________________________________________________________________________________
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
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File #0-12874
[GRAPHIC OMITTED][GRAPHIC OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
State of other jurisdiction of incorporation (I.R.S. Employee Identification Number)
or organization)
Commerce Atrium
1701 Route 70 East 08034-5400
Cherry Hill, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 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 (ss. 229.405 of this chapter) 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes X No __.
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $2,750,085,590. (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 68,766,342
------------------------------------------- ----------------------------------------
Title of Class No. of Shares Outstanding as of 3/21/03
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2003 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 number of
shares of Common Stock held by officers, directors, and shareholders owning 10%
or more of the Registrant's Common Stock, multiplied by $44.20, the last sale
price for the Registrant's Common Stock on June 28, 2002, the last business day
of the Registrant's most recently completed second fiscal quarter. The
information provided shall in no way be construed as an admission that any
person whose holdings are excluded from this figure is an affiliate of the
Registrant or that such person 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 purposes of the
Securities and Exchange Commission.
________________________________________________________________________________
COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
Page
Part I
Item 1. Business..............................................................................................................1
Item 2. Properties............................................................................................................7
Item 3. Legal Proceedings ....................................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders...................................................................7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................................8
Item 6. Selected Financial Data ..............................................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..........................................................21
Item 8. Financial Statements and Supplementary Data .........................................................................22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................45
Part III
Item 10. Directors and Executive Officers of the Registrant...................................................................45
Item 11. Executive Compensation...............................................................................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................45
Item 13. Certain Relationships and Related Transactions.......................................................................45
Item 14. Controls and Procedures..............................................................................................45
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .....................................................46
Signatures...........................................................................................................49
Section 302 Certifications...........................................................................................50
PART I
Item 1. Business
Forward-Looking Statements
Commerce Bancorp, Inc. (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), in its
reports to shareholders 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," "forecast," "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 and world economies 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 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 branch network; the ability to hire and train
qualified personnel to sustain the Company's expansion plans; the Company's
ability to expand its community-based retail branch network to new markets;
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 on 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, 2002, the Company had total assets of $16.4 billion,
total loans of $5.8 billion, and total deposits of $14.5 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, 2002 had over 224 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.
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The Company's primary growth strategy is the opening of new full service
branch offices of which 40 opened in 2002 and 34 opened in 2001. The Company
expects to open an additional 45 full service branch offices in 2003. The
Company has also developed its full service branch office network through the
following strategic acquisitions:
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 with and 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; and
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. Commerce Central was merged with and into
Commerce NJ in 2001.
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, referred to as Commerce Capital Markets, 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.
In addition, the Company, through Commerce Insurance Services, Inc.
(formerly Commerce National Insurance Services, Inc.), a nonbank subsidiary of
Commerce Bank/North, referred to as Commerce Insurance, operates an insurance
brokerage agency concentrating on commercial property, casualty and surety as
well as personal lines of insurance and employee benefits for clients in
multiple states, primarily Delaware, New Jersey, New York and Pennsylvania.
Since 1996, Commerce Insurance has completed several strategic acquisitions of
insurance brokerage agencies the most recent of which include the following:
o in 2001, Fitzsimmons Insurance and Financial Services, Inc.,
Business Training Systems, Inc. and Brettler Financial Group,
Inc. were acquired.
o in 2002, Sanford and Purvis, Inc., Upper Montclair, NJ, was
acquired.
o in 2003, The Porch Agency, Bridgeton, NJ, was acquired.
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.
The Banks
As of December 31, 2002, Commerce NJ had total assets of $10.1 billion,
total deposits of $7.8 billion, and total shareholders' equity of $582.1
million; Commerce PA had total assets of $3.4 billion, total deposits of $3.1
billion and total shareholders' equity of $231.7 million; Commerce Shore had
total assets of $2.1 billion, total deposits of $1.9 billion and total
shareholders' equity of $130.5 million; Commerce North had total assets of $1.9
billion, total deposits of $1.7 billion, and total shareholders' equity of
$130.4 million; and Commerce Delaware had total assets of $225.6 million, total
deposits of $203.7 million, and total shareholders' equity of $19.9 million.
Commerce NJ provides retail and commercial banking services through 111
retail branch offices in Central and Southern New Jersey, and Metropolitan New
York.; Commerce PA provides retail and commercial banking services through 53
retail branch offices in Philadelphia, Bucks, Chester, Delaware and Montgomery
Counties in Southeastern Pennsylvania; Commerce Shore provides retail and
commercial banking services through 29 retail branch offices in Ocean and
Monmouth Counties, New Jersey; Commerce North provides retail and commercial
banking services through 25 retail branch offices in Bergen and Passaic
Counties, New Jersey; and Commerce Delaware provides retail and commercial
banking services through 6 retail branch offices in New Castle County, Delaware.
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Service Areas
The Company's primary service areas includes New Jersey, Metropolitan
Philadelphia and New York, and Northern Delaware. The Company has attempted to
locate its branches in the fastest growing communities within its service areas.
Retail deposits gathered through these focused branching activities are used to
support lending throughout the Company.
Retail Banking Services and Products
Each bank provides a broad range of retail banking services and products,
including free checking accounts, subject to minimum balances, 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. Each bank also offers construction loans and
permanent mortgages for houses.
Trust Services
Commerce NJ, Commerce PA and Commerce Delaware each offer trust services
primarily focusing on corporate trust services, particularly as bond trustee,
paying agent, and registrar for municipal bond offerings.
Commercial Banking Services and Products
Each bank 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 and leases to fit the needs of
its customers. Each bank also finances the construction of business properties
and makes real estate mortgage loans on completed buildings. Where the needs of
a customer exceed a bank's legal lending limit for any one customer, such bank
may participate with other banks, including the other banks owned by the
Company, in making a loan.
Additional information pertaining to the Company's segments is set forth in
"Note 19 - Segment Reporting" of the Company's Notes to Consolidated Financial
Statements which appear elsewhere herein.
Commerce Insurance
Commerce Insurance operates one of the nation's largest regional insurance
brokerage firm concentrating on commercial property, casualty and surety as well
as personal lines. In addition, Commerce Insurance offers a line of employee
benefit programs including group as well as individual medical, life,
disability, pension, and risk management services. Commerce Insurance currently
operates out of 12 locations in New Jersey, 2 locations in Pennsylvania, and 2
locations in Delaware. Commerce Insurance places insurance for clients in
multiple states, primarily New Jersey, Pennsylvania, New York, and Delaware.
Commerce Capital Markets
Commerce Capital Markets engages 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; and Cambridge, Massachusetts.
Commerce Capital Trust II
Commerce Capital Trust II, a wholly-owned subsidiary of the Company, is a
statutory business trust created under Delaware law. On March 11, 2002 the
Company issued $200.0 million of 5.95% Convertible Trust Capital Securities
through Commerce Capital Trust II.
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. Commerce Commercial Leasing
LLC, a New Jersey Limited Liability Company, is a wholly-owned subsidiary of
Commerce NJ that provides business leasing services.
The Company has an equity investment in Pennsylvania Commerce Bancorp,
Inc., Camp Hill, Pennsylvania (14.47% beneficial ownership assuming the exercise
of all outstanding warrants held by the Company). The Company and its
subsidiaries provide marketing support and technical support services to
Pennsylvania Commerce Bancorp, Inc. and its wholly owned subsidiary, Commerce
Bank/Harrisburg.
Risk Factors
The Company is subject to a number of risk factors including, among others,
business and economic conditions, monetary and other governmental policies, and
competition. These factors, and others, could impact the Company's business,
financial
3
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 the Company. 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 $88.8 million, $31.3 million, $19.7 million, $18.7
million, and $2.8 million, respectively, as of December 31, 2002) enables the
banks to compete effectively for the business of smaller and mid-sized
businesses. The combined legal lending limit of the Company is $161.3 million.
These legal lending limits are 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
Federal Reserve Board ("FRB"). The Company is also regulated by the New Jersey
Department of Banking and Insurance (the "Department").
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.
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, as amended ("CRA")
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 CRA.
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
4
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 FRB 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 Department and the FDIC, and is required to furnish
quarterly reports to each agency. The approval of the Department and the 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 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.
5
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.
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 FRB 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 Insurance/ Commerce Capital Markets
Commerce Insurance, a nonbank subsidiary of Commerce North, is currently
subject to supervision, regulation and examination by the Department, as well as
other state insurance departments where it operates. 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 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.
Gramm-Leach-Bliley Act
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 expanded 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 Act created a 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 FRB 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 FRB 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 financial activities authorized by the Act may also be engaged in by
a "financial subsidiary" of a national or state bank, except for annuity
underwriting, insurance company portfolio investments, real estate investment
and development, and merchant banking, which must be conducted in a financial
holding company. 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 $50.0 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 SEC 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.
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 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.
6
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, 2002, the Company had in excess of 6,800 full-time
equivalent employees.
Available Information
The Company's internet address is www.yesbank.com. The Company makes
available free of charge on or through www.yesbank.com its annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC.
In addition, the Company will provide, at no cost, paper or electronic
copies of its reports and other filings (excluding exhibits) made with the SEC.
Requests should be directed to:
Commerce Bancorp, Inc.
Commerce Atrium
1701 Route 70 East
Cherry Hill, NJ 08034-5400
Attn: C. Edward Jordan, Jr.
Executive Vice President
The information on the website listed above, is not and should not be considered
part of this annual report on Form 10-K and is not incorporated by reference in
this document. This website is and is only intended to be an inactive textual
reference.
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 2002.
7
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations; Stockholders' Equity and Dividends included elsewhere
herein.
See Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters for disclosure regarding the Company's Equity
Compensation Plans.
Dividend Policy
It is the present intention of the Company's Board of Directors to pay
quarterly cash dividends on the Company's common stock. However, the declaration
and payment of future dividends will be subject to determination and declaration
by the Board of Directors, which will consider the Company's earnings, financial
condition and capital needs and applicable regulatory requirements. See Note 18
of the Company's Notes to Consolidated Financial Statements which appears
elsewhere herein.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and accompanying
notes included elsewhere herein.
8
-------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Net interest income $ 572,755 $ 401,326 $ 296,930 $ 244,367 $ 194,661
Provision for loan losses 33,150 26,384 13,931 9,175 8,762
Noninterest income 257,466 196,805 150,760 114,596 96,277
Noninterest expense 579,168 420,036 315,357 252,523 213,950
Income before income taxes 217,903 151,711 118,402 97,265 68,226
Net income 144,815 103,022 80,047 65,960 42,155
Balance Sheet Data:
Total assets $16,403,981 $11,363,703 $8,296,516 $6,635,793 $5,424,190
Loans (net) 5,731,856 4,516,431 3,638,580 2,922,706 2,249,061
Securities available for sale 7,806,779 4,152,704 2,021,326 1,664,257 1,305,004
Securities held to maturity 763,026 1,132,172 1,513,456 1,201,892 1,220,874
Trading securities 326,479 282,811 109,306 117,837 85,359
Federal funds sold 52,000 5,300 10,395
Deposits 14,548,841 10,185,594 7,387,594 5,608,920 4,928,808
Long-term debt 23,000 23,000 23,000 24,282
Trust preferred securities 57,500 57,500 57,500 57,500
Convertible trust preferred securities 200,000
Stockholders' equity 918,010 636,570 492,224 356,756 323,552
Per Share Data:
Net income-basic $ 2.16 $ 1.59 $ 1.30 $ 1.13 $ 0.75
Net income-diluted 2.04 1.51 1.25 1.08 0.71
Cash dividends 0.60 0.55 0.48 0.41 0.44
Book value 13.53 9.70 7.77 6.00 5.64
Average shares outstanding:
Basic 66,795 64,666 61,755 58,310 56,509
Diluted 70,903 68,102 64,223 60,930 59,324
Selected Ratios:
Performance
Return on average assets 1.05 % 1.08 % 1.09 % 1.12 % 0.87%
Return on average equity 18.50 17.64 19.81 19.63 13.57
Net interest margin 4.69 4.76 4.62 4.65 4.42
Liquidity and Capital
Average loans to average deposits 42.48 % 48.04 % 52.17 % 50.31 % 44.71%
Dividend payout 27.78 34.59 37.45 36.64 58.55
Stockholders' equity to total assets 5.60 5.60 5.93 5.38 5.96
Risk-based capital:
Tier 1 11.47 10.81 10.79 11.40 12.09
Total 12.51 11.96 11.92 12.72 13.71
Leverage capital 6.37 6.24 6.92 7.02 7.05
Asset Quality
Non-performing assets to total year-end assets 0.11 % 0.16 % 0.20 % 0.18 % 0.27%
Net charge-offs to average loans outstanding 0.18 0.19 0.11 0.08 0.08
Non-performing loans to total
year-end loans 0.24 0.37 0.37 0.29 0.38
Allowance for loan losses to total
end of year loans 1.56 1.46 1.32 1.30 1.37
Allowance for loan losses to non-
performing loans 640.18 397.73 356.84 442.09 364.86
9
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.
Application of Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the industries in which it operates. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported.
The Company's accounting policies are fundamental to understanding Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Company has identified two policies as being critical: the policies related to
the allowance for loan losses and capitalization of branch costs. The Company,
in consultation with the Audit Committee, has reviewed and approved these
critical accounting policies (further described in Note 1 Significant Accounting
Policies to the Consolidated Financial Statements.)
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio of the Company. Determining the
amount of the allowance for loan losses is considered a critical accounting
estimate because it requires significant judgment and the use of estimates
related to the amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends and conditions, all of
which may be susceptible to significant change. Note 1 to the Consolidated
Financial Statements describes the methodology used to determine the allowance
for loan losses and a discussion of the factors driving changes in the amount of
the allowance for loan losses is included in the Allowance for Loan Losses
discussion within this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In addition, due to the Company's recent growth and plans for future expansion,
management has identified the accounting for the capitalization of fixed assets,
including costs related to branch construction, as an application of a critical
accounting policy. In accordance with accounting principles generally accepted
in the United States, when capitalizing costs for branch construction, the
Company includes the costs of purchasing the land, developing the site,
constructing the building (or leasehold improvements if the property is leased),
and furniture, fixtures and equipment necessary to equip the branch. All other
pre-opening and post-opening costs related to branches are expensed as incurred.
2002 Overview
In 2002, the Company again 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 27% for 2002, and deposit
growth totaled 43%. At December 31, 2002, the Company had total assets of $16.4
billion, total loans of $5.8 billion, total investment securities of $8.9
billion, and total deposits of $14.5 billion. 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's
continued ability to grow deposits, resulting in significant earning asset
growth, permitted the Company to report $585.9 million in net interest income on
a tax equivalent basis in 2002, an increase of $173.2 million or 42% over 2001.
As more fully depicted in the chart below, the increase in net interest income
in both 2002 and 2001 was almost entirely due to volume increases in the
Company's earning assets.
------------------------------------------------------------
Net Interest Income
------------------------------------------------------------
Volume Rate Total Increase
Increase Change
(in millions) (in millions) (in millions) % increase
2002 $174.0 ($0.8) $173.2 42%
2001 91.4 15.1 $106.5 35%
-----------------------------------------------------------------------
Segment Reporting
The Company operates one reportable segment of business, Community Banks, as
more fully described in Note 19 to the Consolidated Financial Statements. The
following table summarizes net income by segment for each of the last three
years:
-----------------------------------------------------------
Net Income
-----------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------
Community Banks $139,560 $ 95,574 $77,262
Parent/Other 5,255 7,448 2,785
-----------------------------------------------------------
Consolidated total $144,815 $103,022 $80,047
-----------------------------------------------------------
Average Balances and Net Interest Income
The table on page 12 sets forth balance sheet items on a daily average basis for
the years ended December 31, 2002, 2001 and 2000 and presents the daily average
interest rates earned on assets and the daily average interest rates paid on
liabilities for such periods. During 2002, average interest earning assets
totaled $12.5 billion, an increase of $3.8 billion, or 44% over 2001. This
increase resulted primarily from the increase in the average balance of
investments, which rose $2.8 billion, and the average balance of loans, which
rose $1.1 billion
10
during 2002. 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 $3.8 billion.
Net Interest Income and Net Interest Margin
Net interest margin on a tax equivalent basis was 4.69% for 2002, a decrease of
7 basis points from 2001.
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company.
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 2002 was $585.9 million, an increase of $173.2
million, or 42%, over 2001. Interest income on a tax-equivalent basis increased
to $768.5 million from $615.7 million, or 25%. This increase was primarily
related to volume increases in the loan and investment portfolios. Interest
expense for 2002 fell $20.4 million to $182.6 million from $203.0 million in
2001. This decrease was primarily related to decreases in the rates paid on the
Company's deposits and debt instruments.
The tax-equivalent yield on interest earning assets during 2002 was 6.15%, a
decrease of 95 basis points from 7.10% in 2001. The cost of interest-bearing
liabilities decreased 115 basis points in 2002 to 1.81% from 2.96% in 2001. The
decrease resulted primarily from decreased general market interest rates during
2002 as compared to 2001. The cost of total funding sources decreased 88 basis
points in 2002 to 1.46% from 2.34%.
The following table presents the major factors that contributed to the changes
in net interest income for the years ended December 31, 2002 and 2001 as
compared to the respective previous periods.
-----------------------------------------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
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 $ 156,146 ($ 29,870) $ 126,276 $ 71,674 $ (9,886) $ 61,788
Tax-exempt 1,968 (214) 1,754 297 (110) 187
Trading 1,558 253 1,811 3,669 (2,256) 1,413
Federal
Funds sold (1,802) (3,270) (5,072) 3,448 (1,976) 1,472
Interest on
loans:
Commercial
mortgages 31,083 (17,921) 13,792 27,325 (11,170) 16,155
Commercial 16,240 (17,045) (805) 18,542 (12,473) 6,069
Consumer 27,817 (13,936) 13,881 8,428 850 9,278
Tax-exempt 1,612 (499) 1,113 5,492 (638) 4,854
---------------------------------------------------------------------------------------------------------------------------
Total
interest
Income 234,622 (81,872) 152,750 138,875 (37,659) 101,216
---------------------------------------------------------------------------------------------------------------------------
Interest
expense:
Regular
Savings 9,678 (12,093) (2,415) 5,777 (10,065) (4,288)
N.O.W.
Accounts 1,128 (2,606) (1,478) 1,821 (2,104) (283)
Money
Market plus 17,669 (24,332) (6,663) 12,622 (21,759) (9,137)
Time
Deposits 20,708 (20,730) (22) 17,471 (3,237) 14,234
Public funds 2,960 (19,455) (16,495) (16,495) (7,443) 8,804
Other
Borrowed
Money 379 (2,048) (1,669) 16,247 (6,957) (13,435)
Long-term
Debt 8,090 227 8,317 (1,223) (1,223)
---------------------------------------------------------------------------------------------------------------------------
Total
interest
Expense 60,612 (81,037) (20,425) 47,461 (52,789) (5,328)
Net increase $ 174,010 ($ 835) $ 173,175 $ 91,413 $ 15,131 $ 106,544
-------------------------------------------------------------
(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.
11
Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
Investment securities
Taxable $ 6,835,820 $387,811 5.67 % $4,083,493 $261,535 6.40 % $2,964,401 $199,747 6.74 %
Tax-exempt 110,235 6,852 6.22 78,572 5,098 6.49 74,001 4,911 6.64
Trading 214,016 12,193 5.70 186,678 10,382 5.56 120,702 8,969 7.43
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 7,160,071 406,856 5.68 4,348,743 277,015 6.37 3,159,104 213,627 6.76
Federal funds sold 54,043 865 1.60 166,619 5,937 3.56 69,841 4,465 6.39
Loans
Commercial mortgages 2,037,091 138,864 6.82 1,581,118 125,072 7.91 1,235,690 108,917 8.81
Commercial 1,219,182 73,338 6.02 949,205 74,143 7.81 711,826 68,074 9.56
Consumer 1,815,679 130,143 7.17 1,427,586 116,262 8.14 1,323,795 106,984 8.08
Tax-exempt 212,261 18,416 8.68 193,678 17,303 8.93 132,507 12,449 9.40
------------------------------------------------------------------------------------------------------------------------------------
Total loans 5,284,213 360,761 6.83 4,151,587 332,780 8.02 3,403,818 296,424 8.71
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $12,498,327 $768,482 6.15 % $8,666,949 $615,732 7.10 % $6,632,763 $514,516 7.76 %
------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Regular savings $ 2,416,884 $ 30,232 1.25 % $1,643,145 $ 32,647 1.99 % $1,352,364 $ 36,935 2.73 %
N.O.W. accounts 344,951 4,156 1.20 251,352 5,634 2.24 170,118 5,918 3.48
Money market plus 4,193,963 51,257 1.22 2,748,236 57,920 2.11 2,149,329 67,057 3.12
Time deposits 1,882,823 61,393 3.26 1,247,741 61,415 4.92 892,780 47,181 5.28
Public funds 925,827 20,174 2.18 790,001 36,669 4.64 439,972 27,865 6.33
------------------------------------------------------------------------------------------------------------------------------------
Total deposits 9,764,448 167,212 1.71 6,680,475 194,285 2.91 5,004,563 184,956 3.70
Other borrowed money 118,734 1,839 1.55 94,257 3,508 3.72 268,304 16,943 6.31
Long-term debt 199,464 13,565 6.80 80,500 5,248 6.52 80,500 6,471 8.04
------------------------------------------------------------------------------------------------------------------------------------
Total deposits and interest-
bearing liabilities 10,082,646 182,616 1.81 6,855,232 203,041 2.96 5,353,367 208,370 3.89
Noninterest-bearing funds
(net) 2,415,681 1,811,717 1,279,396
------------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $12,498,327 182,616 1.46 $8,666,949 $203,041 2.34 $6,632,763 $208,370 3.14
------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
margin tax-equivalent
basis $585,866 4.69 412,691 4.76 306,146 4.62
Tax-exempt adjustment 13,111 11,365 9,216
----------- ------------- ------------
Net interest income and margin $572,755 4.58 % $401,326 4.63 % $296,930 4.48 %
------------------------------------------------------------------------------------------------------------------------------------
Other Balances
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 630,134 $ 417,110 $ 328,390
Other assets 702,898 519,799 431,884
Total assets 13,752,237 9,546,794 7,348,963
Demand deposits
(noninterest-bearing) 2,674,233 1,962,354 1,519,313
Other liabilities 212,775 145,084 72,162
Stockholders' equity 782,583 584,124 404,121
------------------------------------------------------------------------------------------------------------------------------------
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.
12
Noninterest Income
For 2002, noninterest income totaled $257.5 million, an increase of $60.7
million or 31% from 2001. 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
Insurance, the Company's insurance brokerage subsidiary recorded a 12% increase
in revenues or $6.1 million to $55.9 million from $49.8 million in 2001.
Commerce Capital Markets generated noninterest revenues of $35.1 million in
2002, an increase of $13.0 million or 59% from revenues of $22.0 million in
2001. The growth in noninterest income is more fully depicted in the following
chart.
2002 2001
------------ ------------
Deposit Charges & Service $130,993 $100,912
Fees
Other Operating Income:
Insurance 55,875 49,803
Capital Markets 35,082 22,049
Loan Brokerage Fees 18,655 10,976
Other 16,861 13,065
------------ ------------
126,473 95,893
------------ ------------
Total NonInterest Income $257,466 $196,805
Noninterest Expenses
Noninterest expenses totaled $579.2 million for 2002, an increase of $159.1
million, or 38% over 2001. Contributing to this increase was the addition of 40
new branches. With the addition of these new offices, staff, facilities,
marketing, and related expenses rose accordingly. Other noninterest expenses
rose $37.2 million to $124.1 million in 2002. This increase included increased
bank-card related service charges of $8.3 million, increased business
development expenses of $6.6 million, and increased professional services and
insurance expenses of $5.4 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 69.73%, 70.06%, and 70.72%, in 2002,
2001, and 2000, respectively. The Company's efficiency ratio remains above its
peer group primarily due to its aggressive expansion activities. Income Taxes
The provision for federal and state income taxes for 2002 was $73.1 million
compared to $48.7 million in 2001 and $38.4 million in 2000. The effective tax
rate was 33.5%, 32.1% and 32.4% in 2002, 2001, and 2000, respectively. The
increase in the effective income tax rate for 2002 is due primarily to higher
state income taxes under newly enacted tax laws in New Jersey.
Net Income
Net income for 2002 was $144.8 million, an increase of $41.8 million, or 41%
over the $103.0 million recorded for 2001. 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 2002 was $2.04 compared to
$1.51 per common share for 2001.
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
1.05%, 1.08%, and 1.09% for 2002, 2001, and 2000, 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
18.50%, 17.64%, and 19.81% for 2002, 2001, and 2000, respectively.
The Company's ROE excluding the accumulated other comprehensive income component
of stockholders equity (the unrealized appreciation /depreciation of its
available for sale securities) was 20.28%, 18.33%, and 18.00% for 2002, 2001 and
2000 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 1998 through 2002.
-------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial real estate:
Owner-occupied $1,345,306 $1,028,408 $ 945,599 $ 634,726 $ 516,477
Investor/developer 885,276 799,799 578,982 452,579 361,115
Residential
construction 102,080 47,917 13,743 5,580 1,738
-----------------------------------------------------------------------------------------------------------------------
2,332,662 1,876,124 1,538,324 1,092,885 879,330
Commercial:
Term 842,869 600,374 469,564 393,953 282,556
Line of credit 683,640 556,977 430,811 277,917 192,485
Demand 317 440 1,400 1,328 417
-----------------------------------------------------------------------------------------------------------------------
1,526,826 1,157,791 901,775 673,198 475,458
Consumer:
Mortgages
(1-4 family
residential) 626,652 471,680 351,644 428,453 322,310
Installment 140,493 161,647 154,415 125,856 96,188
Home equity 1,139,589 872,974 710,848 621,597 494,047
Credit lines 56,367 43,196 30,254 19,099 12,993
-----------------------------------------------------------------------------------------------------------------------
1,963,101 1,549,497 1,247,161 1,195,005 925,538
-----------------------------------------------------------------------------------------------------------------------
Total loans $5,822,589 $4,583,412 $3,687,260 $2,961,088 $2,280,326
-----------------------------------------------------------------------------------------------------------------------
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
permanent and construction loans (owner occupies greater than 50% of the
property); investor/developer permanent and construction loans; and residential
construction loans. Owner-occupied and investor/developer loans generally have
13
five year call provisions and bear the personal guarantees of the principals
involved. 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 New Jersey, Philadelphia and the New York City metropolitan
areas. 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. The contractual 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, 2002, are summarized in the following
table.
--------------------------------------------------------------------------------------------------
December 31, 2002
--------------------------------------------------------------------------------------------------
Due in One Year or Due in One to Due in Over Five
Less Five Years Years Total
--------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial real
estate:
Owner-occupied $ 394,166 $ 804,569 $ 146,571 $1,345,306
Investor/
developer 220,464 626,545 38,267 885,276
Residential
construction 77,127 24,797 156 102,080
--------------------------------------------------------------------------------------------------
691,757 1,455,911 184,994 2,332,662
Commercial:
Term 296,311 457,426 89,132 842,869
Line of credit 656,650 26,990 683,640
Demand 129 188 317
--------------------------------------------------------------------------------------------------
953,090 484,604 89,132 1,526,826
Consumer:
Mortgages
(1-4 family
Residential) 73,065 57,901 495,686 626,652
Installment 54,920 64,085 21,488 140,493
Home equity 110,573 379,274 649,742 1,139,589
Credit lines 24,480 31,887 56,367
--------------------------------------------------------------------------------------------------
263,038 533,147 1,166,916 1,963,101
--------------------------------------------------------------------------------------------------
Total loans $1,907,885 $2,473,662 $1,441,042 $5,822,589
--------------------------------------------------------------------------------------------------
Interest rates:
Predetermined $ 686,249 $1,782,506 $ 874,323 $3,343,078
Floating 1,221,636 691,156 566,719 2,479,511
--------------------------------------------------------------------------------------------------
Total loans $1,907,885 $2,473,662 $1,441,042 $5,822,589
-------------------------------------------------------------------------------------------------
During 2002, loans increased $1.2 billion, or 27% from $4.6 billion to $5.8
billion. At December 31, 2002, loans represented 40% of total deposits and 35%
of total assets. All segments of the loan portfolio experienced growth in 2002,
especially owner-occupied loans, 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. Owner occupied properties grew $317.0
million or 31% and the $1.3 billion outstanding at December 31, 2002 represented
58% of commercial real estate. Commercial loan growth of $369.0 million or 32%
was led by activity in the middle market and healthcare sectors. Growth in
consumer loans of $414.0 million, or 27%, was primarily in home equity lending.
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, 2002
were $17.8 million or .11% of total assets, as compared to $18.4 million or .16%
of total assets at December 31, 2001.
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, 2002
were $14.2 million as compared to $16.8 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, 2002, loans past due 90 days or
more and still accruing interest amounted to $620 thousand, compared to $519
thousand at December 31, 2001. Additional loans considered by the Company's
internal loan review department as potential problem loans of $30.3 million at
December 31, 2002 have been evaluated as to risk exposure in determining the
adequacy of the allowance for loan losses.
Other real estate (ORE) totaled $3.6 million at December 31, 2002 as compared to
$1.5 million at December 31, 2001. 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.
The following summary presents information regarding non-performing loans and
assets as of December 31, 1998 through 2002.
14
------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans (1):
Commercial $ 5,412 $ 6,835 $ 4,955 $ 2,254 $ 2,655
Consumer 2,734 1,484 1,295 674 831
Real estate
Construction 131 1,590 1,459 55
Mortgage 5,891 6,924 5,840 5,230 4,849
------------------------------------------------------------------------------------------------
Total non-accrual
loans 14,168 16,833 13,549 8,213 8,335
------------------------------------------------------------------------------------------------
Restructured loans (1):
Commercial 5 8 11 277 17
Real estate
mortgage 82 192 217
------------------------------------------------------------------------------------------------
Total restructured
loans 5 8 93 469 234
------------------------------------------------------------------------------------------------
Total non-performing
loans 14,173 16,841 13,642 8,682 8,569
------------------------------------------------------------------------------------------------
Other real estate 3,589 1,549 2,959 3,523 6,081
------------------------------------------------------------------------------------------------
Total non-performing
assets(1): $17,762 $18,390 $16,601 $12,205 $14,650
------------------------------------------------------------------------------------------------
Non-performing
assets as a percent
of total assets 0.11% 0.16% 0.20% 0.18% 0.27%
------------------------------------------------------------------------------------------------
Loans past due 90
days or more and
still $620 $519 $ 489 $ 499 $ 1,029
accruing interest
------------------------------------------------------------------------------------------------
(1) Interest income of approximately $1,352,000, $2,092,000, $1,731,000,
$986,000, and $1,030,000 would have been recorded in 2002, 2001, 2000,
1999, and 1998 respectively, on non-performing loans in accordance with
their original terms. Actual interest recorded on these loans amounted to
$275,000 in 2002, $237,000 in 2001, $525,000 in 2000, $255,000 in 1999, and
$266,000 in 1998.
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, a 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,
entrance into new geographic markets, changes in credit concentrations, and
national and local economic trends and conditions. 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 2002, net charge-offs amounted to $9.4
million, or .18% of average loans outstanding for the year, compared to $8.1
million, or .19% of average loans outstanding for 2001. During 2002, the Company
recorded provisions of $33.2 million to the allowance for loan losses compared
to $26.4 million for 2001. At December 31, 2002, the allowance aggregated $90.7
million or 1.56% of total loans. The increase in the provision in 2002 reflects
the increases in charge-offs and the growth in the loan portfolio. Additionally,
the increase in the provision for 2002 reflects the ongoing uncertainty with the
overall economy and risks associated with the mix of the loan portfolio, tenure
of loan officers and entrance into new geographic markets.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
-------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning
of period $66,981 $48,680 $38,382 $31,265 $24,150
Provisions charged to
operating expenses 33,150 26,384 13,931 9,175 8,762
-------------------------------------------------------------------------------------------------
100,131 75,064 52,313 40,440 32,912
-------------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 815 552 313 551 418
Consumer 339 288 249 286 305
Commercial real
estate 176 134 14 132 764
-------------------------------------------------------------------------------------------------
Total recoveries 1,330 974 576 969 1,487
-------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial (7,181) (5,862) (2,936) (1,599) (1,281)
Consumer (3,514) (2,784) (1,220) (1,078) (1,352)
Commercial real
estate (33) (411) (53) (350) (501)
-------------------------------------------------------------------------------------------------
Total charged-off (10,728) (9,057) (4,209) (3,027) (3,134)
-------------------------------------------------------------------------------------------------
Net charge-offs (9,398) (8,083) (3,633) (2,058) (1,647)
-------------------------------------------------------------------------------------------------
Balance at end of period $90,733 $66,981 $48,680 $38,382 $31,265
-------------------------------------------------------------------------------------------------
Net charge-offs as a
percentage of average
loans outstanding 0.18% 0.19% 0.11% 0.08% 0.08%
-------------------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
year-end loans 1.56% 1.46% 1.32% 1.30% 1.37%
-------------------------------------------------------------------------------------------------
15
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,
-------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------------------------------------
(dollars in
thousands)
Commercial $33,708 26% $24,110 25% $20,396 24% $14,268 23% $ 7,738 21%
Consumer 14,497 34 9,915 34 4,632 34 4,120 40 7,800 41
Commercial real
estate 42,528 40 32,956 41 23,652 42 19,994 37 15,727 38
-------------------------------------------------------------------------------------------------------------------------
$90,733 100% $66,981 100% $48,680 100% $38,382 100% $31,265 100%
-------------------------------------------------------------------------------------------------------------------------
Investment Securities
The following table summarizes the book value of securities available for sale
and securities held to maturity by the Company as of the dates shown.
-----------------------------------------------------------
December 31,
-----------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------
(dollars in thousands)
U.S. Government agency
and mortgage-backed
obligations $7,659,737 $3,994,523 $1,900,912
Obligations of state
and political
subdivisions 23,185 82,922 46,544
Equity securities 24,054 16,325 16,825
Other 99,803 58,934 57,045
-----------------------------------------------------------
Securities available
for sale $7,806,779 $4,152,704 $2,021,326
-----------------------------------------------------------
U.S. Government agency
and mortgage-backed
obligations $ 624,688 $1,044,266 $1,437,993
Obligations of state
and political 91,204 50,602 42,938
subdivisions
Other 47,134 37,304 32,525
-----------------------------------------------------------
Securities held to
maturity $ 763,026 $1,132,172 $1,513,456
-----------------------------------------------------------
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, net of income tax effects, 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, primarily municipal securities,
are carried at market value, with gains and losses, both realized and
unrealized, included in other operating income.
In total, investment securities increased $3.3 billion from $5.6 billion to $8.9
billion at December 31, 2002. Deposit growth and other funding sources were used
to increase the Company's investment portfolio. The available for sale portfolio
increased $3.7 billion to $7.8 billion, and the securities held to maturity
portfolio decreased $369.0 million to $763.0 million at year-end 2002. The
portfolio of trading securities increased $43.7 million from year-end 2001 to
$326.5 million at year-end 2002. At December 31, 2002, the average life and
duration of the investment portfolio were approximately 3.0 years and 2.5 years,
respectively, as compared to 5.8 years and 4.3 years, respectively, at December
31, 2001. At December 31, 2002 the yield on the portfolio was 5.30%, down from
6.38% at December 31, 2001. The decrease in yield was due to lower reinvestment
rates, which reflect lower general market interest rates in 2002 as compared to
2001. The decrease in duration and average life was due to the decline in
general market interest rates, which resulted in increased prepayments and a
decrease in the duration of the Company's existing portfolio. In addition
management made a conscious decision to maintain a shorter duration when
reinvesting funds in 2002, in anticipation of a rise in interest rates in 2003
and subsequent years.
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, 2002,
the yield on the investment portfolio was 5.68%, a decrease of 69 basis points
from 6.37% in fiscal 2001. The decrease in yield is a reflection of the general
decline in
16
market interest rates in 2002, which impacted returns on the Company's
reinvestment of funds.
At December 31, 2002, the net unrealized appreciation in securities available
for sale included in stockholders' equity totaled $113.6 million, net of tax,
compared to net unrealized appreciation of $15.8 million, net of tax, at
December 31, 2001.
The contractual maturity distribution and weighted average yield of the
Company's investment portfolio (excluding equity and trading securities) at
December 31, 2002, 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.
-------------------------------------------------------------------------------------------------------------------------
December 31, 2002
-------------------------------------------------------------------------------------------------------------------------
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 $36,954 1.73% $32,676 2.12% $252,972 4.52%$7,337,135 5.22% $7,659,737 5.17%
Obligations of state and
political subdivisions 3,211 6.91 14,468 7.03 3,581 6.78 1,925 5.08 23,185 6.81
Other securities 10,786 1.54 10,907 5.78 49,000 7.85 29,110 8.53 99,803 7.14
-------------------------------------------------------------------------------------------------------------------------
$50,951 2.01% $58,051 4.03% $305,553 5.08%$7,368,170 5.23% $7,782,725 5.20%
-------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government agency and
mortgage-backed obligations $ 907 7.89% $12,192 7.30% $77,670 6.85% $533,919 6.76% $ 624,688 6.79%
Obligations of state and
political subdivisions 37,357 2.86 224 2.17 4,798 7.20 48,825 5.71 91,204 4.63
Other securities 47,134 3.81 47,134 3.81
-------------------------------------------------------------------------------------------------------------------------
$85,398 3.44% $12,416 7.22% $82,468 6.87% $582,744 6.68% $ 763,026 6.36%
-------------------------------------------------------------------------------------------------------------------------
Deposits
Total deposits at December 31, 2002 were $14.5 billion, an increase of $4.4
billion or 43% above total deposits of $10.2 billion at December 31, 2001. 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
public certificates of deposit. Deposits in the various core categories
increased $4.3 billion from year-end 2001 to year-end 2002. Certificates of
deposit in excess of $100 thousand, retail and public, increased $69.0 million
from year-end 2001.
Total deposits averaged $12.4 billion for 2002, an increase of $3.8 billion or
44% above the 2001 average. The average balance of noninterest-bearing demand
deposits in 2002 was $2.7 billion, a $711.9 million or 36% increase over the
average balance for 2001. The average total balance of passbook and statement
savings accounts increased $773.7 million, or 47% compared to the prior year.
The average balance of interest-bearing demand accounts (money market and N.O.W.
accounts) for 2002 was $4.5 billion, a $1.5 billion or 51% increase over the
average balance for the prior year. The average balance of time deposits for
2002 was $2.8 billion, a $770.9 million or 38% increase over the average balance
for 2001. For 2002, the cost of total deposits was 1.34% as compared to 2.25% in
2001.
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 superior customer service, convenient branch locations, extended
hours of operation, free checking accounts (subject to a small minimum balance
requirement) and active marketing.
The average balances and weighted average rates of deposits for each of the
years 2002, 2001, and 2000 are presented below.
-------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Demand deposits:
Noninterest-bearing $ 2,674,233 $1,962,354 $1,519,313
Interest-bearing (money market and
N.O.W. accounts) 4,538,914 1.22% 2,999,588 2.12% 2,319,447 3.15%
Savings deposits 2,416,884 1.25 1,643,145 1.99 1,352,364 2.73
Time deposits/public funds 2,808,650 2.90 2,037,742 4.81 1,332,752 5.63
-------------------------------------------------------------------------------------------------------------------------
Total deposits $12,438,681 $8,642,829 $6,523,876
-------------------------------------------------------------------------------------------------------------------------
17
The remaining maturity of certificates of deposit for $100,000 or more as of
December 31, 2002, 2001 and 2000 is presented below:
-------------------------------------------------------------------------------------------------------------------------
Maturity 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
3 months or less $ 950,299 $ 897,304 $641,342
3 to 6 months 116,721 137,388 98,763
6 to 12 months 103,449 70,630 54,489
Over 12 months 10,646 6,820 12,420
-------------------------------------------------------------------------------------------------------------------------
Total $1,181,115 $1,112,142 $807,014
-------------------------------------------------------------------------------------------------------------------------
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 and approved 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, 2002.
----------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gaps
December 31, 2002
----------------------------------------------------------------------------------------------------------------------
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 $2,899.4 $ 118.5 $ 189.1 $1,703.7 $ 994.7 $5,905.4
Investment
securities 1,287.2 1,124.0 1,479.0 4,172.0 834.1 8,896.3
----------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 4,186.6 1,242.5 1,668.1 5,875.7 1,828.8 14,801.7
----------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities
Transaction
accounts 2,689.8 5,807.2 8,497.0
Time deposits 1,204.6 380.7 752.0 471.4 2,808.7
Other borrowed
money 391.6 391.6
Long-term debt 200.0 200.0
----------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 4,286.0 380.7 752.0 471.4 6,007.2 11,897.3
----------------------------------------------------------------------------------------------------------------------
Period gap (99.4) 861.8 916.1 5,404.3 (4,178.4) $2,904.4
----------------------------------------------------------------------------------------------------------------------
Cumulative gap $(99.4) $762.4 $1,678.5 $7,082.8 $2,904.4
----------------------------------------------------------------------------------------------------
Cumulative gap as a
percentage of total
interest-earning
assets (0.7)% 5.2% 11.3% 47.9% 19.6%
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis captures not only the potential of all assets
and liabilities to mature or reprice, but also the probability that they will do
so. Income simulation also attends to the relative interest rate sensitivities
of these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate plus 200 and minus 100 basis point change during the next year,
with rates remaining constant in the second year.
18
The Company's Asset/Liability Committee (ALCO) policy has established that
interest income sensitivity will be considered acceptable if net income in the
above interest rate scenario is within 15% of net income in the flat rate
scenario in the first year and within 30% over the two year time frame. At
December 31, 2002, the Company's income simulation model indicates net income
would decrease by 5.4% and 7.3% in the first year and over a two year time
frame, respectively, if rates decreased as described above, as compared to a
decrease of 3.3% and 13.1%, respectively, at December 31, 2001. The model
projects that net income would increase by 8.8% and increase by 13.5% in the
first year and over a two year time frame, respectively, if rates increased as
described above, as compared to a decrease of 2.1% and an increase of 1.7%,
respectively, at December 31, 2001. 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 plus
200 and minus 100 basis point change in rates. The Company's ALCO policy
indicates that the level of interest rate risk is unacceptable if the immediate
plus 200 or minus 100 basis point change would result in the loss of 50% or more
of the excess of market value over book value in the current rate scenario. At
December 31, 2002, 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 plus 200 or minus 100 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, 2002 provide an accurate assessment
of the Company's interest rate risk.
Although the use of derivatives in 2002 was minimal, the Company may utilize
interest rate derivatives to manage interest rate risk, including interest rate
swaps, interest rate caps and floors, interest rate forwards, and
exchange-traded futures and options contracts. Further discussion of the
accounting for derivative instruments is included in Note 1 to the consolidated
financial statements.
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, 2002
the Company had in excess of $6.9 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 2002, deposit growth and short-term borrowings were used to fund
growth in the loan portfolio and purchase additional investment securities.
Other Borrowed Money
Other borrowed money, or short-term borrowings, which consist primarily of
securities sold under agreement to repurchase, federal funds purchased, and
lines of credit, were used in 2002 to meet short-term liquidity needs. For 2002,
short-term borrowings averaged $118.7 million as compared to $94.3 million in
2001. The average rate on the Company's short-term borrowings was 1.55% and
3.72% during 2002 and 2001, respectively. As of December 31, 2002, short-term
borrowings included $391.6 million of securities sold under agreements to
repurchase at an average rate of 1.56%, compared to $199.6 million at an average
rate of 1.71% as of December 31, 2001.
Long-Term Debt
On March 11, 2002 the Company issued $200 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. The Convertible Trust Capital
Securities mature in 2032. Holders of the Convertible Trust Capital Securities
may convert each security into 0.9478 shares of Company common stock, subject to
adjustment, if (1) the closing sale price of Company common stock for at least
20 trading days in a period of 30 consecutive trading days ending on the last
trading day of any calendar quarter beginning with the quarter ending June 30,
2002 is more than 110% of the Convertible Trust Capital Securities conversion
price ($52.75 at December 31, 2002) then in effect on the last day of such
calendar quarter, (2) the assigned credit rating by Moody's of the Convertible
Trust Capital Securities is at or below Bal, (3) the Convertible Trust Capital
Securities are called for redemption, or (4) specified corporate transactions
have occurred. All $200 million of the Convertible Trust Capital
19
Securities qualify as Tier 1 capital for regulatory capital purposes. As of
December 31, 2002, the Convertible Trust Capital Securities were not
convertible. The net proceeds of this offering were used for general corporate
purposes, including the redemption of the Company's $57.5 million of 8.75% Trust
Capital Securities on July 1, 2002 and the repayment of the Company's $23.0
million of 8 3/8% subordinated notes on May 20, 2002.
Stockholders' Equity and Dividends
At December 31, 2002, stockholders' equity totaled $918.0 million, up $281.4
million or 44% over stockholders' equity of $636.6 million at December 31, 2001.
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, 2002 and 2001, respectively.
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
unrealizedappreciation/depreciation in securities available for sale) plus the
Convertible 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
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
Risk based capital ratios:
Tier 1 11.47% 10.81% 4.00% 4.00%
Total capital 12.51 11.96 8.00 8.00
Leverage ratio 6.37 6.24 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 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, 2002, the Company's consolidated capital
levels and each of the Company's banking subsidiaries met the regulatory
definition of a "well capitalized" financial institution, i.e., a leverage
capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6%, and
a total risk-based capital ratio exceeding 10%.
The Company's common stock is listed for trading on the New York Stock Exchange
under the symbol CBH. The quarterly market price ranges and dividends 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 March 3, 2003, there were
approximately 52,000 holders of record of the Company's common stock.
------------------------------------------------------------
Common Share Data
------------------------------------------------------------
Market Prices Cash Dividends
-------------------
High Low Per Share
------------------------------------------------------------
2002 Quarter Ended
December 31 $47.23 $36.42 $0.15000
September 30 47.85 38.88 0.15000
June 30 50.24 43.70 0.15000
March 31 45.05 38.20 0.15000
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
------------------------------------------------------------
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 the Company's 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. 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. See notes 4 and 7 to the Company's
consolidated financial statements included elsewhere herein.
20
Results of Operations - 2001 versus 2000
Net income for 2001 was $103.0 million compared to $80.0 million in 2000.
Diluted net income per common share was $1.51 compared to $1.25 per common share
for the prior year.
Net interest income on a tax-equivalent basis for 2001 amounted to $412.7
million, an increase of $106.5 million, or 35% over 2000.
Interest income on a tax-equivalent basis increased $101.2 million or 20% to
$615.7 million in 2001. This increase was primarily related to volume increases
in the loan and investment portfolios. Interest expense for 2001 fell $5.3
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 provision for loan losses was $26.4 million in 2001 compared to $13.9
million in the prior year.
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
Insurance 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 $22.0 million in 2001, an increase of $6.7 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 $26.2 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 from 2000.
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 $27.5 million to $86.9 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.
Mergers and Acquisitions
During 2002, the Company purchased Sanford and Purvis, Inc., an insurance
brokerage agency. The Company issued approximately 113,000 shares of common
stock in connection with this immaterial acquisition.
---------------------------
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.
21
Item 8. Financial Statements and Supplementary Financial Data
Consolidated Balance Sheets
Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------------------------------------------------------
December 31
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 811,434 $ 557,738
Federal funds sold
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 811,434 557,738
Loans held for sale 96,920 73,261
Trading securities 326,479 282,811
Securities available for sale 7,806,779 4,152,704
Securities held to maturity 763,026 1,132,172
(market value 2002 -$791,889; 2001- $1,146,345)
Loans 5,822,589 4,583,412
Less allowance for loan losses 90,733 66,981
-----------------------------------------------------------------------------------------------------------
5,731,856 4,516,431
Bank premises and equipment, net 499,189 362,992
Other assets 368,298 285,594
-----------------------------------------------------------------------------------------------------------
Total assets $16,403,981 $11,363,703
--------------------------------------------------------------------------------------------------------------------------------
Liabilities Deposits:
Demand:
Interest-bearing $5,635,351 $3,608,709
Noninterest-bearing 3,243,091 2,403,637
Savings 2,861,677 1,925,919
Time 2,808,722 2,247,329
-----------------------------------------------------------------------------------------------------------
Total deposits 14,548,841 10,185,594
Other borrowed money 391,641 264,554
Other liabilities 345,489 196,485
Trust Capital Securities - Commerce Capital Trust I 57,500
Convertible Trust Capital Securities - Commerce Capital Trust II 200,000
Long-term debt 23,000
-----------------------------------------------------------------------------------------------------------
15,485,971 10,727,133
--------------------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, 68,043,171 shares issued 68,043 65,833
Equity (65,832,559 shares in 2001)
Capital in excess of par or stated value 538,795 461,897
Retained earnings 199,604 94,698
Accumulated other comprehensive income 113,614 15,764
-----------------------------------------------------------------------------------------------------------
920,056 638,192
Less treasury stock, at cost, 209,794 shares (200,118 shares in 2,046 1,622
2001)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 918,010 636,570
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $16,403,981 $11,363,703
-----------------------------------------------------------------------------------------------------------
See accompanying notes.
22
Consolidated Statements of Income
--------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $354,315 $326,723 $292,066
Income Interest on investment securities 400,191 271,707 208,769
Other interest 865 5,937 4,465
-------------------------------------------------------------------------------------------------------------
Total interest income 755,371 604,367 505,300
-------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Interest Interest on deposits:
Expense Demand 55,413 63,554 72,975
Savings 30,232 32,647 36,935
Time 81,567 98,084 75,046
-------------------------------------------------------------------------------------------------------------
Total interest on deposits 167,212 194,285 184,956
Interest on other borrowed money 1,839 3,508 16,943
Interest on long-term debt 13,565 5,248 6,471
-------------------------------------------------------------------------------------------------------------
Total interest expense 182,616 203,041 208,370
-------------------------------------------------------------------------------------------------------------
Net interest income 572,755 401,326 296,930
Provision for loan losses 33,150 26,384 13,931
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 539,605 374,942 282,999
--------------------------------------------------------------------------------------------------------------------------------
Noninterest Deposit charges and service fees 130,993 100,912 74,685
Income Other operating income 126,473 94,913 72,862
Net investment securities gains 0 980 3,213
-------------------------------------------------------------------------------------------------------------
Total noninterest income 257,466 196,805 150,760
-------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and benefits 276,933 198,034 148,799
Expense Occupancy 56,498 39,152 31,419
Furniture and equipment 66,700 50,724 40,436
Office 31,186 26,808 23,548
Marketing 23,733 18,378 11,706
Other 124,118 86,940 59,449
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 579,168 420,036 315,357
-------------------------------------------------------------------------------------------------------------
Income before income taxes 217,903 151,711 118,402
Provision for federal and state income taxes 73,088 48,689 38,355
-------------------------------------------------------------------------------------------------------------
Net income $144,815 $103,022 $ 80,047
-------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share:
Basic $ 2.16 $ 1.59 $ 1.30
-------------------------------------------------------------------------------------------------------------
Diluted $ 2.04 $ 1.51 $ 1.25
-------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding:
Basic 66,795 64,666 61,755
-------------------------------------------------------------------------------------------------------------
Diluted 70,903 68,102 64,223
-------------------------------------------------------------------------------------------------------------
Cash dividends, common stock $ 0.60 $ 0.55 $ 0.48
-------------------------------------------------------------------------------------------------------------
See accompanying notes.
23
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Operating Net income $144,815 $103,022 $80,047
Activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 33,150 26,384 13,931
Provision for depreciation, amortization
and accretion 70,462 44,263 32,596
Gains on sales of securities available for sale (980) (3,213)
Proceeds from sales of loans held for sale 1,375,768 688,752 56,101
Originations of loans held for sale (1,399,427) (720,222) (92,188)
Net loan (chargeoffs) (9,398) (8,083) (3,633)
Net (increase) decrease in trading securities (43,668) (173,505) 8,531
Increase in other assets (132,972) (97,711) (17,494)
Increase in other liabilities 150,194 148,055 26,271
Deferred income tax expense (benefit) 6,359 (4,054) (2,812)
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 195,283 5,921 98,137
Investing Proceeds from the sales of securities available for sale 1,506,996 381,341 410,541
Activities Proceeds from the maturity of securities available for sale 2,413,025 895,077 345,160
Proceeds from the maturity of securities held to maturity 486,292 384,388 174,124
Purchase of securities available for sale (7,437,004) (3,311,356) (1,055,694)
Purchase of securities held to maturity (118,221) (68,420) (127,194)
Net increase in loans (1,289,825) (906,160) (1,095,712)
Proceeds from sales of loans 50,649 10,008 10,622
Purchases of premises and equipment (194,559) (128,137) (109,701)
-----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (4,582,647) (2,743,259) (1,447,854)
Financing Net increase in demand and savings deposits 3,801,855 2,083,736 1,314,974
Activities Net increase in time deposits 561,393 714,264 463,700
Net increase (decrease) in other borrowed money 127,087 (19,160) (274,378)
Dividends paid (39,911) (35,400) (29,761)
Issuance of Convertible Trust Capital Securities 200,000
Redemption of Trust Capital Securities (57,500)
Decrease in long-term debt (23,000)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 66,809 53,004 53,670
Other 4,327 2,714 (5,494)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,641,060 2,799,158 1,522,711
Increase in cash and cash equivalents 253,696 61,820 172,994
Cash and cash equivalents at beginning of year 557,738 495,918 322,924
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $811,434 $557,738 $495,918
-----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Interest $185,143 $201,127 $206,144
Income taxes 59,644 48,826 36,373
Other noncash activities:
Securitization of loans 358,918
-----------------------------------------------------------------------------------------------------------
See accompanying notes.
24
Consolidated Statements of Changes in Stockholders' Equity
----------------------------------------------------------------------------------------------------------------
Years ended December 31, 2002, 2001 and 2000
Capital in
(in thousands, except per share amounts) Common Excess of Retained Treasury Accumulated
Stock Par or Earnings Stock Other
Stated Compre-hensive
Value Income Total
-------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $44,418 $321,443 $32,263 $(1,624) $(39,744) $356,756
Acquisition of insurance brokerage agencies 470 (450) (5,519) (5,499)
(602 shares)
-------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 2000 44,888 320,993 26,744 (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 $422,375 $27,083 $(1,622) $(5,239) $492,224
Acquisition of insurance brokerage agencies 108 (885) (777)
(108 shares)
-------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 2001 49,735 421,490 27,083 (1,622) (5,239) 491,447
Net income 103,022 103,022
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax 20,525 20,525
$31,924)
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 $461,897 $94,698 $(1,622) $15,764 $636,570
Net income 144,815 144,815
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax 97,850 97,850
$153,397)
Reclassification adjustment (pre-tax $0)
-------------
Other comprehensive income 97,850
-------------
Total comprehensive income 242,665
Cash dividends paid (39,911) (39,911)
Shares issued under dividend reinvestment and
compensation and benefit plans (2,098 shares) 2,098 64,711 66,809
Acquisition of insurance brokerage agency 113 4,633 4,746
(113 shares)
Other (1) 7,554 2 (424) 7,131
-------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $68,043 $538,795 $199,604 $(2,046) $113,614 $918,010
-------------------------------------------------------------------------------------------------------------------
See accompanying notes.
25
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 Insurance Services,
Inc., formerly Commerce National Insurance Services, Inc. (Commerce Insurance),
Commerce Capital Trust I, Commerce Capital Trust II and Commerce Capital
Markets, Inc. (CCMI). All material intercompany transactions have been
eliminated. Certain amounts from prior years have been reclassified to conform
with 2002 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 services,
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
CCMI maintains a portfolio of trading account securities which are carried at
market. Gains and losses, both realized and unrealized, are included in other
operating income. Trading gains of $12.8 million, $10.6 million, and $8.4
million were recorded in 2002, 2001, and 2000, respectively, including
unrealized gains of $1.2 million and $265,000 at December 31, 2002 and 2001,
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. Net deferred loan
origination fees and costs are generally considered as adjustments of interest
rate yields and are amortized into interest income on loans over the terms of
the related loans.
Loans are placed on a non-accrual status and cease accruing interest when loan
payment performance is deemed unsatisfactory. However, all loans past due 90
days are placed on non-accrual status, unless the loan is both well secured and
in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Based upon management's
evaluation of the loan portfolio, the allowance is maintained at a level
considered adequate to absorb estimated inherent losses in the loan portfolio.
The level of the allowance is based on an evaluation of the risk characteristics
included in the loan portfolio, including such factors as 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, entrance into new geographic markets,
changes in credit concentrations, and national and local economic trends and
conditions, and other relevant factors, all of which may be susceptible to
significant change.
26
Notes to Consolidated Financial Statements
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.
When capitalizing costs for branch construction, the Company includes the costs
of purchasing the land, developing the site, constructing the building (or
leasehold improvements if the property is leased), and furniture, fixtures and
equipment necessary to equip the branch. All other pre-opening and post-opening
costs related to branches are expensed as incurred.
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 $231,000,
$1.7 million and $1.0 million related to ORE expenses, net for 2002, 2001, and
2000, respectively.
Intangible Assets
On January 1, 2002, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) 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, are no longer amortized into net income over an estimated
life but rather are tested at least annually for impairment based on specific
guidance provided in the new standard. Intangible assets determined to have
finite lives, $4.0 million at December 31, 2002, will continue to be amortized
over their estimated useful lives, generally 10-15 years, and also continue to
be subject to impairment testing. The adoption of FAS 142 did not have a
material impact on the results of operations of the Company. The excess of cost
over fair value of net assets acquired (goodwill) is included in other assets
and amounted to $4.5 million at December 31, 2002.
Advertising Costs
Advertising costs are expensed as incurred.
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 2002 and 2001 were
approximately $39.6 million and $12.2 million, respectively.
Derivative Financial Instruments
The Company may enter into derivative transactions principally to protect
against the risk of adverse price or interest rate movements on the value of
certain assets and liabilities and on future cash flows. The Company applies the
provisions of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), as amended, in accounting for its derivative
transactions. Under the guidelines of FAS 133, all derivative instruments are
required to be carried at fair value on the balance sheet. FAS 133 provides
special hedge accounting provisions, which permit the change in the fair value
of the hedged item related to the risk being hedged to be recognized in earnings
in the same period and in the same income statement line as the change in fair
value of the derivative.
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.
27
Recent Accounting Statements
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions," (FAS 147) which amends FAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," FASB Interpretation No.
9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method," and FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS No. 147 removes acquisitions of financial institutions
from the scope of both FAS No. 72 and FASB Interpretation No. 9 and requires
that those transactions be accounted for in accordance with FAS No. 141,
"Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets."
FAS No. 147 addresses the financial accounting and reporting requirements for
the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises, and provides guidance on
accounting for the impairment and disposal of acquired long-term
customer-relationship intangible assets, including those acquired in
transactions between two or more mutual enterprises. FAS No. 147 was effective
October 1, 2002 and did not have a material impact on the financial condition or
operating results of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance on how to identify a variable interest entity ("VIE") and determine
when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company's consolidated financial
statements. The new accounting provisions of this interpretation became
effective upon issuance for all new variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies to the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. While the impact is currently being assessed, management does not
expect the adoption of FIN 46 to have a material impact on the Company's results
of operations and financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirement of FAS No. 123, "Accounting for Stock-Based
Compensation." This statement is effective for fiscal years ending after
December 15, 2002 and did not have an impact on the financial condition or
operating results of the Company.
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):
----------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------------------
Pro forma net income $136,386 $97,430 $73,456
Pro forma net income per share:
Basic $ 2.04 $ 1.51 $ 1.19
Diluted 1.94 1.44 1.15
----------------------------------------------------------------------------------------------------------
The fair value of options granted in 2002, 2001, and 2000 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 4.41% 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 .304 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 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.
28
2. Mergers and Acquisitions
During 2002, the Company purchased Sanford and Purvis, Inc., an insurance
brokerage agency. The Company issued approximately 113,000 shares of common
stock in connection with this immaterial acquisition.
In 2001, the Company purchased 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
Insurance. The Company issued approximately 108,000 shares of common stock in
exchange for all of the outstanding shares of these agencies in connection with
these immaterial acquisitions.
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, 2002 and
2001 follows:
-----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
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 $7,491,768 $172,699 $(4,730) $7,659,737 $3,974,752 $41,312 $(21,541) $3,994,523
Obligations of state
and political
subdivisions 22,041 1,144 23,185 83,727 768 (1,573) 82,922
Equity securities 18,898 5,156 24,054 11,666 4,828 (169) 16,325
Other 96,291 3,512 99,803 58,175 1,256 (497) 58,934
-----------------------------------------------------------------------------------------------------------------------------------
Securities available
for sale $7,628,998 $182,511 $(4,730) $7,806,779 $4,128,320 $48,164 $(23,780) $4,152,704
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency
and mortgage-backed
obligations $624,688 $27,847 $652,535 $1,044,266 $16,917 $(2,742) $1,058,441
Obligations of state
and political
subdivisions 91,204 1,041 $ (25) 92,220 50,602 50,602
Other 47,134 47,134 37,304 (2) 37,302
-----------------------------------------------------------------------------------------------------------------------------------
Securities held to
maturity $763,026 $28,888 $ (25) $791,889 $1,132,172 $16,917 $(2,744) $1,146,345
-----------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities (in
thousands) at December 31, 2002, 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 Value Amortized Cost Market
Cost Value
----------------------------------------------------------------------------------------------------------
Due in one year or less $ 50,821 $ 50,951 $ 84,491 $ 84,491
Due after one year through five years 54,399 55,464 224 224
Due after five years through ten years 49,372 52,581 4,798 4,990
Due after ten years 30,674 31,036 48,825 49,649
Mortgage backed securities 7,424,834 7,592,693 624,688 652,535
Equity securities 18,898 24,054
----------------------------------------------------------------------------------------------------------
$7,628,998 $7,806,779 $763,026 $791,889
----------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale during 2002, 2001 and 2000
were $1.51 billion, $381.3 million and $410.5 million, respectively. Gross gains
of $6.8 million, $2.2 million and $3.2 million were realized on the sales in
2002, 2001, and 2000, respectively, and gross losses of $6.8 million, $1.2
million and $0 were realized in 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, investment securities with a carrying value of
$2.1 billion and $1.6 billion, respectively, were pledged to secure deposits of
public funds.
29
4. Loans The following is a summary of loans outstanding (in
thousands) at December 31, 2002 and 2001:
----------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------------
Commercial real estate:
Owner-occupied $1,345,306 $1,028,408
Investor/developer 885,276 799,799
Residential construction 102,080 47,917
----------------------------------------------------------------------------------------------------------
2,332,662 1,876,124
Commercial loans:
Term 842,869 600,374
Line of credit 683,640 556,977
Demand 317 440
----------------------------------------------------------------------------------------------------------
1,526,826 1,157,791
Consumer:
Mortgages (1-4 family residential) 626,652 471,680
Installment 140,493 161,647
Home equity 1,139,589 872,974
Credit lines 56,367 43,196
----------------------------------------------------------------------------------------------------------
1,963,101 1,549,497
----------------------------------------------------------------------------------------------------------
$5,822,589 $4,583,412
----------------------------------------------------------------------------------------------------------
Loans to executive officers and directors of the Company and its subsidiaries,
and companies with which they are associated, are made in the ordinary course of
business and on substantially the same terms as comparable unrelated
transactions. Such loans approximated $124.8 million and $70.1 million at
December 31, 2002 and 2001, respectively.
The Company purchased goods and services, including legal services, from related
parties. Such disbursements aggregated $5.9 million, $4.5 million, and $2.8
million, in 2002, 2001, and 2000, respectively. 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.
5. Allowance for Loan Losses
The following is an analysis of changes in the allowance for loan losses (in
thousands) for 2002, 2001 and 2000:
----------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------------------
Balance, January 1 $66,981 $48,680 $38,382
Provision charged to operating expense 33,150 26,384 13,931
Recoveries of loans previously charged off 1,330 974 576
Loan charge-offs (10,728) (9,057) (4,209)
----------------------------------------------------------------------------------------------------------
Balance, December 31 $90,733 $66,981 $48,680
----------------------------------------------------------------------------------------------------------
30
6. Non-accrual and Restructured Loans and Other Real Estate
The total of non-performing loans (non-accrual and restructured loans)
was $14.2 million and $16.8 million at December 31, 2002 and 2001,
respectively. Non-performing loans of $3.8 million, $0.9 million and
$1.3 million net of charge offs of $0, $17,000 and $26,000 were
transferred to other real estate during 2002, 2001 and 2000,
respectively. Other real estate ($3.6 million and $1.5 million at
December 31, 2002 and 2001, respectively) is included in other assets.
At December 31, 2002 and 2001, the recorded investment in loans
considered to be impaired under FASB Statement No. 114 "Accounting by
Creditors for Impairment of a Loan" totaled $9.0 million and $12.2
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. Impaired loans averaged approximately
$10.6 million and $10.7 million during 2002 and 2001, respectively.
Interest income of approximately $1.4 million, $2.1 million, and $1.7
million would have been recorded on non-performing loans (including
impaired loans) in accordance with their original terms in 2002, 2001,
and 2000, respectively. Actual interest income recorded on these loans
amounted to $275,000, $237,000, and $525,000 during 2002, 2001, and
2000, respectively.
7. Bank Premises, Equipment, and Leases
A summary of bank premises and equipment (in thousands) is as follows:
----------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------------
Land $123,880 $ 84,893
Buildings 247,508 172,139
Leasehold improvements 43,130 23,648
Furniture, fixtures and equipment 265,712 217,777
Leased property under capital leases 124 124
----------------------------------------------------------------------------------------------------------
680,354 498,581
Less accumulated depreciation
and amortization 181,165 135,589
----------------------------------------------------------------------------------------------------------
$499,189 $362,992
----------------------------------------------------------------------------------------------------------
At December 31, 2002, the Company leased from various related parties under
separate operating lease agreements the land on which it has constructed 19
offices. Rents paid under these agreements represent market rates, are supported
by independent appraisals and approved by the independent members of the Board
of Directors. The aggregate annual rental under these leases was approximately
$1.6 million, $1.8 million, and $1.6 million in 2002, 2001, and 2000,
respectively. These leases expire periodically beginning in 2004 but are
renewable through 2040.
31
Total rent expense charged to operations under operating leases was
approximately $21.8 million in 2002, $11.6 million in 2001, and $10.4 million in
2000. Total depreciation expense charged to operations was $52.7 million, $41.2
million and $32.1 million in 2002, 2001 and 2000, respectively.
The future minimum rental commitments, by year, under the non-cancelable leases,
including escalation clauses, are as follows (in thousands) at December 31,
2002:
--------------------------------------------------------------------------------
Operating
--------------------------------------------------------------------------------
2003 $ 18,337
2004 18,577
2005 19,120
2006 18,601
2007 22,701
Later years 196,547
--------------------------------------------------------------------------------
Net minimum lease payments $292,883
The Company has obtained architectural 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 $4.6 million, $2.3 million, and
$2.0 million in 2002, 2001, and 2000, respectively, for such services and
related costs. Additionally, the business received additional revenues for
project management of approximately $3.5 million, $1.9 million, and $1.6 million
in 2002, 2001, and 2000, respectively, on furniture and facility purchases made
directly by the Company. Management believes these disbursements were
substantially equivalent to those that would have been paid to unaffiliated
companies for similar services. The Board of Directors believes this arrangement
has been an important factor in the success of the Commerce brand. In 2003, the
Board approved the transfer, without cost, into the Company of the project
management services. The business will continue to provide architectural and
design services to the Company.
8. Deposits
The aggregate amount of time certificates of deposits in denominations of
$100,000 or more was $1.2 billion and $1.1 billion at December 31, 2002 and
2001, respectively.
9. Other Borrowed Money
Other borrowed money consists primarily of securities sold under agreements to
repurchase, federal funds purchased, and lines of credit. The following table
represents information for other borrowed money:
----------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------
2002 2001
----------------------------------------------------------
Average Average
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------
Securities sold under
agreements to repurchase $391,641 1.56% $199,554 1.71%
Federal funds purchased 65,000 2.00
----------------------------------------------------------------------------------------------------------
$391,641 $264,554
----------------------------------------------------------------------------------------------------------
Average amount outstanding $118,734 1.55% $ 94,257 3.72%
Maximum month-end balance 391,641 264,554
----------------------------------------------------------------------------------------------------------
As of December 31, 2002, the Company had a line of credit of $536.2 million from
the Federal Home Loan Bank of New York, all of which was available and a line of
credit of $155.9 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.
32
10. Long-Term Debt
On July 15, 1993, the Company issued $23.0 million of 8 3/8% subordinated notes
due 2003. All of these notes were redeemed on May 20, 2002 at the stated
liquidation amount ($101 per note) plus accrued interest to May 20, 2002.
In 1997, the Company issued $57.5 million of 8.75% Trust Capital Securities
through Commerce Capital Trust I, a Delaware business trust subsidiary of the
Company. All of these Trust Capital Securities were redeemed on July 1, 2002 at
the stated liquidation amount ($25 per capital security) plus accrued and unpaid
distributions thereon to July 1, 2002.
On March 11, 2002 the Company issued $200.0 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. The Convertible Trust Capital
Securities mature in 2032. Holders of the Convertible Trust Capital Securities
may convert each security into 0.9478 shares of Company common stock, subject to
adjustment, if (1) the closing sale price of Company common stock for at least
20 trading days in a period of 30 consecutive trading days ending on the last
trading day of any calendar quarter beginning with the quarter ending June 30,
2002 is more than 110% of the Convertible Trust Capital Securities conversion
price ($52.75 at December 31, 2002) then in effect on the last day of such
calendar quarter, (2) the assigned credit rating by Moody's of the Convertible
Trust Capital Securities is at or below Bal, (3) the Convertible Trust Capital
Securities are called for redemption, or (4) specified corporate transactions
have occurred. All $200.0 million of the Convertible Trust Capital Securities
qualify as Tier 1 capital for regulatory capital purposes. As of December 31,
2002, the Convertible Trust Capital Securities were not convertible. The net
proceeds of this offering were used for general corporate purposes, including
the redemption of the Company's $57.5 million of 8.75% Trust Capital Securities
on July 1, 2002 and the repayment of the Company's $23.0 million of 8 3/8%
subordinated notes on May 20, 2002.
11. Income Taxes
The provision for income taxes consists of the following (in thousands):
---------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------
Current:
Federal $62,660 $52,085 $40,563
State 4,069 658 604
Deferred:
Federal 6,359 (4,054) (2,812)
---------------------------------------------------------------------
$73,088 $48,689 $38,355
---------------------------------------------------------------------
The above provision includes income taxes related to securities gains of $0,
$400 thousand and $1.1 million for 2002, 2001 and 2000, respectively.
The provision for income taxes differs from the expected statutory provision as
follows:
----------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------------------
Expected provision at statutory rate: 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt interest on loans (1.7) (2.0) (1.4)
Tax-exempt interest on securities (1.8) (1.8) (2.1)
State income taxes (net of federal benefit) 1.2 0.3 0.3
Purchase accounting adjustments 0.0 0.1 0.1
Other, including acquisition costs 0.8 0.5 0.5
----------------------------------------------------------------------------------------------------------
33.5% 32.1% 32.4%
----------------------------------------------------------------------------------------------------------
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.
33
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 2002 and 2001 are as follows (in thousands):
----------------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves $30,960 $22,359
Intangibles 2,837 3,153
Other reserves 2,702 2,645
Other 274 2,711
----------------------------------------------------------------------------------------------------------
Total deferred tax assets 36,773 30,868
----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (16,157) (4,979)
Fair value adjustment, available for sale securities (64,167) (8,620)
Other (2,875) (1,788)
----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (83,199) (15,387)
----------------------------------------------------------------------------------------------------------
Net deferred (liabilities) assets $(46,426) $15,481
----------------------------------------------------------------------------------------------------------
No valuation allowance was recognized for the deferred tax assets at December
31, 2002 and 2001, 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 consolidated 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, 2002,
the Company had outstanding standby letters of credit in the amount of $368.5
million.
In addition, the Company is committed as of December 31, 2002 to advance $307.8
million on construction loans, $606.3 million on home equity lines of credit and
$1.2 billion on lines of credit. All other commitments total approximately
$450.1 million. The Company anticipates no material losses as a result of these
transactions.
13. Common Stock
At December 31, 2002, 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 December 17, 2002, the Board of Directors declared a cash dividend of $0.165
for each share of common stock outstanding payable January 20, 2003 to
shareholders of record on January 6, 2003. On November 21, 2001, the Board of
Directors declared a 2 for 1 stock split payable on December 18, 2001 to
shareholders of record on December 3, 2001. Additionally, the Board adjusted the
par value per share to $1.00 from $1.5625.
34
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) 2002 2001 2000
--------------------------------------------------------------------------------------------------------
Basic:
Net income applicable to common stock $144,815 $103,022 $80,047
--------------------------------------------------------------------------------------------------------
Average common shares outstanding 66,795 64,666 61,755
--------------------------------------------------------------------------------------------------------
Net income per common share $2.16 $1.59 $1.30
--------------------------------------------------------------------------------------------------------
Diluted:
Net income applicable to common stock
on a diluted basis $144,815 $103,022 $80,047
--------------------------------------------------------------------------------------------------------
Average common shares outstanding 66,795 64,666 61,755
Additional shares considered in diluted
computation assuming:
Exercise of stock options 4,108 3,436 2,468
--------------------------------------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 70,903 68,102 64,223
--------------------------------------------------------------------------------------------------------
Net income per common and common
equivalent share $2.04 $1.51 $1.25
--------------------------------------------------------------------------------------------------------
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. As of December 31, 2002, options to purchase 11,844,480 shares of
common stock 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.
All options granted after December 31, 2002 will vest over four years,
regardless of the years 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.
35
Information concerning option activity for the periods indicated is as follows:
--------------------------------------------------------------------------------------------------------
Shares Under Weighted Average
Option Exercise Price
--------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 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 2,695,050 30.68
Options exercised 1,092,393 14.70
Options canceled 74,017 26.30
Balance at December 31, 2001 10,182,690 19.83
--------------------------------------------------------------------------------------------------------
Options granted 2,088,744 40.40
Options exercised 974,145 18.59
Options canceled 248,736 29.69
Balance at December 31, 2002 11,048,553 23.71
--------------------------------------------------------------------------------------------------------
Information concerning options outstanding as of December 31, 2002 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 12/31/2002 Exercise Price
--------------------------------------------------------------------------------------------------------
$2.37 to $10.00 1,835,405 2.7 $ 7.22 1,835,405 $ 7.22
$10.01 to $20.00 2,730,702 6.1 17.95 2,526,510 17.86
$20.01 to $49.37 6,482,446 7.5 30.80 3,745,532 25.60
--------------------------------------------------------------------------------------------------------
Employee Stock Ownership Plan
The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of
its officers and employees who meet age and service requirements. As of December
31, 2002, the ESOP held 1,630,000 shares of the Company's common stock, all of
which were allocated to participant accounts. Employer contributions are
determined at the discretion of the Board of Directors. No contribution expense
was recorded in 2002. The total expense associated with the ESOP for both 2001
and 2000 was $100,000. Effective January 1, 2002, the ESOP was merged with and
into the Commerce Bancorp, Inc. 401 (k) Retirement Plan to allow for greater
administrative efficiencies.
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 and $2.2 million for 2002 and 2001, respectively.
No employer matching contributions were made for 2000.
Post-employment or Post-retirement Benefits
The Company offers no post-employment or post-retirement benefits.
36
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, 2002 and 2001:
----------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 811,434 $ 811,434 $ 557,738 $ 557,738
Loans held for sale 96,920 96,920 73,261 73,261
Trading securities 326,479 326,479 282,811 282,811
Investment securities 8,569,805 8,598,668 5,284,876 5,299,049
Loans (net) 5,731,856 5,768,650 4,516,431 4,652,219
Financial liabilities:
Deposits 14,548,841 14,576,800 10,185,594 10,209,099
Other borrowed money 391,641 391,641 264,554 264,554
Long-term debt 200,000 222,000 80,500 82,352
----------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letters of credit $ 3,685 $ 1,616
Commitments to extend credit 1,324 1,210
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.
37
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.
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
---------------------------------------------------------------------------------------------------------
2002
Interest income $202,024 $196,775 $188,368 $168,204
Interest expense 42,528 46,221 49,742 44,125
Net interest income 159,496 150,554 138,626 124,079
Provision for loan losses 8,000 8,000 10,250 6,900
Provision for federal and state
income taxes 20,258 19,669 17,763 15,398
Net income 40,574 37,689 34,802 31,750
Net income per common share:
Basic $ 0.60 $ 0.56 $ 0.52 $ 0.48
Diluted 0.57 0.53 0.49 0.45
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
38
18. Condensed Financial Statements of the Parent Company and Other Matters
Balance Sheets
-----------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001
-----------------------------------------------------------------------------------------------------------
Assets
Cash $ 3,034 $ 1,002
Securities available for sale 24,059 35,842
Investment in subsidiaries 1,094,635 700,747
Other assets 9,452 11,534
-----------------------------------------------------------------------------------------------------------
$1,131,180 $749,125
-----------------------------------------------------------------------------------------------------------
Liabilities
Other liabilities $ 13,170 $ 32,055
Trust Capital Securities 57,500
Convertible Trust Capital Securities 200,000
Long-term debt 23,000
-----------------------------------------------------------------------------------------------------------
213,170 112,555
-----------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 68,043 65,833
Capital in excess of par or stated value 538,795 461,897
Retained earnings 199,604 94,698
Accumulated other comprehensive income 113,614 15,764
-----------------------------------------------------------------------------------------------------------
920,056 638,192
Less treasury stock 2,046 1,622
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 918,010 636,570
-----------------------------------------------------------------------------------------------------------
$1,131,180 $749,125
-----------------------------------------------------------------------------------------------------------
Statements of Income
-----------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ 9,600 $ 22,400 $ 9,150
Interest income 552 454 497
Other 2,826 7,022 5,652
-----------------------------------------------------------------------------------------------------------
12,978 29,876 15,299
-----------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 15,554 7,258 7,244
Operating expenses 4,460 3,214 2,352
-----------------------------------------------------------------------------------------------------------
20,014 10,472 9,596
(Loss) income before income taxes and equity
in undistributed income of subsidiaries (7,036) 19,404 5,703
Income tax (benefit) expense (5,757) 1,004 1,274
-----------------------------------------------------------------------------------------------------------
(1,279) 20,408 6,977
Equity in undistributed income of subsidiaries 146,094 82,614 73,070
-----------------------------------------------------------------------------------------------------------
Net income $144,815 $103,022 $80,047
-----------------------------------------------------------------------------------------------------------
39
Statements of Cash Flows
------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $144,815 $103,022 $80,047
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (146,094) (82,614) (73,070)
Gains on sales of securities available for sale 470
Decrease (increase) in other assets 2,082 4,484 (4,430)
(Decrease) increase in other liabilities (11,509) 17,874 1,723
------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (10,706) 43,236 4,270
Investing activities:
Investments in subsidiaries (145,520) (62,667) (28,770)
Proceeds from sale of securities available for sale 3,018 1,828 9,997
Proceeds from the maturity of securities available for sale 95,972 66,422 117,863
Purchase of securities available for sale (91,414) (66,864) (126,522)
Other 19 352 (38)
------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (137,925) (60,929) (27,470)
Financing activities:
Proceeds from issuance of common stock
under dividend reinvestment and other stock plans 66,809 53,005 53,670
Cash dividends (39,911) (35,400) (29,761)
Issuance of Convertible Trust Capital Securities 206,186
Redemption of Trust Capital Securities (59,000)
Decrease in long-term debt (23,000)
Other (421)
------------------------------------------------------------------------------------------------------------
Net cash provided by financing
Activities 150,663 17,605 23,909
Increase (decrease) in cash and cash equivalents 2,032 (88) 709
Cash and cash equivalents at beginning of year 1,002 1,090 381
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,034 $ 1,002 $ 1,090
------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,551 $ 7,089 $ 7,089
Income taxes 56,586 48,616 36,135
------------------------------------------------------------------------------------------------------------
40
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 2003 without additional approval of
approximately $96.0 million, $52.6 million, $42.9 million and $45.7 million,
respectively, plus an additional amount equal to each bank's net profit for 2003
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, 2002 and 2001, the Company complied 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, 2002
and 2001, 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, 2002 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, 2002, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
41
The following table presents the Company's and Commerce NJ's risk-based and
leverage capital ratios at December 31, 2002 and 2001:
-----------------------------------------------------------------------------------------------------------
Per Regulatory Guidelines
-----------------------------------------------------------------------------------------------------------
Actual Minimum "Well Capitalized"
-----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------
December 31, 2002
Company
Risk based capital ratios:
Tier I $995,826 11.47% $347,373 4.00% $521,059 6.00%
Total capital 1,086,559 12.51 697.746 8.00 868,432 10.00
Leverage ratio 995,826 6.37 625,219 4.00 781,524 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $526,612 9.77 $215,519 4.00% $323,279 6.00%
Total capital 586,328 10.88 431,039 8.00 538,799 10.00
Leverage ratio 526,612 5.75 366,657 4.00 458,321 5.00
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
42
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 Insurance (whose revenues of
$55.9 million, $49.8 million, and $45.6 million in 2002, 2001, and 2000,
respectively, were reported in other operating income), CCMI (whose noninterest
revenues of $35.1 million, $22.8 million, and $15.3 million in 2002, 2001, and
2000, respectively, were reported in other operating income), Commerce Capital
Trust I and Commerce Capital Trust II.
Selected segment information for each of the three years ended December 31 is as
follows (in thousands):
----------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/ Community Parent/
Banks Other Total Banks Other Total Banks Other Total
----------------------------------------------------------------------------------------------------------
Net interest $579,687 $(6,932) $572,755 $ 402,040 $(714)$ 401,326 $298,985 $(2,055) $296,930
income
Provision for
loan losses 33,150 - 33,150 26,384 26,384 13,931 13,931
----------------------------------------------------------------------------------------------------------
Net interest
income after 546,537 (6,932) 539,605 375,656 (714) 374,942 285,054 (2,055) 282,999
provision
Noninterest 166,384 91,082 257,466 125,418 71,387 196,805 90,464 60,296 150,760
income
Noninterest 500,522 78,646 579,168 358,870 61,166 420,036 263,001 52,356 315,357
expense
----------------------------------------------------------------------------------------------------------
Income
before income 212,399 5,504 217,903 142,204 9,507 151,711 112,517 5,885 118,402
taxes
Income tax
expense 72,839 249 73,088 46,630 2,059 48,689 35,255 3,100 38,355
----------------------------------------------------------------------------------------------------------
Net income $139,560 $5,255 $144,815 $ 95,574 $ 7,448 $ 103,022 $77,262 $2,785 $80,047
----------------------------------------------------------------------------------------------------------
Average assets
(in millions) $12,192 $1,560 $13,752 $8,548 $ 999 $9,547 $ 6,626 $723 $7,349
----------------------------------------------------------------------------------------------------------
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.
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 years ended December 31, 2002 and 2001, respectively:
----------------------------------------------------------------------------------------------
Notional Unrealized
Amount Gain (Loss)
Long (Short) Net
----------------------------------------------------------------------------------------------
2002 2001 2002 2001
Municipal bond futures $ 36,500 $ (62,600) $ 278 $ 241
Treasury bond futures (60,000) 1,000 (2,537) (36)
Treasury bond put options 45,000 6,500 (23) (43)
Treasury bond call options (105,000) (76,000) (1,342) (46)
-----------------------------------------------------------------------------------------------
Total $(83,500) $(131,100) $(3,624) $116
-----------------------------------------------------------------------------------------------
The average notional amount for futures and options contracts for the years
ended December 31, 2002 and 2001 was $106.7 million and $151.2 million,
respectively. Realized and unrealized gains and losses related to derivative
financial instruments are included in other operating income in the statement of
income.
43
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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
February 7, 2003
44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of Registrant.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Shareholders, which will be filed with the SEC.
Item 11. Executive Compensation.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Shareholders, which will be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Shareholders, which will be filed with the SEC.
The following table details information regarding the company's existing equity
compensation plans as of December 31, 2002:
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outsatnding options, (excluding securities
warrants and rights warrants and rights refelected in column (a))
------------------------- ------------------------- ---------------------------------
Equity compensation plans approved by 11,048,553 $23.71 5,389,520
security holders
------------------------- ------------------------- ---------------------------------
Total 11,048,553 $23.71 5,389,520
========================= ========================= =================================
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2003 Annual Meeting of
Shareholders, which will be filed with the SEC.
Item 14. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-K, the Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls"
) will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective to timely alert management to material information relating to the
Company during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Annual Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
45
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following financial statements of Commerce Bancorp, Inc. and
Subsidiaries are filed as part of this Form 10-K in Item 8:
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) Schedules
All schedules have been omitted since the required information is
included in the financial statements or the notes thereto, or is not
applicable.
(a) (3) - Exhibits:
3.1 Restated Certificate of Incorporation of the Company, as amended.
3.2 By-laws of the Company, as amended.
4.1 Certificate of Trust of Commerce Capital Trust II, a
Delaware statutory trust, filed March 4, 2002. (Q)
4.2 Declaration of Trust of Commerce Capital Trust II, dated as of
March 4, 2002, among Commerce
Bancorp, Inc., as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware),
as Delaware Trustee and the Administrative Trustees named therein. (Q)
4.3 Amended and Restated Declaration of Trust of Commerce Capital Trust II, dated as of March 11, 2002, among
Commerce Bancorp, Inc., as Sponsor, The Bank of New York, as Property Trustee, The Bank of New York
(Delaware), as Delaware Trustee, the Administrative Trustees, and the holders from time to time of
undivided beneficial interests in the assets of the Trust, including form of 5.95% Convertible Trust
Preferred Security. (Q)
4.4 Indenture, dated as of March 11, 2002, between Commerce Bancorp, Inc. and The Bank of New York as
Debenture Trustee, including form of 5.95% Junior Subordinated Convertible Debenture due March 11, 2032.
(Q)
4.5 Registration Rights Agreement, dated March 11, 2002, among Commerce Bancorp, Inc., and Commerce Capital
Trust II, as issuers, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of itself and as representative of the other initial purchasers. (Q)
4.6 Guarantee Agreement, dated as of March 11, 2002, between Commerce Bancorp, Inc. and The Bank of New York,
as Guarantee Trustee. (Q)
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)
46
*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. (I)
*10.15 The Company's 1997 Employee Stock Option Plan. (J)
*10.16 A copy of employment contracts with Dennis M. DiFlorio and Robert D. Falese dated
January 1, 1998. (K)
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. (K)
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. (K)
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. (K)
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. (K)
10.21 Ground lease, dated October 11, 1996 and First Lease Amendment dated November 25, 1996 between
Commerce PA and Plymouth Equities, L.L.C., relating to Commerce PA's branch office in Plymouth Township,
PA. (K)
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. (M)
*10.23 The Company's 1998 Stock Option Plan for Non-Employee Directors. (L)
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. (M)
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. (N)
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. (N)
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. (N)
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. (N)
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. (O)
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. (O)
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. (P)
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. (P)
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. (P)
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.
99.1 Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
--------------
(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).
47
(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 Annual
Report on Form 10-K for the fiscal year ended December
31, 1994.
(J) Incorporated ( by reference from the Company's
Definitive Proxy Statement for its 1997 Annual Meeting
of Shareholders, Exhibit A thereto.
(K) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997.
(L) Incorporated by reference from the Company's Definitive
Proxy Statement for its 1998 Annual Meeting of
Shareholders, Exhibit A thereto.
(M) Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998.
(N) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
1999.
(O) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
2000.
(P) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
2001.
(Q) Incorporated by reference form the Company's
Registration Statement on Form S-3 (Registration No.
333-87512)
* Management contract or compensation plan or
arrangement.
(b) There were no reports on Form 8-K filed in the fourth quarter of
2002.
(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.
48
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 28, 2003 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 28, 2003
-----------------------------------------------
Vernon W. Hill, II (Principal Executive Officer)
/s/ C. EDWARD JORDAN JR. Executive Vice President and Director March 28, 2003
-----------------------------------------------
C. Edward Jordan Jr.
/s/ ROBERT C. BECK Secretary and Director March 28, 2003
-----------------------------------------------
Robert C. Beck
/s/ JACK R BERSHAD Director March 28, 2003
-----------------------------------------------
Jack R Bershad
/s/ JOSEPH BUCKELEW Director March 28, 2003
-----------------------------------------------
Joseph Buckelew
/s/ DONALD T. DIFRANCESCO Director March 28, 2003
-----------------------------------------------
Donald T. DiFrancesco
/s/ MORTON N. KERR Director March 28, 2003
-----------------------------------------------
Morton N. Kerr
/s/ STEVEN M. LEWIS Director March 28, 2003
-----------------------------------------------
Steven M. Lewis
/s/ GEORGE E. NORCROSS, III Director March 28, 2003
-----------------------------------------------
George E. Norcross, III
/s/ DANIEL J. RAGONE Director March 28, 2003
-----------------------------------------------
Daniel J. Ragone
/s/ WILLIAM A. SCHWARTZ JR. Director March 28, 2003
-----------------------------------------------
William A. Schwartz Jr.
/s/ JOSEPH T. TARQUINI JR. Director March 28, 2003
-----------------------------------------------
Joseph T. Tarquini Jr.
/s/ FRANK C. VIDEON SR. Director March 28, 2003
-----------------------------------------------
Frank C. Videon Sr.
49
CERTIFICATION
-------------
I, Vernon W. Hill, II , Chief Executive Officer of Commerce Bancorp, Inc.
certify that:
1. I have reviewed this annual report on Form 10-K of Commerce Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Vernon W. Hill, II Date: March 28, 2003
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Chief Executive Officer
50
CERTIFICATION
-------------
I, Douglas J. Pauls , Chief Financial Officer of Commerce Bancorp, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Commerce Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Douglas J. Pauls Date: March 28, 2003
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Chief Financial Officer
51