UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2004
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File #1-12069
----------
[COMMERCE BANCORP LOGO OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(856) 751-9000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 78,585,388
--------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of August 2, 2004)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 2004 and December 31, 2003...................................1
Consolidated Statements of Income (unaudited)
Three months ended June 30, 2004 and June 30, 2003 and
six months ended June 30, 2004 and June 30, 2003......................2
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2004 and June 30, 2003......................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Six months ended June 30, 2004........................................4
Notes to Consolidated Financial Statements (unaudited)................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation...................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........22
Item 4. Controls and Procedures..............................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................23
Item 2. Changes in Securities, Use of Proceeds and Purchases of
Certain Equity Securities by the Issuer and Others...................23
Item 4. Submission of Matters to a Vote of Security Holders..................24
Item 6. Exhibits and Reports on Form 8-K.....................................25
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
------------------------------------------------------------------------------------------------
June 30, December 31,
---------------------------------
(dollars in thousands) 2004 2003
------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 1,081,459 $ 910,092
Federal funds sold 8,500
-------------- --------------
Cash and cash equivalents 1,089,959 910,092
Loans held for sale 41,047 42,769
Trading securities 182,105 170,458
Securities available for sale 12,131,104 10,650,655
Securities held to maturity 3,772,204 2,490,484
(market value 06/04-$3,696,221; 12/03-$2,467,192)
Loans 8,330,456 7,440,576
Less allowance for loan losses 124,688 112,057
-------------- --------------
8,205,768 7,328,519
Bank premises and equipment, net 906,455 811,451
Other assets 410,029 307,752
-------------- --------------
$ 26,738,671 $ 22,712,180
============== ==============
Liabilities Deposits:
Demand:
Noninterest-bearing $ 5,622,574 $ 4,574,714
Interest-bearing 9,632,178 8,574,297
Savings 5,597,767 4,222,282
Time 3,209,229 3,330,107
-------------- --------------
Total deposits 24,061,748 20,701,400
Other borrowed money 944,040 311,510
Other liabilities 204,768 221,982
Long-term debt 200,000 200,000
-------------- --------------
25,410,556 21,434,892
Stockholders' Common stock, 78,658,414 shares
Equity issued (76,869,415 shares at December 31, 2003) 78,658 76,869
Capital in excess of par value 936,539 866,095
Retained earnings 446,260 347,365
Accumulated other comprehensive loss (122,003) (3,702)
-------------- --------------
1,339,454 1,286,627
Less treasury stock, at cost, 397,859 shares
issued (363,076 shares at December 31, 2003) 11,339 9,339
-------------- --------------
Total stockholders' equity 1,328,115 1,277,288
-------------- --------------
$ 26,738,671 $ 22,712,180
============== ==============
See accompanying notes.
1
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
(dollars in thousands, except per share
amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $113,947 $ 95,548 $ 222,160 $188,669
income Interest on investments 177,929 123,098 341,428 236,759
Other interest 154 98 494 177
------------- ------------ ------------ ------------
Total interest income 292,030 218,744 564,082 425,605
------------- ------------ ------------ ------------
Interest Interest on deposits:
expense Demand 18,729 11,961 34,672 24,358
Savings 10,216 6,754 18,002 13,109
Time 14,264 17,387 28,907 34,233
------------- ------------ ------------ ------------
Total interest on deposits 43,209 36,102 81,581 71,700
Interest on other borrowed money 1,052 318 1,500 1,232
Interest on long-term debt 3,020 3,020 6,040 6,040
------------- ------------ ------------ ------------
Total interest expense 47,281 39,440 89,121 78,972
------------- ------------ ------------ ------------
Net interest income 244,749 179,304 474,961 346,633
Provision for loan losses 10,748 6,900 20,248 13,800
------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 234,001 172,404 454,713 332,833
Noninterest Deposit charges and service fees 52,717 38,765 98,198 73,607
income Other operating income 38,923 43,388 79,250 84,748
Net investment securities gains 635 1,217 1,059 1,081
------------- ------------ ------------ ------------
Total noninterest income 92,275 83,370 178,507 159,436
------------- ------------ ------------ ------------
Noninterest Salaries and benefits 104,110 86,338 201,450 168,420
expense Occupancy 27,949 22,695 56,059 43,183
Furniture and equipment 27,001 20,556 51,180 41,782
Office 10,920 9,233 21,840 18,419
Marketing 9,278 9,198 17,974 14,474
Other 46,997 39,658 90,002 73,521
------------- ------------ ------------ ------------
Total noninterest expenses 226,255 187,678 438,505 359,799
------------- ------------ ------------ ------------
Income before income taxes 100,021 68,096 194,715 132,470
Provision for federal and state income taxes 33,786 22,779 66,505 44,263
------------- ------------ ------------ ------------
Net income $ 66,235 $ 45,317 $ 128,210 $ 88,207
============= ============ ============ ============
Net income per common and common equivalent share:
Basic $ 0.85 $ 0.65 $ 1.65 $ 1.28
Diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23
Average common and common equivalent shares outstanding:
Basic 77,980 69,193 77,572 68,758
Diluted 86,260 72,128 85,893 71,944
Cash dividends, common stock $ 0.19 $ 0.16 $ 0.38 $ 0.33
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------------------
(dollars in thousands) 2004 2003
----------------------------------------------------------------------------------------------------
Operating Net income $ 128,210 $ 88,207
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 20,248 13,800
Provision for depreciation, amortization and accretion 63,429 60,943
Gain on sales of securities available for sale (1,059) (1,081)
Proceeds from sales of loans held for sale 408,006 854,984
Originations of loans held for sale (406,284) (849,349)
Net (increase) decrease in trading securities (11,647) 117,028
Increase in other assets, net (35,859) (18,039)
Decrease in other liabilities (14,414) (13,724)
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 150,630 252,769
Investing Proceeds from the sales of securities available for sale 1,656,912 2,072,409
activities Proceeds from the maturity of securities available for sale 2,228,796 2,493,675
Proceeds from the maturity of securities held to maturity 407,486 279,923
Purchase of securities available for sale (5,569,909) (7,207,889)
Purchase of securities held to maturity (1,690,817) (358,633)
Net increase in loans (897,497) (561,249)
Capital expenditures (136,731) (151,499)
----------------------------------------------------------------------------------------------------
Net cash used by investing activities (4,001,760) (3,433,263)
Financing Net increase in demand and savings deposits 3,481,226 2,848,174
activities Net (decrease) increase in time deposits (120,878) 390,067
Net increase in other borrowed money 632,530 116,334
Dividends paid (29,315) (22,569)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 69,433 52,251
Other (1,999) (1,312)
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,030,997 3,382,945
Increase in cash and cash equivalents 179,867 202,451
Cash and cash equivalents at beginning of year 910,092 811,434
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,089,959 $ 1,013,885
====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 89,705 $ 79,741
Income taxes 63,339 36,462
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Six months ended June 30, 2004
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Excess of Other
Common Par Retained Treasury Comprehensive
Stock Value Earnings Stock Income (Loss) Total
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $76,869 $866,095 $347,365 $ (9,339) $ (3,702) $1,277,288
Net income 128,210 128,210
Other comprehensive income(loss), net of tax
Unrealized loss on securities (pre-tax $217,801) (139,612) (139,612)
Reclassification adjustment (pre-tax $32,786) 21,311 21,311
------------
Other comprehensive income (loss) (118,301)
Total comprehensive income 9,909
Cash dividends paid (29,315) (29,315)
Shares issued under dividend reinvestment
and compensation and benefit plans (1,789 shares) 1,789 67,644 69,433
Other 2,800 (2,000) 800
------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004 $78,658 $936,539 $446,260 $(11,339) $(122,003) $1,328,115
====================================================================================================================================
See accompanying notes.
4
COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Consolidated Financial Statements
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements were prepared in
accordance with the accounting policies set forth in note 1 (Significant
Accounting Policies) of the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003. The accompanying consolidated financial statements reflect all adjustments
that are, in the opinion of management, necessary to reflect a fair statement of
the results for the interim periods presented. Such adjustments are of a normal
recurring nature.
These consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the registrant's
Annual Report on Form 10-K for the year ended December 31, 2003. The results for
the three and six months ended June 30, 2004 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2004.
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. and its consolidated subsidiaries. All material intercompany transactions
have been eliminated. Certain amounts from prior years have been reclassified to
conform with 2004 presentation.
B. Legal Proceedings
On June 29, 2004 the U.S. Attorney General indicted two officers of the
Company's Philadelphia bank subsidiary in connection with its investigation of
certain Philadelphia city government officials. The Company confirms that
neither it, nor any of its subsidiaries or other officers and employees are
targets of the investigation. The Company has fully cooperated with this
investigation and believes it will have no material negative financial impact on
the Company.
During July 2004, class action complaints were filed in the United States
District Court for the District of New Jersey and the Eastern District of
Pennsylvania against the Company and certain Company (or subsidiary) current and
former officers and directors. The complaints allege that the defendants
violated the federal securities laws, specifically Sections 10 (b) and 20 (a) of
the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission. The plaintiffs seek unspecified damages on behalf of a
purported class of purchasers of the Company's securities during various
periods. The Company believes that the complaints against it are without merit
and intends to vigorously defend itself.
C. Long Term Debt
On April 1, 2004, the Company's $200.0 million of 5.95% Convertible Trust
Capital Securities, recorded on the consolidated balance sheet as long term
debt, became convertible at the option of the holder. The holders of the
Convertible Trust Capital Securities may convert each security into 0.9478
shares of Company common stock. The Company has calculated the effect of these
securities on diluted net income per share by using the if-converted method.
Under the if-converted method, the related interest charges on the Convertible
Trust Capital Securities, adjusted for income taxes, have been added back to the
numerator and the common shares to be issued upon conversion have been added to
the denominator.
The Convertible Trust Capital Securities were issued on March 11, 2002 through
Commerce Capital Trust II, a Delaware business trust. The Convertible Trust
Capital Securities mature in 2032.
5
D. Bank Premises and Equipment
In accordance with accounting principles generally accepted in the United
States, when capitalizing costs for branch construction, the Company includes
the costs of purchasing the land, developing the site, constructing the building
(or leasehold improvements if the property is leased), and furniture, fixtures
and equipment necessary to equip the branch. All other pre-opening and
post-opening costs related to branches are expensed as incurred. As of June 30,
2004 and December 31, 2003, Bank premises and equipment in progress was $87.6
million and $87.2 million, respectively.
E. Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments.
Management does not anticipate any material losses as a result of these
transactions. In accordance with FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), the Company defers the fees
associated with standby letters of credit and records them in "Other
liabilities" on the consolidated balance sheet. These fees are immaterial to the
Company's consolidated financial statements at June 30, 2004.
F. Comprehensive Income (Loss)
Total comprehensive income (loss), which for the Company included net income and
changes in unrealized gains and losses on the Company's available for sale
securities, amounted to $(133.8) million and $41.6 million, respectively, for
the three months ended June 30, 2004 and 2003. For the six months ended June 30,
2004 and 2003, total comprehensive income was $9.9 million and $64.1 million,
respectively.
G. New Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). In December 2003, the FASB deferred the
implementation date of FIN 46 to periods ending after March 15, 2004 for all
variable interest entities with the exception of special-purpose entities, which
were subject to adoption in periods ending after December 15, 2003. This
interpretation provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests, and
results of operations of a VIE need to be included in a company's consolidated
financial statements. The adoption of FIN 46 did not have a material impact on
the Company's financial condition or operating results.
The Company makes investments directly in low-income housing tax credit (LIHTC)
operating partnerships, private venture capital funds and Small Business
Investment Companies (SBIC). The Company has determined these entities do not
meet the consolidation criteria of FIN 46. At June 30, 2004 and December 31,
2003, the Company's investment in these entities totaled $38.8 million and $30.1
million, respectively.
6
H. Stock-Based Compensation
The Company follows APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations to account for its stock-based
compensation plans. If the Company had accounted for stock options under the
fair value provisions of FAS 123, "Accounting for Stock-Based Compensation", net
income and net income per share would have been as follows (in thousands, except
per share amounts):
-------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------
Reported net income $66,235 $45,317 $128,210 $88,207
Less: Stock option compensation expense
determined under fair value method, net of tax (3,090) (2,233) (6,510) (4,613)
--------------- --------------- -------------- ---------------
Pro forma net income, basic $63,145 $43,084 $121,700 $83,594
=============== ===============
Add: Interest expense on Convertible Trust
Capital Securities, net of tax 1,963 3,926
--------------- --------------
Pro forma net income, diluted $65,108 $125,626
=============== ==============
Reported net income per share:
Basic $ 0.85 $ 0.65 $ 1.65 $ 1.28
Diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23
Pro forma net income per share:
Basic $ 0.81 $ 0.62 $ 1.57 $ 1.22
Diluted $ 0.75 $ 0.60 $ 1.46 $ 1.16
-------------------------------------------------------------------------------------------------------------------
The fair value of options granted in 2004 and 2003 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 3.09% to 3.00%, dividend yields
of 1.33% to 1.50%, volatility factors of the expected market price of the
Company's common stock of .255 to .304 and weighted average expected lives of
the options of 5.27 and 5.22 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.
7
I. Segment Information
The Company operates one reportable segment of business, Community Banks, which
includes all of the Company's banking subsidiaries. Through its Community Banks,
the Company provides a broad range of retail and commercial banking services,
and corporate trust services. Parent/Other includes the holding company,
Commerce Insurance Services, Inc. and Commerce Capital Markets, Inc.
Selected segment information is as follows (in thousands):
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 246,385 $ (1,636) $ 244,749 $ 180,729 $ (1,425) $ 179,304
Provision for loan losses 10,748 - 10,748 6,900 6,900
-----------------------------------------------------------------------------------
Net interest income after provision 235,637 (1,636) 234,001 173,829 (1,425) 172,404
Noninterest income 66,836 25,439 92,275 56,009 27,361 83,370
Noninterest expense 203,155 23,100 226,255 166,136 21,542 187,678
-----------------------------------------------------------------------------------
Income before income taxes 99,318 703 100,021 63,702 4,394 68,096
Income tax expense 33,917 (131) 33,786 21,317 1,462 22,779
-----------------------------------------------------------------------------------
Net income $ 65,401 $ 834 $ 66,235 $ 42,385 $ 2,932 $ 45,317
===================================================================================
Average assets (in millions) $ 23,778 $ 2,044 $ 25,822 $ 16,715 $ 1,784 $ 18,499
===================================================================================
-------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 478,221 $ (3,260) $ 474,961 $ 348,958 $ (2,325) $ 346,633
Provision for loan losses 20,248 20,248 13,800 13,800
-----------------------------------------------------------------------------------
Net interest income after provision 457,973 (3,260) 454,713 335,158 (2,325) 332,833
Noninterest income 124,969 53,538 178,507 106,004 53,432 159,436
Noninterest expense 392,508 45,997 438,505 315,586 44,213 359,799
-----------------------------------------------------------------------------------
Income before income taxes 190,434 4,281 194,715 125,576 6,894 132,470
Income tax expense 65,124 1,381 66,505 42,292 1,971 44,263
-----------------------------------------------------------------------------------
Net income $ 125,310 $ 2,900 $ 128,210 $ 83,284 $ 4,923 $ 88,207
===================================================================================
Average assets (in millions) $ 22,596 $ 2,060 $ 24,656 $ 15,858 $ 1,812 $ 17,670
===================================================================================
8
J. Net Income Per Share
The calculation of net income per share follows (in thousands, except for per
share amounts):
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Basic:
Net income available to common shareholders - basic $66,235 $45,317 $128,210 $88,207
============== ============= =============== ==============
Average common shares outstanding 77,980 69,193 77,572 68,758
============== ============= =============== ==============
Net income per common share - basic $ 0.85 $ 0.65 $ 1.65 $ 1.28
============== ============= =============== ==============
Diluted:
Net income $66,235 $45,317 $128,210 $88,207
Add interest expense on Convertible Trust Capital Securities,
net of tax 1,963 3,926
-------------- ------------- --------------- --------------
Net income available to common shareholders - diluted $68,198 $45,317 $132,136 $88,207
============== ============= =============== ==============
Average common shares outstanding 77,980 69,193 77,572 68,758
Additional shares considered in diluted computation assuming:
Exercise of stock options 4,489 2,935 4,530 3,186
Conversion of Convertible Trust Capital Securities 3,791 3,791
-------------- ------------- --------------- --------------
Average common shares outstanding - diluted 86,260 72,128 85,893 71,944
============== ============= =============== ==============
Net income per common share - diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23
============== ============= =============== ==============
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operation
------------
Executive Summary
-----------------
During the first six months of 2004, the Company experienced strong deposit
growth and positive operating leverage as year over year revenue growth of 29%
exceeded non-interest expense growth of 22% during the same period. Total assets
grew to $26.7 billion, an increase of 35% over June 30, 2003, while total
deposits grew 35%. Net income increased 46% to $66.2 million and 45% to $128.2
million during the second quarter and first six months of 2004, respectively, as
compared to the same periods in 2003. Diluted net income per share increased by
25% to $0.79 and $1.54 during the second quarter and first six months of 2004,
respectively, as compared the same periods in 2003. The net income per share
calculations for 2004 include 5.0 million shares issued in connection with the
Company's September 2003 secondary offering and an additional 3.8 million shares
assuming the conversion of the Company's Convertible Trust Capital Securities,
neither of which were included in the calculations for 2003.
The Company has identified two critical accounting policies: the policies
related to the allowance for loan losses and capitalization of branch costs. The
foregoing critical accounting policies are more fully described in the Company's
annual report on Form 10-K for the year ended December 31, 2003. During the
first six months of 2004, there were no material changes to the estimates or
methods by which estimates are derived with regard to the critical accounting
policies.
Capital Resources
-----------------
At June 30, 2004, stockholders' equity totaled $1.3 billion or 4.97% of total
assets, compared to $1.3 billion or 5.62% of total assets at December 31, 2003.
The Company and its subsidiaries are subject to risk-based capital standards
issued by bank regulatory authorities. Under these standards, Tier 1 capital
includes stockholders' equity, as adjusted for certain items. The Company makes
two significant adjustments in calculating regulatory capital. The first
adjustment is to exclude from capital the unrealized appreciation or
depreciation in its available for sale securities portfolio. The second
adjustment is to add to capital the Convertible Trust Capital Securities. Total
capital is comprised of all the components of Tier 1 capital plus the allowance
for loan losses.
The table below presents Commerce Bancorp and Commerce N.A.'s risk-based and
leverage ratios at June 30, 2004 and 2003:
Per Regulatory Guidelines
--------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
June 30, 2004:
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,640,555 12.37% $530,388 4.00% $795,582 6.00%
Total capital 1,765,243 13.31 1,060,776 8.00 1,325,970 10.00
Leverage ratio 1,640,555 6.33 1,036,022 4.00 1,295,028 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $1,088,255 11.16% $390,195 4.00% $585,292 6.00%
Total capital 1,184,593 12.14 780,389 8.00 975,486 10.00
Leverage ratio 1,088,255 6.03 722,139 4.00 902,674 5.00
10
Per Regulatory Guidelines
--------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
June 30, 2003:
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,110,820 11.13% $399,313 4.00% $598,970 6.00%
Total capital 1,210,138 12.12 798,627 8.00 998,283 10.00
Leverage ratio 1,110,820 6.04 735,335 4.00 919,169 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $756,909 10.29% $294,114 4.00% $441,171 6.00%
Total capital 832,704 11.32 588,228 8.00 735,285 10.00
Leverage ratio 756,909 5.75 526,680 4.00 658,349 5.00
At June 30, 2004, the Company's consolidated capital levels and each of the
Company's bank subsidiaries met the regulatory definition of a "well
capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%,
a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital
ratio exceeding 10%. Management believes that as of June 30, 2004, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject.
Deposits
--------
Total deposits at June 30, 2004 were $24.1 billion, up $6.3 billion, or 35% over
total deposits of $17.8 billion at June 30, 2003, and up by $3.4 billion, or 16%
from year-end 2003. Deposit growth during the first six months of 2004 included
core deposit growth in all categories as well as growth from the public sector.
Same-store core deposit growth is measured as the year over year percentage
increase in core deposits for branches open two years or more at the balance
sheet date. The Company experienced same-store core deposit growth of 25% at
June 30, 2004.
Interest Rate Sensitivity and Liquidity
---------------------------------------
The Company's risk of loss arising from adverse changes in the fair market value
of financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income, while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with these
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
Management considers the simulation of net interest income in different interest
rate environments to be the best indicator of the Company's interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
11
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate plus 200 and minus 100 basis point change during the next year,
with rates remaining constant in the second year. The Company's ALCO policy has
established that interest income sensitivity will be considered acceptable if
net income in the above interest rate scenario is within 10% of net income in
the flat rate scenario in the first year and within 15% over the two year time
frame. Net income in the flat rate scenario is projected to increase by
approximately 25% per year. The following table illustrates the impact on
projected net income at June 30, 2004 and 2003 of a plus 200 and minus 100 basis
point change in interest rates.
------------------------------------------------------------------------
Basis Point Change
------------------------------------------------------------------------
Plus 200 Minus 100
------------------------------------------------------------------------
June 30, 2004:
Twelve Months 4.06% 1.45%
Twenty Four Months 11.38% (0.31)%
June 30, 2003:
Twelve Months 1.34% (9.47)%
Twenty Four Months 11.09% (15.03)%
All of these net income projections are within an acceptable level of interest
rate risk pursuant to the policy established by ALCO.
In the event the Company's interest rate risk models indicate an unacceptable
level of risk, the Company could undertake a number of actions that would reduce
this risk, including the 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 (MVE). The model assesses the impact of a change in interest rates
on the market value of all the Company's assets and liabilities, as well as any
off balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate plus
200 and minus 100 basis point change in rates. The Company's ALCO policy
indicates that the level of interest rate risk is unacceptable if the immediate
plus 200 and minus 100 basis point change would result in the loss of 45% or
more of the excess of market value over book value in the current rate scenario.
At June 30, 2004, the market value of equity model indicates an acceptable level
of interest rate risk.
The MVE reflects certain estimates and assumptions regarding the impact on the
market value of the Company's assets and liabilities given an immediate plus 200
or minus 100 basis point change in interest rates. One of the key assumptions is
the market value assigned to the Company's core deposits, or the core deposit
premium. Utilizing an independent consultant, the Company has completed and
updated comprehensive core deposit studies in order to assign its own core
deposit premiums as permitted by the Company's regulatory authorities. The
studies have consistently confirmed management's assertion that the Company's
core deposits have stable balances over long periods of time, are generally
insensitive to changes in interest rates and have significantly longer average
lives and durations than the Company's loans and investment securities. At June
30, 2004, the average life of the Company's deposits was 13.3 years. Thus, these
core deposit balances provide an internal hedge to market value fluctuations in
the Company's fixed rate assets.
12
The MVE analyzes both sides of the balance sheet and, as indicated below,
demonstrates the inherent value of the Company's core deposits in a rising rate
environment. As rates rise, the value of the Company's core deposits increases
which offsets the decrease in value of the Company's fixed rate assets. The
following table summarizes the market value of equity at June 30, 2004 (in
millions, except for per share amounts):
----------------------------------------------------------------------
Market Value
Of Equity Per Share
----------------------------------------------------------------------
Plus 200 basis points $5,569 $70.81
Current Rate $5,906 $75.09
Minus 100 basis points $5,347 $67.97
Liquidity involves the Company's ability to raise funds to support asset growth
or decrease assets to meet deposit withdrawals and other borrowing needs, to
maintain reserve requirements and to otherwise operate the Company on an ongoing
basis. The Company's liquidity needs are primarily met by growth in core
deposits, its cash and federal funds sold position, cash flow from its
amortizing investment and loan portfolios, as well as the use of short-term
borrowings, as required. If necessary, the Company has the ability to raise
liquidity through collateralized borrowings or Federal Home Loan Bank advances.
As of June 30, 2004 the Company had in excess of $11.8 billion in immediately
available liquidity which includes securities that could be used for
collateralized borrowings, cash on hand, and borrowing capacities under existing
lines of credit. During the first six months of 2004, deposit growth and
short-term borrowings were used to fund growth in the loan portfolio and
purchase additional investment securities.
Short-Term Borrowings
---------------------
Short-term borrowings, or other borrowed money, consist primarily of securities
sold under agreements to repurchase and overnight lines of credit, and are used
to meet short-term funding needs. At June 30, 2004, short-term borrowings
aggregated $944.0 million and had an average rate of 1.68%, as compared to
$311.5 million at an average rate of 0.77% at December 31, 2003. The increase in
short-term borrowings primarily occurred towards the end of the second quarter,
as the Company took advantage of an opportunity to purchase investments by
pre-funding anticipated deposit growth. The Company anticipates the short-term
borrowings will be paid down during the third quarter of 2004.
Interest Earning Assets
-----------------------
The Company's cash flow from deposit growth and repayments from its investment
portfolio totaled approximately $6.0 billion for the first six months of 2004.
This significant cash flow provides the Company with ongoing reinvestment
opportunities as interest rates change. For the six month period ended June 30,
2004, interest earning assets increased $3.7 billion from $20.8 billion to $24.5
billion. This increase was primarily in investment securities and the loan
portfolio as described below.
13
Loans
-----
During the first six months of 2004, loans increased $889.9 million from $7.4
billion to $8.3 billion. All segments of the loan portfolio experienced growth
in the first six months of 2004, including loans secured by commercial real
estate properties, commercial loans, and consumer loans.
The following table summarizes the loan portfolio of the Company by type of loan
as of the dates shown.
June 30, December 31,
---------------------------------------
2004 2003
---------------------------------------
(in thousands)
Commercial:
Term $ 1,111,848 $ 1,027,526
Line of credit 1,046,104 959,158
Demand 1,077
----------------- ---------------------
2,157,952 1,987,761
Owner-occupied 1,805,336 1,619,079
----------------- ---------------------
3,963,288 3,606,840
Consumer:
Mortgages (1-4 family residential) 1,111,049 918,686
Installment 134,710 138,437
Home equity 1,573,454 1,405,795
Credit lines 65,421 60,579
----------------- ---------------------
2,884,634 2,523,497
Commercial real estate:
Investor developer 1,308,103 1,167,672
Construction 174,431 142,567
----------------- ---------------------
1,482,534 1,310,239
----------------- ---------------------
Total loans $ 8,330,456 $ 7,440,576
================= =====================
Investments
-----------
In total, for the first six months of 2004, securities increased $2.8 billion
from $13.3 billion to $16.1 billion. The available for sale portfolio increased
$1.4 billion to $12.1 billion at June 30, 2004 from $10.7 billion at December
31, 2003, and the securities held to maturity portfolio increased $1.3 million
to $3.8 billion at June 30, 2004 from $2.5 billion at year-end 2003. The
portfolio of trading securities increased $11.6 million from year-end 2003 to
$182.1 million at June 30, 2004. At June 30, 2004, the average life of the
investment portfolio was approximately 5.19 years, and the duration was
approximately 4.20 years. The yield on the total portfolio decreased slightly
from 4.86% at December 31, 2003 to 4.79% at June 30, 2004.
14
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.
----------------------------------------------------- -----------------------------------------------------
At June 30, 2004 At December 31, 2003
----------------------------------------------------- -----------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------------- -----------------------------------------------------
U.S. Government
agency and
mortgage-backed $12,172,873 $29,290 $(227,915) $11,974,248 $10,528,396 $82,057 $(98,908) $10,511,545
obligations
Obligations of
state and
political
subdivisions 104,281 548 (1,708) 103,121 30,223 821 (117) 30,927
Other 44,874 8,861 53,735 97,943 10,240 108,183
----------------------------------------------------- -----------------------------------------------------
Securities
available $12,322,028 $38,699 $(229,623) $12,131,104 $10,656,562 $93,118 $(99,025) $10,650,655
for sale
----------------------------------------------------- -----------------------------------------------------
U.S. Government
agency and
mortgage-backed $3,424,051 $ 9,310 $(77,506) $3,355,855 $2,193,577 $15,209 $(27,088) $2,181,698
obligations
Obligations of
state and 258,985 (7,787) 251,198 227,199 30 (11,443) 215,786
political
subdivisions
Other 89,168 89,168 69,708 69,708
----------------------------------------------------- -----------------------------------------------------
Securities held to
maturity $3,772,204 $ 9,310 $(85,293) $3,696,221 $2,490,484 $15,239 $(38,531) $2,467,192
----------------------------------------------------- -----------------------------------------------------
Gross gains and losses on securities sold during the second quarter of 2004 were
$635 thousand and $0, respectively. For the first six months of 2004, gross
gains and losses on securities sold amounted to $12.8 million and $11.8 million,
respectively.
As of August 6, 2004, with the yield on the 10 year Treasury Note at 4.22%, the
after-tax depreciation of the Company's available for sale portfolio was
approximately $6.6 million.
Detailed below is information regarding the composition and characteristics of
the Company's investment portfolio, excluding trading securities, as of June 30,
2004.
Average Average Average Average
Product Description Amount Yield Book Price Duration Life
-------------------------------------------------------------------------------------------------------------------
(in millions) (in years)
Mortgage-backed Securities:
Federal Agencies Pass Through
Certificates (AAA Rated) $4,349 4.88% $ 101.17 4.39 5.58
Collateralized Mortgage
Obligations (AAA Rated) 10,226 4.85 100.84 4.04 4.97
U.S. Government agencies/Other 1,328 4.01 100.24 4.79 5.56
--------------- ------------ --------------- ------------- --------------
Total $15,903 4.79% $ 100.88 4.20 5.19
=============== ============ =============== ============= ==============
The Company's mortgage-backed securities (MBS) portfolio comprises 91% of the
total investment portfolio. The MBS portfolio consists of Federal Agencies
Pass-Through Certificates and Collateralized Mortgage Obligations (CMO's) which
are issued by federal agencies and other private sponsors. The Company's
investment policy does not permit investments in inverse floaters, IO's, PO's
and other similar issues.
15
Net Income
----------
Net income for the second quarter of 2004 was $66.2 million, an increase of
$20.9 million or 46% over the $45.3 million recorded for the second quarter of
2003. Net income for the first six months of 2004 totaled $128.2 million, an
increase of $40.0 million or 45% from $88.2 million in the first six months of
2003. On a per share basis, diluted net income for the second quarter and first
six months of 2004 was $0.79 and $1.54 per common share compared to $0.63 and
$1.23 per common share for the same periods in 2003. Net income per share for
the second quarter and first six months of 2004 reflects the addition of 5.0
million shares from the secondary offering in September 2003 and 3.8 million
shares assuming conversion of the Convertible Trust Capital Securities.
Return on average assets (ROA) and return on average equity (ROE) for the second
quarter of 2004 were 1.03% and 19.86%, respectively, compared to 0.98% and
17.91%, respectively, for the same 2003 period. ROA and ROE for the first six
months of 2004 were 1.04% and 18.87%, respectively, compared to 1.00% and
17.92%, respectively, for the same 2003 period. The increases in both ROA and
ROE are due to net income growth that has exceeded growth in average assets and
average equity during the three month and six month periods ended June 30, 2004
as compared to the same periods in 2003. As noted above, net income has grown
46% and 45% during the second quarter and first six months of 2004,
respectively, as compared to the same 2003 periods. Average assets and average
equity have grown 40% and 32%, respectively, from June 30, 2003 to June 30,
2004.
Net Interest Income
-------------------
Net interest income totaled $244.7 million for the second quarter of 2004, an
increase of $65.4 million or 36% from $179.3 million in the second quarter of
2003. Net interest income for the first six months of 2004 was $475.0 million,
up $128.4 million or 37% from $346.6 million for the first six months of 2003.
The increases in net interest income for the quarter and first six months of
2004 were due to the volume increases in interest earning assets resulting from
the Company's strong, low-cost core deposit growth.
The increase in net interest income on a tax equivalent basis is shown below (in
thousands).
Net Interest Income
---------------------------------------------------------------------
Volume Rate Total %
2004 vs. 2003 Increase Change Increase Increase
---------------------------------------------------------------------------------------------------
Quarter Ended June 30 $72,797 ($6,873) $65,924 36%
Six Months Ended June 30 $142,325 ($13,124) $129,201 36%
The net interest margin for the second quarter of 2004 was 4.29% down 10 basis
points from the 4.39% margin for the first quarter of 2004. The decrease in the
margin was attributed primarily to a decrease in the yield on the investment
portfolio of 10 basis points, which was caused by the spike in mortgage-backed
security prepayments experienced in the second quarter.
The following table sets forth balance sheet items on a daily average basis for
the three months ended June 30, 2004, March 31, 2004 and June 30, 2003 and
presents the daily average interest earned on assets and paid on liabilities for
such periods.
16
Average Balances and Net Interest Income
-----------------------------------------------------------------------------------------------------
June 2004 March 2004 June 2003
---------------------------------- -------------------------------- -------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------- -------------------------------- -------------------------------
Earning Assets
-------------------------------
Investment securities
Taxable $14,747,643 $ 173,678 4.74% $13,295,903 $ 159,648 4.83% $10,026,080 $119,147 4.77%
Tax-exempt 290,200 4,465 6.19 256,628 3,860 6.05 192,892 3,689 7.67
Trading 174,578 2,075 4.78 161,701 2,065 5.14 158,297 2,389 6.05
------------- -------------------- -------------------------------- -------------------------------
Total investment securities 15,212,421 180,218 4.76 13,714,232 165,573 4.86 10,377,269 125,225 4.84
Federal funds sold 62,357 154 0.99 144,297 340 0.95 32,095 97 1.21
Loans
Commercial mortgages 3,021,768 45,333 6.03 2,793,159 42,782 6.16 2,319,945 37,156 6.42
Commercial 1,961,351 25,477 5.22 1,878,353 24,535 5.25 1,552,400 21,587 5.58
Consumer 2,767,826 39,079 5.68 2,603,037 36,936 5.71 2,109,143 33,336 6.34
Tax-exempt 335,505 6,243 7.48 337,313 6,092 7.26 264,737 5,338 8.09
------------- -------------------- -------------------------------- -------------------------------
Total loans 8,086,450 116,132 5.78 7,611,862 110,345 5.83 6,246,225 97,417 6.26
------------- -------------------- -------------------------------- -------------------------------
Total earning assets $23,361,228 $296,504 5.10% $21,470,391 $ 276,258 5.17% $16,655,589 $222,739 5.36%
============= ============= =============
Sources of Funds
-------------------------------
Interest-bearing liabilities
Regular savings $5,276,657 $ 10,216 0.78% $4,492,847 $ 7,786 0.70% $3,477,229 $ 6,754 0.78%
Interest bearing demand 9,643,771 18,729 0.78 8,986,070 15,943 0.71 6,427,333 11,961 0.75
Time deposits 2,507,526 11,378 1.82 2,430,589 11,323 1.87 2,313,690 14,093 2.44
Public funds 856,683 2,886 1.35 968,513 3,320 1.38 878,005 3,294 1.50
------------- ----------- -------- ------------ ------------------- ------------ -------- ---------
Total deposits 18,284,637 43,209 0.95 16,878,019 38,372 0.91 13,096,257 36,102 1.11
Other borrowed money 523,931 1,052 0.81 174,746 448 1.03 278,780 318 0.46
Long-term debt 200,000 3,020 6.07 200,000 3,020 6.07 200,000 3,020 6.06
------------- ----------- -------- ------------ ---------- -------- ------------ -------- ---------
Total deposits and
interest-bearing
liabilities 19,008,568 47,281 1.00 17,252,765 41,840 0.98 13,575,037 39,440 1.17
Noninterest-bearing funds (net) 4,352,660 4,217,626 3,080,552
------------- ----------- -------- ------------ ---------- -------- ------------ -------- ---------
Total sources to fund earning
assets $23,361,228 47,281 0.81 $21,470,391 41,840 0.78 $16,655,589 39,440 0.95
============= ----------- -------- ============ ---------- -------- ============ -------- ---------
Net interest income and
margin tax-equivalent basis $249,223 4.29% $ 234,418 4.39% $183,299 4.41%
=========== ======== ========== ======== ======== =========
Other Balances
-------------------------------
Cash and due from banks $1,163,942 $1,007,182 $945,600
Other assets 1,419,098 1,129,880 994,784
Total assets 25,822,157 23,491,544 18,498,841
Total deposits 23,541,453 21,478,730 16,734,886
Demand deposits (noninterest-
bearing) 5,256,816 4,600,711 3,638,629
Other liabilities 222,779 253,890 273,183
Stockholders' equity 1,333,994 1,384,178 1,011,992
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.
17
Noninterest Income
------------------
Noninterest income totaled $92.3 million for the second quarter of 2004, an
increase of $8.9 million or 11% from $83.4 million in the second quarter of
2003. Noninterest income for the first six months of 2004 increased to $178.5
million from $159.4 million in the first six months of 2003, a 12% increase.
During the second quarter and first six months of 2004, the increases of 11% and
12%, respectively, were primarily due to increased deposit charges and services
fees, which rose $13.9 million, or 36%, and $24.6 million, or 33%, over the
second quarter and first six months of 2003, respectively.
The increases in deposit charges and services fees are attributable to the
Company's 35% deposit growth rate during this same period. These increases were
offset by decreases in both Commerce Capital Markets, Inc. (CCMI) revenues and
loan brokerage fees, which decreased in total by $6.9 million, or 40%, and $12.0
million, or 34%, during the second quarter and first six months of 2004,
respectively, compared to the same periods in 2003. The decrease in CCMI
revenues was related primarily to volatility in interest rates during the second
quarter of 2004 and the resulting impact on the trading and sales function. The
decrease in loan brokerage fees resulted from declines in mortgage refinancing
activity during 2004.
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
6/30/04 6/30/03 % Increase 6/30/04 6/30/03 % Increase
------------------------------------ --------------------------------------
(Dollars in thousands) (Dollars in thousands)
Deposit charges & service fees $52,717 $38,765 36% $98,198 $73,607 33%
Other operating income:
Insurance 18,570 17,190 8 36,906 33,245 11
Capital Markets 6,622 9,695 (32) 16,349 19,698 (17)
Loan Brokerage Fees 3,725 7,545 (51) 6,778 15,468 (56)
Other 10,006 8,958 12 19,217 16,337 18
---------- ---------- --------- ----------- ----------- ----------
Total other 38,923 43,388 (10) 79,250 84,748 (6)
---------- ---------- --------- ----------- ----------- ----------
Net investment securities gains 635 1,217 (48) 1,059 1,081 (2)
---------- ---------- --------- ----------- ----------- ----------
Total non-interest income $92,275 $83,370 11% $178,507 $159,436 12%
========== ========== ========= =========== =========== ==========
Noninterest Expense
-------------------
For the second quarter of 2004, noninterest expense totaled $226.3 million, an
increase of $38.6 million or 21% over the same period in 2003. For the first six
months of 2004, noninterest expense totaled $438.5 million, an increase of $78.7
million or 22% over $359.8 million for the first six months of 2003.
Contributing to this increase was new branch activity over the past twelve
months, with the number of branches increasing from 243 at June 30, 2003 to 289
at June 30, 2004. With the addition of these new offices, staff, facilities, and
related expenses rose accordingly. Other noninterest expenses rose $7.3 million
during the second quarter of 2004 over the same period in 2003 and $16.5 million
during the first six months of 2004 over the same period in 2003. These
increases resulted primarily from higher bank card-related service charges,
increased business development expenses, and increased provisions for
non-credit-related losses.
The Company continued to experience positive operating leverage in the second
quarter, as revenue growth of 28% exceeded non-interest expense growth of 21%.
One important factor influencing the growth in non-interest expenses is that the
Company absorbed significant start-up expenses related to the New York City and
Long Island markets in prior years. As a result, the impact of the growth in
non-interest expenses in these markets is declining in 2004.
18
The Company's operating efficiency ratio (noninterest expenses, less other real
estate expense, divided by net interest income plus noninterest income excluding
non-recurring gains) was 67.5% for the first six months of 2004 as compared to
71.3% for the same 2003 period. This improvement in the operating efficiency
ratio is due to the positive operating leverage ratio discussed above. The
Company's efficiency ratio remains above its peer group primarily due to its
aggressive growth expansion activities.
Loan and Asset Quality
----------------------
Total non-performing assets (non-performing loans and other real estate,
excluding loans past due 90 days or more and still accruing interest) at June
30, 2004 were $30.4 million, or 0.11% of total assets compared to $23.6 million
or 0.10% of total assets at December 31, 2003 and $24.1 million or 0.12% of
total assets at June 30, 2003.
Total non-performing loans (non-accrual loans and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at June 30, 2004
were $29.7 million or 0.36% of total loans compared to $21.7 million or 0.29% of
total loans at December 31, 2003 and $22.5 million or 0.35% of total loans at
June 30, 2003. At June 30, 2004, loans past due 90 days or more and still
accruing interest amounted to $318 thousand compared to $538 thousand at
December 31, 2003 and $434 thousand at June 30, 2003. Additional loans
considered as potential problem loans by the Company's internal loan review
department ($38.1 million at June 30, 2004) have been evaluated as to risk
exposure in determining the adequacy of the allowance for loan losses.
The increase in commercial non-accrual loans during 2004 is the result of four
credits that experienced difficulties in the first quarter of 2004 and were in
the process of collection and/or liquidation at the end of the second quarter.
This increase in commercial non-accrual loans has led to the overall increase in
non-performing assets noted during the first six months of 2004. Total
non-performing assets and loans past due 90 days or more decreased slightly from
March 31, 2004 to June 30, 2004 primarily as a result of collections on existing
commercial non-accrual loans.
19
The following summary presents information regarding non-performing loans and
assets as of June 30, 2004 and the preceding four quarters (dollar amounts in
thousands).
June 30, March 31, December 31, September 30, June 30,
2004 2004 2003 2003 2003
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $17,382 $19,701 $ 6,867 $ 7,295 $ 7,049
Consumer 11,675 9,984 9,242 8,295 9,517
Commercial real estate:
Construction 138
Mortgage 675 810 5,494 7,502 5,970
---------------------------------------------------------------------------
Total non-accrual loans 29,732 30,495 21,741 23,092 22,536
---------------------------------------------------------------------------
Restructured loans:
Commercial 1 1 1 2 3
Consumer
Commercial real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 1 1 1 2 3
---------------------------------------------------------------------------
Total non-performing loans 29,733 30,496 21,742 23,094 22,539
---------------------------------------------------------------------------
Other real estate 653 1,890 1,831 1,670 1,540
---------------------------------------------------------------------------
Total non-performing assets 30,386 32,386 23,573 24,764 24,079
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 318 696 538 649 434
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $30,704 $33,082 $24,111 $25,413 $24,513
===========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.36% 0.39% 0.29% 0.34% 0.35%
Total non-performing assets as a
percentage of total period-end assets 0.11% 0.13% 0.10% 0.12% 0.12%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.11% 0.13% 0.11% 0.12% 0.12%
Allowance for loan losses as a percentage
of total non-performing loans 419% 385% 515% 449% 441%
Allowance for loan losses as a percentage
of total period-end loans 1.50% 1.51% 1.51% 1.52% 1.56%
Total non-performing assets and loans
past due 90 days or more as a
percentage of stockholders' equity and
allowance for loan losses 2% 2% 2% 2% 2%
20
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data (dollar amounts in thousands).
Year
Three Months Ended Six Months Ended Ended
06/30/04 06/30/03 06/30/04 06/30/03 12/31/03
------------ ----------- ------------ ------------ ------------
Balance at beginning of period $117,329 $94,731 $112,057 $90,733 $90,733
Provisions charged to operating expenses 10,748 6,900 20,248 13,800 31,850
------------ ----------- ------------ ------------ ------------
128,077 101,631 132,305 104,533 122,583
Recoveries on loans charged-off:
Commercial 104 141 260 345 669
Consumer 101 146 371 277 584
Commercial real estate 1 - 48 - 11
------------ ----------- ------------ ------------ ------------
Total recoveries 206 287 679 622 1,264
Loans charged-off:
Commercial (2,587) (1,197) (4,880) (3,065) (5,601)
Consumer (1,004) (1,390) (1,776) (2,755) (5,950)
Commercial real estate (4) (13) (1,640) (17) (239)
------------ ----------- ------------ ------------ ------------
Total charge-offs (3,595) (2,600) (8,296) (5,837) (11,790)
------------ ----------- ------------ ------------ ------------
Net charge-offs (3,389) (2,313) (7,617) (5,215) (10,526)
------------ ----------- ------------ ------------ ------------
Balance at end of period $124,688 $99,318 $124,688 $99,318 $112,057
============ =========== ============ ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.17% 0.15% 0.19% 0.17% 0.16%
Net reserve additions $ 7,359 $ 4,587 $12,631 $8,585 $21,324
During the first six months of 2004, there was an increase in commercial and
commercial real estate loan charge-offs. These increases are related to a large
credit that experienced difficulties during the first quarter of 2004 and
another credit with both a real estate as well as a commercial component. The
real estate component of this credit was sold and resulted in a $1.5 million
charge-off. Consumer loan charge-offs continued to decrease during the first six
months of 2004, Consumer loan charge-offs during 2003 reflect charge-offs which
arose as a result of attempts to defraud the Company and several other financial
institutions and mortgage companies. The net reserve additions for the first six
months and second quarter of 2004 are reflective of the increases in the
non-performing assets since December 31, 2003 and increases in the overall loan
portfolio.
The Company considers the allowance for loan losses of $124.7 million adequate
to cover probable losses inherent in the loan portfolio at June 30, 2004. The
Company's determination of the level of the allowance for loan losses rests upon
various judgments and assumptions surrounding the risk characteristics included
in the loan portfolio. Such risk characteristics include changes in levels and
trends of charge-offs, delinquencies, and nonaccrual loans, trends in volume and
terms of loans, changes in underwriting standards and practices, portfolio mix,
tenure of loan officers and management, entrance into new geographic markets,
changes in credit concentrations, and national and local economic trends and
conditions, and other relevant factors, all of which may be susceptible to
significant change.
21
Forward-Looking Statements
--------------------------
The Company may from time to time make written or oral "forward-looking
statements", including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Form 10-Q), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "FRB"); inflation; interest rates,
market and monetary fluctuations; the timely development of competitive new
products and services by the Company and the acceptance of such products and
services by customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services and vice versa;
the impact of changes in financial services' laws and regulations (including
laws concerning taxes, banking, securities and insurance); technological
changes; future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
See Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation, Interest Rate Sensitivity and Liquidity.
Item 4. Controls and Procedures
-----------------------
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the period covered by this quarterly report, the Company has
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become
22
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. The Company conducts periodic evaluations of its
internal controls to enhance, where necessary, its procedures and controls.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective in reaching a reasonable level of assurance that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time period specified in the SEC's rules and forms.
During the quarter ended June 30, 2004, there has not occurred any significant
change in Internal Controls that has materially affected or is reasonably likely
to materially affect Internal Controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
On June 29, 2004 the U.S. Attorney General indicted two officers of the
Company's Philadelphia bank subsidiary in connection with its investigation of
certain Philadelphia city government officials. The Company confirms that
neither it, nor any of its subsidiaries or other officers and employees are
targets of the investigation. The Company has fully cooperated with this
investigation and believes it will have no material negative financial impact on
the Company.
During July 2004, class action complaints were filed in the United States
District Court for the District of New Jersey and the Eastern District of
Pennsylvania against the Company and certain Company (or subsidiary) current and
former officers and directors. The complaints allege that the defendants
violated the federal securities laws, specifically Sections 10 (b) and 20 (a) of
the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission. The plaintiffs seek unspecified damages on behalf of a
purported class of purchasers of the Company's securities during various
periods. The Company believes that the complaints against it are without merit
and intends to vigorously defend itself.
Item 2. Changes in Securities, Use of Proceeds and Purchases of Certain Equity
------------------------------------------------------------------------------
Securities by the Issuer and Others
-----------------------------------
There were no purchases of equity securities by the Company during the second
quarter of 2004.
23
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The Annual Meeting of the Registrant's Shareholders was held on June 11, 2004.
Proxies representing 70,951,587 shares were received (total shares outstanding
as of the record date were 77,907,957). The items of business acted upon at the
Annual Meeting were (i) the election of 13 directors for one year terms; (ii)
approval of the Commerce Bancorp, Inc.'s 2004 Employee Stock Option Plan; (iii)
approval of the amendment to Bancorp's Restated Certificate of Incorporation to
increase the number of shares of Common Stock that Bancorp is authorized to
issue by 350,000,000 shares; and (iv) approval of the appointment of Ernst &
Young LLP as Bancorp's independent auditors for the fiscal year ending December
31, 2004. The number of votes cast for, against, or withheld, as well as the
number of abstentions and broker non-votes was as follows:
(i) Election of directors:
Name of (Withhold Authority)
Nominee For Against
------- --- -------
Vernon W. Hill, II 69,187,219 1,764,368
Robert C. Beck 64,560,038 6,391,549
Jack R Bershad 65,585,542 5,366,045
Joseph E. Buckelew 69,073,581 1,878,006
Donald T. DiFrancesco 64,468,447 6,483,140
John P. Ferguson 70,034,043 917,544
Morton N. Kerr 66,435,444 4,516,143
Steven M. Lewis 69,277,641 1,673,946
George E. Norcross, III 68,958,279 1,993,308
Joseph J. Plumeri, II 70,024,804 926,783
Daniel J. Ragone 67,905,369 3,046,218
William A. Schwartz, Jr. 70,034,493 917,094
Joseph T. Tarquini, Jr. 68,144,986 2,806,601
(ii) Approval of Commerce Bancorp, Inc.'s 2004 Employee Stock Option:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
28,378,564 21,971,757 284,459 27,273,177
(iii) Approval of the amendment to Bancorp's Restated Certificate of
Incorporation to increase the number of shares of Common Stock that Bancorp is
authorized to issue by 350,000,000 shares:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
52,451,292 18,288,419 211,876 6,956,370
(iv) Approval of the appointment of Ernst & Young LLP as Bancorp's independent
auditors for the fiscal year ending December 31, 2004:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
70,146,667 631,760 173,161 6,956,369
24
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
Exhibits
--------
Exhibit 3.2 By-laws of the Company, as amended.
Exhibit 10.37 The Company's 2004 Employee Stock Option Plan.
Exhibit 31.1 Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Reports on Form 8-K
-------------------
On April 13, 2004, we filed a Current Report on Form 8-K which included as
exhibits a press release, issued by us on April 13, 2004, announcing our results
for the first quarter of 2004 and certain supplemental information.
On June 2, 2004, we filed a Current Report on Form 8-K, which included certain
questions and answers regarding corporate information.
On June 29, 2004, we filed a Current Report on Form 8-K, which announced the
indictment of two officers of the Company in connection with the U.S. Attorney
General's investigation of certain Philadelphia government officials.
25
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCORP, INC.
----------------------------
(Registrant)
AUGUST 9, 2004 /s/ DOUGLAS J. PAULS
------------------- ----------------------------------
(Date) DOUGLAS J. PAULS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
26