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 September 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 79,334,532
--------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of November 1, 2004)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 2004 and December 31, 2003...................................................1
Consolidated Statements of Income (unaudited) Three months ended
September 30, 2004 and September 30, 2003 and
nine months ended September 30, 2004 and September 30, 2003................................2
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2004 and September 30, 2003................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Nine months ended September 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 6. Exhibits..................................................................................23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
------------------------------------------------------------------------------------------------
September 30, December 31,
---------------------------------
(dollars in thousands) 2004 2003
------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 1,069,318 $ 910,092
Federal funds sold 255,000
--------------- --------------
Cash and cash equivalents 1,324,318 910,092
Loans held for sale 36,740 42,769
Trading securities 245,258 170,458
Securities available for sale 12,692,985 10,650,655
Securities held to maturity 4,080,134 2,490,484
(market value 09/04-$4,069,903; 12/03-$2,467,192)
Loans 8,910,967 7,440,576
Less allowance for loan losses 131,529 112,057
--------------- --------------
8,779,438 7,328,519
Bank premises and equipment, net 963,459 811,451
Other assets 309,149 307,752
--------------- --------------
$ 28,431,481 $ 22,712,180
=============== ==============
Liabilities Deposits:
Demand:
Noninterest-bearing $ 6,047,322 $ 4,574,714
Interest-bearing 10,886,783 8,574,297
Savings 6,104,644 4,222,282
Time 3,202,883 3,330,107
--------------- --------------
Total deposits 26,241,632 20,701,400
Other borrowed money 165,853 311,510
Other liabilities 274,377 221,982
Long-term debt 200,000 200,000
--------------- --------------
26,881,862 21,434,892
Stockholders' Common stock, 79,435,506 shares
Equity issued (76,869,415 shares at December 31, 2003) 79,436 76,869
Capital in excess of par value 967,296 866,095
Retained earnings 501,477 347,365
Accumulated other comprehensive income (loss) 12,748 (3,702)
--------------- --------------
1,560,957 1,286,627
Less treasury stock, at cost, 397,805 shares
(363,076 shares at December 31, 2003) 11,338 9,339
--------------- --------------
Total stockholders' equity 1,549,619 1,277,288
--------------- --------------
$ 28,431,481 $ 22,712,180
=============== ==============
See accompanying notes.
1
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $124,698 $ 98,889 $346,858 $ 287,558
income Interest on investments 195,968 134,984 537,396 371,743
Other interest 148 28 642 205
------------- ------------ ------------ ------------
Total interest income 320,814 233,901 884,896 659,506
------------- ------------ ------------ ------------
Interest Interest on deposits:
expense Demand 24,539 12,090 59,211 36,448
Savings 12,408 6,890 30,410 19,999
Time 14,210 16,682 43,117 50,915
------------- ------------ ------------ ------------
Total interest on deposits 51,157 35,662 132,738 107,362
Interest on other borrowed money 2,255 1,110 3,755 2,342
Interest on long-term debt 3,020 3,020 9,060 9,060
------------- ------------ ------------ ------------
Total interest expense 56,432 39,792 145,553 118,764
------------- ------------ ------------ ------------
Net interest income 264,382 194,109 739,343 540,742
Provision for loan losses 10,750 7,250 30,998 21,050
------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 253,632 186,859 708,345 519,692
Noninterest Deposit charges and service fees 57,081 41,500 155,279 115,107
income Other operating income 42,089 41,976 121,339 126,724
Net investment securities gains 943 1,682 2,002 2,763
------------- ------------ ------------ ------------
Total noninterest income 100,113 85,158 278,620 244,594
------------- ------------ ------------ ------------
Noninterest Salaries and benefits 114,467 92,732 315,917 261,152
expense Occupancy 31,689 24,760 87,748 67,943
Furniture and equipment 27,987 21,770 79,167 63,552
Office 11,082 9,906 32,922 28,325
Marketing 8,994 9,412 26,968 23,886
Other 52,943 38,732 142,945 112,253
------------- ------------ ------------ ------------
Total noninterest expenses 247,162 197,312 685,667 557,111
------------- ------------ ------------ ------------
Income before income taxes 106,583 74,705 301,298 207,175
Provision for federal and state income taxes 36,493 25,231 102,998 69,494
------------- ------------ ------------ ------------
Net income $ 70,090 $ 49,474 $198,300 $ 137,681
============= ============ ============ ============
Net income per common and common equivalent share:
Basic $ 0.89 $ 0.70 $ 2.54 $ 1.98
Diluted $ 0.84 $ 0.67 $ 2.38 $ 1.90
Average common and common equivalent
shares outstanding:
Basic 78,625 70,787 77,925 69,442
Diluted 86,045 73,926 85,932 72,614
Cash dividends, common stock $ 0.19 $ 0.17 $ 0.57 $ 0.50
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------------------
(dollars in thousands) 2004 2003
----------------------------------------------------------------------------------------------------
Operating Net income $ 198,300 $ 137,681
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 30,998 21,050
Provision for depreciation, amortization and accretion 97,203 97,667
Gain on sales of securities available for sale (2,002) (2,763)
Proceeds from sales of loans held for sale 567,653 1,276,649
Originations of loans held for sale (561,624) (1,274,325)
Net (increase) decrease in trading securities (74,800) 106,046
Increase in other assets, net (11,605) (18,725)
Increase (decrease) in other liabilities 55,195 (56,632)
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 299,318 286,648
Investing Proceeds from the sales of securities available for sale 1,917,794 3,407,875
activities Proceeds from the maturity of securities available for sale 3,044,415 4,094,192
Proceeds from the maturity of securities held to maturity 644,684 498,010
Purchase of securities available for sale (7,005,159) (10,279,232)
Purchase of securities held to maturity (2,237,022) (1,837,448)
Net increase in loans (1,481,917) (1,009,670)
Capital expenditures (217,244) (222,539)
----------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,334,449) (5,348,812)
Financing Net increase in demand and savings deposits 5,667,456 4,381,561
activities Net (decrease) increase in time deposits (127,224) 624,695
Net decrease in other borrowed money (145,657) (235,792)
Issuance of common stock - 208,825
Dividends paid (44,187) (34,063)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 100,954 82,506
Other (1,985) (1,306)
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,449,357 5,026,426
Increase (decrease) in cash and cash equivalents 414,226 (35,738)
Cash and cash equivalents at beginning of year 910,092 811,434
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,324,318 $ 775,696
====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 145,550 $ 119,894
Income taxes 93,432 45,693
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Nine months ended September 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 198,300 198,300
Other comprehensive income (loss), net of tax
Unrealized loss on securities (pre-tax $9,591) (6,823) (6,823)
Reclassification adjustment (pre-tax $35,804) 23,273 23,273
---------------
Other comprehensive income 16,450
---------------
Total comprehensive income 214,750
Cash dividends paid (44,187) (44,187)
Shares issued under dividend reinvestment
and compensation and benefit plans (2,567 shares) 2,567 98,387 100,954
Other 2,814 (1) (1,999) 814
-----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2004 $79,436 $967,296 $501,477 $(11,338) $ 12,748 $1,549,619
===================================================================================================================================
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 U.S. generally accepted
accounting principles 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 nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending 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. 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.
C. Bank Premises and Equipment
In accordance with U.S. generally accepted accounting principles, 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 September 30, 2004 and
December 31, 2003, Bank premises and equipment in progress was $91.1 million and
$87.2 million, respectively.
D. Commitments and Other
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 September 30, 2004.
5
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 FASB Interpretation No. 46R, "Consolidation
of Variable Interest Entities" (FIN 46R). At September 30, 2004 and December 31,
2003, the Company's investment in these entities totaled $44.9 million and $30.1
million, respectively.
E. 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 $204.8 million and $(3.5) million, respectively, for the
three months ended September 30, 2004 and 2003. For the nine months ended
September 30, 2004 and 2003, total comprehensive income was $214.8 million and
$60.6 million, respectively.
F. New Accounting Standards
In September 2004, the EITF reached a consensus on Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share." Issue 04-8
addresses the effect of contingently convertible debt instruments (Co-Cos) on
diluted EPS. The EITF defines Co-Cos as instruments that are convertible into
common stock if one or more specified contingencies occur and at least one of
the contingencies is based on the market price of the Company's common stock
(market price contingency). Issue 04-8 requires that Co-Cos be included in
diluted earnings per share computations (if dilutive) regardless of whether the
market price trigger has been met. This consensus must be applied by restating
all periods during which the Co-Co was outstanding. Issue 04-8 is expected to be
effective for interim or annual reporting periods ending after December 15,
2004. The Company has determined that its Convertible Trust Capital Securities
meet the contingency requirements of Issue 04-8 and plans to adopt Issue 04-8
when it is effective, currently anticipated to be the fourth quarter of 2004.
The adoption will require the Company to restate its prior diluted EPS
calculations using the if-converted method for the periods since March 2002,
which is when the Convertible Trust Capital Securities were issued. When
adopted, the if-converted method will decrease previously reported diluted EPS
by $0.03 and $0.01 per share for the years ended 2003 and 2002, respectively.
In March 2004, the EITF reached a consensus on Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments."
Issue 03-1 provides guidance that should be used to determine when an investment
is considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. Issue 03-1 also includes accounting
considerations subsequent to recognition of an other-than-temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. In September 2004, the FASB
deferred the implementation date of the provisions that relate to measurement
and recognition of other-than-temporary impairments. The disclosure requirements
of Issue 03-1 were effective for fiscal years ending after December 15, 2003.
The Company is continuing to evaluate the impact of the measurement and
recognition provisions of Issue 03-1 but does not expect it to have a material
impact on the results of operations of the Company.
G. Legal Proceedings
During July and August 2004, six 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. All class action complaints have been
consolidated in the United States District Court for the District of New Jersey,
Camden Division. The complaints, which contain virtually the same factual
allegations and causes of action, 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 these class action complaints are without merit. No accrual for
a loss contingency has been recorded, as the risk of loss is considered remote.
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 Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------
Reported net income $ 70,090 $ 49,474 $ 198,300 $ 137,681
Less: Stock option compensation expense
determined under fair value method, net of tax (3,090) (2,684) (9,600) (7,297)
--------- --------- ----------- -----------
Pro forma net income, basic $ 67,000 $ 46,790 $ 188,700 $ 130,384
=========== ===========
Add: Interest expense on Convertible Trust
Capital Securities, net of tax 1,963 5,889
----------- -----------
Pro forma net income, diluted $ 68,963 $ 194,589
=========== ===========
Reported net income per share:
Basic $ 0.89 $ 0.70 $ 2.54 $ 1.98
Diluted $ 0.84 $ 0.67 $ 2.38 $ 1.90
Pro forma net income per share:
Basic $ 0.85 $ 0.66 $ 2.42 $ 1.88
Diluted $ 0.80 $ 0.63 $ 2.26 $ 1.80
-------------------------------------------------------------------------------------------------------------------
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% and 3.00%, dividend
yields of 1.33% and 1.50%, volatility factors of the expected market price of
the Company's common stock of .255 and .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
September 30, 2004 September 30, 2003
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 266,351 $ (1,969) $ 264,382 $ 195,715 $ (1,606) $ 194,109
Provision for loan losses 10,750 10,750 7,250 7,250
-----------------------------------------------------------------------------------
Net interest income after provision 255,601 (1,969) 253,632 188,465 (1,606) 186,859
Noninterest income 67,167 32,946 100,113 58,384 26,774 85,158
Noninterest expense 221,704 25,458 247,162 175,547 21,765 197,312
-----------------------------------------------------------------------------------
Income before income taxes 101,064 5,519 106,583 71,302 3,403 74,705
Income tax expense 34,472 2,021 36,493 24,068 1,163 25,231
-----------------------------------------------------------------------------------
Net income $ 66,592 $ 3,498 $ 70,090 $ 47,234 $ 2,240 $ 49,474
===================================================================================
Average assets (in millions) $ 25,203 $ 2,191 $ 27,394 $ 18,965 $ 1,753 $ 20,718
===================================================================================
-------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 744,572 $ (5,229) $ 739,343 $ 544,673 $ (3,931) $ 540,742
Provision for loan losses 30,998 30,998 21,050 21,050
-----------------------------------------------------------------------------------
Net interest income after provision 713,574 (5,229) 708,345 523,623 (3,931) 519,692
Noninterest income 192,136 86,484 278,620 164,388 80,206 244,594
Noninterest expense 614,212 71,455 685,667 491,133 65,978 557,111
-----------------------------------------------------------------------------------
Income before income taxes 291,498 9,800 301,298 196,878 10,297 207,175
Income tax expense 99,596 3,402 102,998 66,360 3,134 69,494
-----------------------------------------------------------------------------------
Net income $ 191,902 $ 6,398 $ 198,300 $ 130,518 $ 7,163 $ 137,681
===================================================================================
Average assets (in millions) $ 23,471 $ 2,104 $ 25,575 $ 16,905 $ 1,792 $ 18,697
===================================================================================
8
J. Net Income Per Share
The calculation of net income per share follows (in thousands, except for per
share amounts):
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------
Basic:
Net income available to common shareholders - basic $ 70,090 $ 49,474 $198,300 $137,681
======== ======== ======== ========
Average common shares outstanding 78,625 70,787 77,925 69,442
======== ======== ======== ========
Net income per common share - basic $ 0.89 $ 0.70 $ 2.54 $ 1.98
======== ======== ======== ========
Diluted:
Net income $ 70,090 $ 49,474 $198,300 $137,681
Add interest expense on Convertible Trust Capital Securities,
net of tax 1,963 5,889
-------- -------- -------- --------
Net income available to common shareholders - diluted $ 72,053 $ 49,474 $204,189 $137,681
======== ======== ======== ========
Average common shares outstanding 78,625 70,787 77,925 69,442
Additional shares considered in diluted computation assuming:
Exercise of stock options 3,629 3,139 4,216 3,172
Conversion of Convertible Trust Capital Securities 3,791 3,791
-------- -------- -------- --------
Average common shares outstanding - diluted 86,045 73,926 85,932 72,614
======== ======== ======== ========
Net income per common share - diluted $ 0.84 $ 0.67 $ 2.38 $ 1.90
======== ======== ======== ========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
--------------------------------------------------------------------------------
Executive Summary
-----------------
During the first nine months of 2004, the Company experienced strong deposit
growth and positive operating leverage as year over year revenue growth of 30%
exceeded non-interest expense growth of 23% during the same period. Total assets
grew to $28.4 billion, an increase of 33% over September 30, 2003, while total
deposits grew 34%. Net income increased 42% to $70.1 million and 44% to $198.3
million during the third quarter and first nine months of 2004, respectively, as
compared to the same periods in 2003. Diluted net income per share increased by
25% to $.84 and $2.38 during the third quarter and first nine months of 2004,
respectively, as compared to the same periods in 2003 despite the addition of
5.0 million shares from the Company's secondary offering in September 2003 and
3.8 million shares assuming conversion of the Company's Convertible Trust
Capital Securities.
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 nine 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 September 30, 2004, stockholders' equity totaled $1.5 billion or 5.45% 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 September 30, 2004 and 2003:
Per Regulatory Guidelines
--------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
September 30, 2004:
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,727,456 12.31% $561,267 4.00% $841,901 6.00%
Total capital 1,862,398 13.27 1,122,535 8.00 1,403,169 10.00
Leverage ratio 1,727,456 6.30 1,097,088 4.00 1,371,360 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $1,167,708 11.30% $413,165 4.00% $619,748 6.00%
Total capital 1,270,293 12.30 826,331 8.00 1,032,913 10.00
Leverage ratio 1,167,708 6.00 777,894 4.00 972,368 5.00
10
Per Regulatory Guidelines
--------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
September 30, 2003:
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,388,033 12.68% $438,024 4.00% $ 657,036 6.00%
Total capital 1,491,625 13.62 876,048 8.00 1,095,060 10.00
Leverage ratio 1,388,033 6.68 831,046 4.00 1,038,808 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $ 895,416 11.36% $315,315 4.00% $ 472,973 6.00%
Total capital 974,047 12.36 630,630 8.00 788,288 10.00
Leverage ratio 895,416 6.13 583,857 4.00 729,822 5.00
At September 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 September 30, 2004, the
Company and its subsidiaries meet all capital adequacy requirements to which
they are subject.
Deposits
--------
Total deposits at September 30, 2004 were $ 26.2 billion, up $6.7 billion, or
34% over total deposits of $19.5 billion at September 30, 2003, and up by $5.5
billion, or 27% from year-end 2003. Deposit growth during the first nine months
of 2004 included core deposit growth in both demand and savings products offset
by a decrease in time deposits. The Company experienced core deposit growth in
all customer categories. The Company regards core deposits as all deposits other
than public certificates of deposit. Core deposit growth by type of customer is
as follows (in millions):
----------------------------------------------------------------------------
September 30, % of September 30, % of Annual Growth
2004 Total 2003 Total %
----------------------------------------------------------------------------
Consumer $ 11,388 45% $ 9,123 49% 25%
Commercial 8,989 36 6,610 36 36
Government 4,732 19 2,863 15 65
----------------------------------------------------------------------------
Total $ 25,109 100% $ 18,596 100% 35%
----------------------------------------------------------------------------
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 21% at
September 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
11
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 the potential and probability of all assets
and liabilities to mature or reprice. Income simulation also attends to the
relative interest rate sensitivities of these items, and projects their behavior
over an extended period of time. Finally, income simulation permits management
to assess the probable effects on the balance sheet not only of changes in
interest rates, but also of proposed strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate plus 200 and minus 100 basis point change during the next year,
with rates remaining constant in the second year. 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 twenty four
month time frame. Net income in the flat rate scenario is projected to increase
by approximately 25% per year. The following table illustrates the variance to
the projected net income growth rate at September 30, 2004 and 2003 resulting
from a plus 200 and minus 100 basis point change in interest rates.
---------------------------------------------------------------------
Basis Point Change
---------------------------------------------------------------------
Plus 200 Minus 100
---------------------------------------------------------------------
September 30, 2004:
Twelve Months 1.21% (6.34)%
Twenty Four Months 8.64% (11.25)%
September 30, 2003:
Twelve Months 8.16% 0.17%
Twenty Four Months 11.50% (5.30)%
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 and tools, 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 September 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 periodically
completed and updated comprehensive studies of its core deposit transaction
accounts in order to assign its own core deposit premiums as permitted by the
Company's regulatory
12
authorities. The studies have consistently confirmed management's assertion that
the Company's core deposit transaction accounts 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 September 30, 2004, the average life of the Company's
core deposit transaction accounts was 14.1 years. Thus, these core deposit
balances provide an internal hedge to market value fluctuations in the Company's
fixed rate assets.
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 September 30, 2004 (in
millions, except for per share amounts):
------------------------------------------------------------------------
Market Value
Of Equity Per Share
------------------------------------------------------------------------
Plus 200 basis points $5,359 $67.46
Current Rate $5,305 $66.79
Minus 100 basis points $4,489 $56.51
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 September 30, 2004 the Company had in excess of $12.7 billion in
immediately available liquidity which includes unpledged securities that could
be used for collateralized borrowings, cash on hand, and borrowing capacities
under existing lines of credit. During the first nine months of 2004, deposit
growth, short-term borrowings and maturing investment securities 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 September 30, 2004, short-term borrowings
totaled $165.9 million and had an average rate of 1.49%, as compared to $311.5
million at an average rate of 0.77% at December 31, 2003.
Interest Earning Assets
-----------------------
The Company's cash flow from deposit growth and repayments from its investment
portfolio totaled approximately $9.2 billion for the first nine months of 2004.
This significant cash flow provides the Company with ongoing reinvestment
opportunities as interest rates change. For the nine month period ended
September 30, 2004, interest earning assets increased $5.4 billion from $20.8
billion to $26.2 billion. This increase was primarily in investment securities
and the loan portfolio as described below.
Loans
-----
During the first nine months of 2004, loans increased $1.5 billion from $7.4
billion to $8.9 billion. All segments of the loan portfolio experienced growth
in the first nine months of 2004, including loans secured by commercial real
estate properties, commercial loans, and consumer loans.
13
The following table summarizes the loan portfolio of the Company by type of loan
as of the dates shown.
September 30, December 31,
--------------------------------------
2004 2003
--------------------------------------
(in thousands)
Commercial:
Term $ 1,184,854 $ 1,027,526
Line of credit 1,105,510 959,158
Demand 1,077
---------------- ---------------------
2,290,364 1,987,761
Owner-occupied 1,913,351 1,619,079
---------------- ---------------------
4,203,715 3,606,840
Consumer:
Mortgages (1-4 family residential) 1,216,110 918,686
Installment 136,538 138,437
Home equity 1,712,733 1,405,795
Credit lines 67,616 60,579
---------------- ---------------------
3,132,997 2,523,497
Commercial real estate:
Investor developer 1,391,812 1,167,672
Construction 182,443 142,567
---------------- ---------------------
1,574,255 1,310,239
---------------- ---------------------
Total loans $ 8,910,967 $ 7,440,576
================ =====================
Investments
-----------
In total, for the first nine months of 2004, securities increased $3.7 billion
from $13.3 billion to $17.0 billion. The available for sale portfolio increased
$2.0 billion to $12.7 billion at September 30, 2004 from $10.7 billion at
December 31, 2003, and the securities held to maturity portfolio increased $1.6
billion to $4.1 billion at September 30, 2004 from $2.5 billion at year-end
2003. The portfolio of trading securities increased $74.8 million from year-end
2003 to $245.3 million at September 30, 2004.
Detailed below is information regarding the composition and characteristics of
the Company's investment portfolio, excluding trading securities, as of
September 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) $ 4,032 5.01% $101.20 3.67 4.52
Collateralized Mortgage
Obligations (AAA Rated) 11,315 4.86 100.85 3.16 3.78
U.S. Government agencies/Other 1,426 3.77 100.26 4.53 5.18
--------------- ------------- --------------- ------------- -------------
Total $16,773 4.81% $100.89 3.40 4.07
=============== ============= =============== ============= =============
14
The Company's mortgage-backed securities (MBS) portfolio comprises 90% 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.
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 (in
thousands).
-----------------------------------------------------------
At September 30, 2004
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------
U.S. Government agency and mortgage-backed
obligations $12,520,080 $ 79,678 $ (68,842) $12,530,916
Obligations of state and political subdivisions 104,623 1,098 (31) 105,690
Other 47,977 8,402 56,379
---------------------------------------------------------
Securities available for sale $12,672,680 $ 89,178 $ (68,873) $12,692,985
---------------------------------------------------------
U.S. Government agency and mortgage-backed
obligations $ 3,583,525 $ 23,131 $ (25,930) $ 3,580,726
Obligations of state and political subdivisions 400,145 1,558 (8,990) 392,713
Other 96,464 96,464
---------------------------------------------------------
Securities held to maturity $ 4,080,134 $ 24,689 $ (34,920) $ 4,069,903
---------------------------------------------------------
----------------------------------------------------------
At December 31, 2003
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------
U.S. Government agency and mortgage-backed
obligations $10,528,396 $ 82,057 $ (98,908) $10,511,545
Obligations of state and political subdivisions 30,223 821 (117) 30,927
Other 97,943 10,240 108,183
---------------------------------------------------------
Securities available for sale $10,656,562 $ 93,118 $ (99,025) $10,650,655
---------------------------------------------------------
U.S. Government agency and mortgage-backed
obligations $ 2,193,577 $ 15,209 $ (27,088) $ 2,181,698
Obligations of state and political subdivisions 227,199 30 (11,443) 215,786
Other 69,708 69,708
---------------------------------------------------------
Securities held to maturity $ 2,490,484 $ 15,239 $ (38,531) $ 2,467,192
---------------------------------------------------------
Gross gains and losses on securities sold during the third quarter of 2004 were
$2.1 million and $1.1 million, respectively. For the first nine months of 2004,
gross gains and losses on securities sold amounted to $14.9 million and $12.9
million, respectively.
During the third quarter of 2004, $71.2 million of securities were sold which
had unrealized losses at December 31, 2003. Gross gains and losses on these
securities sold were $0 and $1.1 million, respectively. During the first nine
months of 2004, $1.2 billion of securities were sold which had unrealized losses
at December 31, 2003. Gross gains and losses on these securities sold were $1.8
million and $12.8 million, respectively.
The decrease in long-term interest rates during the third quarter led to a
shortening of the duration of the available for sale portfolio to 3.31 years at
September 30, 2004 from 4.07 years at June 30, 2004. The after-tax appreciation
in the Company's available for sale portfolio was $12.7 million at September 30,
2004.
15
Net Income
----------
Net income for the third quarter of 2004 was $70.1 million, an increase of $20.6
million or 42% over the $49.5 million recorded for the third quarter of 2003.
Net income for the first nine months of 2004 totaled $198.3 million, an increase
of $60.6 million or 44% from $137.7 million in the first nine months of 2003. On
a per share basis, diluted net income for the third quarter and first nine
months of 2004 was $0.84 and $2.38 per common share compared to $0.67 and $1.90
per common share for the same periods in 2003. Net income per share for the
third quarter and first nine months of 2004 reflects the addition of 5.0 million
shares from the Company's 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 third
quarter of 2004 were 1.02% and 18.97%, respectively, compared to 0.96% and
21.17%, respectively, for the same 2003 period. ROA and ROE for the first nine
months of 2004 were 1.03% and 18.90%, respectively, compared to 0.98% and
18.97%, respectively, for the same 2003 period. The increase in ROA is due to
net income growth rates that have exceeded growth rates in average assets during
the three month and nine month periods ended September 30, 2004 as compared to
the same periods in 2003. The decrease in ROE is due to average equity growth
rates that have exceeded net income rates growth during the three month and nine
month periods ended September 30, 2004 as compared to the same periods in 2003.
As noted above, net income has grown 42% and 44% during the third quarter and
first nine months of 2004, respectively, as compared to the same 2003 periods.
Average assets and average equity have grown 32% and 58%, respectively, from
September 30, 2003 to September 30, 2004.
Net Interest Income
-------------------
Net interest income totaled $264.4 million for the third quarter of 2004, an
increase of $70.3 million or 36% from $194.1 million in the third quarter of
2003. Net interest income for the first nine months of 2004 was $739.3 million,
up $198.6 million or 37% from $540.7 million for the first nine months of 2003.
The increases in net interest income for the third quarter and first nine 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 September 30 $ 71,018 $ (167) $ 70,851 36%
Nine Months Ended September 30 $213,027 $(12,976) $200,051 36%
The net interest margin for the third quarter of 2004 was 4.29%, consistent with
the margin for the second quarter of 2004 and up 8 basis points from the 4.21%
margin for the third quarter of 2003.
The following table sets forth balance sheet items on a daily average basis for
the three months ended September 30, 2004, June 30, 2004 and September 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
---------------------------------------------------------------------------------------------------
September 2004 June 2004 September 2003
---------------------------------- -------------------------------- -----------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------- -------------------------------- -----------------------------
Earning Assets
----------------------------------
Investment securities
Taxable $15,741,541 $191,627 4.84% $14,747,643 $173,678 4.74% $11,605,502 $131,158 4.48%
Tax-exempt 385,814 5,126 5.29 290,200 4,465 6.19 229,566 3,771 6.52
Trading 159,954 1,552 3.86 174,578 2,075 4.78 155,541 2,115 5.40
------------- -------------------- -------------------------------- -----------------------------
Total investment securities 16,287,309 198,305 4.84 15,212,421 180,218 4.76 11,990,609 137,044 4.53
Federal funds sold 40,413 148 1.46 62,357 154 0.99 10,641 28 1.04
Loans
Commercial mortgages 3,189,126 48,881 6.10 3,021,768 45,333 6.03 2,520,594 39,189 6.17
Commercial 2,069,986 28,552 5.49 1,961,351 25,477 5.22 1,612,069 21,968 5.41
Consumer 3,024,776 43,287 5.69 2,767,826 39,079 5.68 2,262,426 34,309 6.02
Tax-exempt 337,374 6,121 7.22 335,505 6,243 7.48 271,436 5,266 7.70
------------- -------------------- -------------------------------- -----------------------------
Total loans 8,621,262 126,841 5.85 8,086,450 116,132 5.78 6,666,525 100,732 5.99
------------- -------------------- -------------------------------- -----------------------------
Total earning assets $24,948,984 $325,294 5.19% $23,361,228 $296,504 5.10% $18,667,775 $237,804 5.06%
============= ============= =============
Sources of Funds
----------------------------------
Interest-bearing liabilities
Savings $5,715,755 $12,408 0.86% $5,276,657 $10,216 0.78% $3,938,114 $ 6,890 0.69%
Interest bearing demand 10,270,059 24,539 0.95 9,643,771 18,729 0.78 7,293,024 12,090 0.66
Time deposits 2,409,160 11,046 1.82 2,507,526 11,378 1.82 2,470,306 13,848 2.22
Public funds 800,579 3,164 1.57 856,683 2,886 1.35 813,271 2,834 1.38
------------- -------------------- -------------------------------- -----------------------------
Total deposits 19,195,553 51,157 1.06 18,284,637 43,209 0.95 14,514,715 35,662 0.97
Other borrowed money 614,282 2,255 1.46 523,931 1,052 0.81 727,128 1,111 0.61
Long-term debt 200,000 3,020 6.01 200,000 3,020 6.07 200,000 3,020 5.99
------------- -------------------- -------------------------------- -----------------------------
Total deposits and
interest-bearing
liabilities 20,009,835 56,432 1.12 19,008,568 47,281 1.00 15,441,843 39,793 1.02
Noninterest-bearing funds (net) 4,939,149 4,352,660 3,225,932
============= -------------------- =============------------------- =============----------------
Total sources to fund earning
assets $24,948,984 56,432 0.90 $23,361,228 47,281 0.81 $18,667,775 39,793 0.85
============= -------------------- =============------------------- =============----------------
Net interest income and
margin tax-equivalent basis $268,862 4.29% $249,223 4.29% $198,011 4.21%
========== ===== ========== ===== ========== =====
Other Balances
----------------------------------
Cash and due from banks $1,145,324 $1,163,942 $ 971,495
Other assets 1,430,576 1,419,098 1,180,451
Total assets 27,393,847 25,822,157 20,717,697
Total deposits 24,852,938 23,541,453 18,611,894
Demand deposits (noninterest-
bearing) 5,657,385 5,256,816 4,097,179
Other liabilities 248,878 222,779 243,799
Stockholders' equity 1,477,749 1,333,994 934,876
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 $100.1 million for the third quarter of 2004, an
increase of $14.9 million or 18% from $85.2 million in the third quarter of
2003. Noninterest income for the first nine months of 2004 increased to $278.6
million from $244.6 million in the first nine months of 2003, a 14% increase.
During the third quarter and first nine months of 2004, the increases of 18% and
14%, respectively, were primarily due to increased deposit charges and services
fees, which rose $15.6 million, or 38%, and $40.2 million, or 35%, over the
third quarter and first nine months of 2003, respectively.
The increases in deposit charges and services fees are primarily attributable to
the Company's 34% 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 $4.9 million, or 30%, and
$17.0 million, or 33%, during the third quarter and first nine months of 2004,
respectively, compared to the same periods in 2003. The decrease in loan
brokerage fees resulted from declines in mortgage refinancing activity during
2004. The decrease in CCMI revenues is related in part to the Company's decision
to exit the negotiated public finance underwriting business, as discussed below.
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
9/30/04 9/30/03 % Increase 9/30/04 9/30/03 % Increase
------------------------------------ --------------------------------------
(Dollars in thousands) (Dollars in thousands)
Deposit charges & service fees $57,081 $41,500 38% $155,279 $115,107 35%
Other operating income:
Insurance 19,178 17,623 9 56,084 50,868 10
Capital Markets 8,268 9,138 (10) 24,617 28,836 (15)
Loan Brokerage Fees 3,027 7,073 (57) 9,805 22,541 (57)
Other 11,616 8,142 43 30,833 24,479 26
----------- ---------- --------- ----------- ----------- ----------
Total other 42,089 41,976 - 121,339 126,724 (4)
Net investment securities gains 943 1,682 (44) 2,002 2,763 (28)
----------- ---------- --------- ----------- ----------- ----------
Total non-interest income $100,113 $85,158 18% $278,620 $244,594 14%
=========== ========== ========= =========== =========== ==========
The Company previously announced during its second quarter earnings conference
call on July 13, 2004, that it was exiting the negotiated public finance
underwriting business. Negotiated public finance revenues represented less than
1% of the Company's total revenues for the nine months ended September 30, 2004
and 2003.
Noninterest Expense
-------------------
For the third quarter of 2004, noninterest expense totaled $247.2 million, an
increase of $49.8 million or 25% over the same period in 2003. For the first
nine months of 2004, noninterest expense totaled $685.7 million, an increase of
$128.6 million or 23% over $557.1 million for the first nine months of 2003.
Contributing to this increase was new branch activity over the past twelve
months, with the number of branches increasing from 257 at September 30, 2003 to
297 at September 30, 2004. With the addition of these new offices, staff,
facilities, and related expenses rose accordingly. Other noninterest expenses
rose $14.2 million during the third quarter of 2004 over the same period in 2003
and $30.7 million during the first nine months of 2004 over the same period in
2003. These increases resulted primarily from higher bank card-related service
charges, increased business development expenses, increased professional fees
and increased provisions for non-credit-related losses. For the quarter and nine
months ended September 30, 2004, provisions for non-credit-related losses were
$5.4 million and $15.3 million, respectively, which represent increases of $1.9
million and $4.2 million, respectively, over the same periods in 2003. Such
growth in non-credit related losses, which include fraud and forgery losses on
deposit items, and other non-credit related items, is primarily attributable to
the Company's growth in new branches and customer accounts.
18
During the third quarter of 2004, the Company exited the negotiated public
finance underwriting business. Exiting this business involved the elimination of
public finance banking professionals and related support. The Company recorded
non-recurring expenses of $1.3 million, primarily severance payments, in the
third quarter related to the exit of this line of business.
The Company continued to experience positive operating leverage in the third
quarter, as revenue growth of 31% exceeded non-interest expense growth of 25%.
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.
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 67.63% for the first nine months of 2004 as compared to
71.20% 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
September 30, 2004 were $38.3 million, or 0.13% of total assets compared to
$23.6 million or 0.10% of total assets at December 31, 2003 and $24.8 million or
0.12% of total assets at September 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 September 30,
2004 were $37.3 million or 0.42% of total loans compared to $21.7 million or
0.29% of total loans at December 31, 2003 and $23.1 million or 0.34% of total
loans at September 30, 2003. At September 30, 2004, loans past due 90 days or
more and still accruing interest amounted to $614 thousand compared to $538
thousand at December 31, 2003 and $649 thousand at September 30, 2003.
Additional loans considered as potential problem loans by the Company's internal
loan review department ($32.6 million at September 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 the third quarter of 2004 is
the result of one large credit that was moved to non-accrual in the third
quarter of 2004 and is in the process of collection. The increase is offset by a
reduction in consumer non-accrual, with three credits relating to the 2003
attempt to defraud the Company and other financial institutions being
charged-off. Additionally, during the third quarter one commercial credit was
restructured and re-classified from Non-accrual loans to Restructured loans
(both classifications are part of Total non-performing loans). The increase in
commercial non-performing loans has led to the overall increase in
non-performing assets noted during the first nine months of 2004. Total
non-performing assets and loans past due 90 days or more increased from June 30,
2004 to September 30, 2004 primarily as a result of the increase in commercial
non-accrual loans as previously discussed. Despite these increases, the overall
asset quality of the Company, as measured in terms of non-performing assets to
total assets, coverage ratios and non-performing assets to stockholders' equity,
remains strong.
19
The following summary presents information regarding non-performing loans and
assets as of September 30, 2004 and the preceding four quarters (dollar amounts
in thousands).
September 30, June 30, March 31, December 31, September 30,
2004 2004 2004 2003 2003
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $22,647 $17,382 $19,701 $ 6,867 $ 7,295
Consumer 9,784 11,675 9,984 9,242 8,295
Commercial real estate:
Construction 138
Mortgage 1,251 675 810 5,494 7,502
---------------------------------------------------------------------------
Total non-accrual loans 33,682 29,732 30,495 21,741 23,092
---------------------------------------------------------------------------
Restructured loans:
Commercial 3,614 1 1 1 2
Consumer
Commercial real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 3,614 1 1 1 2
---------------------------------------------------------------------------
Total non-performing loans 37,296 29,733 30,496 21,742 23,094
---------------------------------------------------------------------------
Other real estate 972 653 1,890 1,831 1,670
---------------------------------------------------------------------------
Total non-performing assets 38,268 30,386 32,386 23,573 24,764
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 614 318 696 538 649
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $38,882 $30,704 $33,082 $24,111 $25,413
===========================================================================
Total non-performing loans as a
Percentage of total period-end loans 0.42% 0.36% 0.39% 0.29% 0.34%
Total non-performing assets as a
Percentage of total period-end assets 0.13% 0.11% 0.13% 0.10% 0.12%
Total non-performing assets and loans
past due 90 days or more as a
Percentage of total period-end assets 0.14% 0.11% 0.13% 0.11% 0.12%
Allowance for loan losses as a percentage
of total non-performing loans 353% 419% 385% 515% 449%
Allowance for loan losses as a percentage
of total period-end loans 1.48% 1.50% 1.51% 1.51% 1.52%
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 Nine Months Ended Ended
09/30/04 09/30/03 09/30/04 09/30/03 12/31/03
------------ ----------- ------------ ------------ ------------
Balance at beginning of period $124,688 $99,318 $112,057 $90,733 $90,733
Provisions charged to operating expenses 10,750 7,250 30,998 21,050 31,850
------------ ----------- ------------ ------------ ------------
135,438 106,568 143,055 111,783 122,583
Recoveries on loans charged-off:
Commercial 435 111 695 456 669
Consumer 265 239 636 516 584
Commercial real estate 4 - 52 - 11
------------ ----------- ------------ ------------ ------------
Total recoveries 704 350 1,383 972 1,264
Loans charged-off:
Commercial (1,634) (1,608) (6,514) (4,673) (5,601)
Consumer (2,968) (1,684) (4,744) (4,439) (5,950)
Commercial real estate (11) (34) (1,651) (51) (239)
------------ ----------- ------------ ------------ ------------
Total charge-offs (4,613) (3,326) (12,909) (9,163) (11,790)
------------ ----------- ------------ ------------ ------------
Net charge-offs (3,909) (2,976) (11,526) (8,191) (10,526)
------------ ----------- ------------ ------------ ------------
Balance at end of period $131,529 $103,592 $131,529 $103,592 $112,057
============ =========== ============ ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.18% 0.18% 0.19% 0.17% 0.16%
Net reserve additions $ 6,841 $ 4,274 $19,472 $12,859 $21,324
The increases in commercial and commercial real estate charge-offs during the
first nine months of 2004 are primarily related to a large credit, with both a
real estate as well as a commercial component, that experienced difficulties
during the first quarter of 2004 and another non-accrual commercial credit.
Charge-offs relating to these credits were approximately $3.0 million. Consumer
loan charge-offs increased during the third quarter as a result of the
previously mentioned charge-offs of three non-accrual loans. The net reserve
additions for the first nine months and third quarter of 2004 are reflective of
the increases in non-performing assets since December 31, 2003 and increases in
the overall loan portfolio.
The Company considers the allowance for loan losses of $131.5 million adequate
to cover probable losses inherent in the loan portfolio at September 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 non-accrual 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 management is timely
alerted to material information relating to the Company during the period when
the Company's periodic reports are being prepared.
During the quarter ended September 30, 2004, there has not occurred any 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
-----------------
During July and August 2004, six 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. All class action complaints have been
consolidated in the United States District Court for the District of New Jersey,
Camden Division. The complaints, which contain virtually the same factual
allegations and causes of action, 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 these class action complaints are without merit. No accrual for
a loss contingency has been recorded, as the risk of loss is considered remote.
Item 6. Exhibits
--------
Exhibits
--------
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.
23
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)
NOVEMBER 8, 2004 /s/ DOUGLAS J. PAULS
---------------------------- --------------------------------------------
(Date) DOUGLAS J. PAULS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
24