UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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 #0-12069
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Commerce Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(856) 751-9000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the 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 75,834,723
- --------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of November 3, 2003)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 2003 and December 31, 2002...................................................1
Consolidated Statements of Income (unaudited) Three months ended
September 30, 2003 and September 30, 2002 and
nine months ended September 30, 2003 and September 30, 2002................................2
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2003 and September 30, 2002................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Nine months ended September 30, 2003.......................................................4
Notes to Consolidated Financial Statements (unaudited).....................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................20
Item 4. Control and Procedures....................................................................21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................21
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
---------------------------------------------------------------------------------------------------
September 30, December 31,
------------------------------------
(in thousands) 2003 2002
---------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 775,696 $ 811,434
Federal funds sold - -
---------------- ---------------
Cash and cash equivalents 775,696 811,434
Loans held for sale 94,596 96,920
Trading securities 220,433 326,479
Securities available for sale 10,416,934 7,806,779
Securities held to maturity 2,102,235 763,026
(market value 09/03-$2,090,082; 12/02-$791,889)
Loans 6,824,068 5,822,589
Less allowance for loan losses 103,592 90,733
---------------- ---------------
6,720,476 5,731,856
Bank premises and equipment, net 754,253 580,818
Other assets 274,546 286,669
---------------- ---------------
Total assets $21,359,169 $16,403,981
================ ===============
Liabilities Deposits:
Demand:
Interest-bearing $ 7,622,949 $ 5,635,351
Noninterest-bearing 4,323,354 3,243,091
Savings 4,175,377 2,861,677
Time 3,433,417 2,808,722
---------------- ---------------
Total deposits 19,555,097 14,548,841
Other borrowed money 155,849 391,641
Other liabilities 213,661 345,489
Convertible Trust Capital Securities - Commerce Capital
Trust II 200,000 200,000
---------------- ---------------
Total liabilities 20,124,607 15,485,971
Stockholders' Common stock, 75,805,917 shares
Equity issued (68,043,171 shares at December 31, 2002) 75,806 68,043
Capital in excess of par or stated value 824,255 538,795
Retained earnings 303,221 199,604
Accumulated other comprehensive income 36,523 113,614
---------------- ---------------
1,239,805 920,056
Less treasury stock, at cost, 286,218 shares
(209,794 shares at December 31, 2002) 5,243 2,046
---------------- ---------------
Total stockholders' equity 1,234,562 918,010
---------------- ---------------
Total liabilities and stockholders' equity $21,359,169 $16,403,981
================ ===============
See accompanying notes.
1
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $98,889 $91,843 $287,558 $260,625
income Interest on investments 134,984 104,528 371,743 292,038
Other interest 28 404 205 684
------------- ------------ ------------ ------------
Total interest income 233,901 196,775 659,506 553,347
------------- ------------ ------------ ------------
Interest Interest on deposits:
expense Demand 12,090 14,504 36,448 42,119
Savings 6,890 7,912 19,999 23,123
Time 16,682 20,374 50,915 63,193
------------- ------------ ------------ ------------
Total interest on deposits 35,662 42,790 107,362 128,435
Interest on other borrowed money 1,110 403 2,342 1,111
Interest on long-term debt 3,020 3,028 9,060 10,542
------------- ------------ ------------ ------------
Total interest expense 39,792 46,221 118,764 140,088
------------- ------------ ------------ ------------
Net interest income 194,109 150,554 540,742 413,259
Provision for loan losses 7,250 8,000 21,050 25,150
------------- ------------ ------------ ------------
Net interest income after provision for
loan losses 186,859 142,554 519,692 388,109
Noninterest Deposit charges and service fees 41,500 33,802 115,107 94,394
income Other operating income 41,976 35,830 126,724 92,857
Net investment securities gains 1,682 - 2,763 -
------------- ------------ ------------ ------------
Total noninterest income 85,158 69,632 244,594 187,251
------------- ------------ ------------ ------------
Noninterest Salaries and benefits 92,732 74,164 261,152 198,487
expense Occupancy 24,760 15,215 67,943 40,396
Furniture and equipment 21,770 17,012 63,552 47,705
Office 9,906 8,173 28,325 22,543
Marketing 9,412 7,850 23,886 18,823
Other 38,732 32,414 112,253 90,335
------------- ------------ ------------ ------------
Total noninterest expenses 197,312 154,828 557,111 418,289
------------- ------------ ------------ ------------
Income before income taxes 74,705 57,358 207,175 157,071
Provision for federal and state income taxes 25,231 19,669 69,494 52,830
------------- ------------ ------------ ------------
Net income $ 49,474 $ 37,689 $137,681 $104,241
============= ============ ============ ============
Net income per common and common equivalent share:
Basic $ 0.70 $ 0.56 $ 1.98 $ 1.56
Diluted $ 0.67 $ 0.53 $ 1.90 $ 1.47
Average common and common equivalent shares outstanding:
Basic 70,787 67,065 69,442 66,541
Diluted 73,926 71,084 72,614 70,704
Cash dividends, common stock $ 0.17 $ 0.15 $ 0.50 $ 0.45
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------------------
(in thousands) 2003 2002
------------------------------------------------------------------------------------------------------
Operating Net income $ 137,681 $104,241
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 21,050 25,150
Provision for depreciation, amortization and accretion 97,667 42,623
Gain on sales of securities available for sale (2,763) -
Proceeds from sales of loans held for sale 1,184,192 998,966
Originations of loans held for sale (1,156,305) (992,317)
Net decrease in trading securities 106,046 85,425
Increase in other assets (18,725) (139,016)
(Decrease) increase in other liabilities (56,632) 84,614
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 312,211 209,686
Investing Proceeds from the sales of securities available for sale 3,407,875 1,020,605
activities Proceeds from the repayment or maturity of securities available for 4,102,521 1,280,991
sale
Proceeds from the repayment or maturity of securities held to 489,681 338,551
maturity
Purchase of securities available for sale (10,279,232) (5,076,572)
Purchase of securities held to maturity (1,837,448) (106,083)
Net increase in loans (1,127,690) (998,793)
Proceeds from sales of loans 92,457 32,929
Capital expenditures (222,539) (144,030)
------------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,374,375) (3,652,402)
Financing Net increase in demand and savings deposits 4,381,561 2,990,096
activities Net increase in time deposits 624,695 703,946
Net decrease in other borrowed money (235,792) (122,086)
Issuance of common stock 208,825 -
Issuance of Convertible Trust Capital Securities - 200,000
Redemption of Trust Capital Securities - (57,500)
Decrease in long-term debt - (23,000)
Dividends paid (34,063) (29,814)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 82,506 47,090
Other (1,306) 4,750
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,026,426 3,713,482
(Decrease) increase in cash and cash equivalents (35,738) 270,766
Cash and cash equivalents at beginning of year 811,434 557,738
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 775,696 $828,504
======================================================================================================
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $119,894 $142,450
Income taxes 45,693 39,978
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)
Nine months ended September 30, 2003
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Excess of Other
Common Par or Retained Treasury Comprehensive
Stock Stated Value Earnings Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $68,043 $538,795 $199,604 $(2,046) $113,614 $918,010
Net income 137,681 137,681
Other Comprehensive Income (Loss), net of tax
Unrealized loss on securities available for sale (55,716) (55,716)
Reclassification adjustment (21,375) (21,375)
------------
Other comprehensive income (loss) (77,091)
Total comprehensive income 60,590
Cash dividends paid (34,063) (34,063)
Shares issued under common stock offering
(5,000 shares) 5,000 203,825 208,825
Shares issued under dividend reinvestment
and compensation and benefit plans (2,719 shares) 2,719 79,787 82,506
Acquisition of insurance brokerage agencies (44 shares) 44 1,848 1,892
Other (1) (3,197) (3,198)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2003 $75,806 $824,255 $303,221 $(5,243) $36,523 $1,234,562
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
4
COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Consolidated Financial Statements
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements were compiled in
accordance with the accounting policies set forth in note 1 (Significant
Accounting Policies) of the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002. The accompanying 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 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 nine months ended September 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. Capital Resources
In August 2003, the Company filed a Form S-3 shelf registration statement with
the Securities and Exchange Commission (SEC). This shelf registration statement
allows 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.
In September 2003, the Company completed an offering of 5,000,000 shares of
common stock for aggregate proceeds of approximately $209 million under its
shelf registration. The proceeds from this offering will be used to support the
Company's future growth.
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. As of September
30, 2003 and December 31, 2002, Bank premises and equipment in progress was
$95.8 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.
5
E. Comprehensive Income
Total comprehensive income (loss), which for the Company included net income and
unrealized gains and losses on the Company's available for sale securities,
amounted to $(3.5) million and $89.7 million, respectively, for the three months
ended September 30, 2003 and 2002. For the nine months ended September 30, 2003
and 2002, total comprehensive income was $60.6 million and $212.5 million,
respectively.
F. New Accounting Standards
In October 2003, the Financial Accounting Standards Board (FASB) decided to
defer the implementation date for FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), previously issued in January 2003. This
deferral applies only to variable interest entities that existed prior to
February 1, 2003. Pursuant to this deferral, the recognition and measurement
provisions of FIN 46 are delayed to the first interim or annual reporting period
ending after December 15, 2003. FIN 46 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. The Company does not have any variable interest entities that were
created after February 1, 2003. The Company intends to adopt the recognition and
measurement provisions of FIN 46 for existing VIEs on December 31, 2003.
Management is in the process of reviewing the application of FIN 46 and does not
expect its adoption to have a material impact on the Company's consolidated
financial statements.
In May 2003, the 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 September 15, 2003. The adoption of
FAS 150 did not have an 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. The adoption of
FAS 149 did not have a material impact on the Company's results of operations
and financial position.
6
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 Nine Months Ended
September 30 September 30
---------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------
Net income, as reported $49,474 $37,689 $137,681 $104,241
Pro forma net income $46,790 $35,582 $130,384 $97,920
Pro forma net income per share:
Basic $ 0.66 $ 0.53 $ 1.88 $ 1.47
Diluted $ 0.63 $ 0.50 $ 1.80 $ 1.38
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.
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 (in thousands, except as noted):
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 195,715 $ (1,606) $ 194,109 $ 152,148 $ (1,594) $ 150,554
Provision for loan losses 7,250 7,250 8,000 8,000
------------------------------------------------------------------------------------
Net interest income after provision 188,465 (1,606) 186,859 144,148 (1,594) 142,554
Noninterest income 58,384 26,774 85,158 43,031 26,601 69,632
Noninterest expense 175,547 21,765 197,312 133,219 21,609 154,828
------------------------------------------------------------------------------------
Income before income taxes 71,302 3,403 74,705 53,960 3,398 57,358
Income tax expense 24,068 1,163 25,231 18,507 1,162 19,669
------------------------------------------------------------------------------------
Net income $ 47,234 $ 2,240 $ 49,474 $ 35,453 $ 2,236 $ 37,689
====================================================================================
Average assets (in millions) $ 18,965 $ 1,753 $ 20,718 $ 12,763 $ 1,597 $ 14,360
====================================================================================
7
G. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
-------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 544,673 $ (3,931) $ 540,742 $ 419,909 $ (6,650) $ 413,259
Provision for loan losses 21,050 21,050 25,150 25,150
------------------------------------------------------------------------------------
Net interest income after provision 523,623 (3,931) 519,692 394,759 (6,650) 388,109
Noninterest income 164,388 80,206 244,594 118,972 68,279 187,251
Noninterest expense 491,133 65,978 557,111 359,366 58,923 418,289
------------------------------------------------------------------------------------
Income before income taxes 196,878 10,297 207,175 154,365 2,706 157,071
Income tax expense 66,360 3,134 69,494 52,797 33 52,830
------------------------------------------------------------------------------------
Net income $ 130,518 $ 7,163 $ 137,681 $ 101,568 $ 2,673 $ 104,241
====================================================================================
Average assets (in millions) $ 16,905 $ 1,792 $ 18,697 $ 11,596 $ 1,486 $ 13,082
====================================================================================
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 September
30, 2002 is more than 110% of the Convertible Trust Capital Securities
conversion price ($52.75 at September 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
September 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.
8
I. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
- ----------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Basic:
Net income $49,474 $37,689 $137,681 $104,241
============== ============== ============== ==============
Average common shares outstanding 70,787 67,065 69,442 66,541
============== ============== ============== ==============
Net income per share of common stock $ 0.70 $ 0.56 $ 1.98 $ 1.56
============== ============== ============== ==============
Diluted:
Net income $49,474 $37,689 $137,681 $104,241
============== ============== ============== ==============
Average common shares outstanding 70,787 67,065 69,442 66,541
Additional shares considered in diluted
computation assuming:
Exercise of stock options 3,139 4,019 3,172 4,163
-------------- -------------- -------------- --------------
Average common shares outstanding
on a diluted basis 73,926 71,084 72,614 70,704
============== ============== ============== ==============
Net income per common share - diluted $ 0.67 $ 0.53 $ 1.90 $ 1.47
============== ============== ============== ==============
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operation
- ------------
Capital Resources
- -----------------
During September 2003, the Company successfully completed a public offering of
5,000,000 shares of common stock, which generated approximately $209 million in
new capital. The proceeds from this offering will be used to support the
Company's future growth.
At September 30, 2003, stockholders' equity totaled $1,234.6 million or 5.78% 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 September 30, 2003 and 2002 (in thousands):
Per Regulatory Guidelines
-------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
September 30, 2003
Company
Risk based capital ratios:
Tier 1 $1,388,033 12.68% $438,024 4.00% $657,036 6.00%
Total capital 1,491,625 13.62 876,048 8.00 1,095,060 10.00
Leverage ratio 1,388,033 6.68 831,046 4.00 1,038,808 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $747,313 11.18% $267,335 4.00% $401,003 6.00%
Total capital 816,121 12.21 534,670 8.00 668,338 10.00
Leverage ratio 747,313 6.04 495,125 4.00 618,907 5.00
September 30, 2002
Company
Risk based capital ratios:
Tier 1 $938,603 11.54% $325,260 4.00% $487,890 6.00%
Total capital 1,024,082 12.59 650,519 8.00 813,149 10.00
Leverage ratio 938,603 6.59 569,878 4.00 712,347 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $492,564 10.05% $196,119 4.00% $294,179 6.00%
Total capital 554,007 11.30 392,238 8.00 490,298 10.00
Leverage ratio 492,564 6.25 315,059 4.00 393,824 5.00
At September 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 September 30, 2003, the
Company and its subsidiaries meet all capital adequacy requirements to which
they are subject.
10
Deposits
- --------
Total deposits at September 30, 2003 were $19.6 billion, up $5.7 billion, or 41%
over total deposits of $13.9 billion at September 30, 2002, and up by $5.0
billion, or 34% from year-end 2002. Deposit growth during the first nine months
of 2003 included core deposit growth in all categories as well as growth from
the public sector. The Company regards core deposits as all deposits other than
public certificates of deposit. Same-store core deposit growth is measured as
the year over year percentage increase in core deposits for branches open two
years or more at the balance sheet date. The Company experienced same-store core
deposit growth of 30% at September 30, 2003 as compared to the same period in
2002.
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 September 30, 2003, the Company's income simulation model indicates
net income would increase by 0.17% and decrease by 5.30% in the first year and
over a two year time frame, respectively, if rates decreased as described above.
At September 30, 2002, the Company's income simulation model was run assuming a
200 basis point decrease and indicated net income would decrease by 8.34% and by
17.56% in the first year and over a two year time frame, respectively. At
September 30, 2003, the model projects that net income would increase by 8.16%
and by 11.50% in the first year and over a two year time frame, respectively, if
rates increased as described above, as compared to an increase by 4.61% and by
11.81%, respectively, at September 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.
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 September 30, 2003, the market
value of equity model indicates an acceptable level of interest rate risk.
11
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 September 30,
2003:
---------------------------------------------------------------
Average Life
(in years)
---------------------------------------------------------------
Loans 3.5
Investments 4.4
Deposits 13.5
The MVE analyzes both sides of the balance sheet and, as indicated below,
demonstrates the inherent value of the Company's core deposits in a rising rate
environment. As rates rise, the value of the Company's core deposits increases
which offsets the decrease in value of the Company's fixed rate assets. The
following table summarizes the market value of equity at September 30, 2003 (in
millions, except for per share amounts):
----------------------------------------------------------------------------
Market Value
Of Equity Per Share
----------------------------------------------------------------------------
Plus 200 basis point $4,003 $52.82
Current Rate $4,117 $54.31
Minus 100 basis point $3,259 $43.00
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 September 30, 2003 the Company
had in excess of $10.5 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.
Short-Term Borrowings
- ---------------------
Short-term borrowings, or other borrowed money, consist primarily of securities
sold under agreements to repurchase and overnight lines of credit, and are used
to meet short-term funding needs. At September 30, 2003, short-term borrowings
aggregated $155.8 million and had an average rate of 0.90%, as compared to
$391.6 million at an average rate of 1.55% at December 31, 2002.
12
Interest Earning Assets
- -----------------------
The Company's cash flow from deposit growth and repayments from its investment
portfolio totaled approximately $9.6 billion for the first nine months of 2003.
This significant cash flow has provided the Company with ongoing reinvestment
opportunities as interest rates change. For the nine month period ended
September 30, 2003, interest earning assets increased $4.8 billion from $14.8
billion to $19.6 billion. This increase was primarily in investment securities
and the loan portfolio as described below.
Loans
- -----
During the first nine months of 2003, loans increased $1.0 billion from $5.8
billion to $6.8 billion. At September 30, 2003, loans represented 35% of total
deposits and 32% of total assets. All segments of the loan portfolio experienced
growth in the first nine 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.
September 30, December 31,
---------------------------------------
2003 2002
---------------------------------------
(in thousands)
Commercial:
Term $ 887,687 $ 842,869
Line of credit 840,736 683,640
Demand 1,080 317
----------------- ---------------------
1,729,503 1,526,826
Owner-occupied 1,535,906 1,345,306
Consumer:
Mortgages (1-4 family residential) 842,321 626,652
Installment 140,337 140,493
Home equity 1,306,462 1,139,589
Credit lines 55,931 56,367
----------------- ---------------------
2,345,051 1,963,101
Commercial real estate:
Investor developer 1,087,956 885,276
Construction 125,652 102,080
----------------- ---------------------
1,213,608 987,356
----------------- ---------------------
Total loans $ 6,824,068 $ 5,822,589
================= =====================
Investments
- -----------
For the first nine months of 2003, total securities increased $3.8 billion from
$8.9 billion to $12.7 billion. The available for sale portfolio increased $2.6
billion to $10.4 billion at September 30, 2003 from $7.8 billion at December 31,
2002, and the securities held to maturity portfolio increased $1.3 billion to
$2.1 billion at September 30, 2003 from $763.0 million at year-end 2002. The
portfolio of trading securities decreased $106.0 million from year-end 2002 to
$220.4 million at September 30, 2003.
The portfolio is comprised primarily of high quality US Government agency and
mortgage-backed obligations with a current duration of 4.0 years and an average
life of 4.4 years. At September 30, 2003, total securities represented 60% of
total assets.
13
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.
September 30, December 31,
---------------------------------
2003 2002
---------------------------------
(in thousands)
U.S. Government agency and mortgage-backed obligations $10,065,733 $7,659,737
Obligations of state and political subdivisions 31,645 23,185
Equity securities 14,783 24,054
Other 304,773 99,803
---------------- ----------------
Securities available for sale $10,416,934 $7,806,779
================ ================
U.S. Government agency and mortgage-backed obligations $1,813,055 $624,688
Obligations of state and political subdivisions 222,067 91,204
Other 67,113 47,134
---------------- ----------------
Securities held to maturity $2,102,235 $763,026
================ ================
Detailed below is information regarding the composition and characteristics of
the Company's investment portfolio, excluding trading securities, as of
September 30, 2003.
Average Average Average Average
Product Description Amount Yield Book Price Duration Life
- -------------------------------------------------------------------------------------------------------------------
(in millions) (in years)
Mortgage-backed Securities:
Federal Agencies Pass Through
Certificates (AAA Rated) $ 4,666 4.71% $101.33 4.30 4.65
Collateralized Mortgage
Obligations (AAA Rated) 6,069 4.33 100.76 3.76 4.12
Obligations of State and Political
Subdivisions/Other 1,784 4.37 100.29 4.01 4.81
--------------- -------------- --------------- ------------- --------------
Total $12,519 4.48% $100.88 4.00 4.42
=============== ============== =============== ============= ==============
The Company's mortgage-backed securities (MBS) portfolio comprises 86% of the
total investment portfolio. The MBS portfolio consists of Federal Agencies
Pass-Through Certificates and Collateralized Mortgage Obligations (CMO's) which
are issued by federal agencies and other private sponsors. The Company's
investment policy does not permit investments in inverse floaters, IO's, PO's
and other similar issues.
14
Net Income
- ----------
Net income for the third quarter of 2003 was $49.5 million, an increase of $11.8
million or 31% over the $37.7 million recorded for the third quarter of 2002.
Net income for the first nine months of 2003 totaled $137.7 million, an increase
of $33.5 million or 32% from $104.2 million in the first nine months of 2002. On
a per share basis, diluted net income for the third quarter and first nine
months of 2003 was $0.67 and $1.90 per common share compared to $0.53 and $1.47
per common share for the same periods in 2002.
Return on average assets (ROA) and return on average equity (ROE) for the third
quarter of 2003 were 0.96% and 21.17%, respectively, compared to 1.05% and
17.95%, respectively, for the same 2002 period. ROA and ROE for the first nine
months of 2003 were 0.98% and 18.97%, respectively, compared to 1.06% and
18.59%, respectively, for the same 2002 period.
Net Interest Income
- -------------------
Net interest income totaled $194.1 million for the third quarter of 2003, an
increase of $43.5 million or 29% from $150.6 million in the third quarter of
2002. Net interest income for the first nine months of 2003 was $540.7 million,
up $127.4 million or 31% from $413.3 million for the first nine 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.
As shown below, the increase in net interest income on a tax equivalent basis
was due to volume increases in the Company's earning assets, which were fueled
by the Company's rapid growth of low-cost core deposits (in thousands).
Net Interest Income
Volume Rate Total %
2003 vs. 2002 Increase Change Increase Increase
-------------------------------------------------------------------------------------------------
Third Quarter $ 55,842 ($10,925) $ 44,918 29 %
First Nine Months $155,418 ($25,694) $ 129,724 31 %
The net interest margin for the third quarter of 2003 was 4.21%, down 44 basis
points from the margin for the third quarter of 2002. The decline in the margin
was attributed primarily to a decrease in the yield on the investment portfolio,
which was due in part to lower reinvestment rates.
The third quarter of 2003 was marked by continued volatility in long term
interest rates and the lingering process of working through the most recent
mortgage refinancing cycle. The significant prepayments in the mortgage-backed
securities portfolio were also accompanied by accelerated premium amortization,
which lowered the net interest margin for the quarter.
The following table sets forth balance sheet items on a daily average basis for
the three months ended September 30, 2003, June 30, 2003 and September 30, 2002
and presents the daily average interest earned on assets and paid on liabilities
for such periods.
15
Average Balances and Net Interest Income
------------------------------------------------------------------------------------------------------
September 2003 June 2003 September 2002
---------------------------------- ---------------------------------- --------------------------------
Average Average Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------- ---------------------------------- --------------------------------
Earning Assets
- ------------------------------
Investment securities
Taxable $11,605,502 $131,158 4.48% $10,026,080 $119,147 4.77% $7,281,082 $102,306 5.57%
Tax-exempt 229,566 3,771 6.52 192,892 3,689 7.67 88,711 1,325 5.92
Trading 155,541 2,115 5.40 158,297 2,389 6.05 168,668 2,095 4.93
----------- --------------------- ---------------------------------- --------------------------------
Total investment securities 11,990,609 137,044 4.53 10,377,269 125,225 4.84 7,538,461 105,726 5.56
Federal funds sold 10,641 28 1.04 32,095 97 1.21 95,341 403 1.68
Loans
Commercial mortgages 2,520,594 39,189 6.17 2,319,945 37,156 6.42 2,131,809 36,868 6.86
Commercial 1,612,069 21,968 5.41 1,552,400 21,587 5.58 1,253,565 19,230 6.09
Consumer 2,262,426 34,309 6.02 2,109,143 33,336 6.34 1,865,040 33,252 7.07
Tax-exempt 271,436 5,266 7.70 264,737 5,338 8.09 178,956 3,835 8.50
----------- --------------------- ---------------------------------- --------------------------------
Total loans 6,666,525 100,732 5.99 6,246,225 97,417 6.26 5,429,370 93,185 6.81
----------- --------------------- ---------------------------------- --------------------------------
Total earning assets $18,667,775 $237,804 5.06% $16,655,589 $222,739 5.36% $13,063,172 $199,314 6.05%
=========== ============== ==============
Sources of Funds
- ------------------------------
Interest-bearing liabilities
Regular savings $3,938,114 $6,889 0.69% $3,477,229 $6,755 0.78% $2,498,700 $7,912 1.26%
N.O.W. accounts 484,279 874 0.72 437,455 734 0.67 352,234 1,031 1.16
Money market plus 6,808,745 11,216 0.65 5,989,878 11,226 0.75 4,389,903 13,472 1.22
Time deposits 2,470,306 13,849 2.22 2,313,690 14,093 2.44 1,958,165 15,021 3.04
Public funds 813,271 2,834 1.38 878,005 3,294 1.50 1,001,570 5,353 2.12
----------- --------------------- ---------------------------------- --------------------------------
Total deposits 14,514,715 35,662 0.97 13,096,257 36,102 1.11 10,200,572 42,789 1.66
Other borrowed money 727,128 1,111 0.61 278,780 318 0.46 99,819 403 1.60
Long-term debt 200,000 3,020 5.99 200,000 3,020 6.06 200,000 3,029 6.01
----------- --------------------- ---------------------------------- --------------------------------
Total deposits and
interest-bearing
liabilities 15,441,843 39,793 1.02 13,575,037 39,440 1.17 10,500,391 46,221 1.75
Noninterest-bearing funds
(net) 3,225,932 3,080,552 2,562,781
----------- --------------------- ---------------------------------- --------------------------------
Total sources to fund earning
assets $18,667,775 39,793 0.85 $16,655,589 39,440 0.95 $13,063,172 46,221 1.40
=========== --------------------- -=============-------------------- ============= ------------------
Net interest income and
margin tax-equivalent basis $198,011 4.21% $183,299 4.41% $153,093 4.65%
======== ===== ======== ===== ======== =====
Other Balances
- ------------------------------
Cash and due from banks $971,495 $945,600 $671,394
Other assets 1,180,451 994,784 708,005
Total assets 20,717,697 18,498,841 14,359,739
Total deposits 18,611,894 16,734,886 12,970,854
Demand deposits (noninterest-
bearing) 4,097,179 3,638,629 2,770,282
Other liabilities 243,799 273,183 248,999
Stockholders' equity 934,876 1,011,992 840,067
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 include investments available for sale. - Consumer loans include
mortgage loans held for sale.
16
Noninterest Income
- ------------------
Noninterest income totaled $85.2 million for the third quarter of 2003, an
increase of $15.6 million or 22% from $69.6 million in the third quarter of
2002. Noninterest income for the first nine months of 2003 increased to $244.6
million from $187.3 million in the first nine months of 2002, a 31% increase.
Increased deposit charges and service fees of $7.7 million and $20.7 million
during the three and nine months ended September 30, 2003, respectively,
resulted primarily from higher transaction volumes. In addition, other operating
income increased $6.1 million during the third quarter of 2003 and $33.9 million
during the first nine months of 2003 as compared to the same periods in 2002.
Included in these increases are increased revenues from CIS, the Company's
insurance brokerage subsidiary, of $3.2 million and $8.8 million during the
three and nine months ended September 30, 2003, respectively, as compared to the
same periods in 2002. CCMI, the Company's municipal public finance subsidiary,
had a decrease in revenues of $2.9 million during the third quarter of 2003 as
compared to the same period in 2002. This decrease occurred in the trading and
sales segment of CCMI, which was the result of a difficult trading environment
during the quarter. For the nine months ended September 30, 2003, CCMI has
increased revenues of $2.2 million over the same period in 2002.
The growth in non-interest income for the third quarter and the first nine
months of 2003 is more fully depicted below (in thousands):
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
9/30/03 9/30/02 % Increase 9/30/03 9/30/02 % Increase
------------------------------------ --------------------------------------
Deposit charges & service fees $41,500 $33,802 23% $115,107 $94,394 22%
Other operating income:
Insurance 17,623 14,447 22 50,868 42,076 21
Capital Markets 9,138 12,077 (24) 28,836 26,605 8
Loan Brokerage Fees 7,073 4,328 63 22,541 12,471 81
Other 8,142 4,978 64 24,479 11,705 109
---------- ---------- --------- ----------- ----------- ----------
Total other 41,976 35,830 17 126,724 92,857 36
---------- ---------- --------- ----------- ----------- ----------
Net investment security gains 1,682 - - 2,763 - -
---------- ---------- --------- ----------- ----------- ----------
Total non-interest income $85,158 $69,632 22% $244,594 $187,251 31%
========== ========== ========= =========== =========== ==========
Noninterest Expense
- -------------------
For the third quarter of 2003, noninterest expense totaled $197.3 million, an
increase of $42.5 million or 27% over the third quarter in 2002. For the first
nine months of 2003, noninterest expense totaled $557.1 million, an increase of
$138.8 million or 33% over $418.3 million for the first nine months of 2002.
Contributing to these increases was new branch activity over the past twelve
months, with the number of branches increasing from 203 at September 30, 2002 to
257 at September 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 third quarter of 2003, other noninterest expenses rose $6.3 million over
the third quarter of 2002. For the first nine months of 2003, other noninterest
expense rose $21.9 million over the first nine 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 71.20% for the first nine months of 2003 as compared to
69.50% 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
September 30, 2003 were $24.8 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
0.11% of total assets at September 30, 2002.
17
Total non-performing loans (non-accrual loans and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at September 30,
2003 were $23.1 million or 0.34% of total loans compared to $14.2 million or
0.24% of total loans at December 31, 2002 and $15.3 million or 0.28% of total
loans at September 30, 2002. At September 30, 2003, loans past due 90 days or
more and still accruing interest amounted to $649 thousand compared to $620
thousand at December 31, 2002 and $900 thousand at September 30, 2002.
Additional loans considered as potential problem loans by the Company's internal
loan review department ($29.1 million at September 30, 2003) have been evaluated
as to risk exposure in determining the adequacy of the allowance for loan
losses.
Other real estate (ORE) at September 30, 2003 totaled $1.7 million compared to
$3.6 million at December 31, 2002 and $2.4 million at September 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 September 30, 2003 and the preceding four quarters (in thousands):
---------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
2003 2003 2003 2002 2002
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $7,295 $7,049 $4,874 $5,412 $7,213
Consumer 8,295 9,517 9,860 6,326 5,512
Real estate:
Construction - - - 131 131
Mortgage 7,502 5,970 4,249 2,299 2,389
---------------------------------------------------------------------------
Total non-accrual loans 23,092 22,536 18,983 14,168 15,245
---------------------------------------------------------------------------
Restructured loans:
Commercial 2 3 4 5 6
Consumer
Real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 2 3 4 5 6
---------------------------------------------------------------------------
Total non-performing loans 23,094 22,539 18,987 14,173 15,251
---------------------------------------------------------------------------
Other real estate 1,670 1,540 3,553 3,589 2,367
---------------------------------------------------------------------------
Total non-performing assets 24,764 24,079 22,540 17,762 17,618
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 649 434 376 620 900
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $25,413 $24,513 $22,916 $18,382 $18,518
===========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.34% 0.35% 0.32% 0.24% 0.28%
Total non-performing assets as a
percentage of total period-end assets 0.12% 0.12% 0.13% 0.11% 0.11%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.12% 0.12% 0.13% 0.11% 0.12%
18
September 30, June 30, March 31, December 31, September 30,
2003 2003 2003 2002 2002
---------------------------------------------------------------------------
Allowance for loan losses as a percentage
of total non-performing loans 449% 441% 499% 640% 560%
Allowance for loan losses as a percentage
of total period-end loans 1.52% 1.56% 1.58% 1.56% 1.54%
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 (in thousands):
Year
Three Months Ended Nine Months Ended Ended
09/30/03 09/30/02 09/30/03 09/30/02 12/31/02
------------ ----------- ------------ ------------ ------------
Balance at beginning of period $99,318 $80,098 $90,733 $66,981 $66,981
Provisions charged to operating expenses 7,250 8,000 21,050 25,150 33,150
------------ ----------- ------------ ------------ ------------
106,568 88,098 111,783 92,131 100,131
Recoveries on loans charged-off:
Commercial 111 52 456 457 815
Consumer 239 61 516 281 339
Real estate - 22 - 23 176
------------ ----------- ------------ ------------ ------------
Total recoveries 350 135 972 761 1,330
Loans charged-off:
Commercial (1,608) (1,926) (4,673) (4,987) (7,181)
Consumer (1,684) (828) (4,439) (2,393) (3,514)
Real estate (34) - (51) (33) (33)
------------ ----------- ------------ ------------ ------------
Total charge-offs (3,326) (2,754) (9,163) (7,413) (10,728)
------------ ----------- ------------ ------------ ------------
Net charge-offs (2,976) (2,619) (8,191) (6,652) (9,398)
------------ ----------- ------------ ------------ ------------
Balance at end of period $103,592 $85,479 $103,592 $85,479 $90,733
============ =========== ============ ============ ============
Net charge-offs as a percentage of
average loans outstanding 0.18% 0.19% 0.17% 0.17% 0.18%
Net reserve additions $4,274 $5,381 $12,859 $18,498 $23,752
The Company considers the allowance for loan losses of $103.6 million adequate
to cover probable losses inherent in the loan portfolio at September 30, 2003.
The Company's determination of the level of the allowance for loan losses rests
upon various judgments and assumptions surrounding the risk characteristics
included in the loan portfolio. These risk characteristics include trends and
changes in different factors affecting the loan portfolio.
19
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.
20
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
- --------
Exhibit 31 - 302 Certification
Exhibit 32 - 906 Certification
Reports on Form 8-K
- -------------------
On July 15, 2003, we filed a Current Report on Form 8-K which included as
exhibits a press release, issued by us on July 15, 2003, announcing our results
for the second quarter of 2003 and certain supplemental information.
On September 5, 2003, we filed a Current Report on Form 8-K, which included
certain questions and answers regarding corporate information.
On September 18, 2003, we filed a Current Report on Form 8-K announcing the
completion of our offering of 5,000,000 shares of common stock at a public
offering price of $43.67 per share.
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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)
November 13, 2003 /s/ DOUGLAS J. PAULS
-------------------- ---------------------------------------
(Date) DOUGLAS J. PAULS SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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