Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                             Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)    1998               1997               1996               1995               1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>                <C>                <C>                <C>          
Income Statement Data:
  Net interest income                     $     173,727      $     147,140      $     125,413      $     109,899      $     102,997
  Provision for loan losses                       5,867              4,668              4,857              2,774              5,224
  Noninterest income                             88,947             57,374             32,776             23,623             19,591
  Noninterest expense                           181,967            137,929            109,031             89,316             82,734
  Income before income taxes                     74,840             61,917             44,301             41,432             34,630
  Net income                                     49,318             40,325             28,250             26,652             22,145
Balance Sheet Data:
  Total assets                            $   4,894,065      $   3,938,967      $   3,232,152      $   2,738,587      $   2,571,704
  Loans (net)                                 1,904,954          1,390,028          1,248,880          1,032,801            916,437
  Securities available for sale               1,283,504          1,315,120            767,487            571,553            126,437
  Securities held to maturity                 1,127,658            874,032            837,512            772,999          1,257,551
  Trading securities                             85,359              7,911             15,327              8,843
  Federal funds sold                                                                   26,975             42,370             18,300
  Deposits                                    4,435,115          3,369,404          2,919,670          2,529,186          2,099,247
  Long-term debt                                 24,282             25,308             26,333             27,359             28,385
  Trust preferred securities                     57,500             57,500
  Stockholders' equity                          300,716            250,760            203,964            179,695            126,582
Per Share Data:
  Net income-basic                        $        2.08      $        1.79      $        1.37      $        1.30      $        1.18
  Net income-diluted                               1.98               1.69               1.26               1.23               1.11
  Cash dividends                                   0.92               0.57               0.48               0.42               0.39
  Book value                                      12.50              10.89               9.17               8.81               6.82
  Average shares outstanding:
    Basic                                        23,668             22,197             20,017             19,653             17,357
    Diluted                                      24,951             23,786             22,372             21,536             19,753
Selected Ratios:
  Performance
  Return on average assets                         1.13%              1.13%              0.96%              1.01%              0.89%
  Return on average equity                        17.67              18.18              15.43              16.57              18.54
  Net interest margin                              4.38               4.55               4.72               4.58               4.51
Liquidity and Capital
  Average loans to average deposits               41.81%             42.42%             42.84%             41.92%             43.24%
  Dividend payout                                 44.04              32.04              34.89              32.52              32.82
  Stockholders' equity to total assets             6.14               6.37               6.31               6.56               4.92
  Risk-based capital:
    Tier 1                                        12.98              15.66              12.57              12.64              10.04
    Total                                         14.66              17.97              15.09              15.49              13.08
  Leverage capital                                 7.36               7.81               6.46               6.43               4.93
Asset Quality
  Non-performing assets to total
    year-end assets                                0.27%              0.44%              0.60%              0.81%              1.05%
  Net charge-offs to average loans
    outstanding                                    0.04               0.10               0.25               0.14               0.35
  Non-performing loans to total
    year-end loans                                 0.37               0.82               0.89               0.97               1.64
  Allowance for loan losses to total
    end of year loans                              1.37               1.51               1.42               1.53               1.58
  Allowance for loan losses to non-
    performing loans                             371.28             183.46             159.88             156.72              96.26
</TABLE>

                                                                               1
<PAGE>
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.

1998 Overview

In 1998,  the Company  posted  increases  in net income,  deposits,  loans,  and
assets.  The increase in net income was due to increases in net interest  income
and noninterest income, which offset increased noninterest expenses. Loan growth
totaled 37% for 1998,  and deposit growth totaled 32%. At December 31, 1998, the
Company had total assets of $4.9  billion,  total loans of $1.9  billion,  total
investment securities of $2.5 billion, and total deposits of $4.4 billion.

Segment Reporting

The Company  operates one reportable  segment of business,  Community  Banks, as
more fully described in Note 19 to the Consolidated Financial Statements on page
41. The following  table  summarizes  net income by segment for each of the last
three years:

------------------------------------------------------------
                                     Net Income
------------------------------------------------------------
                         1998          1997          1996
------------------------------------------------------------
Community Banks        $ 50,378      $ 41,429      $ 30,133
Parent/Other             (1,060)       (1,104)       (1,883)
------------------------------------------------------------
Consolidated total     $ 49,318      $ 40,325      $ 28,250
------------------------------------------------------------

Average Balances and Net Interest Income

The table on page 4 sets forth  balance sheet items on a daily average basis for
the years ended December 31, 1998, 1997, and 1996 and presents the daily average
interest  rates earned on assets and the daily  average  interest  rates paid on
liabilities  for such periods.  During 1998,  average  interest  earning  assets
totaled $4.0  billion,  an increase of $754.5  million,  or 23% over 1997.  This
increase  resulted  primarily from the increase in the average balance of loans,
which rose $286.9  million,  and the average  balance of investment  securities,
which rose $459.7  million  during  1998.  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 $733.0
million.

Net Interest Income and Net Interest Margin

Net interest margin on a tax-equivalent  basis was 4.38% for 1998, a decrease of
17 basis points from 1997.

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 1998  was  $176.1  million,  an  increase  of $27.6
million, or 19%, over 1997. Interest income on a tax-equivalent  basis increased
to $291.7  million from $245.5  million,  or 19%.  This  increase was  primarily
related to volume  increases  in the loan and  investment  portfolios.  Interest
expense  for 1998 rose $18.5  million to $115.6  million  from $97.0  million in
1997. This increase was primarily  related to increases in the Company's  levels
of deposits.

The  tax-equivalent  yield on interest  earning  assets during 1998 was 7.25%, a
decrease of 27 basis points from 7.52% in 1997. The decrease resulted  primarily
from decreased yields in the loan and investment portfolios due to the level and
timing of changes in general  market  interest  rates during 1998 as compared to
1997.

The cost of interest-bearing  liabilities  decreased six basis points in 1998 to
3.57% from 3.63% in 1997.  The  decrease  resulted  primarily  from lower market
interest  rates in 1998 as compared to 1997.  The cost of total funding  sources
decreased 10 basis points in 1998 to 2.87% from 2.97%.

2
<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following  table presents the major factors that  contributed to the changes
in net  interest  income  for the  years  ended  December  31,  1998 and 1997 as
compared to the respective previous periods.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                     1998 vs. 1997                         1997 vs. 1996
                                  Increase (Decrease)                   Increase (Decrease)
                                 Due to Changes in (1)                 Due to Changes in (1)
---------------------------------------------------------------------------------------------------
                            Volume       Rate         Total       Volume     Rate          Total
---------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                         <C>         <C>          <C>         <C>       <C>            <C>    
Interest on
  investments:
    Taxable                 $27,766     $(4,909)     $22,857     $26,681   $    610       $27,291
    Tax-exempt                 (342)        750          408         983       (416)          567
    Trading                   1,562          82        1,644          49        (91)          (42)
    Federal
      funds sold                412         (57)         355      (1,577)       197        (1,380)
Interest on loans:
    Commercial
      real estate             8,222      (1,614)       6,608       5,198       (516)        4,682
    Commercial                4,884        (836)       4,048       3,233         53         3,286
    Consumer                 10,654      (1,347)       9,307       7,842       (811)        7,031
    Tax-exempt                  935         (31)         904         297         (3)          294
---------------------------------------------------------------------------------------------------
Total interest
  income                     54,093      (7,962)      46,131      42,706       (977)       41,729
---------------------------------------------------------------------------------------------------
Interest expense:
  Regular
    savings                   2,759        (922)       1,837       2,260      1,252         3,512
  N.O.W.
    accounts                  1,472         (77)       1,395      (5,843)       535        (5,308)
  Money
    market plus               6,082         407        6,489      10,796       (506)       10,290
  Time
    deposits                  3,422         431        3,853       1,404        192         1,596
  Public funds                4,027        (194)       3,833       3,388       (415)        2,973
  Other
    borrowed
    money                    (1,338)        207       (1,131)      3,735         55         3,790
  Long-term
    debt                      2,218          22        2,240       2,860          2         2,862
---------------------------------------------------------------------------------------------------
Total interest
  expense                    18,642        (126)      18,516      18,600      1,115        19,715
---------------------------------------------------------------------------------------------------
Net increase                $35,451     $(7,836)     $27,615     $24,106    $(2,092)      $22,014
---------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>

Noninterest Income

For 1998, noninterest income totaled $88.9 million, an increase of $31.6 million
or 55% from 1997.  The increase was due primarily to increased  other  operating
income,  which rose $24.4  million  from 1997,  including  an  increase  of $8.7
million in revenues from Commerce National  Insurance  Services,  Inc. (Commerce
Insurance),  the Company's  insurance brokerage  subsidiary,  and an increase of
$10.8 million in revenues from Commerce  Capital Markets,  Inc. (CCMI).  CCMI, a
wholly-owned  nonbank  subsidiary of the Company engaging in certain  securities
activities  permitted under Section 20 of the Glass-Steagall  Act, was formed in
the first  quarter of 1998 by the  combination  of  Commerce  Capital,  the bank
securities  dealer division of Commerce NJ, and the former A. H. Williams & Co.,
Philadelphia,  PA, a public  finance firm acquired by the Company.  In addition,
deposit  charges and service fees increased $6.6 million over 1997 due primarily
to higher  transaction  volumes,  and net investment  securities gains were $648
thousand higher in 1998 than the prior year.

Noninterest Expenses

Noninterest  expenses  totaled  $182.0  million  for 1998,  an increase of $44.0
million,  or 32% over 1997.  Contributing  to this  increase was the addition of
eight new branches,  the expansion of Commerce  Insurance,  and the formation of
CCMI.  With the  addition  of these new  offices  and CCMI,  staff,  facilities,
marketing,  and related expenses rose accordingly.  Other  noninterest  expenses
rose $8.3 million to $27.2  million in 1998.  This increase  resulted  primarily
from higher bank-card related service charges,  increased  business  development
expenses, and increased provisions for non-credit-related losses.

A key industry  productivity  measure is the oper-ating  efficiency  ratio. This
ratio expresses the relationship of noninterest  expenses  (excluding other real
estate  expenses)  to net interest  income plus  noninterest  income  (excluding
non-recurring  gains).  Over the last three years,  this ratio  equaled  69.54%,
67.31% and 66.95% in 1998, 1997 and 1996, respectively. The Company's efficiency
ratio  remains  above its peer  group  primarily  due to its  aggressive  growth
expansion activities and investments in technology.

                                                                               3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<TABLE>
<CAPTION>
                           Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                              Year Ended December 31,
                                      ----------------------------------------------------------------------------------------------
                                                     1998                              1997                           1996
                                      ----------------------------------------------------------------------------------------------
(dollars in thousands)                   Average             Average    Average                Average    Average            Average
Earning Assets                           Balance   Interest   Rate      Balance      Interest   Rate      Balance   Interest  Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>        <C>      <C>          <C>        <C>     <C>         <C>        <C>  
Investment securities
        Taxable                        $2,270,569   $143,649   6.33%    $1,831,692   $120,792   6.59%   $1,427,098  $ 93,501   6.55%
        Tax-exempt                         45,633      2,940   6.44         50,940      2,532   4.97        31,163     1,965   6.31
        Trading                            32,921      1,965   5.97          6,766        321   4.74         5,740       363   6.32
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities             2,349,123    148,554   6.32      1,889,398    123,645   6.54     1,464,001    95,829   6.55
Federal funds sold                         35,045      1,842   5.26         27,206      1,487   5.47        56,050     2,867   5.12
Loans
        Commercial real estate            620,582     56,349   9.08        530,467     49,741   9.38       475,038    45,060   9.49
        Commercial                        302,775     27,480   9.08        248,958     23,432   9.41       214,604    20,146   9.39
        Consumer                          693,213     55,490   8.00        559,707     46,183   8.25       465,147    39,152   8.42
        Tax-exempt                         19,678      1,939   9.85         10,193      1,035  10.15         7,269       740  10.18
------------------------------------------------------------------------------------------------------------------------------------
Total loans                             1,636,248    141,258   8.63      1,349,325    120,391   8.92     1,162,058   105,098   9.04
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets                   $4,020,416   $291,654   7.25%    $3,265,929   $245,523   7.52%   $2,682,109  $203,794   7.60%
------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
        Regular savings                 $ 789,389    $18,256   2.31%     $ 670,074    $16,419   2.45%    $ 577,824   $12,907   2.23%
        N.O.W. accounts                   178,805      3,964   2.22        112,421      2,569   2.29       368,120     7,877   2.14
        Money market plus               1,116,628     28,744   2.57        880,357     22,255   2.53       453,284    11,965   2.64
        Time deposits                     656,051     34,440   5.25        590,866     30,587   5.18       563,752    28,991   5.14
        Public funds                      346,866     19,027   5.49        273,445     15,194   5.56       212,468    12,221   5.75
------------------------------------------------------------------------------------------------------------------------------------
Total deposits                          3,087,739    104,431   3.38      2,527,163     87,024   3.44     2,175,448    73,961   3.40

Other borrowed money                       68,400      3,995   5.84         91,308      5,126   5.61        24,782     1,336   5.39
Long-term debt                             80,500      7,127   8.85         55,452      4,887   8.81        23,000     2,025   8.80
------------------------------------------------------------------------------------------------------------------------------------
Total deposits and interest-bearing 
        liabilities                     3,236,639    115,553   3.57      2,673,923     97,037   3.63     2,223,230    77,322   3.48
Noninterest-bearing funds
        (net)                             783,777                          592,006                         458,879
------------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
        earning assets                 $4,020,416    115,553   2.87     $3,265,929     97,037   2.97    $2,682,109    77,322   2.88
------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
        margin tax-equivalent
        basis                                        176,101   4.38                   148,486   4.55                 126,472    4.72
Tax-exempt adjustment                                  2,374                            1,345                          1,059
------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
        margin                                      $173,727   4.33%                 $147,141   4.51%               $125,413   4.68%
------------------------------------------------------------------------------------------------------------------------------------
Other Balances
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks                  $177,570                        $ 154,375                       $ 147,768
Other assets                              204,634                          168,818                         141,848
Total assets                            4,370,097                        3,568,566                       2,954,851
Demand deposits
        (noninterest-bearing)             826,099                          653,626                         537,079
Other liabilities                          37,077                           19,153                          11,488
Stockholders' equity                      279,097                          221,864                         183,055
------------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes    --Weighted average yields on tax-exempt obligations have been computed
           on a tax-equivalent basis assuming a federal tax rate of 35%.
         --Non-accrual loans have been included in the average loan balance.
         --Investment securities includes investments available for sale.
         --Consumer loans include mortgage loans held for sale.
</FN>
</TABLE>

4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Income Taxes

The  provision  for federal and state  income  taxes for 1998 was $25.5  million
compared to $21.6 million in 1997 and $16.1 million in 1996.

The  increase  in 1998 total tax expense was the result of an increase in income
before income taxes. The effective tax rate was 34.1%,  34.9% and 36.2% in 1998,
1997, and 1996, respectively.

Net Income

Net income for 1998 was $49.3 million,  an increase of $9.0 million, or 22% over
the $40.3  million  recorded  for 1997.  The  increase  in net income was due to
increases in net interest income and noninterest income,  which offset increased
noninterest expenses.

Diluted  net income  per share of common  stock for 1998 was $1.98  compared  to
$1.69 per common share for 1997.

Return on Average Equity and Average Assets

Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets ("ROA")
measures  net  income in  relation  to total  average  assets  and  indicates  a
company's  ability to employ its resources  profitably.  For 1998 and 1997,  the
Company's  ROA was 1.13%.  Return on average  equity  ("ROE") is  determined  by
dividing  annual net income by average  stockholders'  equity and  indicates how
effectively  a company can  generate  net income on the capital  invested by its
stockholders.  For 1998,  the  Company's  ROE was 17.67%  compared to 18.18% for
1997.

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 1994 through 1998.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                         December 31,
                          -----------------------------------------------------------------------
                                1998          1997           1996          1995           1994
-------------------------------------------------------------------------------------------------
<S>                         <C>            <C>           <C>           <C>              <C>     
(dollars in thousands)
Commercial real estate:
  Owner-occupied             $ 250,059      $ 221,788     $ 167,702     $ 149,258       $151,420
  Other                        358,600        287,510       288,733       250,782        215,063
  Construction                 111,972         57,182        52,372        52,593         53,792
-------------------------------------------------------------------------------------------------
                               720,631        566,480       508,807       452,633        420,275

Commercial:
  Term                         200,060        152,115       153,793       126,120        106,536
  Line of credit               166,920        101,134        91,418        68,372         54,379
  Demand                           309            442           529           407            766
-------------------------------------------------------------------------------------------------
                               367,289        253,691       245,740       194,899        161,681

Consumer:
  Mortgages
    (1-4 family
    residential)               304,622        167,979       153,615       133,893        111,689
  Installment                   68,032         63,448        54,548        44,781         32,447
  Home equity                  458,401        347,903       293,591       212,845        195,362
  Credit lines                  12,388         11,788        10,554         9,764          9,649
-------------------------------------------------------------------------------------------------
                               843,443        591,118       512,308       401,283        349,147
-------------------------------------------------------------------------------------------------
Total loans                 $1,931,363     $1,411,289    $1,266,855    $1,048,815       $931,103
-------------------------------------------------------------------------------------------------
</TABLE>

The  Company   manages  risk   associated   with  its  loan  portfolio   through
diversification,  underwriting  policies and  procedures  which are reviewed and
updated on at least an annual basis,  and ongoing loan monitoring  efforts.  The
commercial real estate portfolio includes owner-occupied (owner occupies greater
than 50% of the property), other commercial real estate, and construction loans.
Owner-occupied  and other  commercial real estate loans generally have five year
call  provisions and bear the personal  guarantees of the  principals  involved.
Construction loans are primarily used for single family residential  properties.
Financing  is  provided  against  firm  agreements  of  sale,  with  speculative
construction limited to one sample per project. The commercial loan portfolio is
comprised  primarily  of  amortizing  loans  to  small  businesses  in  the  New
Jersey/Southeastern  Pennsylvania market area. These loans are generally secured
by business assets, personal guarantees, and/or personal assets of the borrower.
The consumer loan portfolio is comprised primarily of loans secured by first and
second  mortgage  liens  on  residential  real  estate.   Such  loans  comprised
approximately 90% of consumer loans at December 31, 1998.

                                                                               5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The  maturity  ranges  of the  loan  portfolio  and the  amount  of  loans  with
predetermined  interest rates and floating rates in each maturity  range,  as of
December 31, 1998, are summarized in the following table.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                     December 31, 1998
-------------------------------------------------------------------------------------------------
                                                  Due in One 
                                  Due in One        to Five           Due in Over 
                                 Year or Less        Years            Five Years         Total
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                                 <C>              <C>                <C>             <C>     
Commercial real
  estate:
    Owner           
      occupied/other                $116,872         $411,584           $80,203         $608,659
    Construction                      81,145           30,793                34          111,972
-------------------------------------------------------------------------------------------------
                                     198,017          442,377            80,237          720,631
Commercial:
    Term                              69,472          112,612            17,976          200,060
    Line of credit                   163,921            2,999                 0          166,920
    Demand                               271               38                 0              309
-------------------------------------------------------------------------------------------------
                                     233,664          115,649            17,976          367,289
Consumer:
    Mortgages
      (1-4 family
       residential)                   13,512           38,647           252,463          304,622
    Installment                       30,939           36,008             1,085           68,032
    Home equity                       53,087          194,601           210,713          458,401
    Credit lines                       4,253            8,135                 0           12,388
-------------------------------------------------------------------------------------------------
                                     101,791          277,391           464,261          843,443
-------------------------------------------------------------------------------------------------
Total loans                         $533,472         $835,417          $562,474       $1,931,363
-------------------------------------------------------------------------------------------------
Interest rates:
    Predetermined                   $203,882         $636,278          $442,515       $1,282,675
    Floating                         329,590          199,139           119,959          648,688
-------------------------------------------------------------------------------------------------
Total loans                         $533,472         $835,417          $562,474       $1,931,363
-------------------------------------------------------------------------------------------------
</TABLE>

During 1998,  loans increased  $520.1 million,  or 37% from $1.4 billion to $1.9
billion.  At December 31, 1998, loans  represented 43% of total deposits and 39%
of total assets. All segments of the loan portfolio  experienced growth in 1998,
including  loans  secured by  commercial  real  estate,  commercial  loans,  and
consumer loans.

The Company has traditionally  been an active provider of commercial real estate
loans to  creditworthy  local  borrowers,  with such loans secured by properties
within the Company's  primary trade area. At December 31, 1998,  $250.1 million,
or 41%, of commercial real estate loans (other than  construction)  were secured
by owner-occupied properties.  Commercial loan growth was led by activity in the
middle market and healthcare sectors. Growth in consumer loans was due primarily
to loans secured by one to four family  residential  properties,  including home
equity loans and home equity lines of credit.

Commercial  real estate  construction  loans  increased  $54.8 million to $112.0
million  in 1998.  At  December  31,  1998,  construction  loans for 1-4  family
residential  dwellings  totaled $1.7 million and  construction  loans secured by
commercial  properties  amounted to $28.1 million.  The balance of $82.2 million
was for land development, of which $56.6 million was residential. As of December
31,  1998,  there were no  concentrations  of loans to any one type of  industry
exceeding  10% of total  loans nor were  there any  loans  classified  as highly
leveraged transactions.

Non-Performing Loans and Assets

Non-performing  assets  (non-performing  loans and other real estate,  excluding
loans past due 90 days or more and still accruing interest) at December 31, 1998
were $13.2 million or .27% of total assets, as compared to $17.4 million or .44%
of total assets at December 31, 1997.

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, 1998
were $7.1 million as compared to $11.6 million a year ago. The Company generally
places a loan on  non-accrual  status and  ceases  accruing  interest  when loan
payment performance is deemed  unsatisfactory.  Generally loans past due 90 days
are placed on  non-accrual  status,  unless the loan is both well secured and in
the process of collection.  At December 31, 1998, loans past due 90 days or more
and still accruing interest amounted to $249 thousand, compared to $226 thousand
at December 31, 1997.  Additional  loans  considered as potential  problem loans
($17.7  million at December  31,  1998) by the  Company's  internal  loan review
department  have been evaluated as to risk exposure in determining  the adequacy
of the allowance for loan losses.

Other real estate (ORE) totaled $6.1 million at December 31, 1998 as compared to
$5.8 million at December 31, 1997.  These  properties  have been written down to
the lower of cost or fair value less disposition costs.

The Company has on an ongoing basis updated  appraisals on loans secured by real
estate,  particularly  those categorized as  non-performing  loans and potential
problem loans.  In those  instances  where updated  appraisals  reflect  reduced
collateral values, an evaluation of the borrowers'  overall financial  condition
is made to determine  the

6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

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, 1994 through 1998.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                     Year Ended December 31,
-------------------------------------------------------------------------------------------------
                                       1998        1997         1996          1995         1994
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                                  <C>         <C>          <C>           <C>          <C>    
Non-accrual loans (1):
  Commercial                         $ 1,484     $ 1,816      $ 1,263       $ 1,623      $ 3,925
  Consumer                               831         703        1,145           978        1,755
  Real estate
    Construction                                   1,345        2,156         1,787          955
    Mortgage                           4,564       7,706        6,157         5,308        8,025
-------------------------------------------------------------------------------------------------
  Total non-accrual
    loans                              6,879      11,570       10,721         9,696       14,660
-------------------------------------------------------------------------------------------------
Restructured loans (1):
  Commercial                              17          19           21           161          143
  Consumer                                                         29            60           29
  Real estate
    Construction                               
    Mortgage                             217                      481           301          404
-------------------------------------------------------------------------------------------------
  Total restructured
    loans                                234          19          531           522          576
-------------------------------------------------------------------------------------------------
Total non-performing
  loans                                7,113      11,589       11,252        10,218       15,236
-------------------------------------------------------------------------------------------------
Other real estate                      6,081       5,845        8,252        11,862       11,739
-------------------------------------------------------------------------------------------------
Total non-performing
  assets                             $13,194     $17,434      $19,504       $22,080      $26,975
-------------------------------------------------------------------------------------------------
Non-performing
  assets as a percent
  of total assets                       0.27%       0.44%        0.60%         0.81%        1.05%
-------------------------------------------------------------------------------------------------
Loans past due 90
  days or more and still
  accruing interest                     $249        $226         $259          $159         $400
-------------------------------------------------------------------------------------------------
<FN>
(1)     Interest  income  of  approximately  $897,000,  $1,361,000,  $1,226,000,
        $1,079,000, and $1,496,000 would have been recorded in 1998, 1997, 1996,
        1995 and 1994 respectively,  on non-performing  loans in accordance with
        their original terms.  Actual interest  recorded on these loans amounted
        to $266,000 in 1998,  $323,000  in 1997,  $262,000 in 1996,  $299,000 in
        1995, and $317,000 in 1994.
</FN>
</TABLE>

Allowance for Loan Losses

The allowance for loan losses is increased by provisions  charged to expense and
reduced by loan charge-offs net of recoveries. Management has established a loan
loss  reserve  which it believes is adequate  for  estimated  losses in its loan
portfolio.  Based on an evaluation of the loan portfolio,  management presents a
quarterly review of the loan loss reserve to the Board of Directors,  indicating
any changes in the reserve since the last review and any  recommendations  as to
adjustments in the reserve. In making its evaluation,  management  considers the
results of recent regulatory examinations,  the effects on the loan portfolio of
current economic  indicators and their probable impact on borrowers,  the amount
of charge-offs for the period,  the amount of  non-performing  loans and related
collateral  security,  the evaluation of its loan portfolio by the internal loan
review  department  and  the  annual  examination  of  the  Company's  financial
statements by its independent auditors.  Charge-offs occur when loans are deemed
to be uncollectible.

Through an internal  loan review  function that  operates  independently  of the
lending  function,  management  employs  several  methodologies  to measure  the
appropriate level of loan loss reserves.  Those methodologies  include migration
analyses  based on historical  experience  and the related  internal  ratings of
loans  charged  off,  and an  allocation  methodology  based  on the  review  of
individual loans,  individual loan classifications,  and collateral values. When
utilizing the allocation  methodology,  an unallocated portion of the reserve is
determined based on management's  assessment of general national,  regional, and
local  economic  conditions.  This  determination  inherently  involves a higher
degree  of  subjectivity,  and  considers  risk  factors  that  may not have yet
manifested  themselves  in the  Company's  historical  loss  experience or other
methodology criteria.

During 1998, net charge-offs amounted to $719 thousand, or .04% of average loans
outstanding  for the year,  compared  to $1.4  million or .10% of average  loans
outstanding  for 1997.  During 1998,  the Company  recorded  provisions  of $5.9
million to the allowance  for loan losses  compared to $4.7 million for 1997. At
December 31, 1998,  the  allowance  aggregated  $26.4  million or 1.37% of total
loans and provided coverage of 371% of non-performing loans.

                                                                               7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following  table  presents,  for the periods  indicated,  an analysis of the
allowance for loan losses and other related data.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                      Year Ended December 31,
-------------------------------------------------------------------------------------------------
                                       1998        1997         1996        1995        1994
-------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                                    <C>         <C>          <C>        <C>          <C>    
Balance at beginning
    of period                          $21,261     $17,975      $16,014    $14,666      $12,515
Provisions charged to
    operating expenses                   5,867       4,668        4,857      2,774        5,224
-------------------------------------------------------------------------------------------------
                                        27,128      22,643       20,871     17,440       17,739
-------------------------------------------------------------------------------------------------
Recoveries of loans 
    previously charged-off:
        Commercial                         332         348          286        486          335
        Consumer                           280         406          274        243          247
        Commercial real 
           estate                          756         144           95        292           23
-------------------------------------------------------------------------------------------------
Total recoveries                         1,368         898          655      1,021          605
-------------------------------------------------------------------------------------------------
Loans charged-off:
        Commercial                        (572)       (964)      (1,202)    (1,253)      (2,608)
        Consumer                        (1,211)     (1,170)      (1,046)      (771)        (683)
        Commercial real                 
           estate                         (304)       (146)      (1,303)      (423)        (387)
-------------------------------------------------------------------------------------------------
Total charged-off                       (2,087)     (2,280)      (3,551)    (2,447)      (3,678)
-------------------------------------------------------------------------------------------------
Net charge-offs                           (719)     (1,382)      (2,896)    (1,426)      (3,073)
-------------------------------------------------------------------------------------------------
Balance at end of period               $26,409     $21,261      $17,975    $16,014      $14,666
-------------------------------------------------------------------------------------------------
Net charge-offs as a
    percentage of average
    loans outstanding                     0.04%       0.10%        0.25%      0.14%        0.35%
-------------------------------------------------------------------------------------------------
Allowance for loan losses
    as a percentage of 
    year-end loans                        1.37%       1.51%        1.42%      1.53%        1.58%
-------------------------------------------------------------------------------------------------
</TABLE>

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.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                           Allowance for Loan Losses at December 31,
------------------------------------------------------------------------------------------------------------------------------------
                               1998                  1997                  1996                  1995                1994
------------------------------------------------------------------------------------------------------------------------------------
                                  % Gross               % Gross                % Gross                % Gross             % Gross
                          Amount    Loans      Amount     Loans      Amount      Loans      Amount     Loans     Amount     Loans
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                     <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>
 Commercial              $ 6,224      19%      $ 4,054      18%      $ 3,375      19%      $ 3,364      19%      $ 3,105      18%
 Consumer                 13,520      44        11,628      42         4,081      41         3,321      38         2,707      37
 Commercial real
    estate                 6,665      37         5,579      40        10,519      40         9,329      43         8,854      45
------------------------------------------------------------------------------------------------------------------------------------
                         $26,409     100%      $21,261     100%      $17,975     100%      $16,014     100%      $14,666     100%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Investment Securities

The following table  summarizes the book value of securities  available for sale
and securities held to maturity by the Company as of the dates shown.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                             December 31,
------------------------------------------------------------------------------------------------
                                                  1998               1997               1996
------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                                            <C>                <C>                  <C>     
U.S. Government agency                   
    and mortgage-backed
    obligations                                $1,134,852         $1,252,693           $707,316
Obligations of state and
    political subdivisions                         26,041             23,515             15,743
Equity securities                                  15,397             11,364              3,994
Other                                             107,214             27,548             40,434
------------------------------------------------------------------------------------------------
Securities available
    for sale                                   $1,283,504         $1,315,120           $767,487
------------------------------------------------------------------------------------------------
U.S. Government agency
    and mortgage-backed
    obligations                                $1,081,895          $ 834,228           $798,345
Obligations of state and                 
    political subdivisions                         20,982             20,940             22,674
Other                                              24,781             18,864             16,493
------------------------------------------------------------------------------------------------
Securities held to
    maturity                                   $1,127,658          $ 874,032           $837,512
------------------------------------------------------------------------------------------------
</TABLE>

Consistent  with  accounting  and  regulatory  pronouncements,  the  Company has
segregated a portion of its  investment  portfolio as  securities  available for
sale. The balance of the investment  portfolio (excluding trading securities) is
categorized as securities held to maturity. Investment securities are classified
as  available  for sale if they might be sold in response to changes in interest
rates,  prepayment risk, the Company's income tax position, the need to increase
regulatory capital,  liquidity needs or other similar factors.  These securities
are carried at fair market value.  Investment  securities are classified as held
to maturity when the Company has the intent and ability to hold those securities
to  maturity.  Securities  held to maturity are carried at cost and adjusted for
accretion of discounts and  amortization  of premiums.  Trading  securities  are
carried at market value,  with gains and losses,  both realized and  unrealized,
included in other operating income.

In total,  investment  securities  increased $299.5 million from $2.2 billion to
$2.5 billion at December 31, 1998. Deposit growth and other funding sources were
used to increase the  Company's  investment  portfolio.  The  available for sale
portfolio  decreased  $31.6 million to $1.3 billion,  and the securities held to
maturity portfolio  increased $253.6 million to $1.1 billion from $874.0 million
at year-end 1997. The portfolio of trading  securities  increased  $77.4 million
from  year-end  1997 to $85.4  million at year-end  1998,  primarily  due to the
formation of CCMI.  At December  31, 1998,  the average life and duration of the
investment  portfolio were approximately 4.4 years and 3.2 years,  respectively,
as compared to 5.4 years and 4.2 years,  respectively,  at December 31, 1997. At
December  31,  1998 the yield on the  portfolio  was  6.23%,  down from 6.57% at
December 31, 1997.

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.  Since most 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, 1998,
the yield on the  investment  portfolio was 6.32%, a decrease of 22 basis points
from 6.54% in fiscal 1997.

At December 31, 1998, the unrealized  appreciation  in securities  available for
sale included in stockholders' equity totaled $7.0 million, net of tax, compared
to unrealized appreciation of $3.8 million, net of tax, at December 31, 1997.

                                                                               9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The  contractual  maturity  distribution  and  weighted  average  yield  of  the
Company's  investment  portfolio  (excluding  equity and trading  securities) at
December 31, 1998, are summarized in the following table. Weighted average yield
is calculated by dividing  income within each maturity range by the  outstanding
amount  of the  related  investment  and has been  tax  effected  on  tax-exempt
obligations.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                        December 31, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                   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)
<S>                               <C>         <C>      <C>        <C>      <C>        <C>      <C>        <C>     <C>          <C>  
Securities available for sale:
U.S. Government agency and
    mortgage-backed obligations   $  8,915    5.31%    $ 27,269   5.74%    $ 56,449   6.15%  $1,042,219   6.36%   $1,134,852   6.33%
Obligations of state and
    political subdivisions           1,296    7.83        9,764   7.48       13,415   7.47        1,566   7.27        26,041   7.48
Other securities                   100,164    4.50                                                7,050   8.19       107,214   4.74
------------------------------------------------------------------------------------------------------------------------------------
                                  $110,375    4.60%    $ 37,033   6.20%     $69,864   6.40%  $1,050,835   6.38%   $1,268,107   6.22%
------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government agency and
    mortgage-backed obligations                        $  8,662   6.64%    $109,549   6.08%  $  963,684   6.21%   $1,081,895   6.20%
Obligations of state and 
    political subdivisions        $ 18,327    5.69%       2,655   7.08                                                20,982   5.87
Other securities                    23,786    5.98          995   9.50                                                24,781   6.12
------------------------------------------------------------------------------------------------------------------------------------
                                  $ 42,113    5.85%    $ 12,312   6.96%    $109,549   6.08%    $963,684   6.21%   $1,127,658   6.19%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Deposits

Total  deposits at  December  31,  1998 were $4.4  billion,  an increase of $1.1
billion or 32% above total  deposits of $3.4 billion at December  31, 1997.  The
Company remains a  deposit-driven  financial  institution  with emphasis on core
deposit   accumulation   and   retention   as  a  basis  for  sound  growth  and
profitability.  The Company  regards core  deposits as all  deposits  other than
certificates of deposit,  retail and public, in excess of $100 thousand. All but
$55.2  million  of the  1998  increase  in  deposits  was in  the  various  core
categories.

Total deposits  averaged $3.9 billion for 1998, an increase of $733.0 million or
23% above the 1997 average.  The average balance of  noninterest-bearing  demand
deposits in 1998 was $826.1 million,  an $172.5 million or 26% increase over the
average  balance for 1997.  The average  total balance of passbook and statement
savings accounts  increased  $119.3 million,  or 18% compared to the prior year.
The average balance of interest-bearing demand accounts (money market and N.O.W.
accounts) for 1998 was $1.3 billion,  a $302.7  million or 30% increase over the
average  balance for the prior year.  The average  balance of time  deposits for
1998 was $1.0 billion, a $138.7 million or 16% increase over the average balance
for 1997. For 1998, the cost of total deposits was 2.67% as compared to 2.74% in
1997.

The  Company  believes  that its record of  sustaining  core  deposit  growth is
reflective  of the  Company's  retail  approach to banking  which  emphasizes  a
combination  of free  checking  accounts  (subject  to a small  minimum  balance
requirement),  convenient branch locations, extended hours of operation, quality
service, and active marketing.

The average  balances  and  weighted  average  rates of deposits for each of the
years 1998, 1997, and 1996 are presented below.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                   1998                      1997                        1996
------------------------------------------------------------------------------------------------------------------------------------
                                          Average        Average   Average         Average      Average        Average
                                          Balance         Rate     Balance           Rate       Balance          Rate
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S>                                      <C>              <C>     <C>               <C>       <C>              <C>
Demand deposits:
  Noninterest-bearing                    $  826,099               $  653,626                  $  537,079
  Interest-bearing (money market and      1,295,433        2.52%     992,778         2.50%       821,404         2.42%
    N.O.W. accounts)
Savings deposits                            789,389        2.31      670,074         2.45        577,824         2.23
Time deposits/public funds                1,002,917        5.33      864,311         5.29        776,220         5.31
------------------------------------------------------------------------------------------------------------------------------------
Total deposits                           $3,913,838               $3,180,789                  $2,712,527
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  remaining  maturity of  certificates  of deposit for $100,000 or more as of
December 31, 1998, 1997, and 1996 is presented below:

-----------------------------------------------------------------------------
Maturity                          1998              1997              1996
-----------------------------------------------------------------------------
(dollars in thousands)
3 months or less                $313,613          $271,765          $240,188
3 to 6 months                     37,572            32,017            30,767
6 to 12 months                    19,876            12,249             7,297
Over 12 months                     1,319             1,153             2,071
-----------------------------------------------------------------------------
Total                           $372,380          $317,184          $280,323
-----------------------------------------------------------------------------

                                                                              11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Interest Rate Sensitivity and Liquidity

The  Company's  risk of loss arising  from adverse  changes in the fair value of
financial  instruments,  or market risk, is composed  primarily of interest rate
risk.  The  primary  objective  of  the  Company's  asset/liability   management
activities  is to maximize net  interest  income  while  maintaining  acceptable
levels of interest rate risk. The Company's  Asset/Liability Committee (ALCO) is
responsible for  establishing  policies to limit exposure to interest rate risk,
and to ensure  procedures  are  established  to  monitor  compliance  with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.

An interest rate sensitive asset or liability is one that, within a defined time
period,  either  matures or  experiences  an  interest  rate change in line with
general  market  interest  rates.  Historically,   the  most  common  method  of
estimating  interest  rate  risk  was to  measure  the  maturity  and  repricing
relationships between  interest-earning assets and interest-bearing  liabilities
at specific  points in time ("GAP"),  typically one year.  Under this method,  a
company   is   considered   liability   sensitive   when  the   amount   of  its
interest-bearing  liabilities exceeds the amount of its interest-earning  assets
within the one year  horizon.  However,  assets  and  liabilities  with  similar
repricing  characteristics  may not  reprice  at the  same  time or to the  same
degree. As a result,  the Company's GAP does not necessarily  predict the impact
of changes in general levels of interest rates on net interest income.

The following  table  illustrates the GAP position of the Company as of December
31, 1998.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                 Interest Rate Sensitivity Gaps
                                                       December 31, 1998
---------------------------------------------------------------------------------------------------
                                1-90       91-180    181-365        1-5       Beyond
                                Days        Days       Days        Years      5 Years     Total
---------------------------------------------------------------------------------------------------
(dollars in millions)
<S>                           <C>         <C>         <C>         <C>         <C>        <C>     
Rate sensitive:
  Interest-earning
    assets
    Loans                     $ 720.2     $   55.8    $  73.9     $  631.5    $442.9     $1,924.3
    Investment
      securities                285.2        173.7      325.6      1,277.9     434.1      2,496.5
---------------------------------------------------------------------------------------------------
Total interest-
  earning assets              1,005.4        229.5      399.5      1,909.4     877.0      4,420.8
---------------------------------------------------------------------------------------------------
Interest-bearing
  liabilities
  Transaction
    accounts                    784.5                                        1,674.6      2,459.1
  Time deposits                 453.2        155.4      165.4        165.2       0.1        939.3
  Other borrowed
    money                        21.8                                                        21.8
  Long-term debt                                                      23.0      57.5         80.5
---------------------------------------------------------------------------------------------------
Total interest-
  bearing
  liabilities                 1,259.5        155.4      165.4        188.2   1,732.2      3,500.7
---------------------------------------------------------------------------------------------------
Period gap                     (254.1)        74.1      234.1      1,721.2    (855.2)    $  920.1
---------------------------------------------------------------------------------------------------
Cumulative gap                $(254.1)     $(180.0)     $54.1     $1,775.3    $920.1
---------------------------------------------------------------------------------------
Cumulative gap as a
  percentage of total
  interest-earning
  assets                         (5.7)%       (4.1)%      1.2%        40.2%     20.8%
-------------------------------------------------------------------------------------------
</TABLE>

Management  believes  that the  simulation  of net interest  income in different
interest rate environments  provides a more meaningful  measure of interest rate
risk. Income  simulation  analysis captures not only the potential of all assets
and liabilities to mature or reprice, but also the probability that they will do
so. Income simulation also attends to the relative  interest rate  sensitivities
of these items,  and projects  their  behavior over an extended  period of time.
Finally,  income simulation permits management to assess the probable effects on
the balance  sheet not only of changes in interest  rates,  but also of proposed
strategies for responding to them.

The Company's  income  simulation  model analyzes  interest rate  sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative  interest rate scenarios.  Management  continually reviews
and  refines  its  interest  rate risk  management  process in  response  to the
changing   economic   climate.   Currently,   the  Company's  model  projects  a
proportionate  200 basis point change during the next year, with rates remaining
constant in the second year.

12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The  Company's  Asset/Liability  Committee  (ALCO) policy has  established  that
interest income  sensitivity will be considered  acceptable if net income in the
above  interest  rate  scenario  is  within  15% of net  income in the flat rate
scenario  in the first  year and  within  30% over the two year time  frame.  At
December 31, 1998, the Company's  income  simulation  model indicates net income
would  decrease  by 1.0% and  6.3% in the  first  year and over a two year  time
frame,  respectively,  if rates decreased as described  above, as compared to an
increase of 0.7% and a decrease of 2.7%, respectively, at December 31, 1997. The
model projects that net income would decrease by 2.9% and 2.0% in the first year
and over a two year time frame,  respectively,  if rates  increased as described
above, as compared to a decrease of 6.7% and 8.8%, respectively, at December 31,
1997.  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  portfolio,  the  use of  risk
management  strategies such as interest rate swaps and caps, or the extension of
the maturities of its short-term borrowings.

Management  also  monitors  interest  rate risk by  utilizing a market  value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the  Company's  assets and  liabilities,  as well as any off
balance  sheet items.  The model  calculates  the market value of the  Company's
assets and liabilities in excess of book value in the current rate scenario, and
then  compares the excess of market value over book value given an immediate 200
basis point change in rates.  The Company's ALCO policy indicates that the level
of interest  rate risk is  unacceptable  if the immediate 200 basis point change
would  result in the loss of 60% or more of the excess of market value over book
value in the current rate  scenario.  At December 31, 1998,  the market value of
equity indicates an acceptable level of interest rate risk.

The market value of equity model  reflects  certain  estimates  and  assumptions
regarding the impact on the market value of the Company's assets and liabilities
given an  immediate  200 basis point  change in interest  rates.  One of the key
assumptions is the market value assigned to the Company's core deposits,  or the
core deposit  premium.  The Company has completed a  comprehensive  core deposit
study  in  order to  assign  its own  core  deposit  premiums  as  permitted  by
regulation.  The study 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
mortgage-backed  securities  portfolio.  The data  utilized in the core  deposit
study is updated on a quarterly  basis.  Management  believes  the core  deposit
premiums  produced by its core deposit study and utilized in its market value of
equity  model at  December  31,  1998  provide  an  accurate  assessment  of the
Company's interest rate risk.

Liquidity  involves the Company's ability to raise funds to support asset growth
or reduce  assets to meet deposit  withdrawals  and other  borrowing  needs,  to
maintain reserve requirements and to otherwise operate the Company on an ongoing
basis.  The  Company's  liquidity  needs  are  primarily  met by  growth in core
deposits,  its cash and  federal  funds  sold  position,  and cash flow from its
amortizing  investment and loan  portfolios.  If necessary,  the Company has the
ability to raise liquidity through collateralized borrowings,  FHLB advances, or
the sale of its available for sale investment  portfolio.  During 1998,  deposit
growth was used to fund growth in the loan  portfolio  and  purchase  additional
investment securities.

Short-Term Borrowings

Short-term  borrowings,  or other borrowed  money,  which consists of securities
sold under agreement to repurchase, federal funds purchased, and overnight lines
of  credit,  were used in 1998 to meet  short-term  liquidity  needs.  For 1998,
short-term  borrowings  averaged  $68.4  million as compared to $91.3 million in
1997.  The average rate on the  Company's  short-term  borrowings  was 5.84% and
5.61% during 1998 and 1997,  respectively.  As of December 31, 1998,  short-term
borrowings  included $21.9 million of borrowings under overnight lines of credit
at an average rate of 4.82%.

                                                                              13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Long-Term Debt

On June 9,  1997,  the  Company  issued  $57.5  million of 8.75%  Trust  Capital
Securities  through Commerce  Capital Trust I, a newly formed Delaware  business
trust  subsidiary  of the  Company.  All  $57.5  million  of the  Trust  Capital
Securities qualify as Tier I capital for regulatory  capital purposes.  Proceeds
of this  offering  were  earmarked  for general  corporate  purposes,  including
additional capitalization of existing banking subsidiaries.

Stockholders' Equity and Dividends

At December 31, 1998,  stockholders'  equity  totaled $300.7  million,  up $50.0
million or 20% over stockholders' equity of $250.8 million at December 31, 1997.
This  increase  was  primarily  due to the  Company's  net  income for the year.
Stockholders'  equity as a percent  of total  assets was 6.14% at  December  31,
1998, as compared to 6.37% at December 31, 1997.

Risk-based capital standards issued by bank regulatory authorities in the United
States attempt to relate a banking  company's capital to the risk profile of its
assets  and  provide  the basis for which all  banking  companies  and banks are
evaluated in terms of capital adequacy. The risk-based capital standards require
all  banks to have Tier 1 capital  of at least 4% and total  capital,  including
Tier 1 capital, of at least 8% of risk-adjusted  assets. Tier 1 capital includes
stockholders'  equity  (adjusted  for  goodwill,  other  intangibles,   and  the
unrealized  appreciation/depreciation in securities available for sale) plus the
Trust Capital Securities. Total capital is comprised of all of the components of
Tier 1 capital plus qualifying subordinated debt instruments and the reserve for
possible loan losses.

Banking  regulators have also issued leverage ratio  requirements.  The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted average
assets.  The following  table provides a comparison of the Company's  risk-based
capital ratios and leverage ratio to the minimum regulatory requirements for the
periods indicated.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                                           Minimum
                                          December 31,             Regulatory Requirements
-------------------------------------------------------------------------------------------------
                                        1998        1997           1998              1997
-------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>          <C>              <C> 
Risk based capital ratios:
    Tier 1                             12.98%       15.66%           4.00%           4.00%
    Total capital                      14.66        17.97            8.00            8.00
Leverage ratio                          7.36         7.81        3.00-5.00         3.00-5.00
-------------------------------------------------------------------------------------------------
</TABLE>

The Federal Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA"),
which  became law in December of 1991,  required  each  federal  banking  agency
including  the Board of  Governors of the Federal  Reserve  System  ("FRB"),  to
revise its  risk-based  capital  standards to ensure that those  standards  take
adequate  account of interest  rate risk,  concentration  of credit risk and the
risks of non-traditional  activities,  as well as reflect the actual performance
and expected risk of loss on multi-family mortgages. This law also requires each
federal banking agency, including the FRB, to specify, by regulation, the levels
at  which  an  insured  institution  would  be  considered  "well  capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized, "
or   "critically   undercapitalized."   At  December  31,  1998,  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%.

14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

The Company's  common stock is listed for trading on the New York Stock Exchange
under the symbol CBH. The quarterly  market price ranges and dividends  declared
per  common  share for each of the last two years are shown in the table  below.
The prices and dividends  per share have been  adjusted to reflect  common stock
dividends  of 5% with  record  dates of January 7,  1999,  January 7, 1998,  and
January 8, 1997,  as well as the 5-for-4  stock split in the form of a 25% stock
dividend  with a record date of July 13, 1998.  As of February  28, 1999,  there
were approximately 18,000 holders of record of the Company's common stock.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                       Common Share Data
-------------------------------------------------------------------------------------------------
                                                   Market Prices          
                                             ----------------------       Cash Dividends
                                               High            Low           Per Share
-------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>             <C>    
1998 Quarter Ended
  December 31                                 $50.36         $33.22          $0.1857
  September 30                                 45.19          33.45           0.3733
  June 30                                      46.38          40.58           0.1829
  March 31                                     41.95          32.81           0.1742

1997 Quarter Ended
  December 31                                 $37.38         $27.25          $0.1451
  September 30                                 29.44          26.13           0.1451
  June 30                                      28.13          20.05           0.1451
  March 31                                     23.22          19.95           0.1382
-------------------------------------------------------------------------------------------------
</TABLE>

The Company  offers a Dividend  Reinvestment  and Stock  Purchase  Plan by which
dividends on the  Company's  Common Stock and  optional  cash  payments of up to
$5,000 per month  (subject to change)  may be  invested in Common  Stock at a 3%
discount  (subject  to  change)  to the  market  price and  without  payment  of
brokerage commissions.

Results of Operations - 1997 versus 1996

Net income for 1997 was $40.3 million compared to $28.3 million in 1996. Diluted
net income per common share was $1.69 compared to $1.26 per common share for the
prior  year.  Net income and net  income per share for 1996 were  impacted  by a
one-time  special  assessment of  approximately  $1.3 million from a legislative
mandate to  recapitalize  the Savings  Association  Insurance Fund (SAIF).  This
assessment impacted after tax net income by approximately $850 thousand.

Net  interest  income  on a  tax-equivalent  basis for 1997  amounted  to $148.5
million, an increase of $22.0 million, or 17% over 1996.

Interest  income on a  tax-equivalent  basis  increased  $41.7 million or 20% to
$245.5 million in 1997. This increase was primarily  related to volume increases
in the loan and  investment  portfolios.  Interest  expense  for 1997 rose $19.7
million to $97.0 million from $77.3 million in 1996. This increase was primarily
related to increases in the Company's levels of deposits.

The  provision for loan losses was $4.7 million in 1997 compared to $4.9 million
in the prior year.

For 1997, noninterest income totaled $57.4 million, an increase of $24.6 million
or 75% from 1996.  The increase was due primarily to increased  other  operating
income,  which rose $18.7  million  from 1996,  including  an  increase of $15.3
million in revenues  (to $16.5  million in 1997) from  Commerce  Insurance,  the
insurance  brokerage  subsidiary  formed  in the  fourth  quarter  of  1996.  In
addition,  deposit charges and service fees increased $5.3 million over 1996 due
to higher  transaction  volumes,  and net investment  securities gains were $610
thousand higher in 1997 than the prior year.

Noninterest  expenses  totaled  $137.9  million  for 1997,  an increase of $28.9
million,  or 27% over 1996.  Contributing  to this  increase was the addition of
nine new branches during 1997, and the formation of Commerce Insurance. With the
addition of these new offices and the  insurance  business,  staff,  facilities,
marketing and related expenses rose  accordingly.  Audit and regulatory fees and
assessments  were $1.6 million lower in 1997 than the prior year, which resulted
primarily from 1996 reflecting the SAIF assessment.  Other noninterest  expenses
rose $3.5 million to $17.8  million in 1997.  Higher bank- card related  service
charges,  increased  legal fees, and higher  provisions  for  non-credit-related
losses contributed to the increase.

Year 2000

The Company began the process of preparing its computer systems and applications
for the Year 2000 in 1996. The process  involves  identifying and resolving date
recognition  problems in computer systems and software,  and to a lesser extent,
other operating equipment, that could be caused by the date change from December
31, 1999 to January 1, 2000.

The Company has completed its assessment of all business processes that could be
affected by the Year 2000 issue.  Each business  process  assessment  

                                                                              15

<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

included a review of the  information  systems used in that  process,  including
hardware and software,  involvement  of third parties,  and any other  operating
equipment.  The Company licenses  substantially  all software used in conducting
its business from third party vendors. All vendors have been contacted regarding
the Year 2000 issue, and the Company continues to track the progress each vendor
is making in reaching  Year 2000  compliance.  The Company is also  working with
significant customers and counterparties to monitor their Year 2000 efforts. The
Company had  substantially  all of the necessary changes in place and tested for
all mission critical  systems (those systems defined as absolutely  essential to
the daily business  operation of the Company) by the end of 1998.  Additionally,
the Company has completed  certification  testing with several mission  critical
service providers.  Changes for all remaining systems should be substantially in
place by the end of the first quarter of 1999, with testing completed by the end
of the second quarter of 1999.

The Company believes it is taking the appropriate steps to address all Year 2000
issues.  Despite  the  Company's  efforts to address  the Year 2000  problem and
develop  contingency  plans  in the  event  of  Year  2000  failures,  including
non-compliance  by third parties  (including  loan  customers),  there can be no
assurance  that the Year 2000 issue  will not  materially  adversely  impact the
Company's  financial  position,  results of operations,  or  relationships  with
customers, vendors, or others.

The  Company  estimates  the  total  cost of the Year 2000  compliance  process,
including internal and external personnel and any required hardware and software
modifications, will not exceed $1.0 million.

Mergers and Acquisitions

Effective January 15, 1999, the Company acquired Community First Banking Company
(CFBC),  a one-bank  holding company  headquartered in Tinton Falls, New Jersey,
and Prestige Financial Corp. (PFC), a one-bank holding company  headquartered in
Flemington,  New Jersey.  CFBC had approximately $201 million in assets and $181
million in deposits,  and PFC had approximately  $328 million in assets and $313
in deposits.  The Company issued approximately  1,360,000 shares of common stock
to  shareholders  of CFBC based on an  exchange  ratio of .644 of a share of the
Company's  common stock for each share of CFBC common stock.  The Company issued
approximately  1,857,000  shares of common stock to shareholders of PFC based on
an  exchange  ratio of .397 of a share of the  Company's  common  stock for each
share of PFC common stock.  The  transactions  were accounted for as poolings of
interests.  The combined  organization will have  approximately  $5.4 billion in
assets,  $4.9 billion in deposits,  and 96 branch offices  throughout New Jersey
and Metropolitan Philadelphia, Pennsylvania.

16
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets

Commerce Bancorp, Inc. and Subsidiaries Selected Financial Data
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                               December 31,
                                                                     ----------------------------------
        (dollars in thousands)                                           1998                1997
-------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                 <C>       
Assets
        Cash and due from banks                                      $  245,352          $  167,900
        Federal funds sold
       ------------------------------------------------------------------------------------------------
             Cash and cash equivalents                                  245,352             167,900
        Mortgages held for sale                                                               7,260
        Trading securities                                               85,359               7,911
        Securities available for sale                                 1,283,504           1,315,120
        Securities held to maturity                                   1,127,658             874,032
             (market value 1998-$1,130,777; 1997-$869,815)
        Loans                                                         1,931,363           1,411,289
             Less allowance for loan losses                              26,409              21,261
       ------------------------------------------------------------------------------------------------
                                                                      1,904,954           1,390,028
        Bank premises and equipment, net                                141,848             111,759
        Other assets                                                    105,390              64,957
       ------------------------------------------------------------------------------------------------
                                                                     $4,894,065          $3,938,967
-------------------------------------------------------------------------------------------------------
Liabilities
        Deposits:
             Demand:
                 Interest-bearing                                    $1,568,042          $1,111,302
                 Noninterest-bearing                                  1,036,798             762,843
             Savings                                                    891,002             705,906
             Time                                                       939,273             789,353
       ------------------------------------------------------------------------------------------------
                        Total deposits                                4,435,115           3,369,404

        Other borrowed money                                             21,845             223,300
        Other liabilities                                                54,607              12,695
        Obligation to Employee Stock Ownership Plan (ESOP)                1,282               2,308
        Trust Capital Securities - Commerce Capital Trust I              57,500              57,500
        Long-term debt                                                   23,000              23,000
       ------------------------------------------------------------------------------------------------
                                                                      4,593,349           3,688,207
-------------------------------------------------------------------------------------------------------
Stockholders' Equity
        Common stock, 24,155,166 shares issued                           35,958              25,309
         (22,643,051 shares in 1997)
        Series C preferred stock, 417,000 shares in 1997                                      7,506
        Capital in excess of par or stated value                        211,737             167,529
        Retained earnings                                                48,916              50,592
        Accumulated other comprehensive income                            7,011               3,756
       ------------------------------------------------------------------------------------------------
                                                                        303,622             254,692
        Less commitment to ESOP                                           1,282               2,308
        Less treasury stock, at cost, 100,159 shares                      1,624               1,624
       ------------------------------------------------------------------------------------------------
                        Total stockholders' equity                      300,716             250,760
       ------------------------------------------------------------------------------------------------
                                                                     $4,894,065          $3,938,967
       ------------------------------------------------------------------------------------------------
       See accompanying notes.
</TABLE>

                                                                              17
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income

<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Year Ended December 31,
                                                                                  --------------------------------------------------
                   (dollars in thousands, except per share amounts)                      1998              1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>               <C>     
Interest Income
                    Interest and fees on loans                                         $140,580          $120,028          $104,842
                    Interest on investment securities                                   146,859           122,662            95,026
                    Other interest                                                        1,841             1,487             2,867
                    ---------------------------------------------------------------------------------------------------------------
                                          Total interest income                         289,280           244,177           202,735
                    ---------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
                    Interest on deposits:
                            Demand                                                       32,708            24,824            19,842
                            Savings                                                      18,257            16,419            12,907
                            Time                                                         53,466            45,781            41,212
                    ---------------------------------------------------------------------------------------------------------------
                                          Total interest on deposits                    104,431            87,024            73,961
                     Interest on other borrowed money                                     3,995             5,126             1,336
                     Interest on long-term debt                                           7,127             4,887             2,025
                    ---------------------------------------------------------------------------------------------------------------
                                          Total interest expense                        115,553            97,037            77,322
                    ---------------------------------------------------------------------------------------------------------------

                     Net interest income                                                173,727           147,140           125,413
                     Provision for loan losses                                            5,867             4,668             4,857
                    ---------------------------------------------------------------------------------------------------------------
                     Net interest income after provision for loan losses                167,860           142,472           120,556
                    ---------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
                     Deposit charges and service fees                                    33,685            27,110            21,850
                     Other operating income                                              52,329            27,979             9,251
                     Net investment securities gains                                      2,933             2,285             1,675
                    ---------------------------------------------------------------------------------------------------------------
                                          Total noninterest income                       88,947            57,374            32,776
                    ---------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense

                     Salaries                                                            72,501            52,166            37,668
                     Benefits                                                            15,186            12,161             9,389
                     Occupancy                                                           16,440            14,223            12,418
                     Furniture and equipment                                             23,013            18,374            14,336
                     Office                                                              16,145            12,632             9,760
                     Audit and regulatory fees and assessments                            2,086             1,611             3,173
                     Marketing                                                            8,078             6,069             4,777
                     Other real estate (net)                                              1,348             1,814             2,329
                     Other                                                               27,170            18,879            15,181
                    ---------------------------------------------------------------------------------------------------------------
                                          Total noninterest expenses                    181,967           137,929           109,031
                    ---------------------------------------------------------------------------------------------------------------
                     Income before income taxes                                          74,840            61,917            44,301
                     Provision for federal and state income taxes                        25,522            21,592            16,051
                    ---------------------------------------------------------------------------------------------------------------
                     Net income                                                          49,318            40,325            28,250
                     Dividends on preferred stocks                                                            563               842
                    ---------------------------------------------------------------------------------------------------------------
                     Net income applicable to common stock                             $ 49,318          $ 39,762          $ 27,408
                    ---------------------------------------------------------------------------------------------------------------
                     Net income per common and common equivalent share:
                                   Basic                                               $   2.08          $   1.79          $   1.37
                    ---------------------------------------------------------------------------------------------------------------
                                   Diluted                                             $   1.98          $   1.69          $   1.26
                    ---------------------------------------------------------------------------------------------------------------
                     Average common and common equivalent shares outstanding:
                                   Basic                                                 23,668            22,197            20,017
                    ---------------------------------------------------------------------------------------------------------------
                                   Diluted                                               24,951            23,786            22,372
                    ---------------------------------------------------------------------------------------------------------------
                     Cash dividends declared, common stock                             $   0.92          $   0.57          $   0.48
                    ---------------------------------------------------------------------------------------------------------------
                    See accompanying notes.
</TABLE>

18

<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Year Ended December 31,
                                                                               -----------------------------------------------------
                               (dollars in thousands)                              1998                1997                1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>                 <C>      
Operating Activities
     Net income                                                                $  49,318           $  40,325           $  28,250
     Adjustments to reconcile net income to net cash
         provided by operating activities:
             Provision for loan losses                                             5,867               4,668               4,857
             Provision for depreciation, amortization
                 and accretion                                                    24,053              17,438              16,156
             Gains on sales of securities available for sale                      (2,933)             (2,285)             (1,675)
             Proceeds from sales of mortgages held for sale                       25,093              22,626              23,683
             Originations of mortgages held for sale                             (17,833)            (28,572)            (19,555)
             Net loan (chargeoffs)                                                  (719)             (1,382)             (2,896)
             Net (increase) decrease in trading securities                       (77,448)              7,416              (6,484)
             (Increase) decrease in other assets                                 (43,073)            (12,575)                524
             Increase in other liabilities                                        44,200               2,551               9,823
             Deferred income tax expense (benefit)                                (2,288)             (2,041)                161
      ------------------------------------------------------------------------------------------------------------------------------
                           Net cash provided by operating activities               4,237              48,169              52,844

Investing Activities
      Proceeds from the sales of securities available for sale                   428,483             223,217             107,666
      Proceeds from the maturity of securities available for
         sale                                                                    395,108             162,892             187,120
      Proceeds from the maturity of securities held to
         maturity                                                                299,706             123,496             125,283
      Purchase of securities available for sale                                 (786,226)           (835,005)           (497,926)
      Purchase of securities held to maturity                                   (557,455)           (244,503)           (192,168)
      Net increase in loans                                                     (529,040)           (154,454)           (227,331)
      Proceeds from sales of loans                                                 8,966              10,020               9,291
      Purchases of premises and equipment                                        (46,939)            (31,235)            (25,766)
      ------------------------------------------------------------------------------------------------------------------------------
                           Net cash used by investing activities                (787,397)           (745,572)           (513,831)

Financing Activities
      Net increase in demand and savings deposits                                915,791             430,417             330,095
      Net increase in time deposits                                              149,920              19,317              60,389
      Net (decrease) increase in other borrowed money                           (201,455)            153,300              70,000
      Issuance of common stock                                                                                             6,859
      Dividends paid                                                             (21,563)            (12,484)             (9,298)
      Proceeds from issuance of Trust Capital Securities                                              57,500
      Proceeds from issuance of common stock under
         dividend reinvestment and other stock plans                               9,428               6,876               4,288
      Other                                                                        8,491               1,544              (2,370)
      ------------------------------------------------------------------------------------------------------------------------------
                           Net cash provided  by financing activities            860,612             656,470             459,963

      Increase (decrease) in cash and cash equivalents                            77,452             (40,933)             (1,024)
      Cash and cash equivalents at beginning of year                             167,900             208,833             209,857
      ------------------------------------------------------------------------------------------------------------------------------
      Cash and cash equivalents at end of year                                 $ 245,352           $ 167,900           $ 208,833
      ------------------------------------------------------------------------------------------------------------------------------

      Supplemental disclosures of cash flow
         information: Cash paid during the year for:
             Interest                                                          $ 114,064           $  98,217           $  75,731
             Income taxes                                                         28,808              23,632              14,449
      Other noncash activities:
         Transfer of securities to securities available for sale                                      83,773
      ------------------------------------------------------------------------------------------------------------------------------
      See accompanying notes.
</TABLE>

                                                                              19
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996                              Capital in                             Accumulated 
                                                                            Excess                                  Other
                                                                            of Par             Commitment          Compre-
                                                          Common Preferred or Stated Retained      to   Treasury   hensive 
(in thousands, except per share amounts)                   Stock  Stock      Value   Earnings     ESOP    Stock     Income   Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>      <C>     <C>        <C>       <C>       <C>         <C>  <C>     
Balances at December 31, 1995                             $18,894  $8,283  $125,911   $34,110   $(5,553)  $(2,116)    $166 $179,695
Acquisition of Commerce National
Insurance Services  (983 shares)                            1,114            (1,135)                                            (21)
------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1996                     20,008   8,283   124,776    34,110    (5,553)   (2,116)     166  179,674
Net income                                                                             28,250                                28,250
  Other comprehensive income, net of tax
    Unrealized gain (loss) on securities 
     (pre-tax ($7,992)                                                                                              (6,434)  (6,434)
    Reclassification adjustment (pre-tax $790)                                                                         514      514
                                                                                                                            --------
  Other comprehensive income                                                                                                 (5,920)
                                                                                                                            --------
           Total comprehensive income                                                                                        22,330
5% common stock dividend and cash paid in lieu of
     fractional shares (534 shares)                           834            10,388   (11,244)                                  (22)
Cash dividends, common stock ($0.48 per share)                                         (8,431)                               (8,431)
Common stock issued in connection with
     incentive stock option plan (78 shares)                  121               622                                             743
Cash dividends, preferred stock                                                          (845)                                 (845)
Decrease in obligation to ESOP                                                                    1,150                       1,150
Common stock issued  (727 shares)                           1,136             5,465                                           6,601
Tax benefit from ESOP dividends                                                 197                                             197
Proceeds from issuance of common stock under
     dividend reinvestment plan (175 shares)                  264             3,281                                           3,545
Conversion and redemption of preferred stock                1,183    (747)     (178)                                            258
Purchase of common stock of former Independence
     shareholders                                                                                          (1,236)           (1,236)
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                             $23,546  $7,536  $144,551   $41,840   $(4,403)  $(3,352) $(5,754)$203,964
Acquisition of insurance brokerage agencies (293 shares)
                                                              332               (55)                                            277
------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1997                     23,878   7,536   144,496    41,840    (4,403)   (3,352)  (5,754) 204,241
Net income                                                                             40,325                                40,325
  Other comprehensive income, net of tax
    Unrealized gain (loss) on securities (pre-tax $12,838)                                                          10,475   10,475
    Reclassification adjustment (pre-tax $(1,484))                                                                    (965)    (965)
                                                                                                                            --------
  Other comprehensive income                                                                                                  9,510
                                                                                                                            --------
           Total comprehensive income                                                                                        49,835
5% common stock dividend and cash paid in lieu of
     fractional shares (611 shares)                           955            18,134   (19,113)                                  (24)
Cash dividends, common stock ($0.57 per share)                                        (11,897)                              (11,897)
Common stock issued in connection with
     incentive stock option plan (306 shares)                 478             2,139                                           2,617
Cash dividends, preferred stock                                                          (563)                                 (563)
Decrease in obligation to ESOP                                                                    2,095                       2,095
Tax benefit from ESOP dividends                                                 197                                             197
Proceeds from issuance of common stock under
     dividend reinvestment plan (128 shares)                  201             4,058                                           4,259
Retirement of treasury shares                                (203)    (30)   (1,495)                        1,728                 0
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997                             $25,309  $7,506  $167,529   $50,592   $(2,308)  $(1,624)  $3,756 $250,760
Acquisition of investment firm/insurance brokerage
agency (616 shares)                                           794              (300)    7,997                                 8,491
------------------------------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 1998                     26,103   7,506   167,229    58,589    (2,308)   (1,624)   3,756  259,251
Net income                                                                             49,318                                49,318
  Other comprehensive income, net of tax
    Unrealized gain (loss) on securities (pre-tax $5,831)                                                            3,153    3,153
    Reclassification adjustment (pre-tax $156)                                                                         102      102
                                                                                                                            --------
  Other comprehensive income                                                                                                  3,255
                                                                                                                            --------
           Total comprehensive income                                                                                        52,573
5% common stock dividend and cash paid in lieu of
     fractional shares (809 shares)                         1,264            36,164   (37,467)                                  (39)
25% common stock dividend and cash paid in lieu of
     fractional shares (4,501 shares)                       7,033            (7,033)      (47)                                  (47)
Cash dividends, common stock ($0.92 per share)                                        (21,477)                              (21,477)
Common stock issued in connection with
     incentive stock option plan (185 shares)                 289             1,713                                           2,002
Convert preferred C stock to common stock (647 shares)      1,011  (7,506)    6,495                                               0
Decrease in obligation to ESOP                                                                    1,026                       1,026
Proceeds from issuance of common stock under
     dividend reinvestment plan (165 shares)                  258             7,169                                           7,427
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998                             $35,958     $0   $211,737   $48,916   $(1,282)  $(1,624)  $7,011 $300,716
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

1.   Significant Accounting Policies

Basis of Presentation
The consolidated  financial statements include the accounts of Commerce Bancorp,
Inc.  (the  Company) and its  wholly-owned  subsidiaries,  Commerce  Bank,  N.A.
(Commerce  NJ),  Commerce   Bank/Pennsylvania,   N.A.  (Commerce  PA),  Commerce
Bank/Shore,   N.A.  (Commerce  Shore),  Commerce  Bank/North  (Commerce  North),
Commerce  Capital  Trust I, and  Commerce  Capital  Markets,  Inc.  (CCMI).  All
material  intercompany  transactions have been eliminated.  Certain amounts from
prior years have been reclassified to conform with 1998 presentation. All common
stock and per share information has been adjusted for the 5-for-4 stock split in
the form of a 25% common stock  dividend  declared on June 29, 1998,  and the 5%
common stock dividend declared on December 15, 1998.

The Company is a multi-bank  holding company  headquartered  in Cherry Hill, New
Jersey,  operating  primarily in the  metropolitan  Philadelphia  and New Jersey
markets.  Through its  subsidiaries,  the Company provides retail and commercial
banking  services,   corporate  trust  services,   municipal  bond  underwriting
services, and insurance brokerage services.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Investment Securities
Trading account securities are carried at market value.  Gains and losses,  both
realized and unrealized, are included in other operating income.

Investment  securities  are  classified as held to maturity when the Company has
the intent and ability to hold those securities to maturity.  Securities held to
maturity  are  stated  at cost and  adjusted  for  accretion  of  discounts  and
amortization of premiums.

Those  securities  that might be sold in response to changes in market  interest
rates,  prepayment risk, the Company's income tax position, the need to increase
regulatory  capital,  or similar other  factors are  classified as available for
sale.  Available for sale securities are carried at fair value,  with unrealized
gains and losses,  net of tax, reported as a component of stockholders'  equity.
The amortized cost of debt securities in this category is adjusted for accretion
of  discounts  and  amortization  of  premiums.  Realized  gains and  losses are
determined on the specific  certificate  method and are included in  noninterest
income.

Loans
Loans  are  stated  at  principal  amounts  outstanding,  net of  deferred  loan
origination fees and costs.  Interest income on loans is accrued and credited to
interest  income  monthly  as  earned.   Loan  origination  fees  are  generally
considered  as  adjustments  of  interest  rate  yields and are  amortized  into
interest income on loans over the terms of the related loans.

Loans are placed on a non-accrual  status and cease accruing  interest when loan
payment  performance is deemed  unsatisfactory.  However,  all loans past due 90
days are placed on non-accrual status,  unless the loan is both well secured and
in the process of collection.

Allowance for Loan Losses
The allowance for loan losses is increased by provisions  charged to expense and
reduced  by  loan  charge-offs  net  of  recoveries.   Based  upon  management's
evaluation  of the  loan  portfolio,  the  allowance  is  maintained  at a level
considered  adequate to absorb estimated  inherent losses in the loan portfolio.
The level of the allowance is based on an evaluation of

                                                                              21

<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

the risk characteristics included in the loan portfolio,  including such factors
as the volume and composition of the portfolio, historical loan loss experience,
present and prospective  financial condition of borrowers,  general national and
local economic conditions, and other relevant factors.

Bank Premises and Equipment
Bank premises and equipment are carried at cost less  accumulated  depreciation.
Depreciation  and amortization  are determined on the  straight-line  method for
financial reporting purposes, and accelerated methods for income tax purposes.

Other Real Estate (ORE)
Real estate  acquired in  satisfaction  of a loan is reported in other assets at
the lower of cost or fair value less disposition costs.  Properties  acquired by
foreclosure or deed in lieu of'  foreclosure are transferred to ORE and recorded
at the  lower  of cost or fair  value  less  disposition  costs  based  on their
appraised value at the date actually or constructively received.  Losses arising
from the acquisition of such property are charged against the allowance for loan
losses.  Subsequent  adjustments  to the carrying  values of ORE  properties are
charged to operating expense.

Intangible Assets
The excess of cost over fair value of net assets acquired (goodwill) is included
in other assets and is being amortized on a straight-line  basis over the period
of  expected  benefit,   which  approximates  15  years.  Goodwill  amounted  to
$2,788,000  and  $3,082,000 at December 31, 1998 and 1997,  respectively.  Other
intangible  assets are  amortized  on a  straight-line  basis over 10 to 15 year
lives.  Other intangibles  amounted to $2,019,000 and $2,471,000 at December 31,
1998 and 1997, respectively.

Income Taxes
The provision for income taxes is based on current taxable  income.  When income
and expenses are  recognized in different  periods for book  purposes,  deferred
taxes are provided.

Restriction on Cash and Due From Banks
The Banks are required to maintain  reserve  balances  with the Federal  Reserve
Bank. The weighted average amount of the reserve balances for 1998 and 1997 were
approximately $4,956,000 and $12,355,000, respectively.

Recent Accounting Statements
The Financial  Accounting  Standards Board (FASB) in June 1997 issued  Statement
No. 130  "Reporting  Comprehensive  Income" (FAS 130). FAS 130  establishes  new
standards for reporting  comprehensive income, which includes net income as well
as certain other items which result in a change in equity during the period. FAS
130 requires that all items that are recognized  under  accounting  standards as
components of comprehensive  income be reported in a financial statement that is
displayed with the same  prominence as other financial  statements.  The Company
adopted FAS 130 in 1998.  The  disclosure  standards of FAS 130 had no impact on
the Company's financial position or results of operations.

Also in June 1997, the FASB issued Statement 131 "Disclosures  About Segments of
an Enterprise and Related Information" (FAS 131). FAS 131 requires disclosure of
financial and descriptive  information about an enterprise's  operating segments
that   meet   certain   quantitative   thresholds.    Operating   segments   are
revenue-producing  components of the  enterprise  for which  separate  financial
information is produced  internally  and the  performance of which is subject to
evaluation by the chief operating decision maker, as

22
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

defined,  in determining  resource  allocation.  The Company adopted FAS 131 for
1998 annual reporting.  The disclosure standards of FAS 131 had no impact on the
Company's financial position or results of operations.

In June 1998,  the FASB issued  Statement  No. 133  "Accounting  for  Derivative
Instruments and Hedging  Activities" (FAS 133). FAS 133 will require the Company
to recognize all  derivatives  on the balance  sheet at fair value.  Derivatives
that are not hedges  must be  adjusted  to fair  value  through  income.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the  derivative  will either be offset against the change in fair value
of the hedged  assets or  liability  through  earnings  or  recognized  in other
comprehensive  income  until the hedged  item is  recognized  in  earnings.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized  in earnings.  FAS 133 becomes  effective  for the Company  beginning
January 1, 2000.  Although  early  adoption is allowed in any  quarterly  period
after  June  1998,  the  Company  has no  plans to  adopt  FAS 133  prior to the
effective date. Based on the Company's minimal use of derivatives at the current
time,  management  does not expect the adoption of FAS 133 to have a significant
effect on  results of  operations  or the  financial  position  of the  Company.
However,  the impact from adopting FAS 133 will depend on the nature and purpose
of the derivative instruments in use by the Company at that time.

2.   Mergers and Acquisitions

In November 1996, two insurance brokerage agencies, Keystone National Companies,
Inc.,  Cherry  Hill,  New Jersey,  and  Morales,  Potter & Buckelew,  Inc.,  t/a
Buckelew & Associates,  Toms River, New Jersey, were acquired by the Company and
thereafter merged to form Commerce National Insurance Services,  Inc. ("Commerce
Insurance").  In December 1996,  Chesley & Cline, Inc., Mount Holly, New Jersey,
was merged with and into Commerce  Insurance.  The Company issued  approximately
983,000 shares of common stock in exchange for all of the outstanding  shares of
these  agencies  acquired  in 1996.  In January  1997,  Colkate,  Inc.,  t/a The
Morrissey  Agency,  Mt.  Laurel,  New Jersey,  was merged with and into Commerce
Insurance.  In December 1997,  Joseph J. Reinhart and Associates,  Inc.,  Cherry
Hill, NJ, a risk/loss  management and loss  investigation  consulting  firm, and
Associated  Insurance  Management,   Inc.,  Haddonfield,  NJ,  an  employee  and
executive benefit consulting firm, were merged with and into Commerce Insurance.
The Company issued approximately  293,000 shares of common stock in exchange for
all of the outstanding  shares of the agencies acquired in 1997. In August 1998,
J.A. Montgomery, Inc., Wilmington, DE, an insurance brokerage agency, was merged
with and into  Commerce  Insurance.  The Company  issued  approximately  201,000
shares of common  stock in exchange  for all of the  outstanding  shares of this
agency.  All of these  transactions were accounted for as poolings of interests.
However,  financial statements of the periods prior to the acquisitions have not
been restated, as the changes, in the aggregate, would be immaterial.

The former  Independence  Bancorp,  Inc.  ("Independence"),  Bergen County,  New
Jersey,  was merged  into  Commerce  Bancorp,  Inc.  on January 21, 1997 and its
wholly-owned  subsidiary bank,  Independence Bank of New Jersey,  was thereafter
renamed Commerce Bank/North.  The Company issued approximately  3,666,000 shares
of common stock to effect the merger.  The  transaction  was  accounted for as a
pooling of interests.  The Company's  originally  reported results of operations
for 1996 have been  restated  herein to  include  Commerce  North's  results  of
operations for 1996.

In the first quarter of 1998,  the Company  completed the  acquisition  of A. H.
Williams & Co., Inc., (Williams)  Philadelphia,  PA, a public finance investment
firm, and combined  Williams with Commerce  Capital,  the bank securities dealer
division of Commerce NJ, to form Commerce Capital Markets,  Inc., a wholly-owned
nonbank subsidiary of the Company

                                                                              23
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

engaging in certain  securities  activities  permitted  under  Section 20 of the
Glass-Steagall  Act.  The  acquisition  was  completed by the issuance of common
stock of the Company totaling  approximately 415,000 shares. The transaction was
accounted for as a pooling of interests,  however,  financial  statements of the
periods prior to the acquisition have not been restated,  as the changes, in the
aggregate, would be immaterial.

Effective January 15, 1999, the Company acquired Community First Banking Company
(CFBC),  a one-bank  holding company  headquartered in Tinton Falls, New Jersey,
and Prestige Financial Corp. (PFC), a one-bank holding company  headquartered in
Flemington,  New Jersey.  CFBC had approximately $201 million in assets and $181
million in deposits,  and PFC had approximately  $328 million in assets and $313
million in deposits. The Company issued approximately 1,360,000 shares of common
stock to  shareholders  of CFBC based on an exchange ratio of .644 of a share of
the  Company's  common  stock for each share of CFBC common  stock.  The Company
issued  approximately  1,857,000  shares of common stock to  shareholders of PFC
based on an exchange ratio of .397 of a share of the Company's  common stock for
each share of PFC common stock. The transactions  were accounted for as poolings
of interests.

A summary of unaudited pro forma combined financial information for the Company,
CFBC, and PFC follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                      1998                1997                1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>                 <C>       
Operating results (in thousands, except per share data):
Net interest income                                               $  194,647          $  166,617          $  140,813
Noninterest income                                                    96,288              61,124              35,275
Net income                                                            42,567              44,844              31,561
Net income per common share - diluted                                   1.51                1.65                1.22
Average common shares outstanding
    on a diluted basis                                                28,281              27,116              25,702
----------------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------------
                                                                      1998                1997
----------------------------------------------------------------------------------------------------------------------
Balance sheet at year-end (dollars in thousands):
Assets                                                            $5,423,379          $4,387,851
Loans                                                              2,249,328           1,639,352
Deposits                                                           4,928,808           3,784,576
Stockholders' equity                                                 325,728             281,664
----------------------------------------------------------------------------------------------------------------------
</TABLE>

24
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

3.   Investment Securities

A summary of the  amortized  cost and market value of  securities  available for
sale and  securities  held to maturity (in  thousands)  at December 31, 1998 and
1997 follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                            December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                       1998                                               1997
------------------------------------------------------------------------------------------------------------------------------------
                                                 Gross        Gross                                 Gross       Gross
                                 Amortized     Unrealized   Unrealized    Market   Amortized      Unrealized  Unrealized   Market
                                    Cost         Gains        Losses      Value       Cost          Gains       Losses     Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>             <C>         <C>       <C>         <C>             <C>        <C>       <C>       
U.S. Government agency and
    mortgage-backed obligations  $1,128,033      $9,196      $(2,377)  $1,134,852  $1,250,977      $5,028     $(3,312)  $1,252,693
Obligations of state and
    political subdivisions           25,338         703                    26,041      23,085         430                   23,515
Equity securities                    11,988       3,584         (175)      15,397       7,679       3,685                   11,364
Other                               107,164          50                   107,214      27,548                               27,548
------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale    $1,272,523     $13,533      $(2,552)  $1,283,504  $1,309,289      $9,143     $(3,312)  $1,315,120
------------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency and
    mortgage-backed obligations  $1,081,895      $8,398      $(5,426)  $1,084,867    $834,228      $3,976     $(8,198)    $830,006
Obligations of state and
    political subdivisions           20,982         153                    21,135      20,940                               20,940
Other                                24,781                       (6)      24,775      18,864           5                   18,869
------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity      $1,127,658      $8,551      $(5,432)  $1,130,777    $874,032      $3,981     $(8,198)    $869,815
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The amortized  cost and  estimated  market value of  investment  securities  (in
thousands)  at December  31,  1998,  by  contractual  maturity  are shown below.
Expected  maturities will differ from  contractual  maturities  because obligors
have the right to repay obligations without prepayment penalties.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                               Available for Sale             Held to Maturity
                                            Amortized         Market     Amortized         Market 
                                               Cost           Value         Cost           Value
------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>            <C>            <C>       
Due in one year or less                    $  108,455     $  108,481     $   41,877     $   41,877
Due after one year through five years          11,552         11,816          3,650          3,803
Due after five years through ten years         13,443         13,915         25,000         25,000
Due after ten years                             8,551          8,616          1,600          1,644
Mortgage backed securities                  1,118,534      1,125,279      1,055,531      1,058,453
Equity securities                              11,988         15,397
------------------------------------------------------------------------------------------------------
                                           $1,272,523     $1,283,504     $1,127,658     $1,130,777
------------------------------------------------------------------------------------------------------
</TABLE>

Proceeds from sales of securities  available for sale during 1998, 1997 and 1996
were $428,483,000,  $223,217,000 and $107,666,000,  respectively. Gross gains of
$3,259,000,  $2,669,000 and $1,675,000  were realized on the sales in 1998, 1997
and 1996, respectively,  and gross losses of $326,000 and $384,000 were realized
in 1998 and 1997, respectively.

At December 31, 1998 and 1997,  investment  securities  with a carrying value of
$597,554,000 and $324,717,000,  respectively, were pledged to secure deposits of
public funds.

In connection  with the  acquisition of  Independence,  management  reclassified
$83.8  million of investment  securities  from held to maturity to available for
sale in the  first  quarter  of 1997.  Unrealized  losses  on  those  securities
transferred were $840,000.

                                                                              25
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

4.   Loans

The following is a summary of loans  outstanding  (in thousands) at December 31,
1998 and 1997:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
                                                             December 31,
--------------------------------------------------------------------------------------
                                                        1998                1997
--------------------------------------------------------------------------------------
<S>                                                 <C>                 <C>       
Commercial real estate:
        Owner-occupied                              $  250,059          $  221,788
        Other                                          358,600             287,510
        Construction                                   111,972              57,182
--------------------------------------------------------------------------------------
                                                       720,631             566,480
Commercial loans:
        Term                                           200,060             152,115
        Line of credit                                 166,920             101,134
        Demand                                             309                 442
--------------------------------------------------------------------------------------
                                                       367,289             253,691
Consumer:
        Mortgages (1-4 family residential)             304,622             167,979
        Installment                                     68,032              63,448
        Home equity                                    458,401             347,903
        Credit lines                                    12,388              11,788
--------------------------------------------------------------------------------------
                                                       843,443             591,118
--------------------------------------------------------------------------------------
                                                    $1,931,363          $1,411,289
--------------------------------------------------------------------------------------
</TABLE>

At December 31, 1998 and 1997, loans of approximately $9,489,000 and $8,772,000,
respectively, were outstanding to certain of the Company's and its subsidiaries'
directors  and  officers,   and   approximately   $25,684,000  and  $25,584,000,
respectively, of loans were outstanding from companies with which certain of the
Company's and its subsidiaries' directors and officers are associated, exclusive
of loans to any such person and associated  companies which in aggregate did not
exceed  $60,000.  The terms of these loans are  substantially  the same as those
prevailing  at the time for  comparable  unrelated  transactions.  A summary (in
thousands)  of the related  party loans  outstanding  at December 31, 1998 is as
follows:

--------------------------------------------------------------------------------
                                          1998
--------------------------------------------------------------------------------
Balance, January 1                      $34,356
New loans                                13,717
Loan payments                            12,900
--------------------------------------------------------------------------------
Balance, December 31                    $35,173
--------------------------------------------------------------------------------

The  Company  engaged  in  certain  activities  with  entities  affiliated  with
directors of the Company.  The Company received real estate  appraisal  services
from a company  owned by a director of the Company.  Such real estate  appraisal
services  amounted to $304,000 in 1998,  $183,000 in 1997, and $195,000 in 1996.
The Company received legal services from two law firms of which two directors of
the Company are partners.  Such aggregate legal services  amounted to $1,554,000
in 1998, $1,439,000 in 1997, and $1,243,000 in 1996.

26
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

5.   Allowance for Loan Losses

The  following  is an analysis of changes in the  allowance  for loan losses (in
thousands) for 1998, 1997, and 1996:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                      1998                1997               1996
-----------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>                <C>     
Balance, January 1                                  $ 21,261           $ 17,975           $ 16,014
Provision charged to operating expense                 5,867              4,668              4,857
Recoveries of loans previously charged off             1,368                898                655
Loan charge-offs                                      (2,087)            (2,280)            (3,551)
-----------------------------------------------------------------------------------------------------
Balance, December 31                                $ 26,409           $ 21,261           $ 17,975
-----------------------------------------------------------------------------------------------------
</TABLE>

6.   Non-accrual and Restructured Loans and Other Real Estate

The total of  non-performing  loans  (non-accrual  and  restructured  loans) was
$7,113,000  and  $11,589,000  at  December  31,  1998  and  1997,  respectively.
Non-performing  loans of  $3,361,000,  $2,320,000,  and $1,758,000 net of charge
offs of $0, $47,000,  and $250,000 were  transferred to other real estate during
1998, 1997, and 1996, respectively. Other real estate ($6,081,000 and $5,845,000
at December 31, 1998 and 1997, respectively) is included in other assets.

At December 31, 1998 and 1997, the recorded investment in loans considered to be
impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of
a Loan"  totaled  $3,682,000  and  $9,700,000,  respectively,  all of which  are
included in non-performing  loans. As permitted,  all homogenous smaller balance
consumer and residential  mortgage loans are excluded from individual review for
impairment.  The majority of impaired  loans were measured using the fair market
value of  collateral.  No portion of the  allowance  for loan losses for 1998 or
1997 was allocated to these loans. During 1998 and 1997, impaired loans averaged
approximately  $6,691,000  and  $9,126,000,  respectively.  Interest  income  of
approximately $897,000 and $1,361,000 would have been recorded on non-performing
loans (including impaired loans) in accordance with their original terms in 1998
and 1997, respectively.  Actual interest income recorded on these loans amounted
to $266,000 and $323,000 during 1998 and 1997, respectively.

7.   Bank Premises, Equipment, and Leases

A summary of bank premises and equipment (in thousands) is as follows:

---------------------------------------------------------------------------
                                                     December 31,
                                             ------------------------------
                                                 1998              1997
---------------------------------------------------------------------------
Land                                          $ 28,578          $ 22,707
Buildings                                       67,833            49,101
Leasehold improvements                           5,687             9,293
Furniture, fixtures and equipment               86,872            68,238
Leased property under capital leases               124               124
---------------------------------------------------------------------------
                                               189,094           149,463

Less accumulated depreciation
    and amortization                            47,246            37,704
---------------------------------------------------------------------------
                                              $141,848          $111,759
---------------------------------------------------------------------------

At December  31, 1998,  Commerce NJ leased one of its  branches  under a capital
lease with an unrelated  party.  All other branch  leases are  accounted  for as
operating  leases with the related rental  payments being expensed  ratably over
the life of the lease.

                                                                              27
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

The Company leases its operations  facility from a limited  partnership in which
the Company is a limited  partner at December 31,  1998.  The lease is accounted
for as an operating lease with an annual rent of $584,000.  The lease expires in
2004 and is renewable for two additional terms of five years each.

At December 31, 1998,  the Company  leased from related  parties under  separate
operating  lease  agreements  the land on which it has  constructed  ten  branch
offices.  The aggregate  annual rental under these related party leases for 1998
was approximately  $440,000, and was approximately $375,000 and $250,000 in 1997
and 1996,  respectively.  These leases expire periodically  through 2018 but are
renewable  through 2038.  Aggregate annual rentals escalate to $575,000 in 2007.
The Company  leases land to a limited  partnership  partially  comprised  of the
directors of Commerce PA and  Commerce  NJ. The initial  lease term is 25 years,
with two successive  10-year options.  As of December 31, 1998, the total future
minimum  lease  payments to be received by the Company  amount to  approximately
$432,000 for the remainder of the initial  lease term.  In  accordance  with the
provision of the land lease,  the limited  partnership  constructed and owns the
office building located on the land. Commerce PA leases the building as a branch
facility through 2010. Commerce North leases one of its branches from a director
and its  headquarters  facility  from a  partnership  in which a director  has a
substantial  interest.  The  aggregate  annual  rental under these related party
leases  for 1998,  1997,  and 1996 was  approximately  $434,000,  $432,000,  and
$503,000, respectively. The leases expire in 2007 and 2017.

Total  rent  expense   charged  to  operations   under   operating   leases  was
approximately $5,011,000 in 1998, $4,334,000 in 1997, and $3,706,000 in 1996.

The future minimum rental commitments,  by year, under the non-cancelable leases
are as follows (in thousands) at December 31, 1998:

-------------------------------------------------------------------------
                                      Capital                   Operating
-------------------------------------------------------------------------
1999                                    $ 12                     $ 5,396
2000                                      12                       5,339
2001                                      12                       4,858
2002                                      12                       4,320
2003                                      12                       4,322
Later years                              132                      37,039
-------------------------------------------------------------------------
Net minimum lease payment               $192                     $61,274
-------------------------------------------------------------------------
Less amount representing interest         93
-------------------------------------------------------------------------
Present value of net minimum
        lease payments                  $ 99
-------------------------------------------------------------------------

The  Company  obtained  interior  design and  general  contractor  services  for
$1,313,000, $916,000, and $642,000 in 1998, 1997, and 1996, respectively, from a
business  owned by the  spouse  of the  Chairman  of the  Board of the  Company.
Additionally,  the business  received  commissions  of  approximately  $814,000,
$1,464,000, and $990,000 in 1998, 1997 and 1996, respectively,  on furniture and
facility purchases made directly by the Company.

28
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

8.   Deposits

The  aggregate  amount of time  certificates  of  deposits in  denominations  of
$100,000 or more was  $372,380,000  and  $317,184,000  at December  31, 1998 and
1997, respectively.

9.   Other Borrowed Money

Other borrowed money consisted  primarily of securities sold under agreements to
repurchase,  which ranged up to two months in maturity, federal funds purchased,
and overnight lines of credit.  The following table  represents  information for
other borrowed money.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                December 31,
------------------------------------------------------------------------------------------------------
                                                  1998                               1997
                                        --------------------------------------------------------------
                                                          Average                          Average 
                                         Amount            Rate            Amount            Rate
------------------------------------------------------------------------------------------------------
<S>                                     <C>                <C>           <C>               <C> 
Securities sold under
   agreements to repurchase                                               $178,300           6.22%
Federal funds purchased                                                     45,000           6.00
Lines of credit                         $ 21,845           4.82%
------------------------------------------------------------------------------------------------------
                                        $ 21,845                          $223,300
------------------------------------------------------------------------------------------------------
Average amount outstanding              $ 68,400           5.84%          $ 91,308           5.61%
Maximum month-end balance                228,950                           223,300
------------------------------------------------------------------------------------------------------
</TABLE>

As of  December  31,  1998,  the  Company  had a line of credit of  $493,234,000
available  from the Federal  Home Loan Bank of New York,  and CCMI had a line of
credit of $30,000,000 from another bank, of which $8,155,000 was available.

10.  Long-Term Debt

On July 15, 1993, the Company issued  $23,000,000 of 8 3/8%  subordinated  notes
due 2003.  Interest on the debt is payable  semi-annually on January 15 and July
15 of each year.  The notes may be redeemed in whole or in part at the option of
the Company  after July 15,  2000 at a price from 102% to 100% of the  principal
plus  accrued  interest,  if any, to the date fixed for  redemption,  subject to
certain conditions.  A portion of the notes qualify for total risk-based capital
for regulatory purposes, subject to certain limitations.

On  June 9,  1997,  the  Company  issued  $57,500,000  of 8 3/4%  Trust  Capital
Securities  through Commerce  Capital Trust 1, a newly formed Delaware  business
trust subsidiary.  The Trust Capital Securities  evidence a preferred  ownership
interest  in the  Trust,  of which  100% of the  common  equity  is owned by the
Company.  The proceeds  from the issuance of the Trust Capital  Securities  were
invested in substantially  similar Junior Subordinated Debt of the Company.  The
Trust Capital Securities are unconditionally guaranteed by the Company. Interest
on the debt is payable  quarterly in arrears on March 31, June 30, September 30,
and December 31 of each year.  The Trust  Capital  Securities  are  scheduled to
mature on June 30, 2027.  The Trust Capital  Securities may be redeemed in whole
or in part at the option of the Company on or after June 30, 2002 at 100% of the
principal  plus  accrued  interest,  if any,  to the date fixed for  redemption,
subject to certain  conditions.  All $57,500,000 of the Trust Capital Securities
qualify as Tier I capital for regulatory capital purposes.

                                                                              29
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

11.  Income Taxes

The provision for income taxes consists of the following (in thousands):

-------------------------------------------------------------------------
                            1998               1997               1996
-------------------------------------------------------------------------
Current:
        Federal          $ 26,954           $ 21,980           $ 15,026
        State                 856              1,653                864
Deferred:
        Federal            (2,341)            (1,733)               106
        State                  53               (308)                55
-------------------------------------------------------------------------
                         $ 25,522           $ 21,592           $ 16,051
-------------------------------------------------------------------------

The above  provision  includes  income  taxes  related  to  securities  gains of
$1,026,000, $800,000 and $586,000 for 1998, 1997 and 1996, respectively.

The provision for income taxes differs from the expected statutory  provision as
follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                     1998            1997            1996
--------------------------------------------------------------------------------------------
<S>                                                  <C>             <C>             <C>  
Expected provision at statutory rate:                35.0%           35.0%           35.0%
Difference resulting from:
        Tax-exempt interest on loans                 (0.4)           (0.3)           (0.3)
        Tax-exempt interest on securities            (1.2)           (0.8)           (1.0)
        Purchase accounting adjustments               0.1             0.2             0.3
        Other                                         0.6             0.8             2.2
--------------------------------------------------------------------------------------------
                                                     34.1%           34.9%           36.2%
--------------------------------------------------------------------------------------------
</TABLE>

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.

The significant  components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows (in thousands):

-------------------------------------------------------------------------------
                                                     1998               1997
-------------------------------------------------------------------------------
Deferred tax assets:
        Loan loss reserves                        $  9,411           $  7,525
        Other reserves                                 (50)               651
        Other                                        1,260              1,775
-------------------------------------------------------------------------------
Total deferred tax assets                           10,621              9,951
-------------------------------------------------------------------------------
Deferred tax liabilities:
        Depreciation                                   527              1,252
        Intangibles                                     92                167
        Fair value adjustment, available
           for sale securities                       3,970              2,075
        Other                                        1,729              1,924
-------------------------------------------------------------------------------
Total deferred tax liabilities                       6,318              5,418
-------------------------------------------------------------------------------
Net deferred assets                               $  4,303           $  4,533
-------------------------------------------------------------------------------

30
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

12.  Commitments and Letters of Credit

In the normal course of business,  there are various outstanding  commitments to
extend  credit,  such as  letters  of  credit,  which are not  reflected  in the
accompanying   financial   statements.   These  arrangements  have  credit  risk
essentially  the same as that  involved in extending  loans to customers and are
subject to the Company's normal credit policies. Collateral is obtained based on
management's credit assessment of the borrower.  At December 31, 1998, the Banks
had outstanding standby letters of credit in the amount of $45,606,000.

In  addition,  the  Banks are  committed  as of  December  31,  1998 to  advance
$161,830,000 on construction loans,  $115,899,000 on home equity lines of credit
and $52,023,000 on lines of credit.  All other commitments  total  approximately
$192,876,000.  The Company  anticipates no material  losses as a result of these
transactions.

13.  Common Stock and Preferred Stock

At December 31, 1998, the Company's common stock had a par value of $1.5625. The
Company had 50,000,000 shares authorized as of this date.

At December 31, 1997, the Company had 417,000 shares of Series C ESOP Cumulative
Convertible  Preferred  Stock  authorized  and issued  without par value (stated
value of $1.00 per share),  which were  converted to the Company's  common stock
effective March 1, 1998 (see Note 14).

On October 16, 1992, the Company issued 776,875 shares of non-voting Series A 9%
cumulative  convertible  preferred  stock.  Each share of the Series A preferred
stock gave the holder  thereof the option to purchase  one share of common stock
for $9.60 per share,  subject to adjustment in certain events.  During 1996, the
Company  exercised its option to redeem all  outstanding  shares of the Series A
preferred stock. 30,000 of the redeemed shares were converted into 30,000 shares
of  non-convertible  non-voting  preferred stock, which were held in treasury by
the Company at December 31, 1996, and then retired in 1997.

In conjunction with the redemption, approximately 727,000 shares of common stock
were issued upon the exercise of the attached purchase options.  Net proceeds to
the Company were approximately $6,600,000.

On December 15, 1998,  the Board of Directors  declared a cash dividend of $0.22
for each  share of common  stock  outstanding  and a 5% stock  dividend  payable
January 21, 1999 to  stockholders  of record on January 7, 1999.  Payment of the
stock dividend  resulted in the issuance of 1,142,247  additional  common shares
and cash of $112,284 in lieu of fractional shares.

                                                                              31
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

14.  Earnings Per Share

The  calculation  of earnings per share  follows (in  thousands,  except for per
share amounts):

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                              Year Ended December 31,
                                                   ----------------------------------------------
(dollars in thousands)                                 1998             1997             1996
-------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>    
 Basic:
 Net income                                          $49,318          $40,325          $28,250
 Preferred stock dividends                                                563              842
-------------------------------------------------------------------------------------------------
 Net income applicable to common stock               $49,318          $39,762          $27,408
-------------------------------------------------------------------------------------------------
 Average common shares outstanding                    23,668           22,197           20,017
-------------------------------------------------------------------------------------------------
 Net income per common share                         $  2.08          $  1.79          $  1.37
-------------------------------------------------------------------------------------------------

Diluted:
Net income                                           $49,318          $40,325          $28,250
Additional ESOP contribution
        under the if-converted method                                      50              103
-------------------------------------------------------------------------------------------------
Net income applicable to common stock
        on a diluted basis                           $49,318          $40,275          $28,147
-------------------------------------------------------------------------------------------------

Average common shares outstanding                     23,668           22,197           20,017
Additional shares considered in diluted
        computation assuming:
           Exercise of stock options/rights            1,179              942            1,708
           Conversion of preferred stock                 104              647              647
-------------------------------------------------------------------------------------------------

Average common and common equivalent
        shares outstanding                            24,951           23,786           22,372
-------------------------------------------------------------------------------------------------

Net income per common and common                     
        equivalent share                             $  1.98          $  1.69          $  1.26
-------------------------------------------------------------------------------------------------
</TABLE>

Effective March 1, 1998, the Trustees of the Company's  Employee Stock Ownership
Plan  exercised  their  right to  convert  all  417,000  shares of Series C ESOP
Cumulative  Convertible  Preferred Stock held by the ESOP into 849,062 shares of
the Company's common stock.

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 3,445,000
shares of common stock (as adjusted  for stock  dividends)  upon the exercise of
options. 2,401,000 options have been issued under the Plan. The option price for
options  issued under the Plan must be at least equal to 100% of the fair market
value of the Company's common stock as of the date the option is granted.  These
options generally become exercisable to the extent of 25% annually beginning one
year from the date of grant,  although the amount exercisable beginning one year
from the date of grant may be  greater  depending  on the  employees'  length of
service. The options expire not later than 10 years from the date of grant.

32
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

Information concerning option activity for the periods indicated is as follows:

-------------------------------------------------------------------------
                                    Shares Under       Weighted Average 
                                       Option           Exercise Price
-------------------------------------------------------------------------
Balance at January 1, 1997            2,323,796          $   12.67
Options granted                         825,209              33.09
Options exercised                       261,099               7.88
Options canceled                          7,372              20.36
Balance at December 31, 1997          2,880,534              18.93
-------------------------------------------------------------------------
Balance at January 1, 1998            2,880,534          $   18.93
Options granted                       1,792,322              43.54
Options exercised                       236,668              10.66
Options canceled                        100,957              38.92
Balance at December 31, 1998          4,335,231              29.09
-------------------------------------------------------------------------

Information  concerning  options  outstanding  as of  December  31,  1998  is as
follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                         Options Outstanding                      Options Exercisable
--------------------------------------------------------------------------------------------------------------
                                           Weighted-Average    Weighted-     Exercisable         Weighted
Range of                     Number           Remaining         Average         as of             Average
exercise prices           Outstanding      Contractual Life  Exercise Price  12/31/1998       Exercise Price
--------------------------------------------------------------------------------------------------------------
<S>                        <C>                   <C>        <C>             <C>                <C>      
$3.00 to $18.50             1,341,512             5.50       $   11.22       1,276,789          $   11.09
$18.51 and greater          2,993,719             8.60           37.11       1,026,754              27.47
--------------------------------------------------------------------------------------------------------------
</TABLE>

The  Company  has  elected  not to  adopt  the  recognition  provisions  of FASB
Statement No. 123,  "Accounting for Stock-Based  Compensation"  (FAS 123), which
requires  a fair  value  based  method  of  accounting  for all  employee  stock
compensation  plans.  The  Company  will  continue to follow APB Opinion No. 25,
"Accounting  for Stock  Issued to  Employees"  and  related  Interpretations  to
account for its stock-based compensation plans. If the Company had accounted for
stock options granted in 1998, 1997, and 1996 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):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                             1998                1997                1996
-----------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                 <C>       
Pro forma net income                     $   43,672          $   38,558          $   27,257

Pro forma net income per share:
        Basic                            $     1.85          $     1.71          $     1.32
        Diluted                                1.76                1.62                1.22

-----------------------------------------------------------------------------------------------
</TABLE>

Due to the inclusion of only options  granted after 1994,  the pro forma effects
of applying FAS 123 in 1998, 1997 and 1996 may not be  representative of the pro
forma impact in future years.

                                                                              33
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

The fair value of options  granted in 1998,  1997, and 1996 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  5.47% to  6.35%,
dividend yields of' 3% to 4%, volatility factors of the expected market price of
the Company's common stock of .215 to .309, and a weighted average expected life
of the options of' four 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.

Employee Stock Ownership Plan
As of December 31, 1998, the Company  maintains an Employee Stock Ownership Plan
(ESOP) for the benefit of its  officers and  employees  who meet age and service
requirements.  At December  31, 1997,  the ESOP held 417,000  shares of Series C
ESOP Cumulative  Convertible Preferred Stock, purchased at a price of $18.00 per
share.  The Company  guarantees a loan outstanding held by the ESOP. The loan is
payable in quarterly  installments  with the final payment due January 28, 2000.
The loan currently  bears interest at a variable rate,  although the rate can be
fixed at future  repricing  dates in  accordance  with the loan  agreement.  The
preferred stock was pledged as security for the loan and paid an annual dividend
of $1.35 per share,  which the ESOP applied to its  obligations  under the loan.
Effective  March 1, 1998,  the  Trustees  of the ESOP  exercised  their right to
convert all 417,000  shares of the  preferred  stock into 849,062  shares of the
Company's  common stock, a portion of which is pledged as security for the loan.
Employer  contributions  are  determined  at  the  discretion  of the  Board  of
Directors  but  will be  sufficient  to  enable  the ESOP to  discharge  current
obligations,  including interest, under the loan. The total contribution expense
associated with the Plan for 1998, 1997 and 1996 was $1,134,000,  $1,177,000 and
$885,000, respectively.

Post-employment or Post-retirement Benefits
The Company offers no post-employment or post-retirement benefits.

16.  Fair Value of Financial Instruments

FASB Statement No. 107, "Disclosures about Fair Value of Financial  Instruments"
(FAS  107),  requires  disclosure  of fair  value  information  about  financial
instruments,  whether or not  recognized in the balance  sheet,  for which it is
practicable to estimate that value.  In cases where quoted market prices are not
available,  fair  values are based on  estimates  using  present  value or other
valuation  techniques.  Those  techniques  are  significantly  affected  by  the
assumptions  used,  including  the  discount  rate and  estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in immediate  settlement of the instrument.  FAS 107 excludes certain  financial
instruments and all non-financial  instruments from its disclosure requirements.
Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying value of the Company.

34
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

The  following  table  represents  the  carrying  amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                           December 31,
                                             --------------------------------------------------------------------------
                                                           1998                                     1997
-----------------------------------------------------------------------------------------------------------------------
                                               Carrying              Fair              Carrying                Fair
                                                Amount              Value               Amount                Value
-----------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                 <C>                 <C>                 <C>       
Financial assets:
        Cash and cash equivalents             $  245,352          $  245,352          $  167,900          $  167,900
        Mortgages held for sale                                                            7,260               7,260
        Trading securities                        85,359              85,359               7,911               7,911
        Investment securities                  2,411,162           2,414,281           2,189,152           2,184,935
        Loans (net)                            1,904,954           1,946,031           1,390,028           1,416,151

Financial liabilities:
        Deposits                               4,435,115           4,447,757           3,369,404           3,375,949
        Other borrowed money                      21,845              21,845             223,300             223,300
        Obligation to ESOP                         1,282               1,282               2,308               2,308
        Long-term debt                            80,500              84,939              80,500              85,266
-----------------------------------------------------------------------------------------------------------------------
Off-balance sheet liabilities:
        Standby letters of credit                                 $      456                              $      186
        Commitments to extend credit                                     749                                     520
</TABLE>

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash equivalents,  mortgages 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.

                                                                              35
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

Other borrowed money: The carrying amounts reported approximate fair value.

Obligation to ESOP:  The fair value of the  guarantee of the ESOP  obligation is
estimated using a discounted cash flow  calculation  that applies interest rates
currently being offered to obligations of' a similar maturity.

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):

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                             Three Months Ended
---------------------------------------------------------------------------------------------------------
                                       December 31     September 30        June 30         March 31
                                     --------------------------------------------------------------------
<S>                                      <C>              <C>              <C>              <C>    
1998
Interest income                          $76,002          $73,833          $71,554          $67,891
Interest expense                          29,453           29,317           28,652           28,131
Net interest income                       46,549           44,516           42,902           39,760
Provision for loan losses                  1,419            1,669            1,569            1,210
Net investment securities gains            1,022              991              920
Provision for federal and state
    income taxes                           6,331            6,311            6,584            6,296
Net income                                13,165           12,559           12,147           11,447
Net income applicable to
    common stock                          13,165           12,559           12,147           11,447
Net income per common share:
Basic                                    $  0.55          $  0.53          $  0.51          $  0.49
Diluted                                     0.52             0.50             0.49             0.47

1997
Interest income                          $65,375          $64,315          $59,148          $55,339
Interest expense                          26,735           26,735           22,694           20,873
Net interest income                       38,640           37,580           36,454           34,466
Provision for loan losses                    574            1,142            1,326            1,626
Net investment securities gains              568            1,717
Provision for federal and state
    income taxes                           5,166            5,719            5,558            5,149
Net income                                10,480           10,377           10,034            9,434
Net income applicable to
    common stock                          10,339           10,236            9,894            9,293
Net income per common share:
Basic                                    $  0.46          $  0.46          $  0.45          $  0.42
Diluted                                     0.44             0.43             0.42             0.40
</TABLE>

36

<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

18.  Condensed Financial Statements of the Parent Company and Other Matters

Balance Sheets
--------------------------------------------------------------------------------
                                                         December 31,
                                                 -------------------------------
(dollars in thousands)                              1998              1997
--------------------------------------------------------------------------------
Assets
Cash                                              $ 20,840          $ 62,457
Securities available for sale                       14,575            11,451
Securities held to maturity                                               41
Investment in subsidiaries                         342,949           254,407
Other assets                                        10,253            10,042
--------------------------------------------------------------------------------
                                                  $388,617          $338,398
--------------------------------------------------------------------------------
Liabilities
Other liabilities                                 $  6,119          $  4,830
Trust Capital Securities                            57,500            57,500
Long-term debt                                      23,000            23,000
Obligation to Employee Stock
    Ownership Plan (ESOP)                            1,282             2,308
--------------------------------------------------------------------------------
                                                    87,901            87,638
--------------------------------------------------------------------------------
Stockholders' equity
Common stock                                        35,958            25,309
Series C preferred stock                                               7,506
Capital in excess of par or stated value           211,737           167,529
Retained earnings                                   55,927            54,348
--------------------------------------------------------------------------------
                                                   303,622           254,692
Less commitment to ESOP                              1,282             2,308
Less treasury stock                                  1,624             1,624
--------------------------------------------------------------------------------
        Total stockholders' equity                 300,716           250,760
--------------------------------------------------------------------------------
                                                  $388,617          $338,398
--------------------------------------------------------------------------------

Statements of Income
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                            Year Ended December 31
                                                 ------------------------------------------
(dollars in thousands)                                 1998          1997         1996
-------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>     
Income:
        Dividends from subsidiaries                 $ 18,357      $ 14,448      $ 11,406
        Interest income                                  293           248           728
        Other                                          2,098           491           173
-------------------------------------------------------------------------------------------
                                                      20,748        15,187        12,307
-------------------------------------------------------------------------------------------
Expenses:
        Interest expense                               7,259         4,961         2,025
        Operating expenses                             2,428         2,426         1,911
-------------------------------------------------------------------------------------------
                                                       9,687         7,387         3,936
Income before income taxes and equity
        in undistributed income of subsidiaries       11,061         7,800         8,371
Income tax benefit                                    (2,479)       (2,141)         (975)
-------------------------------------------------------------------------------------------
                                                      13,540         9,941         9,346
Equity in undistributed income of subsidiaries        35,778        30,384        18,904
-------------------------------------------------------------------------------------------
Net income                                            49,318        40,325        28,250
Dividends on preferred stock                                           563           842
-------------------------------------------------------------------------------------------
Net income applicable to common stock               $ 49,318      $ 39,762      $ 27,408
-------------------------------------------------------------------------------------------
</TABLE>

                                                                              37
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

Statements of Cash Flows

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                           Year Ended December 31,
                                                                                ---------------------------------------------
(dollars in thousands)                                                                 1998          1997          1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>           <C>     
Operating activities:
    Net income                                                                       $ 49,318      $ 40,325      $ 28,250
    Adjustments to reconcile net income to net
        cash provided by operating activities:
           Undistributed income of subsidiaries                                       (35,778)      (30,384)      (18,904)
           Gains on sales of securities available for sale                                             (301)
           (Increase) decrease in other assets                                           (211)       (1,329)          137
           Increase in other liabilities                                                1,699           359         1,428
-----------------------------------------------------------------------------------------------------------------------------
               Net cash provided by operating activities                               15,028         8,670        10,911
Investing activities:
    Investment in subsidiaries                                                        (40,253)       (2,000)       (3,000)
    Proceeds from sale of securities available for sale                                               1,090
    Purchase of equity securities                                                      (4,308)       (5,636)       (1,572)
    Other                                                                                  51           (50)           69
-----------------------------------------------------------------------------------------------------------------------------
               Net cash used by investing activities                                  (44,510)       (6,596)       (4,503)
Financing activities:
    Tax benefit from ESOP dividends                                                                     197           197
    Proceeds from issuance of common stock
        under dividend reinvestment plan                                                7,427         4,259         3,397
    Cash dividends                                                                    (21,563)      (12,484)       (8,430)
    Proceeds from exercise of stock options                                             2,001         2,617           743
    Proceeds from issuance of long-term debt                                                         57,500
-----------------------------------------------------------------------------------------------------------------------------
               Net cash (used) provided by financing                                  (12,135)       52,089        (4,093)
                   activities
(Decrease) increase in cash and cash equivalents                                      (41,617)       54,163         2,315
Cash and cash equivalents at beginning of year                                         62,457         8,294         5,979
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                             $ 20,840      $ 62,457      $  8,294
-----------------------------------------------------------------------------------------------------------------------------
Supplemental  disclosures of cash flow information:  
    Cash paid during the period for:
        Interest                                                                     $  7,089      $  4,809      $  1,926
        Income taxes                                                                   27,626        21,377        11,905
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

38
<PAGE>

Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

Holders of common  stock of the Company are entitled to receive  dividends  when
declared by the Board of Directors out of funds legally available. Under the New
Jersey  Business  Corporation  Act, the Company may pay dividends  only if it is
solvent and would not be rendered  insolvent by the dividend payment and only to
the extent of surplus  (the  excess of the net  assets of the  Company  over its
stated capital).

The approval of the  Comptroller of the Currency is required for a national bank
to pay  dividends if the total of all  dividends  declared in any calendar  year
exceeds net profits (as  defined) for that year  combined  with its retained net
profits for the preceding two calendar years. New Jersey state banks are subject
to similar dividend restrictions.  Commerce NJ, Commerce PA, Commerce Shore, and
Commerce  North can declare  dividends  in 1999 without  additional  approval of
approximately $36,352,000, $9,322,000, $8,178,000, and $8,552,000, respectively,
plus an  additional  amount  equal to each  bank's net profit for 1999 up to the
date of any such dividend declaration.

The Federal  Reserve  Act  requires  the  extension  of credit by  Commerce  NJ,
Commerce PA, Commerce Shore, and Commerce North 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, 1998 and 1997, the Company complies with
these guidelines.

The  Company and its  subsidiaries  are  subject to various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory  and  possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct  material  effect on the Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Company must meet specific guidelines that involve quantitative  measures of
the  Company's  assets,  liabilities,  and  certain  off-balance-sheet  items as
calculated under regulatory accounting practices,  The Company's capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and its  subsidiaries to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-based assets
(as defined) and of Tier I capital to average assets (as defined),  or leverage.
Management  believes,  as of  December  31,  1998,  that  the  Company  and  its
subsidiaries meet all capital adequacy requirements to which they are subject.

                                                                              39
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

The following  table  presents the Company's  and Commerce NJ's  risk-based  and
leverage capital ratios at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Per Regulatory Guidelines
----------------------------------------------------------------------------------------------------------------------------------
                                                       Actual                      Minimum                "Well Capitalized"
----------------------------------------------------------------------------------------------------------------------------------
                                               Amount         Ratio         Amount         Ratio         Amount          Ratio
----------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>          <C>              <C>         <C>              <C>  
December 31, 1998
Company
    Risk based capital ratios:
        Tier I                                $346,397        12.98%       $106,717         4.00%       $160,075         6.00%
        Total capital                          391,206        14.66         213,433         8.00         266,791        10.00
    Leverage ratio                             346,397         7.36         141,127         3.00         235,211         5.00

Commerce NJ 
    Risk based capital ratios:
        Tier 1                                $190,578        11.44%       $ 66,657         4.00%       $ 99,985         6.00%
        Total capital                          207,908        12.48         133,314         8.00         166,642        10.00
    Leverage ratio                             190,578         6.51          87,889         3.00         146,481         5.00

December 31, 1997
Company
    Risk based capital ratios:
        Tier I                                $299,191        15.66%       $ 76,439         4.00%       $114,658         6.00%
        Total capital                          343,452        17.97         152,878         8.00         191,097        10.00
    Leverage ratio                             299,191         7.81         114,971         3.00         191,619         5.00

Commerce NJ 
    Risk based capital ratios:
        Tier 1                                $161,621        12.55%       $ 51,494         4.00%       $ 77,241         6.00%
        Total capital                          175,617        13.64         102,988         8.00         128,735        10.00
    Leverage ratio                             161,621         6.27          77,270         3.00         128,784         5.00
</TABLE>

40
<PAGE>
Commerce Bancorp, Inc. and Subsidiaries Notes to 
Consolidated Financial Statements

19.  Segment Reporting


The Company operates one reportable segment of business,  Community Banks, which
includes  Commerce NJ, Commerce PA, Commerce Shore, and Commerce North.  Through
its Community Banks, the Company provides a broad range of retail and commercial
banking services, and corporate trust services.  Parent/Other and other includes
the holding company, Commerce Insurance, CCMI, and Commerce Capital Trust I.

Selected segment information for each of the three years ended December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                       1998                                1997                                 1996
------------------------------------------------------------------------------------------------------------------------------------
                         Community    Parent/               Community     Parent/                Community      Parent/
                            Banks     Other       Total        Banks      Other        Total        Banks       Other        Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>         <C>        <C>         <C>          <C>         <C>          <C>          <C>         <C>       
Net interest income     $  180,064  $ (6,337)  $  173,727  $  151,853   $ (4,713)   $  147,140   $  126,711   $ (1,298)   $  125,413
Provision for loan
      losses                 5,867                  5,867       4,668                    4,668        4,857                    4,857
------------------------------------------------------------------------------------------------------------------------------------
Net interest income
      after provision      174,197    (6,337)     167,860     147,185     (4,713)      142,472      121,854     (1,298)      120,556
Noninterest income          51,096    37,851       88,947      40,354     17,020        57,374       31,403      1,373        32,776
Noninterest expense        149,378    32,589      181,967     123,724     14,205       137,929      106,217      2,814       109,031
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
      income taxes          75,915    (1,075)      74,840      63,815     (1,898)       61,917       47,040     (2,739)       44,301
Income tax expense
      (benefit)             25,537       (15)      25,522      22,386       (794)       21,592       16,907       (856)       16,051
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)       $   50,378  $ (1,060)  $   49,318  $   41,429   $ (1,104)   $   40,325   $   30,133   $ (1,883)   $   28,250
------------------------------------------------------------------------------------------------------------------------------------
Average assets
      (in millions)     $3,899,219  $470,878   $4,370,097  $3,240,260   $328,307    $3,568,567   $2,759,209   $195,642    $2,954,851
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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.

                                                                              41
<PAGE>


Commerce Bancorp, Inc. and Subsidiaries Report of Independent Auditors

The Board of Directors and Stockholders
Commerce Bancorp, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheets  of  Commerce
Bancorp,  Inc. and Subsidiaries as of December 31, 1998 and 1997 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, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits. We did not audit the financial  statements of Independence  Bancorp,
Inc. a wholly-owned subsidiary,  which statements reflect net interest income in
1996 constituting 13.6% of the related consolidated total. Those statements were
audited by other  auditors  whose  reports  have been  furnished  to us, and our
opinion,  insofar as it relates to data included for Independence Bancorp, Inc.,
is based solely on the reports of other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the consolidated  financial position of Commerce Bancorp,  Inc. and Subsidiaries
at December 31, 1998 and 1997, and the consolidated  results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting principles.




Philadelphia, Pennsylvania
January 26, 1999