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 quarter ended June 30, 2002
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File #0-12874
--------
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 __
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 67,261,646
- --------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of 8/7/02)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 2002 and December 31, 2001........................................................1
Consolidated Statements of Income (unaudited) Three months ended
June 30, 2002 and June 30, 2001 and
six months ended June 30, 2002 and June 30, 2001...........................................2
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2002 and June 30, 2001...........................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Six months ended June 30, 2002.............................................................4
Notes to Consolidated Financial Statements (unaudited).....................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................17
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
------------------------------------------------------------------------------------------------
June 30, December 31,
---------------------------------
(dollars in thousands) 2002 2001
------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 659,667 $ 557,738
Federal funds sold 85,000 0
------------ -------------
Cash and cash equivalents 744,667 557,738
Loans held for sale 34,758 73,261
Trading securities 218,854 282,811
Securities available for sale 5,946,271 4,152,704
Securities held to maturity
(market value 06/02-$942,693; 12/01-$1,146,345) 920,893 1,132,172
Loans 5,259,543 4,583,412
Less allowance for loan losses 80,098 66,981
------------ -------------
5,179,445 4,516,431
Bank premises and equipment, net 412,299 362,992
Other assets 271,908 285,594
------------ -------------
$13,729,095 $11,363,703
============ =============
Liabilities Deposits:
Demand:
Interest-bearing $ 4,292,382 $ 3,608,709
Noninterest-bearing 2,767,743 2,403,637
Savings 2,387,166 1,925,919
Time 2,940,098 2,247,329
------------ -------------
Total deposits 12,387,389 10,185,594
Other borrowed money 118,491 264,554
Other liabilities 193,127 196,485
Trust Capital Securities - Commerce Capital Trust I 57,500 57,500
Convertible Trust Capital Securities - Commerce Capital
Trust II 200,000 0
Long-term debt 0 23,000
------------ -------------
12,956,507 10,727,133
Stockholders' Common stock, 67,000,422 shares
Equity issued (65,832,559 shares in 2001) 67,000 65,833
Capital in excess of par or stated value 493,800 461,897
Retained earnings 141,459 94,698
Accumulated other comprehensive income 71,950 15,764
------------ -------------
774,209 638,192
Less treasury stock, at cost, 200,018 shares
(200,118 shares in 2001) 1,621 1,622
------------ -------------
Total stockholders' equity 772,588 636,570
------------ -------------
$13,729,095 $11,363,703
============ =============
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 2002 2001 2002 2001
amounts)
---------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $ 86,959 $ 81,616 $168,782 $161,355
income Interest on investments 101,293 64,643 187,510 126,093
Other interest 116 850 280 2,740
----------- ----------- ----------- -----------
Total interest income 188,368 147,109 356,572 290,188
----------- ----------- ----------- -----------
Interest Interest on deposits:
expense Demand 14,707 15,948 27,615 33,982
Savings 8,133 8,345 15,211 17,240
Time 21,538 25,103 42,819 52,345
----------- ----------- ----------- -----------
Total interest on deposits 44,378 49,396 85,645 103,567
Interest on other borrowed money 282 909 708 2,482
Interest on long-term debt 5,082 1,401 7,514 2,996
----------- ----------- ----------- -----------
Total interest expense 49,742 51,706 93,867 109,045
----------- ----------- ----------- -----------
Net interest income 138,626 95,403 262,705 181,143
Provision for loan losses 10,250 7,982 17,150 12,591
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 128,376 87,421 245,555 168,552
Noninterest Deposit charges and service fees 31,629 25,194 60,592 47,030
income Other operating income 30,100 22,187 57,027 43,479
Net investment securities gains 0 0 0 980
----------- ----------- ----------- -----------
Total noninterest income 61,729 47,381 117,619 91,489
------------- ------------ ------------ ------------
Noninterest Salaries and benefits 64,178 45,574 124,323 89,501
expense Occupancy 13,083 9,129 25,181 17,927
Furniture and equipment 15,588 12,241 30,693 23,847
Office 7,454 6,589 14,370 12,655
Audit and regulatory fees and assessments 1,181 1,005 2,386 1,965
Marketing 6,112 4,211 10,973 6,475
Other 29,944 19,191 55,535 35,924
----------- ----------- ----------- -----------
Total noninterest expenses 137,540 97,940 263,461 188,294
----------- ----------- ----------- -----------
Income before income taxes 52,565 36,862 99,713 71,747
Provision for federal and state income taxes 17,763 11,752 33,161 23,236
----------- ----------- ----------- -----------
Net income $ 34,802 $ 25,110 $ 66,552 $ 48,511
=========== =========== =========== ===========
Net income per common and common
equivalent share:
Basic $ 0.52 $ 0.39 $ 1.00 $ 0.76
----------- ----------- ----------- -----------
Diluted $ 0.49 $ 0.37 $ 0.94 $ 0.72
----------- ----------- ----------- -----------
Average common and common equivalent
shares outstanding:
Basic 66,552 64,452 66,275 64,135
----------- ----------- ----------- -----------
Diluted 71,007 67,873 70,510 67,371
----------- ----------- ----------- -----------
Cash dividends, common stock $ 0.15 $ 0.14 $ 0.30 $ 0.27
=========== =========== =========== ===========
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------------
(dollars in thousands) 2002 2001
------------------------------------------------------------------------------------------------------
Operating Net income $ 66,552 $ 48,511
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 17,150 12,591
Provision for depreciation, amortization and accretion 27,989 20,518
Gains on sales of securities available for sale 0 (980)
Proceeds from sales of mortgages held for sale 777,526 265,608
Originations of mortgages held for sale (739,023) (297,460)
Net loan chargeoffs (4,033) (3,723)
Net decrease (increase) in trading securities 63,957 (34,844)
Increase in other assets (17,553) (31,542)
(Decrease) increase in other liabilities (3,358) 159,749
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 189,207 138,428
Investing Proceeds from the sales of securities available for sale 609,481 275,444
activities Proceeds from the maturity of securities available for sale 760,908 358,552
Proceeds from the maturity of securities held to maturity 242,799 175,158
Purchase of securities available for sale (3,078,553) (1,213,555)
Purchase of securities held to maturity (32,604) (36,485)
Net increase in loans (686,345) (432,081)
Proceeds from sales of loans 10,214 7,392
Purchases of premises and equipment (74,193) (42,933)
------------------------------------------------------------------------------------------------------
Net cash used by investing activities (2,248,293) (908,508)
Financing Net increase in demand and savings deposits 1,509,026 605,494
activities Net increase in time deposits 692,769 373,052
Net decrease in other borrowed money (146,063) (157,653)
Redemption of long term debt (23,000) 0
Issuance of Convertible Trust Capital Securities 200,000 0
Dividends paid (19,792) (17,563)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 33,067 28,789
Other 8 (343)
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,246,015 831,776
Increase in cash and cash equivalents 186,929 61,696
Cash and cash equivalents at beginning of year 557,738 495,918
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 744,667 $ 557,614
======================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 94,301 $ 106,186
Income taxes 29,200 21,901
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Six months ended June 30, 2002
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Excess of Other
Common Par or Retained Treasury Comprehensive
Stock Stated Value Earnings Stock Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $65,833 $461,897 $94,698 $(1,622) $15,764 $636,570
Net income 66,552 66,552
Other Comprehensive Income, net of tax
Unrealized gain on securities (pre-tax $87,170) 56,186 56,186
----------
Total comprehensive income 122,738
Cash dividends paid (19,792) (19,792)
Shares issued under dividend reinvestment
and compensation and benefit plans (1,168 shares) 1,168 31,899 33,067
Other (1) 4 1 1 5
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2002 $67,000 $493,800 $141,459 $(1,621) $71,950 $772,588
- -----------------------------------------------------------------------------------------------------------------------------------
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 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 period ended December 31, 2001.
The results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. 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 National Insurance Services,
Inc. (Commerce National Insurance), Commerce Capital Trust I, Commerce Capital
Trust II, and Commerce Capital Markets, Inc. (CCMI). All material intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with 2002 presentation. All common stock and per share
amounts have been adjusted to reflect the 2 for 1 stock split with a record date
of December 3, 2001.
On August 1, 2002 the Company completed the acquisition of Sanford and Purvis,
Inc., an insurance brokerage agency which will operate as a wholly-owned
subsidiary of Commerce National Insurance. The Company issued approximately
113,000 shares in connection with this acquisition.
B. Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments, which
are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. 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 $116.2 million and $14.5 million, respectively, for the three months
ended June 30, 2002 and 2001. For the six months ended June 30, 2002 and 2001,
total comprehensive income was $122.7 and $57.4 million, respectively.
5
COMMERCE BANCORP, INC. AND SUBSIDIARIES
D. Segment Information
Selected segment information is as follows:
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 142,291 $ (3,665) $ 138,626 $ 95,512 $ (109) $ 95,403
Provision for loan losses 10,250 10,250 7,982 7,982
-----------------------------------------------------------------------------------
Net interest income after provision 132,041 (3,665) 128,376 87,530 (109) 87,421
Noninterest income 39,893 21,836 61,729 29,901 17,480 47,381
Noninterest expense 118,295 19,245 137,540 83,293 14,647 97,940
-----------------------------------------------------------------------------------
Income before income taxes 53,639 (1,074) 52,565 34,138 2,724 36,862
Income tax expense 19,034 (1,271) 17,763 11,270 482 11,752
-----------------------------------------------------------------------------------
Net income $ 34,605 $ 197 $ 34,802 $ 22,868 $ 2,242 $ 25,110
===================================================================================
Average assets (in billions) $ 11,505 $ 1,661 $ 13,166 $ 8,058 $962 $ 9,020
===================================================================================
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 267,761 $ (5,056) $ 262,705 $ 181,392 $ (249) $ 181,143
Provision for loan losses 17,150 17,150 12,591 12,591
-----------------------------------------------------------------------------------
Net interest income after provision 250,611 (5,056) 245,555 168,801 (249) 168,552
Noninterest income 75,941 41,678 117,619 56,279 35,210 91,489
Noninterest expense 226,147 37,314 263,461 159,401 28,893 188,294
-----------------------------------------------------------------------------------
Income before income taxes 100,405 (692) 99,713 65,679 6,068 71,747
Income tax expense 34,290 (1,129) 33,161 21,565 1,671 23,236
-----------------------------------------------------------------------------------
Net income $ 66,115 $ 437 $ 66,552 $ 44,114 $ 4,397 $ 48,511
===================================================================================
Average assets (in billions) $ 11,002 $ 1,431 $ 12,433 $ 7,822 $932 $ 8,754
===================================================================================
E. Recent Accounting Statements
In conjunction with the issuance of the new guidance for business combinations,
the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" (FAS
142), which addresses the accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion 17. Under the provisions of
FAS 142, goodwill and certain other intangible assets, which do not possess
finite useful lives, will no longer be amortized into net income over an
estimated life but rather will be tested at least annually for impairment based
on specific guidance provided in the new standard. Intangible assets determined
to have finite lives will continue to be amortized over their estimated useful
lives and also continue to be subject to impairment testing. The provisions of
FAS 142, which were adopted by the Company as required effective January 1,
2002, did not have a material impact on the results of operations of the
Company. It is anticipated there will not be any material categorical
reclassifications or adjustments to the useful lives of finite-lived intangible
assets as a result of adopting the new guidance.
6
COMMERCE BANCORP, INC. AND SUBSIDIARIES
F. Trust Capital Securities
On June 9, 1997, the Company issued $57.5 million of 8.75% Trust Capital
Securities through Commerce Capital Trust I, a Delaware business trust
subsidiary of the Company. The net proceeds of the offering were used for
general corporate purposes. All $57.5 million of the Trust Capital Securities
qualify as Tier 1 capital for regulatory capital purposes. All of these Trust
Capital Securities were redeemed on July 1, 2002 at the stated liquidation
amount ($25 per capital security) plus accrued and unpaid distributions thereon
to July 1, 2002.
On March 11, 2002 the Company issued $200 million of 5.95% convertible trust
preferred securities through Commerce Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. Holders of the convertible trust
preferred 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
preferred securities conversion price then in effect on the last day of such
calendar quarter, (2) the assigned credit rating by Moody's of the convertible
trust preferred securities is at or below Bal, (3) the convertible trust
preferred securities are called for redemption, or (4) specified corporate
transactions have occurred. The net proceeds of this offering will be used for
general corporate purposes, including the redemption of the Company's $57.5
million of 8.75% Capital Trust I 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.
G. 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
-------------------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Basic:
Net income $34,802 $25,110 $66,552 $48,511
============== ============== ============== ==============
Average common shares outstanding 66,552 64,452 66,275 64,135
============== ============== ============== ==============
Net income per share of common stock $ 0.52 $ 0.39 $ 1.00 $ 0.76
============== ============== ============== ==============
Diluted:
Net income $34,802 $25,110 $66,552 $48,511
============== ============== ============== ==============
Average common shares outstanding 66,552 64,452 66,275 64,135
Additional shares considered in diluted
computation assuming:
Exercise of stock options 4,455 3,421 4,235 3,236
-------------- -------------- -------------- --------------
Average common shares outstanding
on a diluted basis 71,007 67,873 70,510 67,371
============== ============== ============== ==============
Net income per common share - diluted $ 0.49 $ 0.37 $ 0.94 $ 0.72
============== ============== ============== ==============
7
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
Capital Resources
- -----------------
At June 30, 2002, stockholders' equity totaled $772.6 million or 5.63% of total
assets, compared to $636.6 million or 5.60% of total assets at December 31,
2001.
The table below presents the Company's and Commerce NJ's risk-based and leverage
ratios at June 30, 2002 and 2001:
Per Regulatory Guidelines
---------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
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
June 30, 2001
Company
Risk based capital ratios:
Tier 1 $ 610,816 10.77% $226,758 4.00% $340,138 6.00%
Total capital 677,564 11.95 453,517 8.00 566,896 10.00
Leverage ratio 610,816 6.78 360,420 4.00 450,525 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $ 353,611 9.88% $143,215 4.00% $214,822 6.00%
Total capital 391,832 10.94 286,430 8.00 358,037 10.00
Leverage ratio 353,611 6.53 216,581 4.00 270,726 5.00
At June 30, 2002, 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, 2002, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject.
Deposits
- --------
Total deposits at June 30, 2002 were $12.4 billion, up $4.0 billion, or 48% over
total deposits of $8.4 billion at June 30, 2001, and up by $2.2 billion, or 22%
from year-end 2001. Deposit growth during the first six months of 2002 included
core deposit growth in all categories as well as growth from the public sector.
The Company experienced "same-store core deposit growth" of 30% at June 30, 2002
as compared to deposits a year ago for those branches open for more than two
years.
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
8
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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 200 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, 2002, the Company's income simulation model indicates net income would
decrease by 0.35% and by 9.62% in the first year and over a two year time frame,
respectively, if rates decreased as described above, as compared to an increase
of 2.33% and decrease of 3.32%, respectively, at June 30, 2001. At June 30,
2002, the model projects that net income would decrease by 0.18% and increase
5.71% in the first year and over a two year time frame, respectively, if rates
increased as described above, as compared to a decrease by 5.14% and 3.78%,
respectively, at June 30, 2001. 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.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point change
would result in the loss of 50% or more of the excess of market value over book
value in the current rate scenario. At June 30, 2002, the market value of equity
model indicates an acceptable level of interest rate risk.
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, 2002 the Company had in
excess of $5.4 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 2002, deposit growth and long-term borrowings (Commerce Capital
Trust II) were used to fund growth in the loan portfolio and purchase additional
investment securities.
9
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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. During the first six months of 2002, the
Company significantly reduced its short-term borrowings, primarily through
increased deposits. At June 30, 2002, short-term borrowings aggregated $118.5
million and had an average rate of 1.18%, as compared to $264.6 million at an
average rate of 1.78% at December 31, 2001.
Interest Earning Assets
- -----------------------
For the six month period ended June 30, 2002, interest earning assets increased
$2.3 billion from $10.2 billion to $12.5 billion. This increase was primarily in
investment securities and the loan portfolio as described below.
Loans
- -----
During the first six months of 2002, loans increased $676.1 million from $4.6
billion to $5.3 billion. At June 30, 2002, loans represented 42% of total
deposits and 38% of total assets. All segments of the loan portfolio experienced
growth in the first six months of 2002, 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,
---------------------------------------
2002 2001
---------------------------------------
(dollars in thousands)
Commercial real estate:
Owner-occupied $ 880,179 $ 750,562
Investor developer 799,494 664,605
Construction 478,485 460,957
---------------------------------------
2,158,158 1,876,124
Commercial:
Term 687,953 600,374
Line of credit 626,755 556,977
Demand 379 440
---------------------------------------
1,315,087 1,157,791
Consumer:
Mortgages (1-4 family residential) 553,452 471,680
Installment 150,254 161,647
Home equity 1,035,738 872,974
Credit lines 46,854 43,196
---------------------------------------
1,786,298 1,549,497
=======================================
Total loans $5,259,543 $4,583,412
=======================================
10
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Investments
- -----------
For the first six months of 2002, total securities increased $1.5 billion from
$5.6 billion to $7.1 billion. The available for sale portfolio increased $1.8
billion to $5.9 billion at June 30, 2002 from $4.2 billion at December 31, 2001,
and the securities held to maturity portfolio decreased $211.3 million to $920.9
million at June 30, 2002 from $1.1 billion at year-end 2001. The portfolio of
trading securities decreased $63.9 million from year-end 2001 to $218.9 million
at June 30, 2002. At June 30, 2002, the average life of the investment portfolio
was approximately 4.2 years, and the duration was approximately 3.3 years. At
June 30, 2002, total securities represented 52% of total assets.
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,
---------------------------------
2002 2001
---------------------------------
(dollars in thousands)
U.S. Government agency and mortgage backed obligations $5,742,496 $3,994,523
Obligations of state and political subdivisions 71,989 82,922
Equity securities 18,289 16,325
Other 113,497 58,934
---------------------------------
Securities available for sale $5,946,271 $4,152,704
=================================
U.S. Government agency and mortgage backed obligations $840,524 $1,044,266
Obligations of state and political subdivisions 35,919 50,602
Other 44,450 37,304
---------------------------------
Securities held to maturity $920,893 $1,132,172
=================================
Net Income
- ----------
Net income for the second quarter of 2002 was $34.8 million, an increase of $9.7
million or 39% over the $25.1 million recorded for the second quarter of 2001.
Net income for the first six months of 2002 totaled $66.6 million, an increase
of $18.1 million or 37% from $48.5 million in the first six months of 2001. On a
per share basis, diluted net income for the second quarter and first six months
of 2002 was $0.49 and $0.94 per common share compared to $0.37 and $0.72 per
common share for the 2001 periods.
Return on average assets (ROA) and return on average equity (ROE) for the second
quarter of 2002 were 1.06% and 18.99%, respectively, compared to 1.11% and
18.16%, respectively, for the same 2001 period. ROA and ROE for the first six
months of 2002 were 1.07% and 18.99%, respectively, compared to 1.11% and 18.04%
a year ago.
Net Interest Income
- -------------------
Net interest income totaled $138.6 million for the second quarter of 2002, an
increase of $43.2 million or 45% from $95.4 million in the second quarter of
2001. Net interest income for the first six months of 2002 was $262.7 million,
up $81.6 million or 45% from 2001. The improvement in net interest income was
due primarily to volume increases in the loan and investment portfolios.
The following table sets forth balance sheet items on a daily average basis for
the three months ended June 30, 2002, March 31, 2002 and June 30, 2001 and
presents the daily average interest earned on assets and paid on liabilities for
such periods.
11
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Average Balances and Net Interest Income
---------------------------------------------------------------------------------------------------
June 2002 March 2002 June 2001
----------------------------------- -------------------------------- ------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------- -------------------------------- ------------------------------
Earning Assets
- ---------------------------------
Investment securities
Taxable $6,484,728 $97,970 6.06% $5,511,447 $83,211 6.12% $3,802,458 $62,079 6.55%
Tax-exempt 128,237 2,043 6.39 110,293 1,665 6.12 80,070 1,335 6.69
Trading 225,231 3,069 5.47 189,651 2,960 6.33 185,558 2,608 5.64
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total investment securities 6,838,196 103,082 6.05 5,811,391 87,836 6.13 4,068,086 66,022 6.51
Federal funds sold 27,592 116 1.69 40,672 164 1.64 75,659 850 4.51
Loans
Commercial mortgages 1,928,153 33,683 7.01 1,828,586 31,304 6.94 1,532,835 30,982 8.11
Commercial 1,194,310 17,952 6.03 1,087,048 16,338 6.10 934,145 19,071 8.19
Consumer 1,787,395 32,026 7.19 1,656,000 30,936 7.58 1,387,114 28,937 8.37
Tax-exempt 241,226 5,073 8.43 233,669 4,992 8.66 185,415 4,039 8.74
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total loans 5,151,084 88,734 6.91 4,805,303 83,570 7.05 4,039,509 83,029 8.24
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total earning assets $12,016,872 $191,932 6.41% $10,657,366 $171,570 6.53% $8,183,254 $149,901 7.34%
=========== =========== ===========
Sources of Funds
- ---------------------------------
Interest-bearing liabilities
Regular savings $2,304,839 $8,133 1.42% $2,044,873 $7,078 1.40% $1,576,198 $8,345 2.12%
N.O.W. accounts 331,878 1,152 1.39 300,742 1,053 1.42 240,848 1,454 2.42
Money market plus 3,858,362 13,555 1.41 3,459,619 11,855 1.39 2,537,801 14,494 2.29
Time deposits 1,840,499 15,992 3.49 1,673,580 16,004 3.88 1,162,981 15,093 5.21
Public funds 984,503 5,546 2.26 874,379 5,277 2.45 781,823 10,010 5.14
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total deposits 9,320,081 44,378 1.91 8,353,193 41,267 2.00 6,299,651 49,396 3.15
Other borrowed money 70,078 282 1.61 102,611 426 1.68 78,654 908 4.63
Long-term debt 269,885 5,082 7.55 127,167 2,432 7.76 80,500 1,400 6.98
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total deposits and
interest-bearing
liabilities 9,660,044 49,742 2.07 8,582,971 44,125 2.08 6,458,805 51,704 3.21
Noninterest-bearing funds (net) 2,356,828 2,074,395 1,724,449
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Total sources to fund earning
assets $12,016,872 49,742 1.66 $10,657,366 44,125 1.68 $8,183,254 51,704 2.53
----------- ---------- -------- ----------- --------- ------- ----------- -------- -------
Net interest income and
margin tax-equivalent basis $142,190 4.75% $127,445 4.85% $98,197 4.81%
========== ======== ========= ======= ======== =======
Other Balances
- ---------------------------------
Cash and due from banks $547,088 $510,269 $392,267
Other assets 677,551 592,129 498,858
Total assets 13,166,040 11,690,615 9,020,019
Total deposits 11,885,164 10,684,272 8,185,095
Demand deposits (noninterest-
bearing) 2,565,083 2,331,079 1,885,444
Other liabilities 207,939 108,125 122,698
Stockholders' equity 732,974 668,440 553,072
Allowance for loan losses 75,471 69,149 54,360
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.
12
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Noninterest Income
- ------------------
Noninterest income totaled $61.7 million for the second quarter of 2002, an
increase of $14.3 million or 30% from $47.4 million in the second quarter of
2001. Noninterest income for the first six months of 2002 increased to $117.6
million from $91.5 million in the first six months of 2001, a 29% increase. The
increase was due primarily to increased deposit charges and service fees, which
rose $6.4 million over the second quarter of 2001 and $13.6 million for the
first six months of 2002 primarily due to higher transaction volumes. The growth
in non-interest income for the second quarter and the first six months of 2002
is more fully depicted below:
Quarter Ended Six Months Ended
-------------------------------------------------------------------------
6/30/02 6/30/01 % Increase 6/30/02 6/30/01 % Increase
-------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Deposit Charges & Service Fees $31,629 $25,194 26% $60,592 $47,030 29%
Other Operating Income:
Insurance 14,241 12,216 17% 27,629 24,759 12%
Capital Markets 8,082 5,256 54% 14,528 10,431 39%
Loan Brokerage Fees 4,118 1,400 194% 8,143 2,862 185%
Other 3,659 3,315 10% 6,727 6,407 5%
--------- --------- -------- --------- -------- ---------
Total Other 30,100 22,187 36% 57,027 44,459 28%
--------- --------- -------- --------- -------- ---------
Total Non-Interest Income $61,729 $47,381 30% $117,619 $91,489 29%
========= ========= ======== ========= ======== =========
Noninterest Expense
- -------------------
For the second quarter of 2002, noninterest expense totaled $137.5 million, an
increase of $39.6 million or 40% over the same period in 2001. Contributing to
this increase was new branch activity over the past twelve months, with the
number of branches increasing from 159 at June 30, 2001 to 196 at June 30, 2002.
With the addition of these new offices, staff, facilities, and related expenses
rose accordingly. Other noninterest expenses rose $10.8 million over the second
quarter of 2001. This increase resulted primarily from higher bank card-related
service charges, increased business development expenses, and increased
provisions for non-credit-related losses.
For the first six months of 2002, noninterest expense totaled $263.5 million, an
increase of $75.2 million or 40% over $188.3 million for the first six months of
2001. Contributing to this increase was the growth in branches as noted above.
Other noninterest expense rose $19.6 million over the first six months of 2001.
This increase 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 69.11% for the first six months of 2002 as compared to
69.02% for the same 2001 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, 2002 were $17.6 million, or 0.13% of total assets compared to $18.4 million
or 0.16% of total assets at December 31, 2001 and $20.7 million or 0.22% of
total assets at June 30, 2001.
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, 2002
were $15.1 million or 0.29% of total loans compared to $16.8 million or 0.37% of
total loans at December 31, 2001 and $19.1 million or 0.47% of total loans at
June 30, 2001. At June 30, 2002, loans past due 90 days or more and still
accruing interest amounted to $834 thousand compared to $519 thousand at
December 31, 2001 and $1.4 million at June 30, 2001. Additional loans considered
as potential problem loans by the Company's internal loan review department
($21.2 million at June 30, 2002) have been evaluated as to risk exposure in
determining the adequacy of the allowance for loan losses.
13
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Other real estate (ORE) at June 30, 2002 totaled $2.5 million compared to $1.5
million at December 31, 2001 and $1.6 million at June 30, 2001. These properties
have been written down to the lower of cost or fair value less disposition
costs.
Following "Forward Looking Statements" are tabular presentations showing
detailed information about the Company's non-performing loans and assets and an
analysis of the Company's allowance for loan losses and other related data for
June 30, 2002, December 31, 2001, and June 30, 2001.
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.
14
COMMERCE BANCORP, INC. AND SUBSIDIARIES
The following summary presents information regarding non-performing loans and
assets as of June 30, 2002 and the preceding four quarters (dollar amounts in
thousands).
June 30, March 31, December 31, September 30, June 30,
2002 2002 2001 2001 2001
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $7,581 $ 9,473 $ 6,835 $ 9,196 $10,608
Consumer 1,557 1,537 1,484 1,382 1,338
Real estate:
Construction 181 181 1,590 1,590 1,590
Mortgage 5,778 5,695 6,924 6,944 5,598
---------------------------------------------------------------------------
Total non-accrual loans 15,097 16,886 16,833 19,112 19,134
---------------------------------------------------------------------------
Restructured loans:
Commercial 6 7 8 9 10
Consumer
Real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 6 7 8 9 10
---------------------------------------------------------------------------
Total non-performing loans 15,103 16,893 16,841 19,121 19,144
---------------------------------------------------------------------------
Other real estate 2,471 2,602 1,549 1,671 1,552
---------------------------------------------------------------------------
Total non-performing assets 17,574 19,495 18,390 20,792 20,696
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 834 484 519 964 1,416
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $18,408 $19,979 $18,909 $21,756 $22,112
===========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.29% 0.34% 0.37% 0.44% 0.47%
Total non-performing assets as a
percentage of total period-end assets 0.13% 0.16% 0.16% 0.20% 0.22%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.13% 0.16% 0.17% 0.21% 0.24%
Allowance for loan losses as a percentage
of total non-performing loans 530% 428% 398% 321% 301%
Allowance for loan losses as a percentage
of total period-end loans 1.52% 1.47% 1.46% 1.42% 1.40%
Total non-performing assets and loans
past due 90 days or more as a
percentage of stockholders' equity and
allowance for loan losses 2% 3% 3% 3% 4%
15
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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
06/30/02 06/30/01 06/30/02 06/30/01 12/31/01
------------ ----------- ------------ ------------ ------------
Balance at beginning of period $72,253 $52,157 $66,981 $48,680 $48,680
Provisions charged to operating expenses 10,250 7,982 17,150 12,591 26,384
------------ ----------- ------------ ------------ ------------
82,503 60,139 84,131 61,271 75,064
Recoveries on loans charged-off:
Commercial 215 150 405 159 552
Consumer 105 95 220 136 288
Real estate 0 2 1 14 134
------------ ----------- ------------ ------------ ------------
Total recoveries 320 247 626 309 974
Loans charged-off:
Commercial (1,874) (1,976) (3,061) (2,334) (5,862)
Consumer (841) (636) (1,565) (1,295) (2,784)
Real estate (10) (226) (33) (403) (411)
------------ ----------- ------------ ------------ ------------
Total charge-offs (2,725) (2,838) (4,659) (4,032) (9,057)
------------ ----------- ------------ ------------ ------------
Net charge-offs (2,405) (2,591) (4,033) (3,723) (8,083)
------------ ----------- ------------ ------------ ------------
Balance at end of period $80,098 $57,548 $80,098 $57,548 $66,981
============ =========== ============ ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.19% 0.26% 0.16% 0.19% 0.19%
Net reserve additions $7,845 $5,391 $13,117 $8,868 $18,301
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.
16
COMMERCE BANCORP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
The Annual Meeting of the Registrant's Shareholders was held on May 21,
2002. The only item of business acted upon at the Annual Meeting was the
election of 13 directors for one year terms. All 13 directors were elected.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
- --------
Exhibit 99.1 - 906 Certification
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the second quarter ended June 30, 2002.
17
COMMERCE BANCORP, INC. AND SUBSIDIARIES
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 14, 2002 /s/ DOUGLAS J. PAULS
- ------------------------- --------------------------------------------
(Date) DOUGLAS J. PAULS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
18