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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File #0-12874
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[COMPANY LOGO OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
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(Address of Principal Executive Offices) (Zip Code)
(856) 751-9000
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(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 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 last practical date.
Common Stock 69,895,566
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(Title of Class) (No. of Shares Outstanding
as of August 1, 2003)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 2003 and December 31, 2002........................................................1
Consolidated Statements of Income (unaudited) Three months ended
June 30, 2003 and June 30, 2002 and
six months ended June 30, 2003 and June 30, 2002...........................................2
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2003 and June 30, 2002...........................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Six months ended June 30, 2003.............................................................4
Notes to Consolidated Financial Statements (unaudited).....................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................18
Item 4. Control and Procedures....................................................................19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................................20
Item 6. Exhibits and Reports on Form 8-K..........................................................20
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
---------------------------------------------------------------------------------------------------
June 30, December 31,
------------------------------------
-----------------
(dollars in thousands) 2003 2002
---------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 1,013,885 $ 811,434
Federal funds sold - -
---------------- ---------------
Cash and cash equivalents 1,013,885 811,434
Loans held for sale 91,285 96,920
Trading securities 209,451 326,479
Securities available for sale 10,259,811 7,806,779
Securities held to maturity 841,752 763,026
(market value 06/03-$855,444; 12/02-$791,889)
Loans 6,378,623 5,822,589
Less allowance for loan losses 99,318 90,733
---------------- ---------------
6,279,305 5,731,856
Bank premises and equipment, net 701,246 580,818
Other assets 440,577 286,669
---------------- ---------------
Total assets $19,837,312 $16,403,981
================ ===============
Liabilities Deposits:
Demand:
Interest-bearing $ 6,616,309 $ 5,635,351
Noninterest-bearing 4,185,186 3,243,091
Savings 3,786,798 2,861,677
Time 3,198,789 2,808,722
---------------- ---------------
Total deposits 17,787,082 14,548,841
Other borrowed money 507,975 391,641
Other liabilities 331,765 345,489
Convertible Trust Capital Securities - Commerce Capital
Trust II 200,000 200,000
---------------- ---------------
Total liabilities 18,826,822 15,485,971
Stockholders' Common stock, 69,920,679 shares
Equity issued (68,043,171 shares at December 31, 2002) 69,921 68,043
Capital in excess of par or stated value 591,060 538,795
Retained earnings 265,239 199,604
Accumulated other comprehensive income 89,515 113,614
---------------- ---------------
1,015,735 920,056
Less treasury stock, at cost, 286,358 shares
(209,794 shares at December 31, 2002) 5,245 2,046
---------------- ---------------
Total stockholders' equity 1,010,490 918,010
---------------- ---------------
Total liabilities and stockholders' equity $19,837,312 $16,403,981
================ ===============
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 2003 2002 2003 2002
amounts)
---------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $ 95,548 $ 86,959 $188,669 $168,782
income Interest on investments 123,098 101,293 236,759 187,510
Other interest 98 116 177 280
------------- ------------ ------------ ------------
Total interest income 218,744 188,368 425,605 356,572
------------- ------------ ------------ ------------
Interest Interest on deposits:
expense Demand 11,961 14,707 24,358 27,615
Savings 6,754 8,133 13,109 15,211
Time 17,387 21,538 34,233 42,819
------------- ------------ ------------ ------------
Total interest on deposits 36,102 44,378 71,700 85,645
Interest on other borrowed money 318 282 1,232 708
Interest on long-term debt 3,020 5,082 6,040 7,514
------------- ------------ ------------ ------------
Total interest expense 39,440 49,742 78,972 93,867
------------- ------------ ------------ ------------
Net interest income 179,304 138,626 346,633 262,705
Provision for loan losses 6,900 10,250 13,800 17,150
------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 172,404 128,376 332,833 245,555
Noninterest Deposit charges and service fees 38,765 31,629 73,607 60,592
income Other operating income 43,388 30,100 84,748 57,027
Net investment securities gains 1,217 - 1,081 -
------------- ------------ ------------ ------------
Total noninterest income 83,370 61,729 159,436 117,619
------------- ------------ ------------ ------------
Noninterest Salaries and benefits 86,338 64,178 168,420 124,323
expense Occupancy 22,695 13,083 43,183 25,181
Furniture and equipment 20,556 15,588 41,782 30,693
Office 9,233 7,454 18,419 14,370
Marketing 9,198 6,112 14,474 10,973
Other 39,658 31,125 73,521 57,921
------------- ------------ ------------ ------------
Total noninterest expenses 187,678 137,540 359,799 263,461
------------- ------------ ------------ ------------
Income before income taxes 68,096 52,565 132,470 99,713
Provision for federal and state income taxes 22,779 17,763 44,263 33,161
------------- ------------ ------------ ------------
Net income $ 45,317 $ 34,802 $ 88,207 $ 66,552
============= ============ ============ ============
Net income per common and common
equivalent share:
Basic $ 0.65 $ 0.52 $ 1.28 $ 1.00
Diluted $ 0.63 $ 0.49 $ 1.23 $ 0.94
Average common and common equivalent
shares outstanding:
Basic 69,193 66,552 68,758 66,275
Diluted 72,128 71,007 71,944 70,510
Cash dividends, common stock $ 0.16 $ 0.15 $ 0.33 $ 0.30
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Six Months Ended
June 30,
---------------------------------
(dollars in thousands) 2003 2002
------------------------------------------------------------------------------------------------------
Operating Net income $ 88,207 $ 66,552
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 13,800 17,150
Provision for depreciation, amortization and accretion 60,943 27,989
Gain on sales of securities available for sale 1,081 -
Proceeds from sales of loans held for sale 802,737 777,526
Originations of loans held for sale (757,102) (739,023)
Net decrease in trading securities 117,028 63,957
Increase in other assets (18,039) (12,152)
Decrease in other liabilities (13,724) (3,358)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 294,931 198,641
Investing Proceeds from the sales of securities available for sale 2,070,247 609,481
activities Proceeds from the maturity of securities available for sale 2,493,675 760,908
Proceeds from the maturity of securities held to maturity 279,923 242,799
Purchase of securities available for sale (7,207,889) (3,078,553)
Purchase of securities held to maturity (358,633) (32,604)
Net increase in loans (653,496) (690,378)
Proceeds from sales of loans 52,247 10,214
Capital expenditures (151,499) (79,594)
------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,475,425) (2,257,727)
Financing Net increase in demand and savings deposits 2,848,174 1,509,026
activities Net increase in time deposits 390,067 692,769
Net increase (decrease) in other borrowed money 116,334 (146,063)
Redemption of long term debt - (23,000)
` Proceeds from issuance of Trust Capital Securities - 200,000
Dividends paid (22,569) (19,792)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 52,251 33,067
Other (1,312) 8
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,382,945 2,246,015
Increase in cash and cash equivalents 202,451 186,929
Cash and cash equivalents at beginning of year 811,434 557,738
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,013,885 $ 744,667
======================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 79,741 $ 94,301
Income taxes 36,462 29,200
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
Six months ended June 30, 2003
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Excess of Other
Common Par or Retained Treasury Comprehensive
Stock Stated Value Earnings Stock Income Total
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Balances at December 31, 2002 $68,043 $538,795 $199,604 $(2,046) $113,614 $918,010
Net income 88,207 88,207
Other Comprehensive Income, net of tax
Unrealized loss on securities (5,786) (5,786)
Reclassification adjustment (18,313) (18,313)
------------
Other comprehensive income (24,099)
Total comprehensive income 64,108
Cash dividends paid (22,569) (22,569)
Shares issued under dividend reinvestment
and compensation and benefit plans (1,834 shares) 1,834 50,417 52,251
Acquisition of insurance brokerage agencies (44 shares) 44 1,848 1,892
Other (3) (3,199) (3,202)
------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2003 $69,921 $591,060 $265,239 $(5,245) $89,515 $1,010,490
------------------------------------------------------------------------------------------------------------------------------------
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 has been condensed or omitted pursuant to such
rules and regulations. The accompanying condensed consolidated financial
statements reflect all adjustments which 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 condensed 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, 2002.
The results for the three and six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. (the Company) and all of its subsidiaries, including Commerce Bank, N.A.
(Commerce NJ), Commerce Bank/Pennsylvania, N.A., Commerce Bank/Shore, N.A.,
Commerce Bank/North, Commerce Bank/Delaware, N.A., Commerce Insurance Services,
Inc. (CIS), Commerce Capital Trust II, and Commerce Capital Markets, Inc.
(CCMI). All material intercompany transactions have been eliminated. Certain
amounts from prior years have been reclassified to conform with 2003
presentation.
B. Recent Announcements
On August 8, 2003, the Company filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission (SEC). Once declared effective by
the SEC, the shelf registration statement will allow the Company to periodically
offer and sell, individually or in any combination, common stock, preferred
stock, debt securities, trust preferred securities, warrants to purchase other
securities and units (which include a combination of any of the preceding
securities) up to a total of $500 million, subject to market conditions and the
Company's capital needs.
C. 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.
During the second quarter of 2003, the Company reclassed capital expenditures
for bank premises and equipment in progress, previously reported in Other
assets, to Bank premises and equipment, net. As of June 30, 2003 and December
31, 2002, Bank premises and equipment in progress was $98.1 million and $81.6
million, respectively.
D. Commitments
In the normal course of business, there are various commitments to extend credit
outstanding, such as letters of credit, which are not reflected in the
accompanying consolidated financial statements. Management does not anticipate
any material losses as a result of these transactions.
E. Comprehensive Income
Total comprehensive income, which for the Company included net income and
unrealized gains and losses on the Company's available for sale securities,
amounted to $41.6 million and $116.2 million, respectively, for the three months
ended June 30, 2003 and 2002. For the six months ended June 30, 2003 and 2002,
total comprehensive income was $64.1 million and $122.7 million, respectively.
5
F. New Accounting Standards
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (FAS 150), which the Company adopted on July 1,
2003. This statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. Financial instruments that fall within the scope of FAS
150 are to be classified as liabilities, or an asset in some circumstances. This
statement became effective upon issuance for financial instruments entered into
or modified after May 31, 2003 and for all financial instruments previously
entered into at the beginning of the first interim period beginning after June
15, 2003. Management does not expect the adoption of FAS 150 to have a material
impact on the Company's results of operations and financial position.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (FAS 149), which the Company
adopted on July 1, 2003. This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. Management does
not expect the adoption of FAS 149 to have a material impact on the Company's
results of operations and financial position.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which the Company adopted on July 1, 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. FIN 46's consolidation criteria are based on
an analysis of risks and rewards, not control, and represent a significant and
complex modification of previous accounting principles. Management is in the
process of reviewing the application of FIN 46 to all of its interests in
operating entities that are not presently consolidated. Management does not
expect the adoption of FIN 46 to have a material impact on the Company's
consolidated financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). This statement is effective for fiscal years ending
after December 15, 2002 and did not have an impact on the financial condition or
operating results of the Company.
The Company will continue to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations to account for its stock-based
compensation plans. If the Company had accounted for stock options under the
fair value provisions of FAS 123, net income and net income per share would have
been as follows (in thousands, except per share amounts):
---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------------------------------------
Net income, as reported $45,317 $34,802 $85,207 $66,552
Pro forma net income $43,084 $32,695 $83,594 $62,338
Pro forma net income per share:
Basic $ 0.62 $ 0.49 $ 1.22 $ 0.94
Diluted $ 0.60 $ 0.46 $ 1.16 $ 0.88
The fair value of options granted in 2003 and 2002 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 3.00% to 4.41%, dividend yields
of 1.50% to 2.50%, volatility factors of the expected market price of the
Company's common stock of .304 and weighted average expected lives of the
options of 5.22 and 4.75 years.
6
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.
G. Segment Information
Selected segment information is as follows:
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
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Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 180,729 $ (1,425) $ 179,304 $ 142,291 $ (3,665) $ 138,626
Provision for loan losses 6,900 6,900 10,250 10,250
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Net interest income after provision 173,829 (1,425) 172,404 132,041 (3,665) 128,376
Noninterest income 56,009 27,361 83,370 39,893 21,836 61,729
Noninterest expense 166,136 21,542 187,678 118,295 19,245 137,540
------------------------------------------------------------------------------------
Income before income taxes 63,702 4,394 68,096 53,639 (1,074) 52,565
Income tax expense 21,317 1,462 22,779 19,034 (1,271) 17,763
------------------------------------------------------------------------------------
Net income $ 42,385 $ 2,932 $ 45,317 $ 34,605 $ 197 $ 34,802
====================================================================================
Average assets (in millions) $ 16,715 $ 1,784 $ 18,499 $ 11,505 $ 1,661 $ 13,166
====================================================================================
-------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 348,958 $ (2,325) $ 346,633 $ 267,761 $ (5,056) $ 262,705
Provision for loan losses 13,800 13,800 17,150 17,150
------------------------------------------------------------------------------------
Net interest income after provision 335,158 (2,325) 332,833 250,611 (5,056) 245,555
Noninterest income 106,004 53,432 159,436 75,941 41,678 117,619
Noninterest expense 315,586 44,213 359,799 226,147 37,314 263,461
------------------------------------------------------------------------------------
Income before income taxes 125,576 6,894 132,470 100,405 (692) 99,713
Income tax expense 42,292 1,971 44,263 34,290 (1,129) 33,161
------------------------------------------------------------------------------------
Net income $ 83,284 $ 4,923 $ 88,207 $ 66,115 $ 437 $ 66,552
====================================================================================
Average assets (in millions) $ 15,858 $ 1,812 $ 17,670 $ 11,002 $ 1,431 $ 12,433
====================================================================================
7
H. Trust Capital Securities
On March 11, 2002 the Company issued $200 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. The Convertible Trust Capital
Securities mature in 2032. Holders of the Convertible Trust Capital Securities
may convert each security into 0.9478 shares of Company common stock, subject to
adjustment, if (1) the closing sale price of Company common stock for at least
20 trading days in a period of 30 consecutive trading days ending on the last
trading day of any calendar quarter beginning with the quarter ending June 30,
2002 is more than 110% of the Convertible Trust Capital Securities conversion
price ($52.75 at June 30, 2003) then in effect on the last day of such calendar
quarter, (2) the assigned credit rating by Moody's of the Convertible Trust
Capital Securities is at or below Bal, (3) the Convertible Trust Capital
Securities are called for redemption, or (4) specified corporate transactions
have occurred. All $200.0 million of the Convertible Trust Capital Securities
qualify as Tier 1 capital for regulatory capital purposes. As of June 30, 2003
the Convertible Trust Capital Securities were not convertible. The net proceeds
of this offering were used for general corporate purposes, including the
redemption of the Company's $57.5 million of 8.75% Trust Capital Securities on
July 1, 2002 and the repayment of the Company's $23.0 million of 8 3/8%
subordinated notes on May 20, 2002.
I. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------------------
Basic:
Net income $45,317 $34,802 $88,207 $66,552
============== ============== ============== ==============
Average common shares outstanding 69,193 66,552 68,758 66,275
============== ============== ============== ==============
Net income per share of common stock $ 0.65 $ 0.52 $ 1.28 $ 1.00
============== ============== ============== ==============
Diluted:
Net income $45,317 $34,802 $88,207 $66,552
============== ============== ============== ==============
Average common shares outstanding 69,193 66,552 68,758 66,275
Additional shares considered in diluted
computation assuming:
Exercise of stock options 2,935 4,455 3,186 4,235
-------------- -------------- -------------- --------------
Average common shares outstanding
on a diluted basis 72,128 71,007 71,944 70,510
============== ============== ============== ==============
Net income per common share - diluted $ 0.63 $ 0.49 $ 1.23 $ 0.94
============== ============== ============== ==============
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operation
------------
Capital Resources
-----------------
At June 30, 2003, stockholders' equity totaled $1,010.5 million or 5.09% of
total assets, compared to $918.0 million or 5.60% of total assets at December
31, 2002.
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 reserve
for possible loan losses.
The table below presents the Company's and Commerce NJ's risk-based and leverage
ratios at June 30, 2003 and 2002:
Per Regulatory Guidelines
--------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------------
June 30, 2003
Company
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 NJ
Risk based capital ratios:
Tier 1 $638,338 10.00% $255,361 4.00% $383,042 6.00%
Total capital 704,660 11.04 510,722 8.00 638,403 10.00
Leverage ratio 638,338 5.50 464,104 4.00 580,130 5.00
June 30, 2002
Company
Risk based capital ratios:
Tier 1 $ 931,146 12.54% $296,929 4.00% $445,393 6.00%
Total capital 1,035,198 13.95 593,858 8.00 742,322 10.00
Leverage ratio 931,146 7.10 524,807 4.00 656,009 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $ 463,215 10.39% $178,329 4.00% $267,494 6.00%
Total capital 515,483 11.56 356,658 8.00 445,823 10.00
Leverage ratio 463,215 6.25 296,235 4.00 370,294 5.00
At June 30, 2003, 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, 2003, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject.
Deposits
--------
Total deposits at June 30, 2003 were $17.8 billion, up $5.4 billion, or 44% over
total deposits of $12.4 billion at June 30, 2002, and up by $3.3 billion, or 23%
from year-end 2002. Deposit growth during the first six months of 2003 included
core deposit growth in all categories as well as growth from the public sector.
The Company experienced "same-store core deposit growth" of 29% at June 30, 2003
as compared to the same period in 2002 for those branches open for more than two
years.
9
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.
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 a 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 15% of net income in
the flat rate scenario in the first year and within 30% over the two year time
frame. At June 30, 2003, the Company's income simulation model indicates net
income would decrease by 9.47% and by 15.03% in the first year and over a two
year time frame, respectively, if rates decreased as described above. At June
30, 2002, the Company's income simulation model was run assuming a 200 basis
point decrease and indicated net income would decrease by 0.35% and by 9.62% in
the first year and over a two year time frame, respectively. At June 30, 2003,
the model projects that net income would increase by 1.34% and by 11.09% in the
first year and over a two year time frame, respectively, if rates increased as
described above, as compared to a decrease by 0.18% and increase 5.71%,
respectively, at June 30, 2002. 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 sale of a portion of its available for sale portfolio,
the use of risk management strategies such as interest rate swaps and caps, or
the extension of the maturities of its short-term borrowings.
Since June 30, 2003, longer-term interest rates have risen sharply, resulting in
a steeper yield curve. If interest rates remain at current levels for the next
12 months, the Company's models project that the net interest margin will
increase, resulting in increased net income. In addition, the Company's market
value of equity (MVE) would increase as more fully described below.
Management also monitors interest rate risk by utilizing a market value of
equity at risk model. The model assesses the impact of a change in interest
rates on the market value of all the Company's assets and liabilities. 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 or minus 100 basis point
change in rates. The Company's ALCO policy indicates that the level of interest
rate risk is unacceptable if the immediate plus 200 or minus 100 basis point
change would result in the loss of 45% or more of the excess of market value
over book value in the current rate scenario. At June 30, 2003, the market value
of equity model indicates an acceptable level of interest rate risk.
10
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. Thus,
these core deposit balances provide an internal hedge to market value
fluctuations in the Company's fixed rate assets. The following table depicts the
average lives of the Company's loans, investments and deposits at June 30, 2003:
---------------------------------------------------
Average Life
(in years)
---------------------------------------------------
Loans 3.5
Investments 3.8
Deposits 14.3
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
more than the decrease in value of the Company's fixed rate assets. The
following table summarizes the market value of equity at June 30, 2003 (in
millions, except for per share amounts):
-----------------------------------------------------------------
Market Value
Of Equity Per Share
-----------------------------------------------------------------
Plus 200 basis point $4,183 $60.07
Current Rate $3,804 $54.63
Minus 100 basis point $2,885 $41.43
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, FHLB advances, or the sale of its
available for sale investment portfolio. As of June 30, 2003 the Company had in
excess of $8.7 billion in immediately available liquidity which includes
securities that could be sold or used for collateralized borrowings, cash on
hand, and borrowing capacities under existing lines of credit. During the first
six months of 2003, deposit growth was used to fund growth in the loan portfolio
and purchase additional investment securities.
Short-Term Borrowings
---------------------
Short-term borrowings, or other borrowed money, 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, 2003, short-term borrowings
aggregated $508.0 million and had an average rate of 0.70%, as compared to
$391.6 million at an average rate of 1.55% at December 31, 2002.
Interest Earning Assets
-----------------------
For the six month period ended June 30, 2003, interest earning assets increased
$3.0 billion from $14.8 billion to $17.8 billion. This increase was primarily in
investment securities and the loan portfolio as described below.
11
Loans
-----
During the first six months of 2003, loans increased $556.0 million from $5.8
billion to $6.4 billion. At June 30, 2003, loans represented 36% of total
deposits and 32% of total assets. All segments of the loan portfolio experienced
growth in the first six months of 2003, 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,
---------------------------------------
2003 2002
---------------------------------------
(dollars in thousands)
Commercial real estate:
Owner-occupied $ 1,486,464 $ 1,345,306
Investor developer 981,657 885,276
Construction 113,931 102,080
---------------------------------------
2,582,052 2,332,662
Commercial:
Term 897,252 842,869
Line of credit 787,084 683,640
Demand 1,512 317
---------------------------------------
1,685,848 1,526,826
Consumer:
Mortgages (1-4 family residential) 676,350 626,652
Installment 135,750 140,493
Home equity 1,239,553 1,139,589
Credit lines 59,070 56,367
---------------------------------------
2,110,723 1,963,101
---------------------------------------
Total loans $6,378,623 $5,822,589
=======================================
Investments
-----------
For the first six months of 2003, total securities increased $2.4 billion from
$8.9 billion to $11.3 billion. The available for sale portfolio increased $2.5
billion to $10.3 billion at June 30, 2003 from $7.8 billion at December 31,
2002, and the securities held to maturity portfolio increased $78.8 million to
$841.8 million at June 30, 2003 from $763.0 million at year-end 2002. The
portfolio of trading securities decreased $117.0 million from year-end 2002 to
$209.5 million at June 30, 2003. At June 30, 2003, the average life of the
investment portfolio was approximately 3.8 years, and the duration was
approximately 3.1 years. At June 30, 2003, total securities represented 57% of
total assets.
During the second quarter of 2003, the Company continued its ongoing review and
repositioning of the portfolio to adjust for current and anticipated interest
rate and yield curve levels. This repositioning of the portfolio involved sales
of approximately $1.4 billion for the second quarter which reduced future
prepayment risk, provided enhanced yields on new purchases and had minimal
effect on the duration of the portfolio.
12
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.
June 30, December 31,
---------------------------------
2003 2002
---------------------------------
(dollars in thousands)
U.S. Government agency and mortgage backed obligations $10,119,546 $7,659,737
Obligations of state and political subdivisions 30,438 23,185
Equity securities 14,276 24,054
Other 95,551 99,803
---------------------------------
Securities available for sale $10,259,811 $7,806,779
=================================
U.S. Government agency and mortgage backed obligations $595,518 $624,688
Obligations of state and political subdivisions 181,511 91,204
Other 64,723 47,134
---------------------------------
Securities held to maturity $841,752 $763,026
=================================
Net Income
----------
Net income for the second quarter of 2003 was $45.3 million, an increase of
$10.5 million or 30% over the $34.8 million recorded for the second quarter of
2002. Net income for the first six months of 2003 totaled $88.2 million, an
increase of $21.7 million or 32% from $66.5 million in the first six months of
2002. On a per share basis, diluted net income for the second quarter and first
six months of 2003 was $0.63 and $1.23 per common share compared to $0.49 and
$0.94 per common share for the same periods in 2002.
Return on average assets (ROA) and return on average equity (ROE) for the second
quarter of 2003 were 0.98% and 17.91%, respectively, compared to 1.06% and
18.99%, respectively, for the same 2002 period. ROA and ROE for the first six
months of 2003 were 1.00% and 17.92%, respectively, compared to 1.07% and
18.99%, respectively, for the same 2002 period.
Net Interest Income
-------------------
Net interest income totaled $179.3 million for the second quarter of 2003, an
increase of $40.7 million or 29% from $138.6 million in the second quarter of
2002. Net interest income for the first six months of 2003 was $346.6 million,
up $83.9 million or 32% from $262.7 million for the first six months of 2002.
The improvement in net interest income was due primarily to the Company's
continued ability to grow deposits and its loan and investment portfolios.
The following table sets forth balance sheet items on a daily average basis for
the three months ended June 30, 2003, March 31, 2003 and June 30, 2002 and
presents the daily average interest earned on assets and paid on liabilities for
such periods.
13
Average Balances and Net Interest Income
--------------------------------------------------------------------------------------------------------
June 2003 March 2003 June 2002
------------------------------------ ---------------------------------- --------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------ ---------------------------------- --------------------------------
Earning Assets
-----------------------------
Investment securities
Taxable $10,026,080 $119,147 4.77% $ 8,681,675 $109,916 5.13% $6,484,728 $97,970 6.06%
Tax-exempt 192,892 3,689 7.67 140,307 2,545 7.36 128,237 2,043 6.39
Trading 158,297 2,389 6.05 270,299 3,215 4.82 225,231 3,069 5.47
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total investment securities 10,377,269 125,225 4.84 9,092,281 115,676 5.16 6,838,196 103,082 6.05
Federal funds sold 32,095 97 1.21 27,154 80 1.19 27,592 116 1.69
Loans
Commercial mortgages 2,319,945 37,156 6.42 2,177,008 35,125 6.54 1,928,153 33,683 7.01
Commercial 1,552,400 21,587 5.58 1,496,039 20,943 5.68 1,194,310 17,952 6.03
Consumer 2,109,143 33,336 6.34 2,075,256 33,719 6.59 1,787,395 32,026 7.19
Tax-exempt 264,737 5,338 8.09 258,614 5,129 8.04 241,226 5,073 8.43
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total loans 6,246,225 97,417 6.26 6,006,917 94,916 6.41 5,151,084 88,734 6.91
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total earning assets $16,655,589 $222,739 5.36% $15,126,352 $210,672 5.65% $12,016,872 $191,932 6.41%
============= ============== =============
Sources of Funds
-----------------------------
Interest-bearing
liabilities
Regular savings $3,477,229 $6,755 0.78% $ 3,021,219 $6,355 0.85% $2,304,839 $8,133 1.42%
N.O.W. accounts 437,455 734 0.67 403,415 813 0.82 331,878 1,152 1.39
Money market plus 5,989,878 11,226 0.75 5,472,788 11,584 0.86 3,858,362 13,555 1.41
Time deposits 2,313,690 14,093 2.44 2,148,534 13,731 2.59 1,840,499 15,992 3.49
Public funds 878,005 3,294 1.50 793,437 3,115 1.59 984,503 5,546 2.26
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total deposits 13,096,257 36,102 1.11 11,839,393 35,598 1.22 9,320,081 44,378 1.91
Other borrowed money 278,780 318 0.46 272,304 914 1.36 70,078 282 1.61
Long-term debt 200,000 3,020 6.06 200,000 3,020 6.12 269,885 5,082 7.55
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total deposits and
interest-bearing
liabilities 13,575,037 39,440 1.17 12,311,697 39,532 1.30 9,660,044 49,742 2.07
Noninterest-bearing
funds (net) 3,080,552 2,814,655 2,356,828
------------- ------------ --------- -------------- ---------- --------- ------------ --------- -------
Total sources to
fund earning $16,655,589 39,440 0.95 $ 15,126,352 39,532 1.06 $12,016,872 49,742 1.66
============= ------------ --------- ============== ---------- --------- ============ --------- -------
Net interest income and
margin tax-equivalent
basis $183,299 4.41% $171,140 4.59% $142,190 4.75%
============= ========== ========== ========= ============ ======
Other Balances
-----------------------------
Cash and due from banks $945,600 $ 865,209 $547,088
Other assets 994,784 933,321 677,551
Total assets 18,498,841 16,831,542 13,166,040
Total deposits 16,734,886 15,033,367 11,885,164
Demand deposits (noninterest-
bearing) 3,638,629 3,193,974 2,565,083
Other liabilities 273,183 369,691 207,939
Stockholders' equity 1,011,992 956,180 732,974
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.
14
Noninterest Income
------------------
Noninterest income totaled $83.4 million for the second quarter of 2003, an
increase of $21.7 million or 35% from $61.7 million in the second quarter of
2002. Noninterest income for the first six months of 2003 increased to $159.4
million from $117.6 million in the first six months of 2002, a 36% increase.
Increased deposit charges and service fees of $7.1 million and $13.0 million
during the three and six months ended June 30, 2003, respectively, resulted
primarily from higher transaction volumes. In addition, other operating income
increased $13.3 million during the second quarter of 2003 and $27.7 million
during the first six months of 2003 as compared to the same periods in 2002.
Included in these increases are increased revenues from CCMI, the Company's
municipal public finance subsidiary, of $1.6 million and $5.2 million during the
three and six months ended June 30, 2003, respectively, and from CIS, the
Company's insurance brokerage subsidiary, of $2.9 million and $5.6 million
during the three and six months ended June 30, 2003, respectively, as compared
to the same periods in 2002.
The growth in non-interest income for the second quarter and the first six
months of 2003 is more fully depicted below:
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
6/30/03 6/30/02 % Increase 6/30/03 6/30/02 % Increase
------------------------------------ --------------------------------------
(Dollars in thousands) (Dollars in thousands)
Deposit charges & service fees $38,765 $31,629 23% $73,607 $60,592 21%
Other operating income:
Insurance 17,190 14,241 21 33,245 27,629 20
Capital Markets 9,695 8,082 20 19,698 14,528 36
Loan Brokerage Fees 7,545 4,118 83 15,468 8,143 90
Other 8,958 3,659 145 16,337 6,727 143
---------- ---------- --------- ----------- ----------- ----------
Total other 43,388 30,100 44 84,748 57,027 49
---------- ---------- --------- ----------- ----------- ----------
Net investment security gains 1,217 - - 1,081 - -
---------- ---------- --------- ----------- ----------- ----------
Total non-interest income $83,370 $61,729 35% $159,436 $117,619 36%
========== ========== ========= =========== =========== ==========
Noninterest Expense
-------------------
For the second quarter of 2003, noninterest expense totaled $187.7 million, an
increase of $50.1 million or 36% over the second quarter in 2002. For the first
six months of 2003, noninterest expense totaled $359.8 million, an increase of
$96.3 million or 37% over $263.5 million for the first six months of 2002.
Contributing to these increases was new branch activity over the past twelve
months, with the number of branches increasing from 196 at June 30, 2002 to 243
at June 30, 2003. With the addition of these new offices, staff, facilities, and
related expenses rose accordingly. The increases reflect the rapid growth during
each respective period and also reflect substantial infrastructure investments
made by the Company to support future growth.
For the second quarter of 2003, other noninterest expenses rose $8.5 million
over the second quarter of 2002. For the first six months of 2003, other
noninterest expense rose $15.6 million over the first six months of 2002. 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's operating efficiency ratio (noninterest expenses, less other real
estate expense, divided by net interest income plus noninterest income excluding
non-recurring gains) was 71.3 % for the first six months of 2003 as compared to
69.11% for the same 2002 period. 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, 2003 were $24.1 million, or 0.12% of total assets compared to $17.8 million
or 0.11% of total assets at December 31, 2002 and $17.6 million or 0.13% of
total assets at June 30, 2002.
15
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, 2003
were $22.5 million or 0.35% of total loans compared to $14.2 million or 0.24% of
total loans at December 31, 2002 and $15.1 million or 0.29% of total loans at
June 30, 2002. At June 30, 2003, loans past due 90 days or more and still
accruing interest amounted to $434 thousand compared to $620 thousand at
December 31, 2002 and $834 thousand at June 30, 2002. Additional loans
considered as potential problem loans by the Company's internal loan review
department ($32.0 million at June 30, 2003) have been evaluated as to risk
exposure in determining the adequacy of the allowance for loan losses.
Other real estate (ORE) at June 30, 2003 totaled $1.5 million compared to $3.6
million at December 31, 2002 and $2.5 million at June 30, 2002. These properties
have been written down to the lower of cost or fair value less disposition
costs.
The following summary presents information regarding non-performing loans and
assets as of June 30, 2003 and the preceding four quarters (dollar amounts in
thousands).
---------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
2003 2003 2002 2002 2002
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $7,049 $4,874 $5,412 $7,213 $7,581
Consumer 9,517 9,860 6,326 5,512 4,944
Real estate:
Construction - - 131 131 181
Mortgage 5,970 4,249 2,299 2,389 2,391
---------------------------------------------------------------------------
Total non-accrual loans 22,536 18,983 14,168 15,245 15,097
---------------------------------------------------------------------------
Restructured loans:
Commercial 3 4 5 6 6
Consumer
Real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 3 4 5 6 6
---------------------------------------------------------------------------
Total non-performing loans 22,539 18,987 14,173 15,251 15,103
---------------------------------------------------------------------------
Other real estate 1,540 3,553 3,589 2,367 2,471
---------------------------------------------------------------------------
Total non-performing assets 24,079 22,540 17,762 17,618 17,574
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 434 376 620 900 834
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $24,513 $22,916 $18,382 $18,518 $18,408
===========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.35% 0.32% 0.24% 0.28% 0.29%
Total non-performing assets as a
percentage of total period-end assets 0.12% 0.13% 0.11% 0.11% 0.13%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.12% 0.13% 0.11% 0.12% 0.13%
16
June 30, March 31, December 31, September 30, June 30,
2003 2003 2002 2002 2002
---------------------------------------------------------------------------
Allowance for loan losses as a percentage
of total non-performing loans 441% 499% 640% 560% 530%
Allowance for loan losses as a percentage
of total period-end loans 1.56% 1.58% 1.56% 1.54% 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%
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
06/30/03 06/30/02 06/30/03 06/30/02 12/31/02
------------ ----------- ------------ ------------ ------------
Balance at beginning of period $94,731 $72,253 $90,733 $66,981 $66,981
Provisions charged to operating expenses 6,900 10,250 13,800 17,150 33,150
------------ ----------- ------------ ------------ ------------
101,631 82,503 104,533 84,131 100,131
Recoveries on loans charged-off:
Commercial 141 215 345 405 815
Consumer 146 105 277 220 339
Real estate - - - 1 176
------------ ----------- ------------ ------------ ------------
Total recoveries 287 320 622 626 1,330
Loans charged-off:
Commercial (1,197) (1,874) (3,065) (3,061) (7,181)
Consumer (1,390) (841) (2,755) (1,565) (3,514)
Real estate (13) (10) (17) (33) (33)
------------ ----------- ------------ ------------ ------------
Total charge-offs (2,600) (2,725) (5,837) (4,659) (10,728)
------------ ----------- ------------ ------------ ------------
Net charge-offs (2,313) (2,405) (5,215) (4,033) (9,398)
------------ ----------- ------------ ------------ ------------
Balance at end of period $99,318 $80,098 $99,318 $80,098 $90,733
============ =========== ============ ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.15% 0.19% 0.17% 0.16% 0.18%
Net reserve additions $4,587 $7,845 $8,585 $13,117 $23,752
Recent Announcements
--------------------
On August 8, 2003, the Company filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission (SEC). Once declared effective by
the SEC, the shelf registration statement will allow the Company to periodically
offer and sell, individually or in any combination, common stock, preferred
stock, debt securities, trust preferred securities, warrants to purchase other
securities and units (which include a combination of any of the preceding
securities) up to a total of $500 million, subject to market conditions and the
Company's capital needs.
17
To support its growth, which has exceeded 40% per year for the last two years,
the Company expects to complete an initial offering under the shelf registration
during 2003, which could include up to $250 million in equity. If the Company
had completed such an equity offering at June 30, 2003, its pro-forma regulatory
capital ratios would be as follows:
----------------------------------------------------------
June 30, "Well
2003 Capitalized"
----------------------------------------------------------
Leverage 7.40 % 5.00%
Tier 1 13.56 % 6.00%
Total Capital 14.55 % 10.00%
In addition, management projects that the Company's book value would increase by
approximately $2.00 per share.
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.
18
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 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
its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Quarterly Report, there have been
no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Registrant's Shareholders was held on May 20, 2003.
Proxies representing 61,477,881 shares were received (total shares outstanding
as of the record date were 68,797,955). The only items of business acted upon at
the Annual Meeting were (i) the election of 12 directors for one year terms; and
(ii) approval of the amendment of Commerce Bancorp, Inc.'s 1998 Stock Option
Plan for Non-Employee Directors to increase the number of shares that may be
issued under such plan by 500,000 shares. 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 59,135,267 2,342,614
Robert C. Beck 59,136,642 2,341,239
Donald T. DiFrancesco 59,032,096 2,445,785
Jack R Bershad 51,084,929 10,392,952
Morton N. Kerr 58,311,655 3,166,226
Steven M. Lewis 59,210,052 2,267,829
George E. Norcross, III 58,986,721 2,491,160
Daniel J. Ragone 58,188,561 3,289,320
William A. Schwartz Jr. 59,209,794 2,268,087
Joseph T. Tarquini Jr. 59,040,761 2,437,120
Joseph M. Buckelew 59,199,780 2,278,101
Frank C. Videon Sr. 59,153,381 2,324,500
(ii) Approval of the amendment of Commerce Bancorp, Inc.'s 1998 Stock Option
Plan for Non-Employee Directors to increase the number of shares that may
be issued under such plan by 500,000 shares:
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
43,975,139 17,165,927 462,591 7,194,298
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
Exhibit 31 - 302 Certification
Exhibit 32 - 906 Certification
Reports on Form 8-K
-------------------
On April 11, 2003, we filed a Current Report on Form 8-K which included as
exhibits a press release, issued by us on April 10, 2003, announcing our results
for the second quarter of 2003 and certain supplemental information.
On April 29, 2003, we filed a Current Report on Form 8-K which included as
exhibits a press release, issued by us on April 24, 2003, announcing an Investor
Conference to be held on Tuesday, April 29, 2003 and the slide package presented
at the Investor Conference.
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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 8, 2003 /s/ DOUGLAS J. PAULS
------------------------------- ----------------------------------------------
(Date) DOUGLAS J. PAULS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
21