsidiary of the Company engaging in various securities, investment management and brokerage activities, including trading, underwriting, and advisory services. Commerce Capital Markets' principal place of business is Philadelphia, Pennsylvania, with branch locations in Cherry Hill, South Plainfield, Ramsey and Toms River, New Jersey, New York, New York, Burlingame, California, Fort Lauderdale, Florida and Cambridge, Massachussetts. Other Activities NA Asset Management, a Delaware corporation, is a wholly-owned subsidiary of Commerce NJ that purchases, holds and sells investments of Commerce NJ. Commerce Mortgage Acceptance Corp., a Delaware corporation, is a wholly-owned subsidiary of Commerce NJ that is utilized in the securitization of residential mortgage loans. Shore Asset Management Corporation, a Delaware corporation, is a wholly-owned subsidiary of Commerce Shore that purchases, holds and sells investments of Commerce Shore. North Asset Management, a Delaware corporation, is a wholly-owned subsidiary of Commerce North that purchases, holds, and sells investments of Commerce North. Delaware Asset Management, a New Jersey corporation, is a wholly-owned subsidiary of Commerce Delaware that purchases, holds, and sells investments of Commerce Delaware. As part of the Commerce Network, the Company has an equity investment in Commerce Bank/Harrisburg, Camp Hill, Pennsylvania (14.68% beneficial ownership). The Commerce Network provides marketing support and technical support services to its members. Risk Factors The Company is subject to a number of risk factors including, among others, business and economic conditions, monetary and other policies, competition, and risk relating to asset management performance, fund servicing and acquisitions. These factors, and others, could impact the Company's business, financial condition and results of operations. In the normal course of business, the Company assumes various types of risk, which include, among others, credit risk, interest rate risk, liquidity risk and risk associated with trading activities. The Company has risk management processes designed to provide for risk identification, measurement and monitoring. Competition The Company's service area is characterized by intense competition in all aspects and areas of its business from commercial banks, savings and loan associations, mutual savings banks and other financial institutions. The Company's competitors, including credit unions, consumer finance companies, factors, insurance companies and money market mutual funds, compete with lending and deposit gathering services offered by us. Many competitors have substantially greater financial resources with larger lending limits and larger branch systems than the Company's. In commercial transactions, Commerce NJ's, Commerce PA's, Commerce Shore's, Commerce North's, and Commerce Delaware's legal lending limit to a single borrower (approximately $63.1 million, $20.4 million, $15.3 million, $12.9 million, and $1.6 million, respectively, as of December 31, 2001) enables us to compete effectively for the business of smaller and mid-sized businesses. However, these legal lending limits are considerably lower than that of various competing institutions and may act as a constraint on the bank's effectiveness in competing for financing in excess of these limits. The Company believes that it is able to compete on a substantially equal basis with larger financial institutions because its banks offer longer hours of operation than those offered by most of the Company's competitors, free checking accounts for customers maintaining minimum balances and competitive interest rates on savings and time accounts with low minimum deposit requirements. The Company seeks to provide personalized services through management's knowledge and awareness of its market area, customers and borrowers. The Company believes this knowledge and awareness provides a business advantage in serving the retail depositors and the small and mid-sized commercial borrowers that comprise the Company's customer base. Supervision and Regulation THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING COMPANIES AND THEIR SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO THE COMPANY AND ITS SUBSIDIARIES. THE REGULATORY FRAMEWORK IS INTENDED PRIMARILY FOR THE PROTECTION OF DEPOSITORS, OTHER CUSTOMERS AND THE FEDERAL DEPOSIT INSURANCE FUNDS AND NOT FOR THE PROTECTION OF SECURITY HOLDERS. TO THE EXTENT THAT THE FOLLOWING INFORMATION DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTICULAR STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL EFFECT ON THE BUSINESS OF THE COMPANY. The Company The Company is registered as a bank holding company under the Holding Company Act, and is therefore subject to supervision and regulation by the FRB. The Company is also regulated by the New Jersey Department of Banking. Under the Holding Company Act, the Company is required to secure the prior approval of the FRB before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank or acquire direct or indirect ownership or control of any voting shares of any bank that is not already majority owned by it, if after such acquisition it would directly or indirectly own or control more than 5% of the voting shares of such bank. See "Interstate Banking." The Company is generally prohibited under the Holding Company Act from engaging in, or acquiring direct or indirect ownership or control or more than 5% of the voting shares of any company engaged in nonbanking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such a determination, the FRB considers whether the performance of these activities by a bank holding company can reasonably be expected to produce benefits to the public which outweigh the possible adverse effects. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. All of the Company's subsidiary banks are currently rated "satisfactory" under the Community Reinvestment Act. In addition, under the Holding Company Act, the Company is required to file periodic reports of its operations with, and is subject to examination by, the FRB. The Company is under the jurisdiction of the SEC and various state securities commissions for matters relating to the offering and sale of its securities and is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. There are various legal restrictions on the extent to which the Company and its nonbank subsidiaries can borrow or otherwise obtain credit from its banking subsidiaries. In general, these restrictions require that any such extensions of credit must be secured by designated amounts of specified collateral and are limited, as to any one of the Company or such nonbank subsidiaries, to ten percent of the lending bank's capital stock and surplus, and as to the Company and all such nonbank subsidiaries in the aggregate, to 20 percent of such lending bank's capital stock and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") contains a "cross-guarantee" provision that could result in any insured depository institution owned by the Company being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Company. Also, under FRB policy, the Company is expected to act as a source of financial strength to each of its banking subsidiaries and to commit resources to support each such bank in circumstances where such bank might not be in a financial position to support itself. Consistent with the "source of strength" policy for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. A discussion of capital guidelines and capital is included in the section entitled "Stockholders' Equity and Dividends" contained within Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Delaware Commerce NJ, Commerce PA, Commerce Shore, and Commerce Delaware, as national banks, are subject to the National Bank Act. Each is also subject to the supervision of, and is regularly examined by, the Office of the Comptroller of the Currency ("OCC") and is required to furnish quarterly reports to the OCC. The approval of the OCC is required for the establishment of additional branch offices by any national bank, subject to applicable state law restrictions. Commerce North, as a New Jersey state-chartered bank, is subject to the New Jersey Banking Act. Commerce North is also subject to the supervision of, and is regularly examined by, the New Jersey Department of Banking and Insurance ("Department") and the FDIC, and is required to furnish quarterly reports to each agency. The Approval of the Department and FDIC is necessary for the establishment of any additional branch offices by any New Jersey state-chartered bank, subject to applicable state law restrictions. Under present New Jersey law, Commerce NJ, Commerce Shore, and Commerce North would be permitted to operate offices at any location in New Jersey, subject to prior regulatory approval. Under present New York law, Commerce NJ would be permitted to operate offices at any location in New York, subject to certain home office protection rules and subject to regulatory approval. Under present Pennsylvania law, Commerce PA would be permitted to operate offices within any county in Pennsylvania, subject to prior regulatory approval. Under present Delaware law, Commerce Delaware would be permitted to operate offices at any location in Delaware at which deposits are received, checks are paid, or money is lent, subject to prior regulatory approval. Under the Community Reinvestment Act, as amended ("CRA"), a bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA requires that the applicable regulatory agency to assess an institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA requires public disclosure of an institution's CRA rating and requires that the applicable regulatory agency provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. An institution's CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. In addition, under applicable regulations a bank having a less than satisfactory rating is not entitled to participate on the bid list for FDIC offerings. For their most recent examinations, Commerce NJ, Commerce PA, Commerce Shore, Commerce Delaware and Commerce North each received a "satisfactory" rating. Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Delaware are also members of the FDIC and, except for Commerce North, members of the FRB and, therefore, are subject to additional regulation by these agencies. Some of the aspects of the lending and deposit business of Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Delaware which are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The operation of Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Delaware are also subject to numerous federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to interest rates on loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce Delaware are subject to certain limitations on the amount of cash dividends that they can pay. See Note 18 of the Company's Notes to Consolidated Financial Statements which appears elsewhere herein. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Company and the Company's non-bank subsidiaries. The FDIC has similar authority with respect to Commerce North. All of the deposits of the banking subsidiaries are insured up to applicable limits by the FDIC and are subject to deposit insurance assessments. The insurance assessments are based upon a matrix that takes into account a bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits to the statutory minimum of $2,000 annually for "well capitalized" banks. Commerce National Insurance/ Commerce Capital Markets Commerce National Insurance, a nonbank subsidiary of Commerce North, is currently subject to supervision, regulation and examination by the New Jersey Department of Banking and Insurance, as well as other state insurance departments where they operate. Commerce Capital Markets, a nonbank subsidiary of Commerce NJ, engages in certain permitted securities activities and is regulated by the SEC. Commerce Capital Markets is also subject to rules and regulations promulgated by the National Association of Securities Dealers, Inc., the Securities Investors Protection Corporation and various state securities commissions and with respect to public finance activities the Municipal Securities Rulemaking Board. Both Commerce National Insurance and Commerce Capital Markets are also subject to various state laws and regulations in which they do business. These laws and regulations are primarily intended to benefit clients and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, censures and fines. Recent Legislation On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law, repealing the 1933 Glass-Steagall Act's separation of the commercial and investment banking industries. The Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a "Financial Holding Company," a subset of bank holding companies that satisfy the following criteria: (1) all of the depository institution subsidiaries must be well capitalized and well managed; and (2) the holding company must have made an effective election with the Federal Reserve Board that it elects to be a financial holding company to engage in activities that would not have been permissible before the Act. In order for the election to be effective, all of the depository institution subsidiaries must have a CRA rating of "satisfactory" or better as of its most recent examination. The Company has not elected to be a financial holding company. Financial holding companies may engage in any activity that (i) is financial in nature or incidental to such financial activity or (ii) is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Act specifies certain activities that are financial in nature. These activities include acting as principal, agent or broker for insurance; underwriting, dealing in or making a market in securities; and providing financial and investment advice. The Federal Reserve Board and the Secretary of the Treasury have authority to decide whether other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services and so on. These new financial activities authorized by the Act may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, which must be conducted in a financial holding company. Commerce Capital Investments, Inc. is a financial subsidiary of Commerce NJ. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, the Act requires each of the parent bank (and its sister-bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. The Act establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. The Act also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. Except for the increase in competitive pressures faced by all banking organizations that is a likely consequence of the Act, the Company believes that the legislation and implementing regulations are likely to have a more immediate impact on large regional and national institutions than on community-based institutions engaged principally in traditional banking activities. Because the legislation permits bank holding companies to engage in activities previously prohibited altogether or severely restricted because of the risks they posed to the banking system, implementing regulations impose strict and detailed prudential safeguards on affiliations among banking and nonbanking companies in a holding company organization. The foregoing discussion is qualified in its entirety by reference to the statutory provisions of the Act and the implementing regulations which are adopted by various government agencies pursuant to the Act. The exact impact of the Act on the Company and its subsidiaries, if any, cannot be predicted at this time. THE RULES GOVERNING THE REGULATION OF FINANCIAL SERVICES INSTITUTIONS AND THEIR HOLDING COMPANIES ARE VERY DETAILED AND TECHNICAL. ACCORDINGLY, THE ABOVE DISCUSSION IS GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE OR TO DESCRIBE ALL OF THE LAWS AND REGULATIONS THAT APPLY TO THE COMPANY AND ITS SUBSIDIARIES. National Monetary Policy In addition to being affected by general economic conditions, the Company's earnings and growth are affected by the policies of regulatory authorities, including the OCC, the FRB and the FDIC. An important function of the FRB, is to regulate the money supply and credit conditions. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, setting the discount rate, and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the FRB have had significant effects on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of these policies upon the Company's future business, earnings and growth cannot be predicted. Employees As of December 31, 2001, the Company had in excess of 5,300 full-time equivalent employees. Item 2 - PROPERTIES The executive and administrative offices of the Company and Commerce NJ are located at 1701 Route 70 East, Cherry Hill, New Jersey. This six-story structure is owned by the Company. The Company and Commerce NJ occupy the majority of this building. The Company and its subsidiaries own or lease numerous other premises for use in conducting business activities. The facilities owned or occupied under lease by the Company's subsidiaries are considered by management to be adequate. Additional information pertaining to the Company's properties is set forth in "Note 7 - Bank Premises, Equipment and Leases" of the Company's Notes to Consolidated Financial Statements which appear elsewhere herein. Item 3 - LEGAL PROCEEDINGS Other than routine litigation incidental to its business, neither the Company or any of its subsidiaries, nor any of the Company's or any of its subsidiaries' properties, are subject to any material legal proceedings, nor are any such proceedings known to be contemplated. Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth quarter of 2001. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; Stockholders' Equity and Dividends included elsewhere herein. Item 6. Selected Financial Data Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share data) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------------------ Income Statement Data: Net interest income $ 401,326 $ 296,930 $ 244,367 $ 194,661 $ 165,322 Provision for loan losses 26,384 13,931 9,175 8,762 5,805 Noninterest income 196,805 150,760 114,596 96,277 62,410 Noninterest expense 420,036 315,357 252,523 213,950 153,804 Income before income taxes 151,711 118,402 97,265 68,226 68,123 Net income 103,022 80,047 65,960 42,155 44,432 Balance Sheet Data: Total assets $ 11,363,703 $ 8,296,516 $ 6,635,793 $ 5,424,190 $ 4,387,851 Loans (net) 4,516,431 3,638,580 2,922,706 2,249,061 1,638,836 Securities available for sale 4,152,704 2,021,326 1,664,257 1,305,004 1,330,684 Securities held to maturity 1,132,172 1,513,456 1,201,892 1,220,874 985,676 Trading securities 282,811 109,306 117,837 85,359 7,911 Federal funds sold 52,000 5,300 10,395 15,813 Deposits 10,185,594 7,387,594 5,608,920 4,928,808 3,784,576 Long-term debt 23,000 23,000 23,000 24,282 25,308 Trust preferred securities 57,500 57,500 57,500 57,500 57,500 Stockholders' equity 636,570 492,224 356,756 323,552 279,900 Per Share Data: Net income-basic $ 1.59 $ 1.30 $ 1.13 $ 0.75 $ 0.82 Net income-diluted 1.51 1.25 1.08 0.71 0.79 Cash dividends 0.55 0.48 0.41 0.44 0.27 Book value 9.70 7.77 6.00 5.64 5.14 Average shares outstanding: Basic 64,666 61,755 58,310 56,509 53,429 Diluted 68,102 64,223 60,930 59,324 56,125 Selected Ratios: Performance Return on average assets 1.08% 1.09% 1.12% 0.87% 1.12% Return on average equity 17.64 19.81 19.63 13.57 17.87 Net interest margin 4.76 4.62 4.65 4.42 4.59 Liquidity and Capital Average loans to average deposits 48.04% 52.17% 50.31% 44.71% 45.07% Dividend payout 34.59 37.45 36.64 58.55 33.31 Stockholders' equity to total assets 5.60 5.93 5.38 5.96 6.38 Risk-based capital: Tier 1 10.81 10.79 11.40 12.09 14.91 Total 11.96 11.92 12.72 13.71 17.06 Leverage capital 6.24 6.92 7.02 7.05 7.69 Asset Quality Non-performing assets to total year-end assets 0.16% 0.20% 0.18% 0.27% 0.43% Net charge-offs to average loans outstanding 0.19 0.11 0.08 0.08 0.13 Non-performing loans to total year-end loans 0.37 0.37 0.29 0.38 0.78 Allowance for loan losses to total end of year loans 1.46 1.32 1.30 1.37 1.45 Allowance for loan losses to non- performing loans 397.73 356.84 442.09 364.86 187.35
Item 7. 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. 2001 Overview In 2001, 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 increases in both the provision for loan losses and noninterest expenses. Loan growth totaled 24% for 2001, and deposit growth totaled 38%. At December 31, 2001, the Company had total assets of $11.4 billion, total loans of $4.5 billion, total investment securities of $5.6 billion, and total deposits of $10.2 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 -------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------- Community Banks $95,574 $77,262 $66,313 Parent/Other 7,448 2,785 (353) -------------------------------------------------------------------------------- Consolidated total $103,022 $80,047 $65,960 -------------------------------------------------------------------------------- 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, 2001, 2000 and 1999 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods. During 2001, average interest earning assets totaled $8.7 billion, an increase of $2.1 billion, or 31% over 2000. This increase resulted primarily from the increase in the average balance of investments, which rose $1.2 billion, and the average balance of loans, which rose $747.8 million during 2001. 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 $2.3 billion. The growth in interest bearing liabilities was offset by a decrease in other borrowed money, which fell $173.8 million to an average balance of $94.3 million during 2001. Net Interest Income and Net Interest Margin Net interest margin on a tax-equivalent basis was 4.76% for 2001, an increase of 14 basis points from 2000. 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 2001 was $412.7 million, an increase of $106.6 million, or 35%, over 2000. Interest income on a tax-equivalent basis increased to $615.7 million from $514.5 million, or 20%. This increase was primarily related to volume increases in the loan and investment portfolios. Interest expense for 2001 fell $5.4 million to $203.0 million from $208.4 million in 2000. This decrease was primarily related to decreases in the rates paid on the Company's deposits and other borrowed money. The tax-equivalent yield on interest earning assets during 2001 was 7.10%, a decrease of 66 basis points from 7.76% in 2000. Management's Discussion and Analysis of Financial Condition and Results of Operations The cost of interest-bearing liabilities decreased 93 basis points in 2001 to 2.96% from 3.89% in 2000. The decrease resulted primarily from decreased general market interest rates during 2001 as compared to 2000. The cost of total funding sources decreased 80 basis points in 2001 to 2.34% from 3.14%. The following table presents the major factors that contributed to the changes in net interest income for the years ended December 31, 2001 and 2000 as compared to the respective previous periods.
----------------------------------------------------------------------------------- 2001 vs. 2000 2000 vs. 1999 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 $71,674 $(9,886) $61,788 $25,664 $9,371 $35,035 Tax-exempt 297 (110) 187 1,029 54 1,083 Trading 3,669 (2,256) 1,413 3,708 492 4,200 Federal funds sold 3,448 (1,976) 1,472 3,224 263 3,487 Interest on loans: Commercial real estate 27,325 (11,170) 16,155 23,976 2,956 26,932 Commercial 18,542 (12,473) 6,069 18,348 4,111 22,459 Consumer 8,428 850 9,278 19,198 4,261 23,459 Tax-exempt 5,492 (638) 4,854 5,676 551 6,227 ----------------------------------------------------------------------------------- Total interest income 138,875 (37,659) 101,216 100,823 22,059 122,882 ----------------------------------------------------------------------------------- Interest expense: Regular savings 5,777 (10,065) (4,288) 9,306 6,795 16,101 N.O.W. accounts 1,821 (2,104) (283) (2,445) 2,293 (152) Money market plus 12,622 (21,759) (9,137) 17,307 10,546 27,853 Time deposits 17,471 (3,237) 14,234 565 3,621 4,186 Public funds 16,247 (7,443) 8,804 7,550 4,289 11,839 Other borrowed money (6,478) (6,957) (13,435) 5,352 1,711 7,063 Long-term debt (1,223) (1,223) (600) (600) ----------------------------------------------------------------------------------- Total interest expense 47,461 (52,789) (5,328) 37,635 28,655 66,290 ----------------------------------------------------------------------------------- Net increase $91,413 $15,131 $106,544 $63,188 $(6,596) $56,592 ----------------------------------------------------------------------------------- (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 2001, noninterest income totaled $196.8 million, an increase of $46.0 million or 31% from 2000. The growth in noninterest income was primarily reflected in increased deposit and service fees and other operating income, including the Company's insurance and capital markets divisions. Commerce National Insurance Services, Inc. (Commerce National Insurance), the Company's insurance brokerage subsidiary recorded an increase of $4.2 million in revenues to $49.8 million from $45.6 million in 2000. Commerce Capital Markets generated noninterest revenues of $22.8 million in 2001, an increase of $7.5 million from revenues of $15.3 million in 2000. Fees related to bank cards increased $6.9 million in 2001. In addition, deposit charges and service fees increased $27.8 million over 2000 due primarily to higher transaction volumes. These increases were partially offset by a decrease in investment security gains of $2.2 million versus 2000. Noninterest Expenses Noninterest expenses totaled $420.0 million for 2001, an increase of $104.7 million, or 33% over 2000. Contributing to this increase was the addition of 34 new branches. With the addition of these new offices, staff, facilities, marketing, and related expenses rose accordingly. Other noninterest expenses rose $26.7 million to $82.9 million in 2001. This increase included increased bank-card related service charges of $3.3 million, increased business development expenses of $4.3 million, and increased provisions for non-credit-related losses of $4.0 million. 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). This ratio equaled 70.06%, 70.72%, and 70.36% in 2001, 2000, and 1999, respectively. The Company's efficiency ratio remains above its peer group primarily due to its aggressive expansion activities. 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, -------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Average Average Average Average Average Average Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------------------------------------------------- Investment securities Taxable $4,083,493 $261,535 6.40% $2,964,401 $199,747 6.74% $2,583,530 $164,712 6.38% Tax-exempt 78,572 5,098 6.49 74,001 4,911 6.64 58,503 3,828 6.54 Trading 186,678 10,382 5.56 120,702 8,969 7.43 70,800 4,769 6.74 -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 4,348,743 277,015 6.37 3,159,104 213,627 6.76 2,712,833 173,309 6.39 Federal funds sold 166,619 5,937 3.56 69,841 4,465 6.39 19,419 978 5.04 Loans Commercial real estate 1,581,118 125,072 7.91 1,235,690 108,917 8.81 963,679 81,985 8.51 Commercial 949,205 74,143 7.81 711,826 68,074 9.56 519,963 45,615 8.77 Consumer 1,427,586 116,262 8.14 1,323,795 106,984 8.08 1,086,487 83,525 7.69 Tax-exempt 193,678 17,303 8.93 132,507 12,449 9.40 71,926 6,222 8.65 -------------------------------------------------------------------------------------------------------------------------------- Total loans 4,151,587 332,780 8.02 3,403,818 296,424 8.71 2,642,055 217,347 8.23 -------------------------------------------------------------------------------------------------------------------------------- Total earning assets $8,666,949 $615,732 7.10 $6,632,763 $514,516 7.76% $5,374,307 $391,634 7.29% -------------------------------------------------------------------------------------------------------------------------------- Sources of Funds -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Regular savings $1,643,145 $ 32,647 1.99% $1,352,364 $ 36,935 2.73% $1,011,642 $ 20,834 2.06% N.O.W. accounts 251,352 5,634 2.24 170,118 5,918 3.48 240,409 6,070 2.52 Money market plus 2,748,236 57,920 2.11 2,149,329 67,057 3.12 1,594,602 39,204 2.46 Time deposits 1,247,741 61,415 4.92 892,780 47,181 5.28 882,081 42,995 4.87 Public funds 790,001 36,669 4.64 439,972 27,865 6.33 320,768 16,026 5.00 -------------------------------------------------------------------------------------------------------------------------------- Total deposits 6,680,475 194,285 2.91 5,004,563 184,956 3.70 4,049,502 125,129 3.09 Other borrowed money 94,257 3,508 3.72 268,304 16,943 6.31 183,554 9,880 5.38 Long-term debt 80,500 5,248 6.52 80,500 6,471 8.04 80,500 7,071 8.78 -------------------------------------------------------------------------------------------------------------------------------- Total deposits and interest- bearing liabilities 6,855,232 203,041 2.96 5,353,367 208,370 3.89 4,313,556 142,080 3.29 Noninterest-bearing funds (net) 1,811,717 1,279,396 1,060,751 -------------------------------------------------------------------------------------------------------------------------------- Total sources to fund earning assets $8,666,949 $203,041 2.34 $6,632,763 $208,370 3.14 $5,374,307 $142,080 2.64 -------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin tax-equivalent basis 412,691 4.76 306,146 4.62 249,554 4.65 Tax-exempt adjustment 11,365 9,216 5,187 -------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin $401,326 4.63% $296,930 4.48% $244,367 4.55% -------------------------------------------------------------------------------------------------------------------------------- Other Balances -------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 417,110 $ 328,390 $ 251,438 Other assets 519,799 431,884 312,652 Total assets 9,546,794 7,348,963 5,903,869 Demand deposits (noninterest-bearing) 1,962,354 1,519,313 1,202,412 Other liabilities 145,084 72,162 51,921 Stockholders' equity 584,124 404,121 335,982 -------------------------------------------------------------------------------------------------------------------------------- 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 include investments available for sale. --Consumer loans include loans held for sale.
Management's Discussion and Analysis of Financial Condition and Results of Operations Income Taxes The provision for federal and state income taxes for 2001 was $48.7 million compared to $38.4 million in 2000 and $31.3 million in 1999. The effective tax rate was 32.1%, 32.4% and 32.2% in 2001, 2000, and 1999, respectively. The decrease in the effective income tax rate is primarily due to increases in tax-exempt interest income versus both 2000 and 1999, respectively. Net Income Net income for 2001 was $103.0 million, an increase of $23.0 million, or 29% over the $80.0 million recorded for 2000. The increase in net income was due to increases in net interest income and noninterest income, which offset increases in both the provision for loan losses and noninterest expenses. Diluted net income per share of common stock for 2001 was $1.51 compared to $1.25 per common share for 2000. 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. The Company's ROA was 1.08%, 1.09% and 1.12% for 2001, 2000 and 1999, respectively. 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. The Company's ROE was 17.64%, 19.81% and 19.63% for 2001, 2000 and 1999, respectively. 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 1997 through 2001.
--------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------- (dollars in thousands) Commercial real estate: Owner-occupied $ 750,562 $ 685,916 $ 512,087 $ 425,764 $ 332,745 Investor/developer 664,605 471,604 395,086 330,769 270,822 Construction 460,957 380,804 185,712 122,797 64,948 --------------------------------------------------------------------------------- 1,876,124 1,538,324 1,092,885 879,330 668,515 Commercial: Term 600,374 469,564 393,953 282,556 211,827 Line of credit 556,977 430,811 277,917 192,485 118,631 Demand 440 1,400 1,328 417 617 --------------------------------------------------------------------------------- 1,157,791 901,775 673,198 475,458 331,075 Consumer: Mortgages (1-4 family residential) 471,680 351,644 428,453 322,310 184,479 Installment 161,647 154,415 125,856 96,188 89,150 Home equity 872,974 710,848 621,597 494,047 377,437 Credit lines 43,196 30,254 19,099 12,993 12,330 --------------------------------------------------------------------------------- 1,549,497 1,247,161 1,195,005 925,538 663,396 --------------------------------------------------------------------------------- Total loans $4,583,412 $3,687,260 $2,961,088 $2,280,326 $1,662,986 ---------------------------------------------------------------------------------
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 include loans for owner-occupied buildings, investor/developer and single family residential properties. Financing for investor/developer construction is generally for pre-leased or pre-sold property, while residential construction is provided against firm agreements of sale with speculative construction generally limited to two samples per project. The commercial loan portfolio is comprised of loans to 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. 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, 2001, are summarized in the following table.
--------------------------------------------------------------------------------- December 31, 2001 --------------------------------------------------------------------------------- Due in One Due in One Due in Over Year or Less to Five Years Five Years Total --------------------------------------------------------------------------------- (dollars in thousands) Commercial real estate: Owner-occupied and investor/ developer $249,259 $1,048,784 $117,124 $1,415,167 Construction 282,350 174,891 3,716 460,957 --------------------------------------------------------------------------------- 531,609 1,223,675 120,840 1,876,124 Commercial: Term 244,102 302,740 53,532 600,374 Line of credit 536,235 20,742 556,977 Demand 120 320 440 --------------------------------------------------------------------------------- 780,457 323,802 53,532 1,157,791 Consumer: Mortgages (1-4 family Residential) 13,094 40,889 417,697 471,680 Installment 71,799 76,435 13,413 161,647 Home equity 95,964 322,727 454,283 872,974 Credit lines 17,242 25,954 43,196 --------------------------------------------------------------------------------- 198,099 466,005 885,393 1,549,497 --------------------------------------------------------------------------------- Total loans $1,510,165 $2,013,482 $1,059,765 $4,583,412 --------------------------------------------------------------------------------- Interest rates: Predetermined $516,738 $1,537,090 $755,763 $2,809,591 Floating 993,427 476,392 304,002 1,773,821 --------------------------------------------------------------------------------- Total loans $1,510,165 $2,013,482 $1,059,765 $4,583,412 ---------------------------------------------------------------------------------
During 2001, loans increased $896.2 million, or 24% from $3.7 billion to $4.6 billion. At December 31, 2001, loans represented 45% of total deposits and 40% of total assets. All segments of the loan portfolio experienced growth in 2001, 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, 2001, $750.6 million, or 53%, 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. Commercial real estate construction loans increased $80.2 million to $461.0 million in 2001. At December 31, 2001, construction loans for 1-4 family residential dwellings totaled $47.9 million and construction loans secured by commercial properties amounted to $181.1 million. The balance of $232.0 million was for land development, of which $101.8 million was primarily for the development portion of residential tract financing. As of December 31, 2001, there were no concentrations of loans to any one type of industry exceeding 10% of total loans. 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, 2001 were $18.4 million or .16% of total assets, as compared to $16.6 million or .20% of total assets at December 31, 2000. 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, 2001 were $16.8 million as compared to $13.6 million a year ago. The Company generally places a loan on non-accrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. Generally loans past due 90 days are placed on non-accrual status, unless the loan is both well secured and in the process of collection. At December 31, 2001, loans past due 90 days or more and still accruing interest amounted to $519 thousand, compared to $489 thousand at December 31, 2000. Additional loans considered by the Company's internal loan review department as potential problem loans of $17.8 million at December 31, 2001 have been evaluated as to risk exposure in determining the adequacy of the allowance for loan losses. Other real estate (ORE) totaled $1.5 million at December 31, 2001 as compared to $3.0 million at December 31, 2000. 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 non-performing loans secured by real estate. 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. 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, 1997 through 2001.
--------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------- (dollars in thousands) Non-accrual loans (1): Commercial $6,835 $ 4,955 $ 2,254 $ 2,655 $ 2,937 Consumer 1,484 1,295 674 831 703 Real estate Construction 1,590 1,459 55 1,345 Mortgage 6,924 5,840 5,230 4,849 7,886 --------------------------------------------------------------------------------- Total non-accrual Loans 16,833 13,549 8,213 8,335 12,871 --------------------------------------------------------------------------------- Restructured loans (1): Commercial 8 11 277 17 19 Real estate Mortgage 82 192 217 --------------------------------------------------------------------------------- Total restructured Loans 8 93 469 234 19 --------------------------------------------------------------------------------- Total non-performing Loans 16,841 13,642 8,682 8,569 12,890 --------------------------------------------------------------------------------- Other real estate 1,549 2,959 3,523 6,081 5,845 --------------------------------------------------------------------------------- Total non-performing Assets(1): $18,390 $16,601 $12,205 $14,650 $18,735 --------------------------------------------------------------------------------- Non-performing assets as a percent of total assets 0.16% 0.20% 0.18% 0.27% 0.43% --------------------------------------------------------------------------------- Loans past due 90 days or more and still accruing interest $519 $ 489 $ 499 $ 1,029 $ 818 --------------------------------------------------------------------------------- (1) Interest income of approximately $2,092,000, $1,731,000, $986,000, $1,030,000 and $1,434,000 would have been recorded in 2001, 2000, 1999, 1998 and 1997 respectively, on non-performing loans in accordance with their original terms. Actual interest recorded on these loans amounted to $237,000 in 2001, $525,000 in 2000, $255,000 in 1999, $266,000 in 1998 and $323,000 in 1997.
Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio. In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risks on a timely basis so that an appropriate allowance can be maintained. 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, in addition to the factors discussed below, management considers the results of recent regulatory examinations, which typically include a review of the allowance for loan losses as an integral part of the examination process. In establishing the allowance, management evaluates individual large classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review. An allowance for the remainder of the loan portfolio is also determined based on historical loss experience within the components of the portfolio. These allocations may be modified if current conditions indicate that loan losses may differ from historical experience, based on economic factors and changes in portfolio mix and volume. In addition, an unallocated portion of the allowance is established for losses inherent in the loan portfolio which have not been identified by the more quantitative processes described above. 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. Those factors include changes in levels and trends of charge-offs, delinquencies, and nonaccrual loans, trends in volume and terms of loans, changes in underwriting standards and practices, portfolio mix, tenure of loan officers and management, changes in credit concentrations, and national and local economic trends and conditions. While the allowance consists of an allocated and unallocated portion, both portions are available to absorb losses inherent in the total loan portfolio. While the allowance for loan losses is maintained at a level believed to be adequate by management for estimated losses in the loan portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods. The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Charge-offs occur when loans are deemed to be uncollectible. During 2001, net charge-offs amounted to $8.1 million, or .19% of average loans outstanding for the year, compared to $3.6 million or .11% of average loans outstanding for 2000. During 2001, the Company recorded provisions of $26.4 million to the allowance for loan losses compared to $13.9 million for 2000. At December 31, 2001, the allowance aggregated $67.0 million or 1.46% of total loans and provided coverage of 398% of non-performing loans. The increase in the provision in 2001 reflects the increases in non-performing assets, the charge-offs and the growth in the loan portfolio. Additionally, the increase in the Company's allowance for loan losses reflects the current uncertainty with the overall economy and risks associated with the mix of the loan portfolio, including newer products such as health care and asset-based lending, leasing and trade finance Management's Discussion and Analysis of Financial Condition and Results of Operations The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
--------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------- (dollars in thousands) Balance at beginning of period $48,680 $38,382 $31,265 $24,150 $20,397 Provisions charged to operating expenses 26,384 13,931 9,175 8,762 5,805 --------------------------------------------------------------------------------- 75,064 52,313 40,440 32,912 26,202 --------------------------------------------------------------------------------- Recoveries of loans previously charged-off: Commercial 552 313 551 418 360 Consumer 288 249 286 305 415 Commercial real estate 134 14 132 764 144 --------------------------------------------------------------------------------- Total recoveries 974 576 969 1,487 919 --------------------------------------------------------------------------------- Loans charged-off: Commercial (5,862) (2,936) (1,599) (1,281) (1,481) Consumer (2,784) (1,220) (1,078) (1,352) (1,344) Commercial real estate (411) (53) (350) (501) (146) --------------------------------------------------------------------------------- Total charged-off (9,057) (4,209) (3,027) (3,134) (2,971) --------------------------------------------------------------------------------- Net charge-offs (8,083) (3,633) (2,058) (1,647) (2,052) --------------------------------------------------------------------------------- Balance at end of period $66,981 $48,680 $38,382 $31,265 $24,150 --------------------------------------------------------------------------------- Net charge-offs as a percentage of average loans outstanding 0.19% 0.11% 0.08% 0.08% 0.13% --------------------------------------------------------------------------------- Allowance for loan losses as a percentage of year-end loans 1.46% 1.32% 1.30% 1.37% 1.45% ---------------------------------------------------------------------------------
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, ---------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------------- % Gross % Gross % Gross % Gross % Gross Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ---------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Commercial $24,110 25% $20,396 24% $14,268 23% $ 7,738 21% $ 5,236 20% Consumer 9,915 34 4,632 34 4,120 40 7,800 41 6,406 40 Commercial real estate 32,956 41 23,652 42 19,994 37 15,727 38 12,508 40 ---------------------------------------------------------------------------------------------------------------------------------- $66,981 100% $48,680 100% $38,382 100% $31,265 100% $24,150 100% ----------------------------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations Investment Securities The following table summarizes the book value of securities available for sale and securities held to maturity by the Company as of the dates shown.
-------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------- (dollars in thousands) U.S. Government agency and mortgage-backed obligations $3,994,523 $1,900,912 $1,582,933 Obligations of state and political subdivisions 82,922 46,544 42,182 Equity securities 16,325 16,825 9,107 Other 58,934 57,045 30,035 -------------------------------------------------------------------------------- Securities available for sale $4,152,704 $2,021,326 $1,664,257 -------------------------------------------------------------------------------- U.S. Government agency and mortgage-backed obligations $1,044,266 $1,437,993 $1,134,115 Obligations of state and political subdivisions 50,602 42,938 35,667 Other 37,304 32,525 32,110 -------------------------------------------------------------------------------- Securities held to maturity $1,132,172 $1,513,456 $1,201,892 --------------------------------------------------------------------------------
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 with unrealized gains and losses recognized in Stockholders' Equity. 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 $1.9 billion from $3.6 billion to $5.6 billion at December 31, 2001. Deposit growth and other funding sources were used to increase the Company's investment portfolio. The available for sale portfolio increased $2.1 billion to $4.2 billion, and the securities held to maturity portfolio decreased $381.3 million to $1.1 billion at year-end 2001. The portfolio of trading securities increased $173.5 million from year-end 2000 to $282.8 million at year-end 2001. At December 31, 2001, the average life and duration of the investment portfolio were approximately 5.8 years and 4.3 years, respectively, as compared to 6.9 years and 4.9 years, respectively, at December 31, 2000. At December 31, 2001 the yield on the portfolio was 6.38%, down from 6.80% at December 31, 2000. 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 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, 2001, the yield on the investment portfolio was 6.37%, a decrease of 39 basis points from 6.76% in fiscal 2000. At December 31, 2001, the net unrealized appreciation in securities available for sale included in stockholders' equity totaled $15.8 million, net of tax, compared to net unrealized depreciation of $5.2 million, net of tax, at December 31, 2000. The contractual maturity distribution and weighted average yield of the Company's investment portfolio (excluding equity and trading securities) at December 31, 2001, are summarized in the following table. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amortized cost amount of the related investment and has been tax effected, assuming a federal tax rate of 35%, on tax-exempt obligations. Management's Discussion and Analysis of Financial Condition and Results of Operations
------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 ------------------------------------------------------------------------------------------------------------------------------------ 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 $57,615 2.01% $7,466 7.07% $3,929,442 6.37% $3,994,523 6.31% Obligations of state and political subdivisions 2,521 7.04 13,755 7.20 9,831 6.32 56,815 7.66 82,922 7.41 Other securities 3,560 5.91 997 5.03 23,674 7.24 30,703 8.17 58,934 7.60 ------------------------------------------------------------------------------------------------------------------------------------ $63,696 2.43% $22,218 7.06% $33,505 6.97% $4,016,960 6.41% $4,136,379 6.35% ------------------------------------------------------------------------------------------------------------------------------------ Securities held to maturity: U.S. Government agency and mortgage-backed obligations $ 2 7.00% $23,340 6.39% $81,352 6.65% $939,572 6.63% $1,044,266 6.63% Obligations of state and political subdivisions 49,827 4.52 775 7.30 50,602 4.56 Other securities 36,696 5.69 455 9.50 153 2.78 37,304 5.72 ------------------------------------------------------------------------------------------------------------------------------------ $86,525 5.02% $23,795 6.45% $82,127 6.65% $939,725 6.63% $1,132,172 6.51% ------------------------------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations Deposits Total deposits at December 31, 2001 were $10.2 billion, an increase of $2.8 billion or 38% above total deposits of $7.4 billion at December 31, 2000. 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 $2.6 billion from year-end 2000 to year-end 2001. Certificates of deposit in excess of $100 thousand, retail and public, increased $305.1 million from year-end 2000. Total deposits averaged $8.6 billion for 2001, an increase of $2.1 billion or 32% above the 2000 average. The average balance of noninterest-bearing demand deposits in 2001 was $2.0 billion, a $443.0 million or 29% increase over the average balance for 2000. The average total balance of passbook and statement savings accounts increased $290.7 million, or 22% compared to the prior year. The average balance of interest-bearing demand accounts (money market and N.O.W. accounts) for 2001 was $3.0 billion, a $680.1 million or 29% increase over the average balance for the prior year. The average balance of time deposits for 2001 was $2.0 billion, a $705.0 million increase over the average balance for 2000. For 2001, the cost of total deposits was 2.25% as compared to 2.84% in 2000. 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 2001, 2000 and 1999 are presented below.
---------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ---------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Demand deposits: Noninterest-bearing $1,962,354 $1,519,313 $1,202,412 Interest-bearing (money market and N.O.W. accounts) 2,999,588 2.12% 2,319,447 3.15% 1,835,011 2.47% Savings deposits 1,643,145 1.99 1,352,364 2.73 1,011,642 2.06 Time deposits/public funds 2,037,742 4.81 1,332,752 5.63 1,202,849 4.91 ---------------------------------------------------------------------------------------------------------------------- Total deposits $8,642,829 $6,523,876 $5,251,914 ----------------------------------------------------------------------------------------------------------------------
The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 2001, 2000 and 1999 is presented below:
----------------------------------------------------------------------------------------------- Maturity 2001 2000 1999 ----------------------------------------------------------------------------------------------- (dollars in thousands) 3 months or less $897,304 $641,342 $323,029 3 to 6 months 137,388 98,763 49,983 6 to 12 months 70,630 54,489 22,733 Over 12 months 6,820 12,420 7,628 ----------------------------------------------------------------------------------------------- Total $1,112,142 $807,014 $403,373 -----------------------------------------------------------------------------------------------
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, 2001.
----------------------------------------------------------------------------------- Interest Rate Sensitivity Gaps December 31, 2001 ----------------------------------------------------------------------------------- 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 $2,022.8 $ 74.7 $ 170.7 $1,559.5 $ 812.3 $4,640.0 Investment securities 478.6 436.8 775.9 2,915.2 961.0 5,567.5 ------------------------------------------------------------------------------------ Total interest- earning assets 2,501.4 511.5 946.6 4,474.7 1,773.3 10,207.5 ------------------------------------------------------------------------------------ Interest-bearing liabilities Transaction accounts 1,723.8 3,810.9 5,534.7 Time deposits 1,119.3 397.0 551.1 180.1 2,247.5 Other borrowed money 264.6 264.6 Long-term debt 23.0 57.5 80.5 ------------------------------------------------------------------------------------ Total interest- bearing liabilities 3,107.7 397.0 551.1 203.1 3,868.5 8,127.3 ------------------------------------------------------------------------------------ Period gap (606.3) 114.5 395.5 4,271.7 (2,095.1) $2,080.2 ------------------------------------------------------------------------------------ Cumulative gap $(606.3) $(491.8) $(96.3) $4,175.3 $2,080.2 --------------------------------------------------------------------------- Cumulative gap as a percentage of total interest-earning assets (5.9)% (4.8)% (0.9)% 40.9% 20.4% ----------------------------------------------------------------------------
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. The Company's Asset/Liability Committee (ALCO) policy has established that interest income sensitivity will be Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2001, the Company's income simulation model indicates net income would decrease by 3.3% and 13.1% in the first year and over a two year time frame, respectively, if rates decreased as described above, as compared to an increase of 5.0% and 2.6%, respectively, at December 31, 2000. The model projects that net income would decrease by 2.1% and increase by 1.7% in the first year and over a two year time frame, respectively, if rates increased as described above, as compared to a decrease of 7.9% and 8.1%, respectively, at December 31, 2000. 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, 2001, 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, 2001 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. As of December 31, 2001 the Company had in excess of $4.0 billion in immediately available liquidity which includes securities that could be sold or used for collateralized borrowings, cash on hand, and borrowing capacities under existing lines of credit. During 2001, 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, were used in 2001 to meet short-term liquidity needs. For 2001, short-term borrowings averaged $94.3 million as compared to $268.3 million in 2000. The average rate on the Company's short-term borrowings was 3.72% and 6.31% during 2001 and 2000, respectively. As of December 31, 2001, short-term borrowings included $199.6 million of securities sold under agreements to repurchase at an average rate of 1.71%. Long-Term Debt In 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. Management's Discussion and Analysis of Financial Condition and Results of Operations Stockholders' Equity and Dividends At December 31, 2001, stockholders' equity totaled $636.6 million, up $144.3 million or 29% over stockholders' equity of $492.2 million at December 31, 2000. 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 5.60% at December 31, 2001, as compared to 5.93% at December 31, 2000. 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 -------------------------------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------------- Risk based capital ratios: Tier 1 10.81% 10.79% 4.00% 4.00% Total capital 11.96 11.92 8.00 8.00 Leverage ratio 6.24 6.92 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, 2001, 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%. On February 27, 2002, the Company announced that it proposes to privately sell up to $175 million of convertible trust preferred shares comprised of preferred securities issued by a business trust to be formed by Commerce Bancorp. The offering will be made pursuant to SEC Rule 144A only to qualified institutional and certain other accredited investors. The Company intends to file a registration statement with the SEC to register the resale of the trust preferred and the underlying common securities by the purchasers in the private placement. The proceeds of the offering will be used for general corporate purposes, including among other things contributions to the capital of subsidiary banks to fund their growth and operations. A portion of the proceeds may also be used to repay currently outstanding debt. 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 paid per common share for each of the last two years are shown in the table below. Prices and dividends per share have been adjusted to reflect the 2 for 1 stock split with a record date of December 3, 2001. As of February 28, 2002, there were approximately 24,000 holders of record of the Company's common stock.
------------------------------------------------------------------------------- Common Share Data ------------------------------------------------------------------------------- Market Prices -------------------------- Cash Dividends High Low Per Share ------------------------------------------------------------------------------- 2001 Quarter Ended December 31 $39.34 $34.05 $0.13750 September 30 38.79 30.55 0.13750 June 30 36.35 29.40 0.13750 March 31 33.28 26.90 0.13750 2000 Quarter Ended December 31 $35.00 $25.34 $0.12250 September 30 29.25 23.31 0.12250 June 30 24.47 18.94 0.12250 March 31 19.81 15.66 0.11667 -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations 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. Related Parties The Company engaged in certain activities with entities that would be considered related parties. See notes 4 and 7 to the Company's consolidated financial statements included elsewhere herein. Management believes disbursements made to related parties were substantially equivalent to those that would have been paid to unaffiliated companies for similar goods and services. Results of Operations - 2000 versus 1999 Net income for 2000 was $80.0 million compared to $66.0 million in 1999. Diluted net income per common share was $1.25 compared to $1.08 per common share for the prior year. Net interest income on a tax-equivalent basis for 2000 amounted to $306.1 million, an increase of $56.6 million, or 23% over 1999. Interest income on a tax-equivalent basis increased $122.9 million or 31% to $514.5 million in 2000. 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. The provision for loan losses was $13.9 million in 2000 compared to $9.2 million in the prior year. 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. 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 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 during 2000 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 $13.8 million to $56.2 million in 2000. 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 2001, the Company acquired Fitzsimmons Insurance and Financial Services, Inc., Business Training Systems, Inc. and Brettler Financial Group, Inc., insurance brokerage agencies, which were merged with and into Commerce National Insurance. The Company issued approximately 108,000 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; Interest Rate Sensitivity and Liquidity included elsewhere herein. Item 8. Financial Statements and Supplementary Financial Data Commerce Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets
-------------------------------------------------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 557,738 $ 443,918 Federal funds sold 0 52,000 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents 557,738 495,918 Loans held for sale 73,261 41,791 Trading securities 282,811 109,306 Securities available for sale 4,152,704 2,021,326 Securities held to maturity 1,132,172 1,513,456 (market value 2001-$1,146,345; 2000-$1,503,202) Loans 4,583,412 3,687,260 Less allowance for loan losses 66,981 48,680 ----------------------------------------------------------------------------------------------------------- 4,516,431 3,638,580 Bank premises and equipment, net 362,992 276,097 Other assets 285,594 200,042 ----------------------------------------------------------------------------------------------------------- $11,363,703 $8,296,516 -------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits: Demand: Interest-bearing $3,608,709 $2,628,358 Noninterest-bearing 2,403,637 1,789,371 Savings 1,925,919 1,436,800 Time 2,247,329 1,533,065 ----------------------------------------------------------------------------------------------------------- Total deposits 10,185,594 7,387,594 Other borrowed money 264,554 283,714 Other liabilities 196,485 52,484 Trust Capital Securities - Commerce Capital Trust I 57,500 57,500 Long-term debt 23,000 23,000 ----------------------------------------------------------------------------------------------------------- 10,727,133 7,804,292 -------------------------------------------------------------------------------------------------------------------------- Stockholders' Common stock, 65,832,559 shares issued 65,833 49,627 Equity (63,522,906 shares in 2000) Capital in excess of par or stated value 461,897 422,375 Retained earnings 94,698 27,083 Accumulated other comprehensive income (loss) 15,764 (5,239) ----------------------------------------------------------------------------------------------------------- 638,192 493,846 Less treasury stock, at cost 1,622 1,622 ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 636,570 492,224 ----------------------------------------------------------------------------------------------------------- $11,363,703 $8,296,516 -----------------------------------------------------------------------------------------------------------
See accompanying notes. Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Income
---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Interest Interest and fees on loans $326,723 $292,066 $215,170 Income Interest on investment securities 271,707 208,769 170,300 Other interest 5,937 4,465 978 --------------------------------------------------------------------------------------------------------------------- Total interest income 604,367 505,300 386,448 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- Interest Interest on deposits: Expense Demand 63,554 72,975 45,274 Savings 32,647 36,935 20,835 Time 98,084 75,046 59,021 --------------------------------------------------------------------------------------------------------------------- Total interest on deposits 194,285 184,956 125,130 Interest on other borrowed money 3,508 16,943 9,880 Interest on long-term debt 5,248 6,471 7,071 --------------------------------------------------------------------------------------------------------------------- Total interest expense 203,041 208,370 142,081 --------------------------------------------------------------------------------------------------------------------- Net interest income 401,326 296,930 244,367 Provision for loan losses 26,384 13,931 9,175 --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 374,942 282,999 235,192 ---------------------------------------------------------------------------------------------------------------------------------- Noninterest Deposit charges and service fees 84,065 56,306 44,196 Income Other operating income 111,760 91,241 67,818 Net investment securities gains 980 3,213 2,582 --------------------------------------------------------------------------------------------------------------------- Total noninterest income 196,805 150,760 114,596 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- Noninterest Salaries and benefits 198,034 148,799 121,882 Expense Occupancy 39,152 31,419 22,407 Furniture and equipment 50,724 40,436 31,659 Office 26,808 23,548 21,356 Audit and regulatory fees and assessments 4,024 3,256 2,623 Marketing 18,378 11,706 10,155 Other 82,916 56,193 42,441 --------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 420,036 315,357 252,523 --------------------------------------------------------------------------------------------------------------------- Income before income taxes 151,711 118,402 97,265 Provision for federal and state income taxes 48,689 38,355 31,305 --------------------------------------------------------------------------------------------------------------------- Net income $103,022 $ 80,047 $ 65,960 --------------------------------------------------------------------------------------------------------------------- Net income per common and common equivalent share: Basic $ 1.59 $ 1.30 $ 1.13 --------------------------------------------------------------------------------------------------------------------- Diluted $ 1.51 $ 1.25 $ 1.08 --------------------------------------------------------------------------------------------------------------------- Average common and common equivalent shares outstanding: Basic 64,666 61,755 58,310 --------------------------------------------------------------------------------------------------------------------- Diluted 68,102 64,223 60,930 --------------------------------------------------------------------------------------------------------------------- Cash dividends, common stock $0.55 $ 0.48 $ 0.41 ---------------------------------------------------------------------------------------------------------------------
See accompanying notes. Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Operating Net income $103,022 $80,047 $ 65,960 Activities Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 26,384 13,931 9,175 Provision for depreciation, amortization and accretion 44,263 32,596 28,186 Gains on sales of securities available for sale (980) (3,213) (2,582) Proceeds from sales of loans held for sale 689,302 56,101 111,055 Originations of loans held for sale (720,222) (92,188) (94,341) Net loan (chargeoffs) (8,083) (3,633) (2,058) Net decrease (increase) in trading securities (173,505) 8,531 (32,478) Increase in other assets (97,711) (17,494) (60,142) Increase (decrease) in other liabilities 148,055 26,271 (23,064) Deferred income tax benefit (4,054) (2,812) (3,468) ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities 6,471 98,137 (3,757) Investing Proceeds from the sales of securities available for sale 381,341 410,541 398,274 Activities Proceeds from the maturity of securities available for sale 895,077 345,160 313,373 Proceeds from the maturity of securities held to maturity 384,388 174,124 241,690 Purchase of securities available for sale (3,311,356) (1,055,694) (1,002,738) Purchase of securities held to maturity (68,420) (127,194) (236,623) Net increase in loans (906,160) (1,095,712) (820,299) Proceeds from sales of loans 10,008 10,622 9,769 Purchases of premises and equipment (128,137) (109,701) (73,303) ------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (2,743,259) (1,447,854) (1,169,857) Financing Net increase in demand and savings deposits 2,083,736 1,314,974 721,147 Activities Net increase (decrease) in time deposits 714,264 463,700 (41,035) Net (decrease) increase in other borrowed money (19,160) (274,378) 530,247 Dividends paid (35,400) (29,761) (23,476) Proceeds from issuance of common stock under dividend reinvestment and other stock plans 53,004 53,670 31,428 Other 2,714 (5,494) 612 ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 2,799,158 1,522,711 1,218,923 Increase in cash and cash equivalents 61,820 172,994 45,309 Cash and cash equivalents at beginning of year 495,918 322,924 277,615 ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $557,738 $495,918 $ 322,924 ------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $201,127 $206,144 $ 141,810 Income taxes 48,826 36,373 26,753 Other noncash activities: Transfer of securities to securities available for sale 91,010 Securitization of loans 358,918 129,768 ------------------------------------------------------------------------------------------------------------------------
See accompanying notes. Commerce Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
------------------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 2001, 2000 and 1999 Capital in Accumulated Excess of Other Par or Commitment Compre- (in thousands, except per share amounts) Common Preferred Stated Retained to Treasury hensive Stock Stock Value Earnings ESOP Stock Income Total ------------------------------------------------------------------------------------------------------------------------------------ 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 (148 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 (2,290 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 (1,960 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 (602 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 (2,834 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 (3,230 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 Acquisition of insurance brokerage agencies (108 shares) 108 (885) (777) ------------------------------------------------------------------------------------------------------------------------------------ As adjusted balance at January 1, 2001 63,630 407,595 27,083 0 (1,622) (5,239) 491,447 Net income 103,022 103,022 Other comprehensive income, net of tax Unrealized gain on securities (pre-tax $31,924) 20,525 20,525 Reclassification adjustment (pre-tax $735) 478 478 ----------- Other comprehensive income 21,003 ----------- Total comprehensive income 124,025 Cash dividends paid (35,400) (35,400) Shares issued under dividend reinvestment and compensation and benefit plans (2,202 shares) 2,202 50,802 53,004 Restatement of par value (17,865) 17,865 Shares issued pursuant to stock split 31,761 (31,761) Other 3,501 (7) 3,494 ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2001 $65,833 $ 0 $461,897 $94,698 $ 0 $(1,622) $15,764 $636,570 ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 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/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 2001 presentation. All common stock and per share amounts have been adjusted to reflect the 2 for 1 stock split with a record date of December 3, 2001. The Company is a multi-bank holding company headquartered in Cherry Hill, New Jersey, operating primarily in the metropolitan Philadelphia, New Jersey, Delaware and metropolitan New York markets. Through its subsidiaries, the Company provides retail and commercial banking services, corporate trust services, insurance brokerage services, and certain securities activities, including trading, underwriting and advisory 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 of $10.6 million, $8.4 million, and $7.8 million were recorded in 2001, 2000, and 1999, respectively, including unrealized gains of $265,000 and $2.4 million at December 31, 2001 and 2000, 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. Loans held for sale are valued on an aggregate basis at the lower of cost or fair value. Loan origination fees are generally considered as adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Loans are placed on a non-accrual status and cease accruing interest when loan payment performance is deemed unsatisfactory. However, all loans past due 90 days are placed on non-accrual status, unless the loan is both well secured and in the process of collection. Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Based upon management's evaluation of the loan portfolio, the allowance is maintained at a level considered adequate to absorb estimated inherent losses in the loan portfolio. The level of the allowance is Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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, all of which may be susceptible to significant change. 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. Included in Other noninterest expense is $1.7 million, $1.0 million and $1.8 million related to Other Real Estate expenses, net for 2001, 2000 and 1999, respectively. 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 $1.9 million and $2.2 million at December 31, 2001 and 2000, respectively. Other intangible assets are amortized on a straight-line basis over 10 to 15 year lives. Other intangibles amounted to $1.4 million and $1.6 million at December 31, 2001 and 2000, respectively. Income Taxes The provision for income taxes is based on current taxable income. Deferred income taxes are provided on temporary differences between amounts reported for financial statement and tax purposes. 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 2001 and 2000 were approximately $16.7 million and $7.1 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. Management has determined the swap to be effective swap since the terms of the swap are substantially identical to those contained in the Trust Capital Securities. The Company adopted the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) as of January 1, 2001. Under FAS 133 derivatives are carried at fair value with correpsonding changes recognized in other comprehensive income. The cumulative effect of adoption of FAS 133 and the unrealized gain on the swap were not material. 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. Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Recent Accounting Statements In June 2001, the FASB issued Statement No. 141, "Business Combinations" (FAS 141), which replaces APB Opinion 16. FAS 141 requires all business combinations to be accounted for by the purchase method and eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. While FAS 141 will affect how future business combinations, if undertaken, are accounted for and disclosed in the financial statements, the issuance of the new guidance had no effect on the Company's results of operations, financial position, or liquidity during 2001. In conjunction with the issuance of the new guidance for business combinations, the FASB also issued Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142), which addresses the accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 17. Under the provisions of FAS 142, goodwill and certain other intangible assets, which do not possess finite useful lives, will no longer be amortized into net income over an estimated life but rather will be tested at least annually for impairment based on specific guidance provided in the new standard. Intangible assets determined to have finite lives will continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. The provisions of FAS 142, which were adopted by the Company as required effective January 1, 2002, will not have a material impact on the results of operations of the Company. It is anticipated there will not be any material categorical reclassifications or adjustments to the useful lives of finite-lived intangible assets as a result of adopting the new guidance. 2. Mergers and Acquisitions During 2001, the Company acquired Fitzsimmons Insurance and Financial Services, Inc., Business Training Systems, Inc. and Brettler Financial Group, Inc., insurance brokerage agencies, which were merged with and into Commerce National Insurance. The Company issued approximately 108,000 shares of common stock in exchange for all of the outstanding shares of these agencies. In November 1999, Mullaney Insurance Associates, Oakhurst, NJ, an insurance brokerage agency was merged with and into Commerce National Insurance. The Company issued approximately 134,000 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 602,000 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. 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, 2001 and 2000 follows:
------------------------------------------------------------------------------------------------------------------------------------ December 31, ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ 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 $3,974,752 $41,312 $(21,541) $3,994,523 $1,912,261 $ 6,562 $(17,911) $1,900,912 Obligations of state and political subdivisions 83,727 768 (1,573) 82,922 46,528 436 (420) 46,544 Equity securities 11,666 4,828 (169) 16,325 13,823 3,170 (168) 16,825 Other 58,175 1,256 (497) 58,934 56,989 1,083 (1,027) 57,045 ------------------------------------------------------------------------------------------------------------------------------------ Securities available for sale $4,128,320 $48,164 $(23,780) $4,152,704 $2,029,601 $11,251 $(19,526) $2,021,326 ------------------------------------------------------------------------------------------------------------------------------------ U.S. Government agency and mortgage-backed obligations $1,044,266 $16,917 $(2,742) $1,058,441 $1,437,993 $ 5,111 $(15,365) $1,427,739 Obligations of state and political subdivisions 50,602 50,602 42,938 42,938 Other 37,304 (2) 37,304 32,525 32,525 ------------------------------------------------------------------------------------------------------------------------------------ Securities held to maturity $1,132,172 $16,917 $(2,744) $1,146,345 $1,513,456 $ 5,111 $(15,365) $1,503,202 ------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities (in thousands) at December 31, 2001, 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 $ 63,186 $ 63,697 $ 86,523 $ 86,523 Due after one year through five years 14,202 14,752 455 455 Due after five years through ten years 32,349 33,504 775 775 Due after ten years 89,149 87,518 153 151 Mortgage backed securities 3,917,768 3,936,908 1,044,266 1,058,441 Equity securities 11,666 16,325 ---------------------------------------------------------------------------------------------------------------------- $4,128,320 $4,152,704 $1,132,172 $1,146,345 ----------------------------------------------------------------------------------------------------------------------
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Proceeds from sales of securities available for sale during 2001, 2000 and 1999 were $381.3 million, $410.5 million and $398.3 million, respectively. Gross gains of $2.2 million, $3.2 million and $2.6 million were realized on the sales in 2001, 2000, and 1999, respectively, and gross losses of $1.2 million, $0 and $27,000 were realized in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, investment securities with a carrying value of $1,610.3 million and $998.9 million, respectively, were pledged to secure deposits of public funds. 4. Loans The following is a summary of loans outstanding (in thousands) at December 31, 2001 and 2000:
------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------------------------- Commercial real estate: Owner-occupied $ 750,562 $ 685,916 Investor/developer 664,605 471,604 Construction 460,957 380,804 ------------------------------------------------------------------------------------------------- 1,876,124 1,538,324 Commercial loans: Term 600,374 469,564 Line of credit 556,977 430,811 Demand 440 1,400 ------------------------------------------------------------------------------------------------- 1,157,791 901,775 Consumer: Mortgages (1-4 family residential) 471,680 351,644 Installment 161,647 154,415 Home equity 872,974 710,848 Credit lines 43,196 30,254 ------------------------------------------------------------------------------------------------- 1,549,497 1,247,161 ------------------------------------------------------------------------------------------------- $4,583,412 $3,687,260 -------------------------------------------------------------------------------------------------
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. No loan securitizations occurred in 2001. At December 31, 2001 and 2000, loans of approximately $21.8 million and $11.2 million, respectively, were outstanding to certain of the Company's and its subsidiaries' directors and officers, and approximately $48.2 million and $45.4 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, 2001 is as follows:
---------------------------------------------------------------------- 2001 ---------------------------------------------------------------------- Balance, January 1 $56,563 New loans 30,601 Loan payments 17,113 ---------------------------------------------------------------------- Balance, December 31 $70,051 ----------------------------------------------------------------------
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 $252,730 in 2001, $202,000 in 2000, and $334,000 in 1999. The Company received legal services from two law firms of which two directors of the Company are partners. Such aggregate legal services amounted to $2.8 million in 2001, $1.7 million in 2000 and $1.6 million in 1999. Other disbursements to related parties, including vehicle purchases, business development expenses and facility approval services were approximately $1.4 million, $900 thousand and $800 thousand in 2001, 2000 and 1999, respectively. 5. Allowance for Loan Losses The following is an analysis of changes in the allowance for loan losses (in thousands) for 2001, 2000 and 1999:
---------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------- Balance, January 1 $48,680 $38,382 $31,265 Provision charged to operating expense 26,384 13,931 9,175 Recoveries of loans previously charged off 974 576 969 Loan charge-offs (9,057) (4,209) (3,027) ---------------------------------------------------------------------------------------------------- Balance, December 31 $66,981 $48,680 $38,382 ----------------------------------------------------------------------------------------------------
6. Non-accrual and Restructured Loans and Other Real Estate The total of non-performing loans (non-accrual and restructured loans) was $16.8 million and $13.6 million at December 31, 2001 and 2000, respectively. Non-performing loans of $0.9 million, $1.3 million and $1.6 million net of charge offs of $17,000, $26,000 and $39,000 were transferred to other real estate during 2001, 2000 and 1999, respectively. Other real estate ($1.5 million and $3.0 million at December 31, 2001 and 2000, respectively) is included in other assets. At December 31, 2001 and 2000, the recorded investment in loans considered to be impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan" totaled $12.2 million and $9.1 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. At December 31, 2001, approximately $1.5 million was allocated to these loans. Impaired loans averaged approximately $10.7 million, $7.3 million and $4.6 million, during 2001, 2000 and 1999, respectively. Interest income of approximately $2.1 million, $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 2001, 2000 and 1999, respectively. Actual interest income recorded on these loans amounted to $237,000, $525,000 and $255,000 during 2001, 2000 and 1999, respectively. Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 7. Bank Premises, Equipment, and Leases A summary of bank premises and equipment (in thousands) is as follows:
------------------------------------------------------------------------------------------ December 31, ----------------------------------- 2001 2000 ------------------------------------------------------------------------------------------ Land $ 84,893 $ 54,066 Buildings 172,139 121,908 Leasehold improvements 23,648 20,979 Furniture, fixtures and equipment 217,777 177,708 Leased property under capital leases 124 124 ------------------------------------------------------------------------------------------ 498,581 374,785 Less accumulated depreciation and amortization 135,589 98,688 ------------------------------------------------------------------------------------------ $362,992 $276,097 ------------------------------------------------------------------------------------------
At December 31, 2001, 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, 2001. The leases are accounted for as operating leases with an aggregate annual rent of $1.5 million, which escalates to $1.6 million in 2003 and to $1.8 million in 2010. 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, 2001, the Company leased from various related parties under separate operating lease agreements the land on which it has constructed 32 branch offices and the headquarters for Commerce North. The aggregate annual rental under these related party leases for 2001 was approximately $2.5 million, and was approximately $1.6 million and $1.2 million in 2000 and 1999, respectively. These leases expire periodically beginning in 2007 but are renewable through 2040. Aggregate annual rentals escalate to $3.6 million in 2006. Total rent expense charged to operations under operating leases was approximately $11.6 million in 2001, $10.4 million in 2000 and $7.8 million in 1999. Total depreciation expense charged to operations was $41.2 million, $32.1 million and $22.2 million in 2001, 2000 and 1999, respectively. 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, 2001: ----------------------------------------------------------------------------- Capital Operating ----------------------------------------------------------------------------- 2002 $ 12 $12,728 2003 12 11,620 2004 12 11,420 2005 12 11,516 2006 12 11,044 Later years 100 110,271 ----------------------------------------------------------------------------- Net minimum lease payment $160 $168,599 ----------------------------------------------------------------------------- Less amount representing interest 67 ----------------------------------------------------------------------------- Present value of net minimum lease payments $93 ----------------------------------------------------------------------------- The Company has obtained interior design and facilities management services for over twenty-five years from a business owned by the spouse of the Chairman of the Board of the Company. The Company spent $2.3 million, $2.0 million and $2.5 million in 2001, 2000 and 1999, respectively, for such services. Additionally, the business received additional revenues for project management of approximately $1.9 million, $1.6 million and $1.4 million in 2001, 2000 and 1999, 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 $1.1 billion and $807.0 million at December 31, 2001 and 2000, 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, ----------------------------------------------------------------------------------------------------------- 2001 2000 --------------------------------------------------------------- Average Average Amount Rate Amount Rate ----------------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase $199,554 1.71% $283,714 6.70% Federal funds purchased 65,000 2.00 ----------------------------------------------------------------------------------------------------------- $264,554 $283,714 ----------------------------------------------------------------------------------------------------------- Average amount outstanding $94,257 3.72% $268,304 6.31% Maximum month-end balance 264,554 583,208 -----------------------------------------------------------------------------------------------------------
As of December 31, 2001, the Company had a line of credit of $453.8 million from the Federal Home Loan Bank of New York, all of which was available and a line of credit of $110.3 million from the Federal Home Loan Bank of Pittsburgh, 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. 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 qualifies 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 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):
-------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------- Current: Federal $52,085 $40,563 $34,339 State 658 604 434 Deferred: Federal (4,054) (2,812) (2,368) State (1,100) -------------------------------------------------------------------------------- $48,689 $38,355 $31,305 --------------------------------------------------------------------------------
The above provision includes income taxes related to securities gains of $400 thousand, $1.1 million and $900 thousand for 2001, 2000 and 1999, respectively. The provision for income taxes differs from the expected statutory provision as follows:
-------------------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------------------------- Expected provision at statutory rate: 35.0% 35.0% 35.0% Difference resulting from: Tax-exempt interest on loans (2.0) (1.4) (0.7) Tax-exempt interest on securities (1.8) (2.1) (1.0) Purchase accounting adjustments 0.1 0.1 0.1 Other, including acquisition costs 0.8 0.8 (1.2) -------------------------------------------------------------------------------------------------- 32.1% 32.4% 32.2% --------------------------------------------------------------------------------------------------
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. 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, 2001 and 2000 are as follows (in thousands):
----------------------------------------------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------------------------------------------- Deferred tax assets: Loan loss reserves $22,359 $15,577 Fair value adjustment, available for sale securities 3,036 Intangibles 3,153 2,901 Other reserves 2,645 2,597 Other 2,711 1,738 ----------------------------------------------------------------------------------------------------- Total deferred tax assets 30,868 25,849 ----------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation 4,979 1,440 Fair value adjustment, available for sale securities 8,620 Other 1,788 1,326 ----------------------------------------------------------------------------------------------------- Total deferred tax liabilities 15,387 2,766 ----------------------------------------------------------------------------------------------------- Net deferred assets $15,481 $23,083 -----------------------------------------------------------------------------------------------------
No valuation allowance was recognized for the deferred tax assets at December 31, 2001 and 2000, respectively. 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, 2001, the Banks had outstanding standby letters of credit in the amount of $161.6 million. In addition, the Banks are committed as of December 31, 2001 to advance $343.5 million on construction loans, $325.2 million on home equity lines of credit and $785.9 million on lines of credit. All other commitments total approximately $334.7 million. The Company anticipates no material losses as a result of these transactions. 13. Common Stock At December 31, 2001, the Company's common stock had a par value of $1.00. The Company had 150,000,000 shares authorized as of this date. On November 21, 2001, the Board of Directors declared a 2 for 1 stock split payable on December 18, 2001 to stockholders of record on December 3, 2001. Additionally, the Board adjusted the par value per share to $1.00 from $1.5625. On December 19, 2001, the Board of Directors declared a cash dividend of $0.15 for each share of common stock outstanding payable January 18, 2002 to stockholders of record on January 4, 2002. 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) 2001 2000 1999 ------------------------------------------------------------------------------------------------ Basic: Net income applicable to common stock $103,022 $80,047 $65,960 ------------------------------------------------------------------------------------------------ Average common shares outstanding 64,666 61,755 58,310 ------------------------------------------------------------------------------------------------ Net income per common share $ 1.59 $ 1.30 $ 1.13 ------------------------------------------------------------------------------------------------ Diluted: Net income applicable to common stock on a diluted basis $103,022 $80,047 $65,960 ------------------------------------------------------------------------------------------------ Average common shares outstanding 64,666 61,755 58,310 Additional shares considered in diluted computation assuming: Exercise of stock options 3,436 2,468 2,620 ------------------------------------------------------------------------------------------------ Average common and common equivalent shares outstanding 68,102 64,223 60,930 ------------------------------------------------------------------------------------------------ Net income per common and common equivalent share $ 1.51 $ 1.25 $ 1.08 ------------------------------------------------------------------------------------------------
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 17,234,000 shares of common stock (as adjusted for stock dividends) upon the exercise of options. 9,880,220 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 prior plans. 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 9,083,212 $13.84 Options granted 2,260,256 19.41 Options exercised 690,944 6.28 Options canceled 260,588 19.93 Balance at December 31, 1999 10,391,936 15.39 ---------------------------------------------------------------------------------------------- Options granted 98,000 18.25 Options exercised 1,521,224 11.94 Options canceled 314,662 20.21 Balance at December 31, 2000 8,654,050 15.86 ---------------------------------------------------------------------------------------------- Options granted 2,694,550 30.68 Options exercised 1,092,393 14.70 Options canceled 74,017 26.30 Balance at December 31, 2001 10,182,190 19.83 ----------------------------------------------------------------------------------------------
Information concerning options outstanding as of December 31, 2001 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 12/31/2001 Exercise Price ------------------------------------------------------------------------------------------------------------------------------ $1.52 to $10.00 2,074,458 3.6 $ 7.07 2,074,458 $ 7.07 $10.01 to $20.00 3,111,071 7.0 17.96 2,622,114 17.77 $20.01 to $37.50 4,996,661 7.6 26.29 2,166,254 21.27 ------------------------------------------------------------------------------------------------------------------------------
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):
----------------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------------------------- Pro forma net income $94,918 $70,706 $57,619 Pro forma net income per share: Basic $ 1.47 $ 1.14 $ 0.99 Diluted 1.40 1.11 0.95 -----------------------------------------------------------------------------------------------
The fair value of options granted in 2001, 2000 and 1999 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 4.86% to 6.54%, dividend yields of 2.50% to 3.00%, volatility factors of the expected market price of the Company's common stock of .309 to .332, and weighted average expected lives of the options of 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 Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Employee Stock Ownership Plan As of December 31, 2001, 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 1,676,000 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 2001, 2000, and 1999 was $100,000, $100,000 and $547,000, respectively. Employee 401(k) Plan The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code. The plan allows all eligible employees to defer a percentage of their income on a pretax basis through contributions to the plan. Under the provisions of the plan, the Company may match a percentage of the employees' contributions subject to a maximum limit. The charge to operations for Company contributions was $2.8 million for 2001. No employer matching contributions were made for 2000 and 1999, 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, 2001 and 2000:
----------------------------------------------------------------------- December 31, ----------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------------------------------------------ Financial assets: Cash and cash equivalents $ 557,738 $ 557,738 $ 495,918 $ 495,918 Loans held for sale 73,261 73,261 41,791 41,791 Trading securities 282,811 282,811 109,306 109,306 Investment securities 5,284,876 5,299,049 3,534,782 3,524,528 Loans (net) 4,516,431 4,652,219 3,638,580 3,652,000 Financial liabilities: Deposits 10,185,594 10,209,099 7,387,594 7,400,507 Other borrowed money 264,554 264,554 283,714 283,714 Long-term debt 80,500 82,352 80,500 81,475 ------------------------------------------------------------------------------------------------------------ Off-balance sheet liabilities: Standby letters of credit $ 1,616 $ 1,693 Commitments to extend credit 1,210 932
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. 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 --------------------------------------------------------------------------------------------------------------------------------- 2001 Interest income $161,198 $152,981 $147,109 $143,079 Interest expense 43,728 50,268 51,706 57,339 Net interest income 117,470 102,713 95,403 85,740 Provision for loan losses 7,458 6,335 7,982 4,609 Net investment securities gains 980 Provision for federal and state income taxes 13,175 12,278 11,752 11,484 Net income 28,230 26,281 25,110 23,401 Net income per common share: Basic $ 0.43 $ 0.40 $ 0.39 $ 0.37 Diluted 0.41 0.38 0.37 0.35 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 $ 0.34 $ 0.34 $ 0.32 $ 0.30 Diluted 0.33 0.32 0.31 0.29
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) 2001 2000 ------------------------------------------------------------------------------------------------------ Assets Cash $ 1,002 $ 1,090 Securities available for sale 35,842 36,392 Investment in subsidiaries 700,747 536,324 Other assets 11,534 16,018 ------------------------------------------------------------------------------------------------------ $749,125 $589,824 ------------------------------------------------------------------------------------------------------ Liabilities Other liabilities $ 32,055 $ 17,100 Trust Capital Securities 57,500 57,500 Long-term debt 23,000 23,000 ------------------------------------------------------------------------------------------------------ 112,555 97,600 ------------------------------------------------------------------------------------------------------ Stockholders' equity Common stock 65,833 49,627 Capital in excess of par or stated value 461,897 422,375 Retained earnings 94,698 27,083 Accumulated other comprehensive income 15,764 (5,239) ------------------------------------------------------------------------------------------------------ 638,192 493,846 Less treasury stock 1,622 1,622 ------------------------------------------------------------------------------------------------------ Total stockholders' equity 636,570 492,224 ------------------------------------------------------------------------------------------------------ $749,125 $589,824 ------------------------------------------------------------------------------------------------------
Statements of Income
------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2001 2000 1999 ------------------------------------------------------------------------------------------------------------- Income: Dividends from subsidiaries $22,400 $ 9,150 $15,750 Interest income 454 497 507 Other 7,022 5,652 3,690 ------------------------------------------------------------------------------------------------------------- 29,876 15,299 19,947 ------------------------------------------------------------------------------------------------------------- Expenses: Interest expense 7,258 7,244 7,375 Operating expenses 3,214 2,352 2,508 ------------------------------------------------------------------------------------------------------------- 10,472 9,596 9,883 Income before income taxes and equity in undistributed income of subsidiaries 19,404 5,703 10,064 Income tax benefit (1,004) (1,274) (2,636) ------------------------------------------------------------------------------------------------------------- 20,408 6,977 12,700 Equity in undistributed income of subsidiaries 82,614 73,070 53,260 ------------------------------------------------------------------------------------------------------------- Net income $103,022 $80,047 $65,960 -------------------------------------------------------------------------------------------------------------
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Statements of Cash Flows
-------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------- Operating activities: Net income $103,022 $80,047 $65,960 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries (82,614) (73,070) (53,260) (Gains) losses on sales of securities available for sale 470 (639) Decrease (increase) in other assets 4,484 (4,430) (1,335) Increase in other liabilities 17,874 1,723 13,846 -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 43,236 4,270 24,572 Investing activities: Investment in subsidiaries (62,667) (28,770) (31,000) Proceeds from sale of securities available for sale 1,828 9,997 5,733 Proceeds from the maturity of securities available for sale 66,422 117,863 26,980 Purchase of securities available for sale (66,864) (126,522) (54,723) Other 352 (38) 27 -------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (60,929) (27,470) (52,983) Financing activities: Proceeds from issuance of common stock under dividend reinvestment and other stock plans 53,004 53,670 31,428 Cash dividends (35,400) (29,761) (23,476) -------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing 17,605 23,909 7,952 activities Increase (decrease) in cash and cash equivalents (88) 709 (20,459) Cash and cash equivalents at beginning of year 1,090 381 20,840 -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,002 $ 1,090 $ 381 -------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,089 $ 7,089 $ 7,089 Income taxes 48,616 36,135 26,056 --------------------------------------------------------------------------------------------------------------------------
Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements Holders of common stock of the Company are entitled to receive dividends when declared by the Board of Directors out of funds legally available. Under the New Jersey Business Corporation Act, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment and only to the extent of surplus (the excess of the net assets of the Company over its stated capital). The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. New Jersey state banks are subject to similar dividend restrictions. Commerce NJ, Commerce PA, Commerce Shore and Commerce North can declare dividends in 2002 without additional approval of approximately $79.2 million, $20.5 million, $32.5 million and $30.8 million, respectively, plus an additional amount equal to each bank's net profit for 2002 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, 2001 and 2000, 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. As of December 31, 2001 and 2000, the Company and each of its subsidiary banks were categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2001 that management believes have changed any subsidiary bank's capital category. 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, 2001, that the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. 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, 2001 and 2000:
------------------------------------------------------------------------------------------------------------------------------- Per Regulatory Guidelines ------------------------------------------------------------------------------------------------------------------------------- Actual Minimum "Well Capitalized" ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 Company Risk based capital ratios: Tier I $675,015 10.81% $249,780 4.00% $374,670 6.00% Total capital 746,596 11.96 499,561 8.00 624,451 10.00 Leverage ratio 675,015 6.24 432,502 4.00 540,628 5.00 Commerce NJ Risk based capital ratios: Tier 1 $375,144 9.61% $156,111 4.00% $234,167 6.00% Total capital 419,926 10.76 312,222 8.00 390,278 10.00 Leverage ratio 375,144 6.01 249,852 4.00 312,315 5.00 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
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, 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 $49.8 million, $45.6 million and $32.4 2 million in 2001, 2000 and 1999, respectively, were reported in other operating income), CCMI (whose noninterest revenues of $22.8 million, $15.3 million and $12.5 million in 2001, 2000 and 1999, respectively, were reported in other operating income), and Commerce Capital Trust I. Selected segment information for each of the three years ended December 31 is as follows:
------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Community Parent/ Community Parent/ Community Parent/ Banks Other Total Banks Other Total Banks Other Total ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 402,040 $ (714) $ 401,326 $298,985 $(2,055) $296,930 $ 251,132 $ (6,765) $ 244,367 Provision for loan losses 26,384 26,384 13,931 13,931 9,175 9,175 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision 375,656 (714) 374,942 285,054 (2,055) 282,999 241,957 (6,765) 235,192 Noninterest income 125,418 71,387 196,805 90,464 60,296 150,760 66,127 48,469 114,596 Noninterest expense 358,870 61,166 420,036 263,001 52,356 315,357 209,808 42,715 252,523 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 142,204 9,507 151,711 112,517 5,885 118,402 98,276 (1,011) 97,265 Income tax expense (benefit) 46,630 2,059 48,689 35,255 3,100 38,355 31,963 (658) 31,305 ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 95,574 $ 7,448 $ 103,022 $77,262 $2,785 $80,047 $ 66,313 $ (353) $ 65,960 ------------------------------------------------------------------------------------------------------------------------------------ Average assets (in thousands) $8,547,839 $998,955 $9,546,794 $6,626,429 $722,534 $7,348,963 $5,301,844 $602,025 $5,903,869 ------------------------------------------------------------------------------------------------------------------------------------
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. 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, 2001: ------------------------------------------------------------------------------ Notional Unrealized Amount Gain (Loss) Long (Short) Net ------------------------------------------------------------------------------ Municipal bond futures $(62,600) $241 Treasury bond futures 1,000 (36) Treasury bond put options 6,500 (43) Treasury bond call options (76,000) (46) ------------------------------------------------------------------------------ Total $(131,100) $116 ------------------------------------------------------------------------------ The average notional amount for futures and options contracts for the year ended December 31, 2001 was $62.3 million and $126.0 million, respectively. Realized and unrealized gains and losses related to derivative financial instruments are included in other operating income in the statement of income. Commerce Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 21. Subsequent Event (Unaudited) On February 27, 2002, the Company announced that it proposes to privately sell up to $175 million of convertible trust preferred shares comprised of preferred securities issued by a business trust to be formed by Commerce Bancorp. The offering will be made pursuant to SEC Rule 144A only to qualified institutional and certain other accredited investors. The Company intends to file a registration statement with the SEC to register the resale of the trust preferred and the underlying common securities by the purchasers in the private placement. The proceeds of the offering will be used for general corporate purposes, including among other things contributions to the capital of subsidiary banks to fund their growth and operations. A portion of the proceeds may also be used to repay currently outstanding debt. 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, 2001 and 2000 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, 2001. 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 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 provide a reasonable basis for our opinion. In our opinion, based on our audits, 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Philadelphia, Pennsylvania January 25, 2002 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (3) - Exhibits: 3.1 Restated Certificate of Incorporation of the Company, as amended. (I) 3.2 By-laws of the Company, as amended. (K) 4.1 Form of Trust Indenture, dated July 15, 1993, between the Company and United Jersey Bank, with respect to the Company's $23,000,000 8 3/8% Subordinated Notes due July 15, 2003. (I) 4.2 Form of Indenture between the Company and Wilmington Trust Company, as Debenture Trustee. (M) 4.3 Certificate of Trust of Commerce Capital Trust I. (M) 4.4 Form of Amended and Restated Declaration of Trust of Commerce Capital Trust I. (M) 4.5 Form of Capital Security Certificate for Commerce Capital Trust I (included in Exhibit 4.4). (M) 4.6 Form of Guarantee Agreement. (M) 10.1 Ground lease, dated July 1, 1984, between Commerce NJ and Group Four Equities, relating to the branch office in Gloucester Township, New Jersey. (A) 10.2 Ground lease, dated April 15, 1986, between Commerce NJ and Mount Holly Equities, relating to Commerce NJ's branch office in Mt. Holly, New Jersey. (C) *10.3 The Company's 1984 Incentive Stock Option Plan. (A) *10.4 The Company's Employee Stock Ownership Plan. (F) 10.5 Lease, dated March 29, 1985, between Commerce PA and Devon Properties (Ltd.), and lease dated September 4, 1985, between Commerce PA and Devon Properties (Ltd.), relating to Commerce PA's branch office in Devon, Pennsylvania. (B) 10.6 Assignment of Lease and Assumption Agreement dated November 30, 1987, between the Company and Commerce PA, relating to Commerce PA's branch office in Devon, Pennsylvania. (C) 10.7 Lease between the Company and Astoria Associates, relating to the Company's and Commerce NJ's headquarters facilities. (B) 10.8 Ground lease, dated April 15, 1986, between Commerce NJ and U.S. Equities, relating to one of Commerce NJ's branch offices in Washington Township, New Jersey. (D) 10.9 Ground lease, dated February 1, 1988, between Commerce NJ and Diversified Properties of New Jersey, relating to one of Commerce NJ's branch offices in Washington Township, New Jersey. (D) 10.10 Ground lease, dated February 15, 1988, between Commerce NJ and Diversified Properties of New Jersey, relating to one of Commerce NJ's branch offices in Cherry Hill, New Jersey. (D) *10.11 The Company's 1989 Stock Option Plan for Non-Employee Directors. (E) *10.12 A copy of employment contracts with Vernon W. Hill, II, C. Edward Jordan, Jr., and Peter Musumeci, Jr., dated January 2, 1992. (G) *10.13 A copy of the Retirement Plan for Outside Directors of Commerce Bancorp, Inc. (H) *10.14 The Company's 1994 Employee Stock Option Plan. (J) *10.15 The Company's 1997 Employee Stock Option Plan. (L) *10.16 A copy of employment contracts with Dennis M. DiFlorio and Robert D. Falese dated January 1, 1998. (N) 10.17 Ground lease, dated June 1, 1994, between Commerce NJ and Absecon Associates, L.L.C., relating to Commerce NJ's branch office in Absecon, New Jersey. (N) 10.18 Ground lease, dated September 11, 1995, between Commerce Shore and Whiting Equities, L.L.C., relating to Commerce Shore's branch office in Manchester Township, New Jersey. (N) 10.19 Ground lease, dated November 1, 1995, between Commerce NJ and Evesboro Associates, L.L.C., relating to Commerce NJ's branch office in Evesham Township, New Jersey. (N) 10.20 Ground lease, dated October 1, 1996, between Commerce NJ and Triad Equities, L.L.C., relating to one of Commerce NJ's branch offices in Gloucester Township, New Jersey. (N) 10.21 Ground lease, dated October 11, 1996, between Commerce PA and Plymouth Equities, L.L.C., relating to Commerce PA's branch office in Plymouth Township, PA. (N) 10.22 Ground lease, dated January 16, 1998, between Commerce NJ and Ewing Equities, L.L.C., relating to Commerce NJ's branch in Ewing, New Jersey. (P) *10.23 The Company's 1998 Stock Option Plan for Non-Employee Directors. (O) 10.24 Ground lease, dated July 31, 1998, between Commerce NJ and English Creek Properties, L.L.C., relating to Commerce NJ's branch in Egg Harbor Township, New Jersey. (P) 10.25 Ground lease, dated November 30, 1998, between Commerce Shore and Brick/Burnt Tavern Equities, L.L.C., relating to Commerce Shore's branch office in Brick, New Jersey. (Q) 10.26 Ground lease, dated November 30, 1998, between Commerce Shore and Aberdeen Equities, L.L.C., relating to Commerce Shore's branch office in Aberdeen, New Jersey. (Q) 10.27 Ground lease, dated November 30, 1998, between Commerce NJ and Hamilton/Wash Properties, L.L.C., relating to Commerce NJ's branch office in Hamilton Township, New Jersey. (Q) 10.28 Ground lease, dated April 2, 1999, between Commerce PA and Abington Equities, L.L.C., relating to Commerce PA's branch office in Abington Township, Pennsylvania. (Q) 10.29 Ground lease, dated October, 1999, between Commerce PA and Bensalem Equities, L.L.C., relating to Commerce PA's branch office in Bensalem, Pennsylvania. (R) 10.30 Ground lease, dated June 9, 2000, between Commerce NJ and Galloway Equities, L.L.C., relating to Commerce NJ's branch office in Galloway, New Jersey. (R) 10.31 Ground lease, dated December 11, 2000, between Commerce PA and Chadds Ford Equities, L.L.C., relating to Commerce PA's branch office in Chadds Ford, Pennsylvania. 10.32 Ground lease, dated March 10, 2000, between Commerce PA and Chalfont Equities, L.L.C., relating to Commerce PA's branch office in New Britain Township, Pennsylvania. 10.33 Ground lease, dated January 4, 2001, between Commerce PA and Warminster Equities, L.L.C., relating to Commerce PA's branch office in Warminster Township, Pennsylvania. 11.1 Computation of Net Income Per Share (incorporated by reference from PART II, Item 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA" of this Report on Form 10-K.) 21.1 Subsidiaries of the Company (incorporated by reference from PART I, Item 1. "BUSINESS" of this Report on Form 10-K.) 23.1 Consent of Ernst & Young LLP. ______________ (A) Incorporated by reference from the Company's Registration Statement on Form S-1, and Amendments Nos. I and 2 thereto (Registration No. 2-94189). (B) Incorporated by reference from the Company's Registration Statement on Form S-2 (Registration No 33-12603). (C) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. (D) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (E) Incorporated by reference from the Company's Registration Statement on Form S-2 and Amendments Nos. 1 and 2 thereto (Registration No. 33-31042). (F) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (G) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (H) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (I) Incorporated by reference from the Company's Registration Statement on Form S-2 and Amendments Nos. 1 and 2 thereto (Registration No. 33-62702). (J) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (K) Incorporated by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-10771). (L) Incorporated by reference from the Company's Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, Exhibit A thereto. (M) Incorporated by reference from the Company's Registration Statement on Form S-3 (Registration No. 333-28311). (N) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (O) Incorporated by reference from the Company's Definitive Proxy Statement for its 1998 Annual Meeting of Shareholders, Exhibit A thereto. (P) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (Q) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (R) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2000. * Management contract or compensation plan or arrangement. (b) There were no reports on Form 8-K filed in the fourth quarter of 2001. (c)(d) Exhibits and Financial Statement Schedules - All other exhibits and schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. Item 15. Signatures SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Commerce Bancorp, Inc. By /s/ VERNON W. HILL, II ----------------------------------- Vernon W. Hill, II Date: March 6, 2002 Chairman of the Board and President By /s/ DOUGLAS J. PAULS ----------------------------------- Douglas J. Pauls Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ VERNON W. HILL, II Chairman of the Board and President March 6, 2002 -------------------------------------- (Principal Executive Officer) Vernon W. Hill, II /s/ C. EDWARD JORDAN JR. Executive Vice President and Director March 6, 2002 -------------------------------------- C. Edward Jordan Jr. /s/ ROBERT C. BECK Secretary and Director March 6, 2002 -------------------------------------- Robert C. Beck /s/ JACK R BERSHAD Director March 6, 2002 -------------------------------------- Jack R Bershad /s/ JOSEPH BUCKELEW Director March 6, 2002 -------------------------------------- Joseph Buckelew /s/ MORTON N. KERR Director March 6, 2002 -------------------------------------- Morton N. Kerr /s/ STEVEN M. LEWIS Director March 6, 2002 -------------------------------------- Steven M. Lewis /s/ DANIEL J. RAGONE Director March 6, 2002 -------------------------------------- Daniel J. Ragone /s/ WILLIAM A. SCHWARTZ JR. Director March 6, 2002 -------------------------------------- William A. Schwartz Jr. /s/ JOSEPH T. TARQUINI JR. Director March 6, 2002 -------------------------------------- Joseph T. Tarquini Jr. /s/ FRANK C. VIDEON SR. Director March 6, 2002 -------------------------------------- Frank C. Videon Sr.