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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File #1-12609
Commerce Bancorp, Inc
[GRAPHIC OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
-------------------------------- ---------------------
(State of other jurisdiction (I.R.S. Employee
of incorporation or organization) Identification Number)
Commerce Atrium
1701 Route 70 East
Cherry Hill, New Jersey 08034-5400
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 856-751-9000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
---------------------- -----------------------------------------------
Title of Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10- K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes X No __.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $3,611,075,918.(1)
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 practicable date.
Common Stock $1.00 Par Value 161,188,028
- -------------------------------- ----------------------------------------
Title of Class No. of Shares Outstanding as of 3/8/05
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders.
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Registrant's Common Stock outstanding reduced by the number of
shares of Common Stock held by officers, directors, and shareholders owning 10%
or more of the Registrant's Common Stock, multiplied by $27.22 (as adjusted for
the two-for-one stock split effective March 7, 2005), the last sale price for
the Registrant's Common Stock on June 30, 2004 the last business day of the
Registrant's most recently completed second fiscal quarter. The information
provided shall in no way be construed as an admission that any person whose
holdings are excluded from this figure is an affiliate of the Registrant or that
such person is the beneficial owner of the shares reported as being held by him,
and any such inference is hereby disclaimed. The information provided herein is
included solely for the recordkeeping purposes of the Securities and Exchange
Commission.
COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
Page
Part I
Item 1. Business..............................................................................................................3
Item 2. Properties............................................................................................................9
Item 3. Legal Proceedings ...................................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................................................................10
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ...........................................10
Item 6. Selected Financial Data .............................................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..........................................................26
Item 8. Financial Statements and Supplementary Data .........................................................................30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................54
Item 9A. Controls and Procedures..............................................................................................54
Part III
Item 10. Directors and Executive Officers of the Registrant...................................................................54
Item 11. Executive Compensation...............................................................................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................54
Item 13. Certain Relationships and Related Transactions.......................................................................55
Item 14. Principal Accountant Fees and Services...............................................................................55
Part IV
Item 15. Exhibits and Financial Statement Schedules...........................................................................55
Signatures......................................................................................................................59
Section 302 Certifications......................................................................................................60
Section 906 Certification.......................................................................................................62
30
PART I
Item 1. Business
Forward-Looking Statements
Commerce Bancorp, Inc. (the "Company") may from time to time make various
written or oral "forward looking statements" including statements contained in
the Company's filings with the Securities and Exchange Commission ("SEC")
(including this Annual Report on Form 10-K and the exhibits hereto), in its
reports to shareholders and in other communications by the Company, which are
made in good faith by the Company pursuant to 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 that are
sometimes beyond the Company's control. You will generally be able to recognize
a forward-looking statement because it contains the words "anticipate,"
"believe," "estimate," "expect," "project," "objective," "may," "could,"
"should," "would," "intend," "forecast," "plan" or similar expressions to
identify it as a forward-looking statement.
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 and world economies in general and
the strength of the local economies in which the Company conducts its
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; inflation; interest rates, market and monetary fluctuations; the
Company's timely development of competitive new products and services 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; the ability to maintain the growth and further
development of the Company's community-based retail branching network;
unanticipated regulatory or judicial proceedings; changes in consumer spending
and saving habits; and the Company's success at managing the risks involved in
the foregoing. The Company cautions that the foregoing list of important factors
is not exclusive.
The Company cautions you that any such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors which may cause the Company's actual results,
performance or achievements to differ materially from the future results,
performance or achievements the Company has anticipated in such forward-looking
statements. You should note that many factors, some of which are discussed in
this Annual Report on Form 10-K could affect the Company's future financial
results and could cause those results to differ materially from those expressed
or implied in the Company's forward-looking statements contained or incorporated
by reference in this document. 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.
General
The Company is a New Jersey business corporation registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended ("Holding
Company Act"). The Company was incorporated on December 9, 1982 and became an
active bank holding company on June 30, 1983 through the acquisition of Commerce
Bank, N.A., referred to as Commerce NJ.
As of December 31, 2004, the Company had total assets of $30.5 billion,
total loans of $9.5 billion, and total deposits of $27.7 billion. The address of
the Company's principal executive office is Commerce Atrium, 1701 Route 70 East,
Cherry Hill, New Jersey, 08034-5400 and the telephone number is (856) 751-9000.
The Company operates:
o three nationally chartered bank subsidiaries:
o Commerce Bank, N.A., Cherry Hill, New Jersey;
o Commerce Bank/Pennsylvania, N.A., Devon, Pennsylvania;
o Commerce Bank/Delaware, N.A., Wilmington, Delaware; and
o one New Jersey state chartered bank subsidiary:
o Commerce Bank/North, Ramsey, New Jersey.
3
These four bank subsidiaries, referred to collectively as the banks, as of
December 31, 2004 had 319 full service retail stores located in the states of
New Jersey, Pennsylvania, Delaware and New York. These banks provide a full
range of retail and commercial banking services for consumers and small and
mid-sized companies. Lending services are focused on commercial real estate and
commercial and consumer loans to local borrowers. These banks' lending and
investment activities are funded principally by retail deposits gathered through
each bank's retail store network.
Stock Split
On February 15, 2005, the Board of Directors declared a two-for-one stock
split in the form of a 100% stock dividend distributed on March 7, 2005 to
stockholders of record on February 25, 2005. Per share data and other
appropriate share information for all periods presented have been restated to
reflect the stock split.
Acquisitions
The Company's primary growth strategy is the opening of new full service
stores of which 49 opened in 2004 and 46 opened in 2003. The Company expects to
open an additional 55 - 60 full service stores in 2005, including its first
stores in the Metro Washington, D.C. market. The Company has also developed its
full service office network through certain acquisitions including:
o on January 2, 1987, the Company acquired all of the outstanding shares
of Commerce Bank/Pennsylvania, N.A., referred to as Commerce PA;
o on December 31, 1988 the Company acquired all of the outstanding
shares of Citizens State Bank of New Jersey, Forked River, which was
subsequently converted to a national charter and renamed Commerce
Bank/Shore, N.A., referred to as Commerce Shore. Commerce Shore was
merged with and into Commerce NJ in 2004;
o on January 21, 1997, the Company acquired Independence Bancorp, Inc.,
a bank holding company headquartered in Bergen County, New Jersey.
Independence Bancorp, Inc.'s wholly-owned state-chartered bank
subsidiary, Independence Bank of New Jersey, was subsequently renamed
Commerce Bank/North, referred to as Commerce North; and
o on January 15, 1999, the Company acquired Prestige Financial Corp.,
referred to as PFC, a one-bank holding company headquartered in
Flemington, New Jersey. PFC's wholly-owned state-chartered bank
subsidiary, Prestige State Bank, was subsequently re-chartered as a
national bank and renamed Commerce Bank/Central, N.A. Commerce Central
was merged with and into Commerce NJ in 2001.
In 1998, the Company received regulatory approvals to open Commerce
Bank/Delaware, N.A., referred to as Commerce Delaware. Commerce Delaware's first
store opened in New Castle County, Delaware, on December 18, 1999.
Commerce NJ operates a non-bank subsidiary, Commerce Capital Markets, Inc.
(CCMI), Philadelphia, Pennsylvania, referred to as Commerce Capital Markets,
which engages in various securities, investment banking and brokerage
activities.
In addition, the Company, through Commerce Insurance Services, Inc., a
non-bank subsidiary of Commerce Bank/North, referred to as Commerce Insurance,
operates an insurance brokerage agency concentrating on commercial property,
casualty and surety as well as personal lines of insurance and employee benefits
for clients in multiple states, primarily Delaware, New Jersey, New York and
Pennsylvania. Since 1996, Commerce Insurance has completed several strategic
acquisitions of insurance brokerage agencies.
Dividends
As a legal entity separate and distinct from its bank and non-bank
subsidiaries, the Company's principal sources of revenues are dividends and fees
from its bank and non-bank subsidiaries. The subsidiaries that operate in the
banking, insurance and securities business can pay dividends only if they are in
compliance with the applicable regulatory requirements imposed on them by
federal and state regulatory authorities.
The Banks
As of December 31, 2004, Commerce NJ had total assets of $21.4 billion,
total deposits of $19.1 billion, and total shareholders' equity of $1.3 billion;
Commerce PA had total assets of $5.7 billion, total deposits of $5.3 billion and
total shareholders' equity of $340.4 million; Commerce North had total assets of
$3.2 billion, total deposits of $2.9 billion, and total shareholders' equity of
$203.3 million; and Commerce Delaware had total assets of $381.0 million, total
deposits of $356.7 million, and total shareholders' equity of $23.0 million.
Service Areas
The Company's primary service areas include New Jersey, Metropolitan
Philadelphia and New York, and Northern Delaware. The Company has attempted to
locate its stores in the fastest growing communities within its service areas.
Retail deposits gathered through these focused branching activities are used to
support lending throughout the Company.
4
Commerce NJ provides retail and commercial banking services through 208
retail stores in Central and Southern New Jersey, and Metropolitan New York.;
Commerce PA provides retail and commercial banking services through 68 retail
stores in Philadelphia, Bucks, Chester, Delaware and Montgomery Counties in
Southeastern Pennsylvania; Commerce North provides retail and commercial banking
services through 35 retail stores in Bergen, Essex, Hudson and Passaic Counties,
New Jersey; and Commerce Delaware provides retail and commercial banking
services through 8 retail stores in New Castle and Kent Counties, Delaware.
Retail Banking Services and Products
Each bank provides a broad range of retail banking services and products,
including free checking accounts, subject to minimum balances, savings programs,
money market accounts, negotiable orders of withdrawal accounts, certificates of
deposit, safe deposit facilities, free coin counting, consumer loan programs,
including installment loans for home improvement and the purchase of consumer
goods and automobiles, home equity and revolving lines of credit, overdraft
checking and automated teller facilities. Each bank also offers construction
loans and permanent mortgages for houses.
Trust Services
Commerce NJ, Commerce PA and Commerce Delaware each offer trust services
primarily focusing on corporate trust services, particularly as bond trustee,
paying agent, and registrar for municipal bond offerings.
Commercial Banking Services and Products
Each bank offers a broad range of commercial banking services, including
free checking accounts, subject to minimum balance, night depository facilities,
money market accounts, certificates of deposit, short-term loans for seasonal or
working capital purposes, term loans for fixed assets and expansion purposes,
revolving credit plans and other commercial loans and leases to fit the needs of
its customers. Each bank also finances the construction of business properties
and makes real estate mortgage loans on completed buildings. Where the needs of
a customer exceed a bank's legal lending limit for any one customer, such bank
may participate with other banks, including the other banks owned by the
Company, in making a loan.
Additional information pertaining to the Company's segments is set forth in
Note 18 - Segment Reporting of the Notes to Consolidated Financial Statements,
which appears elsewhere herein.
Commerce Insurance
Commerce Insurance operates one of the nation's largest regional insurance
brokerage firms concentrating on commercial property, casualty and surety as
well as personal lines. In addition, Commerce Insurance offers a line of
employee benefit programs including group as well as individual medical, life,
disability, pension, and risk management services. Commerce Insurance currently
operates out of 12 locations in New Jersey, 2 locations in Pennsylvania, and 3
locations in Delaware. Commerce Insurance places insurance for clients in
multiple states, primarily New Jersey, Pennsylvania, New York, and Delaware.
Commerce Capital Markets
Commerce Capital Markets engages in various securities, investment
management and brokerage activities. Commerce Capital Markets' principal place
of business is Philadelphia, Pennsylvania, with locations in Cherry Hill, South
Plainfield, Ramsey and Mount Laurel, New Jersey and New York, New York.
Commerce Capital Trust II
Commerce Capital Trust II is a statutory business trust created under
Delaware law. On March 11, 2002 the Company issued $200.0 million of 5.95%
Convertible Trust Capital Securities through Commerce Capital Trust II.
Other Activities
NA Asset Management, a Delaware corporation, is a wholly-owned subsidiary
of Commerce NJ that purchases, holds and sells investments of Commerce NJ.
Commerce Mortgage Acceptance Corp., a Delaware corporation, is a wholly-owned
subsidiary of Commerce NJ that is utilized in the securitization of residential
mortgage loans. North Asset Management, a Delaware corporation, is a
wholly-owned subsidiary of Commerce North that purchases, holds, and sells
investments of Commerce North. Delaware Asset Management, a New Jersey
corporation, is a wholly-owned subsidiary of Commerce Delaware that purchases,
holds, and sells investments of Commerce Delaware. Commerce Commercial Leasing
LLC, a New Jersey Limited Liability Company, is a wholly-owned subsidiary of
Commerce NJ that provides business leasing services.
The Company has an investment in Pennsylvania Commerce Bancorp, Inc., Camp
Hill, Pennsylvania (15.50% beneficial ownership assuming the exercise of all
outstanding warrants held by the Company). The Company and its subsidiaries
provide marketing support and technical support services to Pennsylvania
Commerce Bancorp, Inc. and its wholly-owned subsidiary, Commerce
Bank/Harrisburg.
5
Risk Factors
The Company is subject to a number of risk factors including, among others,
business and economic conditions, monetary and other governmental policies, and
competition. These factors, and others, could impact the Company's business,
financial condition and results of operations. In the normal course of business,
the Company assumes various types of risk, which include, among others, credit
risk, interest rate risk, liquidity risk and risk associated with trading
activities. The Company has risk management processes designed to provide for
risk identification, measurement and monitoring. Additional information
pertaining to the Company's risk factors is set forth in the Forward-Looking
Statements, which appear on page 3.
Competition
The Company's service area is characterized by intense competition in all
aspects and areas of its business from commercial banks, savings and loan
associations, mutual savings banks and other financial institutions. The
Company's competitors, including credit unions, consumer finance companies,
factors, insurance companies and money market mutual funds, compete with lending
and deposit gathering services offered by the Company. Many competitors have
substantially greater financial resources with larger lending limits and larger
branch systems than the Company.
In commercial transactions, Commerce NJ's, Commerce PA's, Commerce North's,
and Commerce Delaware's legal lending limit to a single borrower (approximately
$204.0 million, $53.3 million, $31.7 million, and $3.7 million, respectively, as
of December 31, 2004) enables the banks to compete effectively for the business
of smaller and mid-sized businesses. The combined legal lending limit of the
Company is $292.7 million. These legal lending limits are lower than that of
various competing institutions and may act as a constraint on the bank's
effectiveness in competing to provide financing in excess of these limits.
The Company believes that it is able to compete on a substantially equal
basis with larger financial institutions because its banks offer longer hours of
operation than those offered by most of the Company's competitors, free checking
accounts for customers maintaining minimum balances and competitive interest
rates on savings and time accounts with low minimum deposit requirements.
The Company seeks to provide personalized services through management's
knowledge and awareness of its market area, customers and borrowers. The Company
believes this knowledge and awareness provides a business advantage in serving
the retail depositors and the small and mid-sized commercial borrowers that
comprise the Company's customer base.
Supervision and Regulation
THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE
REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING COMPANIES AND THEIR SUBSIDIARIES
AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO THE COMPANY AND ITS
SUBSIDIARIES. THE REGULATORY FRAMEWORK IS INTENDED PRIMARILY FOR THE PROTECTION
OF DEPOSITORS, OTHER CUSTOMERS AND THE FEDERAL DEPOSIT INSURANCE FUNDS AND NOT
FOR THE PROTECTION OF SECURITY HOLDERS. TO THE EXTENT THAT THE FOLLOWING
INFORMATION DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE PARTICULAR STATUTORY AND REGULATORY PROVISIONS.
A CHANGE IN APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A
MATERIAL EFFECT ON THE BUSINESS OF THE COMPANY.
The Company
The Company is registered as a bank holding company under the Holding
Company Act, and is therefore subject to supervision and regulation by the
Federal Reserve Board ("FRB"). The Company is also regulated by the New Jersey
Department of Banking and Insurance (the "Department").
Under the Holding Company Act, the Company is required to secure the prior
approval of the FRB before it can merge or consolidate with any other bank
holding company or acquire all or substantially all of the assets of any bank or
acquire direct or indirect ownership or control of any voting shares of any bank
that is not already majority owned by it, if after such acquisition it would
directly or indirectly own or control more than 5% of the voting shares of such
bank.
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control or more than
5% of the voting shares of any company engaged in non-banking activities unless
the FRB, by order or regulation, has found such activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making such a determination, the FRB considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public which outweigh the possible adverse
effects.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act, as amended ("CRA")
ratings are generally prerequisites to obtaining federal regulatory approval to
make acquisitions and open branches. Under the CRA, Commerce NJ, Commerce
Delaware and Commerce North are currently rated "outstanding", while Commerce
Pennsylvania is currently rated "satisfactory".
In addition, under the Holding Company Act, the Company is required to file
periodic reports of its operations with, and is subject to examination by, the
FRB.
6
The Company is under the jurisdiction of the SEC and various state
securities commissions for matters relating to the offering and sale of its
securities and is subject to the SEC's rules and regulations relating to
periodic reporting, reporting to shareholders, proxy solicitation and insider
trading.
There are various legal restrictions on the extent to which the Company and
its non-bank subsidiaries can borrow or otherwise obtain credit from its banking
subsidiaries. In general, these restrictions require that any such extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the Company or such non-bank subsidiaries, to ten
percent of the lending bank's capital stock and surplus, and as to the Company
and all such non-bank subsidiaries in the aggregate, to 20% of such lending
bank's capital stock and surplus. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA")
contains a "cross-guarantee" provision that could result in any insured
depository institution owned by the Company being assessed for losses incurred
by the FDIC in connection with assistance provided to, or the failure of, any
other depository institution owned by the Company. Also, under FRB policy, the
Company is expected to act as a source of financial strength to each of its
banking subsidiaries and to commit resources to support each such bank in
circumstances where such bank might not be in a financial position to support
itself. Consistent with the "source of strength" policy for subsidiary banks,
the FRB has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears to be consistent with the
corporation's capital needs, asset quality and overall financial condition.
A discussion of capital guidelines and capital is included in the section
entitled "Stockholders' Equity and Dividends" contained within "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware
Commerce NJ, Commerce PA, and Commerce Delaware, as national banks, are
subject to the National Bank Act. Each is also subject to the supervision of,
and is regularly examined by, the Office of the Comptroller of the Currency
("OCC") and is required to furnish quarterly reports to the OCC. The approval of
the OCC is required for the establishment of additional stores by any national
bank, subject to applicable state law restrictions.
Commerce North, as a New Jersey state-chartered bank, is subject to the New
Jersey Banking Act. Commerce North is also subject to the supervision of, and is
regularly examined by, the Department and the FDIC, and is required to furnish
quarterly reports to each agency. The approval of the Department and the FDIC is
necessary for the establishment of any additional stores by any New Jersey
state-chartered bank, subject to applicable state law restrictions.
Under present New Jersey law, Commerce NJ, and Commerce North are permitted
to operate stores at any location in New Jersey, subject to prior regulatory
approval. Under present New York law, Commerce NJ is permitted to operate stores
at any location in New York, subject to certain home office protection rules and
subject to regulatory approval. Under present Pennsylvania law, Commerce PA is
permitted to operate stores within any county in Pennsylvania, subject to prior
regulatory approval. Under present Delaware law, Commerce Delaware is permitted
to operate stores at any location in Delaware at which deposits are received,
checks are paid, or money is lent, subject to prior regulatory approval.
Under the CRA, a bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low- and moderate-income neighborhoods. CRA does
not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with CRA. CRA requires that the applicable regulatory
agency assess an institution's record of meeting the credit needs of its
community. The CRA requires public disclosure of an institution's CRA rating and
requires that the applicable regulatory agency provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system. An institution's CRA rating is considered in determining whether to
grant charters, stores and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Performance less than satisfactory may be the
basis for denying an application. For their most recent examinations, Commerce
NJ, Commerce Delaware and Commerce North each received an "outstanding" rating
while Commerce PA received a "satisfactory" rating.
Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware are also
members of the FDIC and, except for Commerce North, members of the FRB and,
therefore, are subject to additional regulation by these agencies. Some of the
aspects of the lending and deposit business of Commerce NJ, Commerce PA,
Commerce North, and Commerce Delaware which are regulated by these agencies
include personal lending, mortgage lending and reserve requirements. The
operation of Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware is
also subject to numerous federal, state and local laws and regulations which set
forth specific restrictions and procedural requirements with respect to interest
rates on loans, the extension of credit, credit practices, the disclosure of
credit terms and discrimination in credit transactions.
7
Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware are subject
to certain limitations on the amount of cash dividends that they can pay. See
Note 17 - Condensed Financial Statements of the Parent Company and Other Matters
of the Notes to Consolidated Financial Statements, which appears elsewhere
herein.
A discussion of capital guidelines and capital is included in the section
entitled "Stockholders' Equity and Dividends" contained within "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The FRB has similar authority with respect to the Company and the
Company's non-bank subsidiaries. The FDIC has similar authority with respect to
Commerce North.
All of the deposits of the banking subsidiaries are insured up to
applicable limits by the FDIC and are subject to deposit insurance assessments.
The insurance assessments are based upon a matrix that takes into account a
bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC
reduced the insurance premiums it charged on bank deposits to the statutory
minimum of $2,000 annually for "well capitalized" banks. At December 31, 2004
the Company's consolidated capital levels and each of the Company's banking
subsidiaries meet the regulatory definition of a "well capitalized" financial
institution.
Commerce Insurance/ Commerce Capital Markets
Commerce Insurance, a non-bank subsidiary of Commerce North, is currently
subject to supervision, regulation and examination by the Department, as well as
other state insurance departments where it operates. Commerce Capital Markets, a
non-bank subsidiary of Commerce NJ, engages in certain permitted securities and
brokerage activities and is regulated by the SEC. Commerce Capital Markets is
also subject to rules and regulations promulgated by the National Association of
Securities Dealers, Inc., the Securities Investors Protection Corporation and
various state securities commissions and with respect to municipal securities
activities the Municipal Securities Rulemaking Board.
Both Commerce Insurance and Commerce Capital Markets are also subject to
various state laws and regulations in which they do business. These laws and
regulations are primarily intended to benefit clients and generally grant
supervisory agencies broad administrative powers, including the power to limit
or restrict the carrying on of business for failure to comply with such laws and
regulations. In such event, the possible sanctions which may be imposed include
the suspension of individual employees, limitations on engaging in business for
specific periods, censures and fines.
Gramm-Leach-Bliley Act
On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law,
repealing the 1933 Glass-Steagall Act's separation of the commercial and
investment banking industries. The Act expanded the range of non-banking
activities a bank holding company may engage in, while preserving existing
authority for bank holding companies to engage in activities that are closely
related to banking. The Act created a category of holding company called a
"Financial Holding Company," a subset of bank holding companies that satisfy the
following criteria: (1) all of the depository institution subsidiaries must be
well capitalized and well managed; and (2) the holding company must have made an
effective election with the FRB that it elects to be a financial holding company
to engage in activities that would not have been permissible before the Act. In
order for the election to be effective, all of the depository institution
subsidiaries must have a CRA rating of "satisfactory" or better as of its most
recent examination. The Company has not elected to be a financial holding
company. Financial holding companies may engage in any activity that (i) is
financial in nature or incidental to such financial activity or (ii) is
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. The Act specifies certain activities that are financial in nature.
These activities include acting as principal, agent or broker for insurance;
underwriting, dealing in or making a market in securities; and providing
financial and investment advice. The FRB and the Secretary of the Treasury have
authority to decide whether other activities are also financial in nature or
incidental to financial activity, taking into account changes in technology,
changes in the banking marketplace, competition for banking services and so on.
These financial activities authorized by the Act may also be engaged in by
a "financial subsidiary" of a national or state bank, except for annuity
underwriting, insurance company portfolio investments, real estate investment
and development, and merchant banking, which must be conducted in a financial
holding company. In order for the new financial activities to be engaged in by a
financial subsidiary of a national or state bank, the Act requires each of the
parent bank (and its sister-bank affiliates) to be well capitalized and well
managed; the aggregate consolidated assets of all of that bank's financial
subsidiaries may not exceed the lesser of 45% of its consolidated total assets
or $50.0 billion; the bank must have at least a satisfactory CRA rating; and, if
that bank is one of the 100 largest national banks, it must meet certain
financial rating or other comparable requirements.
The Act establishes a system of functional regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and banks' financial subsidiaries, the SEC will regulate their
securities activities and state insurance regulators will regulate their
insurance activities. The Act also provides new protections against the transfer
and use by financial institutions of consumers' nonpublic, personal information.
8
The foregoing discussion is qualified in its entirety by reference to the
statutory provisions of the Act and the implementing regulations, which are
adopted by various government agencies pursuant to the Act.
THE RULES GOVERNING THE REGULATION OF FINANCIAL SERVICES INSTITUTIONS AND
THEIR HOLDING COMPANIES ARE VERY DETAILED AND TECHNICAL. ACCORDINGLY, THE ABOVE
DISCUSSION IS GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE OR TO
DESCRIBE ALL OF THE LAWS AND REGULATIONS THAT APPLY TO THE COMPANY AND ITS
SUBSIDIARIES.
National Monetary Policy
In addition to being affected by general economic conditions, the Company's
earnings and growth are affected by the policies of regulatory authorities,
including the OCC, the FRB and the FDIC. An important function of the FRB, is to
regulate the money supply and credit conditions. Among the instruments used to
implement these objectives are open market operations in U.S. Government
securities, setting the discount rate, and changes in reserve requirements
against bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of credit, bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits.
The monetary policies and regulations of the FRB have had significant
effects on the operating results of commercial banks in the past and are
expected to continue to do so in the future. The effects of these policies upon
the Company's future business, earnings and growth cannot be predicted.
Employees
As of December 31, 2004 the Company had in excess of 9,800 full-time
equivalent employees.
Available Information
The Company's internet address is www.commerceonline.com. The Company makes
available free of charge on www.commerceonline.com its annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC. In
addition, the Company makes available free of charge on www.commerceonline.com
its Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code
of Ethics for Senior Financial Officers, and the charters of its Audit,
Compensation and Nominating and Governance Committees.
In addition, the Company will provide, at no cost, paper or electronic
copies of its reports and other filings (excluding exhibits) made with the SEC
and its Corporate Governance Guidelines, Code of Business Conduct and Ethics,
Code of Ethics for Senior Financial Officers, and the charters of its Audit,
Compensation and Nominating and Governance Committees. Requests should be
directed to:
Commerce Bancorp, Inc.
Commerce Atrium
1701 Route 70 East
Cherry Hill, NJ 08034-5400
Attn: C. Edward Jordan, Jr.
Executive Vice President
The information on the website listed above, is not, and should not, be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is and is only intended to be an
inactive textual reference.
Item 2. Properties
The executive and administrative offices of the Company and Commerce NJ are
located at 1701 Route 70 East, Cherry Hill, New Jersey. This six-story structure
is owned by the Company.The Company and its subsidiaries own or lease numerous
other premises for use in conducting business activities. The facilities owned
or occupied under lease by the Company's subsidiaries are considered by
management to be adequate.
Additional information pertaining to the Company's properties is set forth
in Note 6 - Bank Premises, Equipment, and Leases of the Notes to Consolidated
Financial Statements, which appears elsewhere herein.
9
Item 3. Legal Proceedings
During July and August 2004, six class action complaints were filed in the
United States District Court for the District of New Jersey and the Eastern
District of Pennsylvania against the Company and certain Company (or subsidiary)
current and former officers and directors. All class action complaints have been
consolidated in the United States District Court for the District of New Jersey,
Camden Division. As a result of the consolidation, a single consolidated
complaint has been filed. It alleges that the defendants violated federal
securities laws, specifically Sections 10(b) and 20(a) of the Securities Act of
1934 and Rule 10b-5 of the Securities and Exchange Commission. The plaintiffs
seek unspecified damages on behalf of a purported class of purchasers of the
Company's securities during various periods. The Company believes these class
action complaints are without merit. No accrual for a loss contingency has been
recorded, as the risk of loss is considered remote.
Other than routine litigation arising in the normal course of business, the
Company and its subsidiaries are not parties to any other material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of 2004.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations; Stockholders' Equity and Dividends and Capital Resources,
which appear elsewhere herein.
See Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters, which appears elsewhere herein, for disclosure
regarding the Company's Equity Compensation Plans.
Dividend Policy
It is the present intention of the Company's Board of Directors to pay
quarterly cash dividends on the Company's common stock. However, the declaration
and payment of future dividends will be subject to determination and declaration
by the Board of Directors, which will consider the Company's earnings, financial
condition and capital needs and applicable regulatory requirements. See Note 17
- - Condensed Financial Statements of the Parent Company and Other Matters of the
Notes to Consolidated Financial Statements, which appears elsewhere herein.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and accompanying notes included elsewhere herein. Per share data and other
appropriate share information for all periods presented have been restated for
the two-for-one stock split in the form of a 100% stock dividend effective March
7, 2005. In addition, prior year diluted net income per share amounts have been
restated to reflect the impact of the Company's 5.95% Convertible Trust Capital
Securities. Refer to Note 1 - Significant Accounting Policies of the Notes to
Consolidated Financial Statements, which appears elsewhere herein, under Recent
Accounting Statements for further discussion of the required restatement.
10
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Net interest income $ 1,017,785 $ 755,866 $ 572,755 $ 401,326 $ 296,930
Provision for loan losses 39,238 31,850 33,150 26,384 13,931
Noninterest income 375,071 332,478 257,466 196,805 150,760
Noninterest expense 938,778 763,392 579,168 420,036 315,357
Income before income taxes 414,840 293,102 217,903 151,711 118,402
Net income 273,418 194,287 144,815 103,022 80,047
Balance Sheet Data:
Total assets $30,501,645 $22,712,180 $16,403,981 $11,363,703 $ 8,296,516
Loans (net) 9,318,991 7,328,519 5,731,856 4,516,431 3,638,580
Securities available for sale 8,044,150 10,650,655 7,806,779 4,152,704 2,021,326
Securities held to maturity 10,463,658 2,490,484 763,026 1,132,172 1,513,456
Trading securities 169,103 170,458 326,479 282,811 109,306
Deposits 27,658,885 20,701,400 14,548,841 10,185,594 7,387,594
Long-term debt 200,000 200,000 200,000 80,500 80,500
Stockholders' equity 1,665,705 1,277,288 918,010 636,570 492,224
Per Share Data:
Net income-basic $ 1.74 $ 1.36 $ 1.08 $ 0.80 $ 0.65
Net income-diluted 1.63 1.29 1.01 0.76 0.62
Dividends declared 0.40 0.34 0.31 0.28 0.25
Book value 10.42 8.35 6.77 4.85 3.89
Average shares outstanding:
Basic 156,625 142,169 133,590 129,331 123,511
Diluted 172,603 156,507 149,389 136,204 128,445
Selected Ratios:
Performance
Return on average assets 1.03 % 0.99 % 1.05 % 1.08 % 1.09%
Return on average equity 18.78 18.81 18.50 17.64 19.81
Net interest margin 4.28 4.36 4.69 4.76 4.62
Liquidity and Capital
Average loans to average deposits 34.49 % 36.93 % 42.48 % 48.04 % 52.17%
Dividend payout-basic 22.99 25.00 28.70 35.00 38.46
Stockholders' equity to total assets 5.46 5.62 5.60 5.60 5.93
Risk-based capital:
Tier 1 12.30 12.66 11.47 10.81 10.79
Total 13.25 13.62 12.51 11.96 11.92
Leverage ratio 6.19 6.61 6.37 6.24 6.92
Asset Quality
Non-performing assets to total year-end assets 0.11 % 0.10 % 0.11 % 0.16 % 0.20%
Net charge-offs to average loans outstanding 0.19 0.16 0.18 0.19 0.11
Non-performing loans to total
year-end loans 0.35 0.29 0.24 0.37 0.37
Allowance for loan losses to total
end of year loans 1.43 1.51 1.56 1.46 1.32
Allowance for loan losses to non-
performing loans 412.88 515.39 640.18 397.73 356.84
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes.
Executive Summary
The Commerce model is built on the gathering and retention of low cost core
deposits as being essential to shareholder value. Management believes core
deposit growth has been and will continue to be the primary driver of the
Company's success, and that service and a great retail experience, not rates,
drives deposit growth. The consistent inflow of low cost, long lived core
deposits allows the Company to avoid taking excessive risks in growing its loan
and investment portfolios. In addition, the Company's significant cash flow
provides ongoing reinvestment opportunities as interest rates change.
During 2004, the Company's total assets grew 34%. The interest rate environment
was difficult for the Company's growth model, with overall low interest rates
and the flattening of the yield curve during the second half of the year. The
flattening curve contributed to the compression of the Company's net interest
margin to 4.28%, the lowest level in over 10 years. Despite this, the Company's
continued low cost deposit growth significantly outpaced the current year margin
compression and enabled the Company to grow revenue 28%, net income 41%, and
diluted net income per share by 26%.
The Company's financial performance for 2004 and projected performance for 2005
are further discussed below.
The 2004 financial highlights are summarized below.
o Net income increased 41% and earnings per share increased 26%.
o Total deposits grew 34% and total (net) loans grew 27%.
o Total revenues (net interest income plus noninterest income) increased
28%.
2004 2003 Increase
(amounts in billions)
Total Assets $ 30.5 $ 22.7 34%
Total Loans (net) 9.3 7.3 27%
Total Investments 18.7 13.3 41%
Total Deposits 27.7 20.7 34%
(amounts in millions)
Total Revenues $ 1,392.9 $ 1,088.3 28%
Net Income 273.4 194.3 41%
Net Income per Share Diluted 1.63 1.29 26%
The Company's 26% increase in diluted net income per share includes a full year
impact of the additional 5,000,000 shares resulting from the Company's common
stock offering during September 2003.
The Company remains a deposit-driven financial institution with emphasis on core
deposit accumulation and retention as a basis for sound growth and
profitability. The Company's unique business model continues to produce strong
top-line revenue growth that is driven by strong deposit growth.
The continued ability to grow deposits has resulted in significant earning asset
growth. This growth resulted in $1.0 billion of net interest income on a tax
equivalent basis in 2004, an increase of $264.7 million or 34% over 2003. As
more fully depicted in the chart below, the increase in net interest income in
both 2004 and 2003 was due to volume increases in the Company's earning assets.
- ------------------------------------------------------------
Net Interest Income
(dollars in millions)
- ------------------------------------------------------------
Volume Rate
Increase Change Total Increase
- ------------------------------------------------------------
2004 $285.0 ($20.3) $264.7 34%
- ------------------------------------------------------------
2003 $227.1 ($41.5) $185.6 32%
- ------------------------------------------------------------
The Company continues to reiterate its future growth targets, which management
expects to meet or exceed.
Growth Actual
Target 2004 Growth
Total Deposits 25% 34%
Comp Store Deposits 18% 24%
Total Revenue 25% 28%
Net Income 25% 41%
Earnings Per Share 20% 26%
The Company opened 49 stores in 2004 and plans to open 55 - 60 more during 2005,
including its first stores in the Metro Washington, D.C. market. The Company
plans to open approximately 35 stores in 2005 in the metro New York market. This
market has seen the highest deposit growth per store and management expects
these stores to continue to lead the deposit growth of the Company.
Per share data and other appropriate share information for all periods presented
have been restated for the two-for-one stock split in the form of a 100% stock
dividend effective March 7, 2005. In addition, prior year net income per share
amounts have been restated to reflect the impact of the Company's 5.95%
Convertible Trust Capital Securities. Refer to Note 1 - Significant Accounting
Policies of the Notes to Consolidated Financial Statements, which appears
elsewhere herein, under Recent Accounting Statements for further discussion of
the required restatement.
12
Application of Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the industry in which it operates. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported.
The Company's accounting policies are fundamental to understanding Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Company has identified the policy related to the allowance for loan losses as
being critical. The Company, in consultation with the Audit Committee, has
reviewed and approved this critical accounting policy (further described in Note
1 - Significant Accounting Policies of the Notes to Consolidated Financial
Statements, which appears elsewhere herein.)
Allowance for loan losses. The allowance for loan losses represents management's
estimate of probable credit losses inherent in the loan portfolio of the
Company. Determining the amount of the allowance for loan losses is considered a
critical accounting estimate because it requires significant judgment and the
use of estimates related to the amount and timing of expected future cash flows
on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant change. Note 1 -
Significant Accounting Policies of the Notes to Consolidated Financial
Statements describes the methodology used to determine the allowance for loan
losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in the Allowance for Loan Losses
discussion within this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Segment Reporting
The Company operates one reportable segment of business, Community Banks, as
more fully described in Note 18 - Segment Reporting of the Notes to Consolidated
Financial Statements, which appears elsewhere herein. The following table
summarizes net income by segment for each of the last three years (amounts in
thousands):
-----------------------------------------------------------
Net Income
-----------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------
Community Banks $267,466 $183,068 $139,560
Parent/Other 5,952 11,219 5,255
-----------------------------------------------------------
Consolidated Total $273,418 $194,287 $144,815
-----------------------------------------------------------
Average Balances and Net Interest Income
The table on page 15 sets forth balance sheet items on a daily average basis for
the years ended December 31, 2004, 2003 and 2002 and presents the daily average
interest rates earned on assets and the daily average interest rates paid on
liabilities for such periods. During 2004, average interest earning assets
totaled $24.2 billion, an increase of $6.5 billion, or 37% over 2003. This
increase resulted primarily from the increase in the average balance of
investments, which rose $4.6 billion, and the average balance of loans, which
rose $1.8 billion during 2004. The growth in the average balance of interest
earning assets was funded primarily by an increase in the average balance of
deposits (including noninterest-bearing demand deposits) of $6.6 billion.
Net Interest Margin and Net Interest Income
Net interest margin on a tax equivalent basis was 4.28% for 2004, a decrease of
8 basis points from 2003. The decrease was due to the overall low interest rate
environment in 2004 and the flattening yield curve in the second half of the
year. During the third and fourth quarters of 2004, short-term interest rates
increased by 125 basis points, increasing the Company's overall cost of funds by
approximately 30 basis points. With no significant change in long-term interest
rates over the same time periods, the Company did not experience a similar
increase in its interest earning assets. While the Company's continuing ability
to grow core deposits produces net interest income growth despite rate
compression, management does not expect net interest margin expansion until long
term rates increase and/or the yield curve steepens. The net interest margin is
calculated by dividing net interest income by average earning assets.
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. There are several factors that affect net
interest income, including:
o the volume, pricing, mix and maturity of earning assets and
interest-bearing liabilities;
o market interest rate fluctuations; and
o asset quality.
13
Net interest income on a tax-equivalent basis (which adjusts for the tax-exempt
status of income earned on certain loans and investments to express such income
as if it were taxable) for 2004 was $1.0 billion, an increase of $264.7 million,
or 34%, over 2003. Interest income on a tax-equivalent basis increased to $1.3
billion from $931.3 million, or 35%. This increase was primarily related to
volume increases in the loan and investment portfolios. Interest expense for
2004 increased $60.7 million to $220.5 million from $159.8 million in 2003. This
increase was primarily related to increases in the Company's average deposit
balances.
The tax-equivalent yield on interest earning assets during 2004 was 5.19%, a
decrease of 7 basis points from 5.26% in 2003. The cost of interest-bearing
liabilities increased 2 basis points in 2004 to 1.13% from 1.11% in 2003. The
cost of total funding sources increased slightly to 0.91% in 2004 from 0.90% in
2003.
The following table presents the major factors that contributed to the changes
in net interest income on a tax equivalent basis for the years ended December
31, 2004 and 2003 as compared to the respective previous periods.
- ---------------------------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
- ---------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------
(dollars in thousands)
- ---------------------------------------------------------------------------------------------
Interest on
Investments:
Taxable $ 216,828 $ 10,630 $ 227,458 $ 186,070 ($65,123) $ 120,947
Tax-exempt 8,015 (2,772) 5,243 6,277 706 6,983
Trading (1,225) 180 (1,045) (1,029) (1,527) (2,556)
Federal
Funds sold 633 15 648 (356) (254) (610)
Interest on
loans:
Commercial
mortgages 41,216 (4,115) 37,101 24,352 (10,574) 13,778
Commercial 22,840 (206) 22,634 21,154 (6,710) 14,444
Consumer 39,258 (9,545) 29,713 24,965 (17,970) 6,995
Tax-exempt 5,163 (1,507) 3,656 4,515 (1,701) 2,814
- ---------------------------------------------------------------------------------------------
Total
interest
income 332,728 (7,320) 325,408 265,948 (103,153) 162,795
- ---------------------------------------------------------------------------------------------
Interest
expense:
Savings 15,174 3,910 19,084 9,453 (12,089) (2,636)
Interest
bearing 29,354 15,188 44,542 17,665 (22,367) (4,702)
demand
Time
deposits 2,253 (9,792) (7,539) 10,405 (18,077) (7,672)
Public funds 404 828 1,232 (1,069) (6,711) (7,780)
Other
borrowed
money 598 2,824 3,422 2,349 (924) 1,425
Long-term
debt 32 (1,517) (1,485)
- ---------------------------------------------------------------------------------------------
Total
interest
expense 47,783 12,958 60,741 38,835 (61,685) (22,850)
- ---------------------------------------------------------------------------------------------
Net change $ 284,945 ($20,278) $ 264,667 $ 227,113 ($41,468) $ 185,645
- ---------------------------------------------------------------------------------------------
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change in each.
14
Commerce Bancorp, Inc. and Subsidiaries Average Balances and Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities
Taxable $15,276,797 $736,216 4.82 % $10,777,538 $508,758 4.72 % $6,835,820 $387,811 5.67 %
Tax-exempt 347,979 19,078 5.48 201,775 13,835 6.86 110,235 6,852 6.22
Trading 169,242 8,592 5.08 193,376 9,637 4.98 214,016 12,193 5.70
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 15,794,018 763,886 4.84 11,172,689 532,230 4.76 7,160,071 406,856 5.68
Federal funds sold 75,269 903 1.20 22,530 255 1.13 54,043 865 1.60
Loans
Commercial mortgages 3,091,350 189,743 6.14 2,419,855 152,642 6.31 2,037,091 138,864 6.82
Commercial 2,024,648 110,416 5.45 1,605,845 87,782 5.47 1,219,182 73,338 6.02
Consumer 2,908,561 166,851 5.74 2,224,197 137,138 6.17 1,815,679 130,143 7.17
Tax-exempt 340,172 24,886 7.32 269,592 21,230 7.87 212,261 18,416 8.68
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 8,364,731 491,896 5.88 6,519,489 398,792 6.12 5,284,213 360,761 6.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $24,234,018 $1,256,685 5.19 % $17,714,708 $931,277 5.26 % $12,498,327 $768,482 6.15 %
- ------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Savings $5,446,713 $46,680 0.86 % $3,676,147 $27,596 0.75 % $2,416,884 $30,232 1.25 %
Interest-bearing demand 10,066,187 95,253 0.95 6,964,158 50,711 0.73 4,538,914 55,413 1.22
Time deposits 2,454,910 46,182 1.88 2,335,124 53,721 2.30 1,882,823 61,393 3.26
Public funds 878,310 13,626 1.55 852,319 12,394 1.45 925,827 20,174 2.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 18,846,120 201,741 1.07 13,827,748 144,422 1.04 9,764,448 167,212 1.71
Other borrowed money 465,137 6,685 1.44 423,538 3,263 0.77 118,734 1,839 1.55
Long-term debt 200,000 12,080 6.04 200,000 12,080 6.04 199,464 13,565 6.80
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and interest-
bearing liabilities 19,511,257 220,506 1.13 14,451,286 159,765 1.11 10,082,646 182,616 1.81
Noninterest-bearing funds
(net) 4,722,761 3,263,422 2,415,681
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $24,234,018 $220,506 0.91 $17,714,708 $159,765 0.90 $12,498,327 $182,616 1.46
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
margin tax-equivalent
basis $1,036,179 4.28 $771,512 4.36 $585,866 4.69
Tax-exempt adjustment 18,394 15,646 13,111
------------ ------------ ------------
Net interest income and margin $1,017,785 4.20 % $755,866 4.27 % $572,755 4.58 %
- ------------------------------------------------------------------------------------------------------------------------------------
Other Balances
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $1,134,991 $922,188 $ 630,134
Other assets 1,376,006 1,053,283 702,898
Total assets 26,618,555 19,590,319 13,752,237
Demand deposits
(noninterest-bearing) 5,408,094 3,826,885 2,674,233
Other liabilities 243,284 279,203 212,775
Stockholders' equity 1,455,920 1,032,945 782,583
- ------------------------------------------------------------------------------------------------------------------------------------
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.
15
Noninterest Income
For 2004, noninterest income totaled $375.1 million, an increase of $42.6
million or 13% from 2003. Deposit charges and service fees increased $57.4
million, or 36%. Other operating income, which includes the Company's insurance
and capital markets divisions, decreased by $13.6 million, or 8%. The decrease
in other operating income is more fully depicted in the following chart.
2004 2003
------------- ------------
Other Operating Income:
Insurance $ 72,479 $ 66,482
Capital Markets 28,053 42,518
Loan Brokerage Fees 13,189 27,169
Other 40,585 31,780
------------- ------------
Total Other $154,306 $167,949
------------- ------------
Commerce Insurance, the Company's insurance brokerage subsidiary, recorded
increased revenues of $6.0 million, or 9%, while Commerce Capital Markets
recorded decreased revenues of $14.5 million, or 34%. The decrease in revenues
for Commerce Capital Markets was primarily attributable to the exit from the
government public finance business and lower municipal trading results.
The decrease in loan brokerage fees resulted primarily from the reduced volume
of mortgage refinancing activity in 2004, as compared to the record levels in
2003 as well as the Company's decision to hold certain loans in its portfolio.
Other increased by $8.8 million, or 28%, primarily due to increased letter of
credit fees and revenues generated by the Company's leasing division. Included
in other noninterest income are gains on sale of SBA loans of $9.1 million and
$11.7 million during 2004 and 2003, respectively.
Noninterest Expenses
Noninterest expenses totaled $938.8 million for 2004, an increase of $175.4
million, or 23% over 2003. Contributing to this increase was the opening of 49
new stores during 2004. With the addition of these new stores, staff,
facilities, marketing, and related expenses rose accordingly.
Other noninterest expense increased by $44.8 million, or 30%. The increase in
other noninterest expenses is depicted in the following chart.
2004 2003
------------ ------------
Other Noninterest Expenses:
Business Development Costs $ 29,516 $ 24,937
Bank-Card Related Service
Charges 35,728 25,382
Professional 40,515 24,597
Services/Insurance
Provisions for
Non-Credit-Related Losses 22,243 15,546
Other 66,919 59,623
------------ ------------
Total Other $194,921 $150,085
------------ ------------
The growth in business development costs, bank-card related service charges and
non-credit-related losses, which includes fraud and forgery losses on deposit
and other non-credit related items, was due to the Company's growth in new
stores and customer accounts. The growth in professional services and insurance
expense was primarily attributable to increased consulting and insurance costs
related to the Company's growth as well as increased legal fees.
The Company experienced positive operating leverage in 2004, as revenue growth
of 28% exceeded noninterest expense growth of 23%. One important factor
influencing the growth in noninterest expense is that the Company absorbed
significant start-up expenses related to the New York City and Long Island
markets in prior years. As a result, the impact of the growth in noninterest
expenses in these markets declined in 2004. A key industry productivity measure
is the operating efficiency ratio. This ratio expresses the relationship of
noninterest expenses (excluding other real estate expenses) to net interest
income plus noninterest income (excluding non-recurring gains). This ratio
equaled 67.62%, 70.38%, and 69.73%, in 2004, 2003, and 2002, respectively.
Management believes the Company's aggressive growth activities will keep its
efficiency ratio above its peer group.
Income Taxes
The provision for federal and state income taxes for 2004 was $141.4 million
compared to $98.8 million in 2003 and $73.1 million in 2002. The effective tax
rate was 34.1%, 33.7% and 33.5% in 2004, 2003, and 2002, respectively. The
increase in the effective income tax rate for 2004 was primarily due to the
reduced impact of tax free interest income.
Net Income
Net income for 2004 was $273.4 million, an increase of $79.1 million, or 41%
over the $194.3 million recorded for 2003.
Diluted net income per share of common stock for 2004 was $1.63 compared to
$1.29 per common share for 2003.
Return on Average Equity and Average Assets
Two industry measures of performance by a banking institution are its return on
average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
company's ability to employ its resources profitably. The Company's ROA was
1.03%, 0.99%, and 1.05% for 2004, 2003, and 2002, respectively. The increase in
the Company's 2004 ROA as compared to the 2003 ROA was the result of the
Company's positive operating leverage for 2004, which contributed to net income
growth of 41%. Prior year ROA's were impacted in part by the significant
start-up expenses related to the New York City and Long Island markets.
16
Return on average equity ("ROE") is determined by dividing annual net income by
average stockholders' equity and indicates how effectively a company can
generate net income on the capital invested by its stockholders. The Company's
ROE was 18.78%, 18.81%, and 18.50% for 2004, 2003, and 2002, respectively.
Loan Portfolio
The following table summarizes the loan portfolio of the Company by type of loan
as of December 31, for each of the years 2000 through 2004.
- --------------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial:
Term $1,283,476 $1,027,526 842,869 600,374 469,564
Line of credit 1,168,542 959,158 683,640 556,977 430,811
Demand 1,077 317 440 1,400
- --------------------------------------------------------------------------------------------------------------------------
2,452,018 1,987,761 1,526,826 1,157,791 901,775
Owner-occupied 1,998,203 1,619,079 1,345,306 1,028,408 945,599
Consumer:
Mortgages
(1-4 family
residential) 1,340,009 918,686 626,652 471,680 351,644
Installment 132,646 138,437 140,493 161,647 154,415
Home equity 1,799,841 1,405,795 1,139,589 872,974 710,848
Credit lines 69,079 60,579 56,367 43,196 30,254
- --------------------------------------------------------------------------------------------------------------------------
3,341,575 2,523,497 1,963,101 1,549,497 1,247,161
Commercial real estate:
Investor developer 1,455,891 1,167,672 885,276 799,799 578,982
Construction 206,924 142,567 102,080 47,917 13,743
- --------------------------------------------------------------------------------------------------------------------------
1,662,815 1,310,239 987,356 847,716 592,725
- --------------------------------------------------------------------------------------------------------------------------
Total loans $9,454,611 $7,440,576 $5,822,589 $4,583,412 $3,687,260
==========================================================================================================================
The Company manages risk associated with its loan portfolio through
diversification, underwriting policies and procedures, and ongoing loan
monitoring efforts. The commercial real estate portfolio includes investor/
developer permanent and construction loans and residential construction loans.
The owner-occupied portfolio is comprised primarily of commercial real estate
loans in which the borrower occupies a majority of the commercial space.
Owner-occupied and investor/ developer loans generally have five year call
provisions and bear the personal guarantees of the principals involved.
Financing for investor/developer construction is generally for pre-leased or
pre-sold property, while residential construction is provided against firm
agreements of sale with speculative construction generally limited to three
samples per project. The commercial loan portfolio is comprised of loans to
businesses in the Philadelphia and New York City metropolitan areas. These loans
are generally secured by business assets, personal guarantees, and/or personal
assets of the borrower. The consumer loan portfolio is comprised primarily of
loans secured by first and second mortgage liens on residential real estate.
The contractual maturity ranges of the loan portfolio and the amount of loans
with predetermined interest rates and floating rates in each maturity range, as
of December 31, 2004, are summarized in the following table.
- --------------------------------------------------------------------------------
December 31, 2004
- --------------------------------------------------------------------------------
Due in One Due in One Due in Over
Year or Less to Five Years Five Years Total
- --------------------------------------------------------------------------------
(dollars in thousands)
Commercial:
Term $ 378,421 $ 802,481 $ 102,574 $1,283,476
Line of credit 1,112,853 55,689 1,168,542
- -------------------------------------------------------------------------------
1,491,274 858,170 102,574 2,452,018
Owner-occupied 375,001 1,059,003 564,199 1,998,203
Consumer:
Mortgages
(1-4 family
residential) 40,654 152,452 1,146,903 1,340,009
Installment 45,045 51,421 36,180 132,646
Home equity 137,615 503,920 1,158,306 1,799,841
Credit lines 23,737 45,342 69,079
- -------------------------------------------------------------------------------
247,051 753,135 2,341,389 3,341,575
Commercial real estate:
Investor developer 392,612 813,982 249,297 1,455,891
Construction 119,535 87,389 206,924
- -------------------------------------------------------------------------------
512,147 901,371 249,297 1,662,815
- -------------------------------------------------------------------------------
Total loans $2,625,473 $3,571,679 $3,257,459 $9,454,611
- -------------------------------------------------------------------------------
Interest rates:
Predetermined $ 721,526 $2,421,222 $2,205,961 $5,348,709
Floating 1,903,947 1,150,457 1,051,498 4,105,902
- -------------------------------------------------------------------------------
Total loans $2,625,473 $3,571,679 $3,257,459 $9,454,611
===============================================================================
During 2004, loans increased $2.0 billion, or 27% from $7.4 billion to $9.4
billion. At December 31, 2004, loans represented 34% of total deposits and 31%
of total assets. All segments of the loan portfolio experienced growth in 2004.
Geographically, the metro Philadelphia market contributed 48% of the total
growth in the loan portfolio while the northern New Jersey and metro New York
markets contributed 25% and 27%, respectively. During 2004, the metro New York
market continued to mature and its loan portfolio grew by almost 100%. The loan
portfolios in metro Philadelphia and northern New Jersey grew by 21% and 23%,
respectively.
The Company has traditionally been an active provider of real estate loans to
creditworthy local borrowers, with such loans secured by properties within the
Company's primary trade area. During 2004, commercial real estate lending
increased $352.6 million or 27%, which was consistent with the overall growth in
the loan portfolio. Loans to finance owner-occupied properties grew $379.1
million or 23%. Commercial loan growth of $464.3 million or 23% was led by
activity in the middle market and healthcare sectors. Growth in consumer loans
of $818.1 million, or 32%, was primarily in mortgage lending. The residential
mortgage portfolio increased $421.3 million, or 46%, during 2004, due to the
Company's decision to hold jumbo mortgage loans in its portfolio as opposed to
selling them in the secondary market. The Company's home equity portfolio grew
$394.0 million or 28%, which was consistent with the overall growth in the loan
portfolio.
Non-Performing Loans and Assets
Non-performing assets (non-performing loans and other real estate, excluding
loans past due 90 days or more and still accruing interest) at December 31, 2004
were $33.5 million or .11% of total assets, as compared to $23.6 million or .10%
of total assets at December 31, 2003.
17
Total non-performing loans (non-accrual loans, and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at December 31, 2004
were $32.8 million as compared to $21.7 million a year ago. The Company
generally places a loan on non-accrual status and ceases accruing interest when
loan payment performance is deemed unsatisfactory. During 2004, commercial
non-accrual loans increased $6.9 million or 63%. The increase in commercial
non-accrual loans was primarily due to one large credit of approximately $9.3
million that was placed on non-accrual status during the third quarter of 2004.
This increase was offset by a commercial credit of $3.5 million that was
restructured and reclassified as a restructured loan during 2004. Generally
loans past due 90 days are placed on non-accrual status, unless the loan is both
well secured and in the process of collection. At December 31, 2004, loans past
due 90 days or more and still accruing interest amounted to $602 thousand,
compared to $538 thousand at December 31, 2003. Additional loans considered by
the Company's internal loan review department as potential problem loans of
$37.7 million at December 31, 2004, compared to $47.7 million at December 31,
2003, have been evaluated as to risk exposure in determining the adequacy of the
allowance for loan losses.
Other real estate (ORE) totaled $626 thousand at December 31, 2004 as compared
to $1.8 million at December 31, 2003. These properties have been written down to
the lower of cost or fair value less disposition costs.
The Company has, on an ongoing basis, updated appraisals on non-performing loans
secured by real estate. In those instances where updated appraisals reflect
reduced collateral values, an evaluation of the borrowers' overall financial
condition is made to determine the need, if any, for possible writedowns or
appropriate additions to the allowance for loan losses.
The following summary presents information regarding non-performing loans and
assets as of December 31, 2000 through 2004.
- ----------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans (1):
Commercial $17,874 $10,972 $ 6,829 $ 9,104 $ 7,468
Consumer 10,138 9,242 6,326 4,390 3,467
Real estate
Construction 138 131 1,590 1,459
Mortgage 1,317 1,389 882 1,749 1,155
- ----------------------------------------------------------------------------------------
Total non-accrual
Loans 29,329 21,741 14,168 16,833 13,549
- ----------------------------------------------------------------------------------------
Restructured loans (1):
Commercial 3,518 1 5 8 11
Real estate mortgage 82
- ----------------------------------------------------------------------------------------
Total restructured
loans 3,518 1 5 8 93
- ----------------------------------------------------------------------------------------
Total non-performing
loans 32,847 21,742 14,173 16,841 13,642
- ----------------------------------------------------------------------------------------
Other real estate 626 1,831 3,589 1,549 2,959
- ----------------------------------------------------------------------------------------
Total non-performing
assets(1): $33,473 $23,573 $17,762 $18,390 $16,601
- ----------------------------------------------------------------------------------------
Non-performing
assets as a percent
of total assets 0.11% 0.10% 0.11% 0.16% 0.20%
- ----------------------------------------------------------------------------------------
Loans past due 90
days or more and still
accruing interest $ 602 $ 538 $ 620 $ 519 $ 489
- ----------------------------------------------------------------------------------------
(1) Interest income of approximately $2,906,000, $1,908,000, $1,352,000,
$2,092,000, and $1,731,000 would have been recorded in 2004, 2003, 2002,
2001, and 2000 respectively, on non-performing loans in accordance with
their original terms. Actual interest recorded on these loans amounted to
$1,070,000 in 2004, $418,000 in 2003, $275,000 in 2002, $237,000 in 2001,
and $525,000 in 2000.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses inherent in the loan portfolio. In conjunction with
an internal loan review function that operates independently of the lending
function, management monitors the loan portfolio to identify risks on a timely
basis so that an appropriate allowance can be maintained. Based on an evaluation
of the loan portfolio, management presents a quarterly review of the loan loss
reserve to the Board of Directors, indicating any changes in the reserve since
the last review and any recommendations as to adjustments in the reserve. In
making its evaluation, in addition to the factors discussed below, management
considers the results of regulatory examinations, which typically include a
review of the allowance for loan losses as an integral part of the examination
process.
In establishing the allowance, management evaluates individual large classified
loans and nonaccrual loans, and determines an aggregate reserve for those loans
based on that review. At December 31, 2004, approximately 26.4% of the allowance
was attributed to individually evaluated loans. An allowance for the remainder
of the loan portfolio is also determined based on historical loss experience
within the components of the portfolio. These allocations may be modified if
current conditions indicate that loan losses may differ from historical
experience, based on economic factors and changes in portfolio mix and volume.
At December 31, 2004, approximately 58.5% of the allowance was attributed to
historical loss experience.
18
In addition, a portion of the allowance is established for losses inherent in
the loan portfolio which have not been identified by the more quantitative
processes described above. This determination inherently involves a higher
degree of subjectivity, and considers risk factors that may not have yet
manifested themselves in the Company's historical loss experience. Those factors
include changes in levels and trends of charge-offs, delinquencies, and
nonaccrual loans, trends in volume and terms of loans, changes in underwriting
standards and practices, portfolio mix, tenure of loan officers and management,
entrance into new geographic markets, changes in credit concentrations, and
national and local economic trends and conditions. At December 31, 2004,
approximately 15.1% of the allowance was attributed to these qualitative
factors.
While the allowance for loan losses is maintained at a level believed to be
adequate by management for estimated losses in the loan portfolio, determination
of the allowance is inherently subjective, as it requires estimates, all of
which may be susceptible to significant change. Changes in these estimates may
impact the provisions charged to expense in future periods.
The allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Charge-offs occur when loans are
deemed to be uncollectible. During 2004, net charge-offs amounted to $15.7
million, or .19% of average loans outstanding for the year, compared to $10.5
million, or .16% of average loans outstanding for 2003. Total charge-offs
increased $6.1 million or 51% during 2004. The commercial and commercial real
estate categories experienced increases of $3.8 million or 68% and $1.5 million
or 612%, respectively. Both categories were impacted by a few large credits,
relative to each portfolio, that were charged-off during the year. During 2004,
the Company recorded provisions of $39.2 million to the allowance for loan
losses compared to $31.9 million for 2003. The Company continued to proactively
manage its exposure to credit risk in 2004. Based upon the application of the
Company's reserve methodology, allowance levels increased by $23.6 million to
$135.6 million at December 31, 2004, but decreased as a percentage of the total
loans due to growth in the portfolio (1.43% at December 31, 2004 versus 1.51% at
December 31, 2003).
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
- ----------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning
of period $112,057 $90,733 $66,981 $48,680 $38,382
Provisions charged to
operating expenses 39,238 31,850 33,150 26,384 13,931
- ----------------------------------------------------------------------------------------
151,295 122,583 100,131 75,064 52,313
- ----------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 1,000 669 815 552 313
Consumer 1,123 584 339 288 249
Commercial real
estate 52 11 176 134 14
- ----------------------------------------------------------------------------------------
Total recoveries 2,175 1,264 1,330 974 576
- ----------------------------------------------------------------------------------------
Loans charged-off:
Commercial (9,416) (5,601) (7,181) (5,862) (2,936)
Consumer (6,733) (5,950) (3,514) (2,784) (1,220)
Commercial real
estate (1,701) (239) (33) (411) (53)
- ----------------------------------------------------------------------------------------
Total charged-off (17,850) (11,790) (10,728) (9,057) (4,209)
- ----------------------------------------------------------------------------------------
Net charge-offs (15,675) (10,526) (9,398) (8,083) (3,633)
- ----------------------------------------------------------------------------------------
Balance at end of period $135,620 $112,057 $90,733 $66,981 $48,680
- ----------------------------------------------------------------------------------------
Net charge-offs as a
percentage of average
loans outstanding 0.19% 0.16% 0.18% 0.19% 0.11%
- ----------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
year-end loans 1.43% 1.51% 1.56% 1.46% 1.32%
- ----------------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to
the various loan categories. The current year evaluation of the Company's
allowance for loan losses by loan category has been expanded to include analyses
under multiple economic and portfolio assumptions. The allocation is made for
analytical purposes and it is not necessarily indicative of the categories in
which future loan losses may occur. The total allowance is available to absorb
losses from any segment of loans.
-------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses at December 31,
-------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------------------------------------
(dollars in
thousands)
Commercial $ 47,230 26% $ 50,400 27% $33,708 26% $24,110 25% $20,396 24%
Owner-occupied 29,488 21 26,862 22 24,539 23 18,060 22 14,546 26
Consumer 38,100 35 13,082 34 14,497 34 9,915 34 4,632 34
Commercial real
estate 20,802 18 21,713 17 17,989 17 14,896 19 9,106 16
-------------------------------------------------------------------------------------------------------------------------
$135,620 100% $112,057 100% $90,733 100% $66,981 100% $48,680 100%
-------------------------------------------------------------------------------------------------------------------------
19
Investment Securities
The following table summarizes the Company's securities available for sale and
securities held to maturity as of the dates shown.
- -------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------
(dollars in thousands)
U.S. Government agency
and mortgage-backed
obligations $ 7,902,816 $10,511,545 $ 7,659,737
Obligations of state and
political subdivisions 87,910 30,927 23,185
Equity securities 23,303 16,588 24,054
Other 30,121 91,595 99,803
- -------------------------------------------------------------------
Securities available
for sale $ 8,044,150 $10,650,655 $ 7,806,779
- -------------------------------------------------------------------
U.S. Government agency
and mortgage-backed
obligations $ 9,967,041 $ 2,193,577 $ 624,688
Obligations of state and
political subdivisions 398,963 227,199 91,204
Other 97,654 69,708 47,134
- -------------------------------------------------------------------
Securities held to
maturity $10,463,658 $ 2,490,484 $ 763,026
- -------------------------------------------------------------------
The Company has segregated a portion of its investment portfolio as securities
available for sale. The balance of the investment portfolio (excluding trading
securities) is categorized as securities held to maturity. Investment securities
are classified as available for sale if they might be sold in response to
changes in interest rates, prepayment risk, the Company's income tax position,
the need to increase regulatory capital, liquidity needs or other similar
factors. These securities are carried at fair market value with unrealized gains
and losses, net of income tax effects, recognized in Stockholders' Equity.
Investment securities are classified as held to maturity when the Company has
the intent and ability to hold those securities to maturity. Securities held to
maturity are carried at cost and adjusted for accretion of discounts and
amortization of premiums. Trading securities, primarily municipal securities,
are carried at market value, with gains and losses, both realized and
unrealized, included in other operating income.
In total, investment securities increased $5.4 billion from $13.3 billion to
$18.7 billion at December 31, 2004. Deposit growth and other funding sources
were used to increase the Company's investment portfolio. The available for sale
portfolio decreased $2.6 billion to $8.0 billion, and the securities held to
maturity portfolio increased $8.0 billion to $10.5 billion at year-end 2004. The
portfolio of trading securities decreased to $169.1 million at year-end 2004
from $170.5 million at year-end 2003. During the fourth quarter of 2004, the
Company transferred $5.9 billion of securities classified as available for sale
to the held to maturity classification based on the Company's anticipated
liquidity needs and expected annual cash flow from deposit growth and bond and
loan prepayments. The aggregate market value of the securities transferred
equaled their book value, with no effect on stockholders' equity, regulatory
capital or results of operations. During the fourth quarter of 2004, the Company
sold $126.0 million of securities from its held to maturity portfolio. These
securities experienced a deterioration in creditworthiness which meets the
specific exception provided for a sale of a security classified as held to
maturity. Gross gains of $768 thousand and gross losses of $1.2 million were
realized on the sale of these securities.
At December 31, 2004, the average life and duration of the investment portfolio
were approximately 3.8 years and 3.2 years, respectively, as compared to 4.9
years and 3.9 years, respectively, at December 31, 2003. The Company's
significant cash flow provides reinvestment opportunities as interest rates
change. In addition, management continually reviews and repositions the
investment portfolio to adjust for current and anticipated interest rate and
yield curve levels.
The Company's investment portfolio consists primarily of U.S. Government agency
and mortgage-backed obligations. These securities have little, if any, credit
risk since they are either backed by the full faith and credit of the U.S.
Government, or are guaranteed by an agency of the U.S. Government, or are AAA
rated. These investment securities carry fixed coupons whose rate does not
change over the life of the securities. Certain securities are purchased at
premiums or discounts. Their yield will change depending on any change in the
estimated rate of prepayments. The Company amortizes premiums and accretes
discounts over the estimated life of the securities in the investment portfolio.
Changes in the estimated life of the securities in the investment portfolio will
lengthen or shorten the period in which the premium or discount must be
amortized or accreted, thus affecting the Company's investment yields. For the
year ended December 31, 2004, the yield on the investment portfolio was 4.84%,
an increase of 8 basis points from 4.76% in fiscal year 2003.
At December 31, 2004, the net unrealized appreciation in securities available
for sale included in stockholders' equity totaled $21.0 million, net of tax,
compared to net unrealized depreciation of $3.7 million, net of tax, at December
31, 2003.
The contractual maturity distribution and weighted average yield of the
Company's investment portfolio (excluding equity and trading securities) at
December 31, 2004, are summarized in the following table. Weighted average yield
is calculated by dividing income within each maturity range by the outstanding
amortized cost amount of the related investment and has been tax effected,
assuming a federal tax rate of 35%, on tax-exempt obligations.
20
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------
Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total
- -------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Securities available for sale:
U.S. Government agency and
mortgage-backed obligations $61,927 1.44% $428,928 4.87% $7,411,961 4.83% $ 7,902,816 4.81%
Obligations of state and
political subdivisions 3,395 7.12 $4,663 6.72% 3,038 3.22 76,814 2.40 87,910 2.84
Other securities 2,289 0.99 275 4.00 2,180 5.97 25,377 8.62 30,121 7.81
- -------------------------------------------------------------------------------------------------------------------------
$67,611 1.71% $4,983 6.57% $434,146 4.87% $7,514,152 4.82% $ 8,020,847 4.80%
- -------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government agency and
mortgage-backed obligations $ 366 8.46% $472,758 4.18% $9,493,917 4.94% $ 9,967,041 4.91%
Obligations of state and
political subdivisions $272,404 1.49% 4,326 3.23 1,303 3.55 120,930 5.22 398,963 2.67
Other securities 97,654 2.36 97,654 2.36
- -------------------------------------------------------------------------------------------------------------------------
$370,058 1.72% $4,692 3.64% $474,061 4.18% $9,614,847 4.94% $10,463,658 4.80%
- -------------------------------------------------------------------------------------------------------------------------
Deposits
Total deposits at December 31, 2004 were $27.7 billion, an increase of $7.0
billion or 34% above total deposits of $20.7 billion at December 31, 2003. The
Company remains a deposit-driven financial institution with emphasis on core
deposit accumulation and retention as a basis for sound growth and
profitability. The Company regards core deposits as all deposits other than
public certificates of deposit. Deposits in the various core categories
increased $6.9 billion from year-end 2003 to year-end 2004. Core deposits by
type of customer is as follows (in millions):
- ------------------------------------------------------
December 31,
- ------------------------------------------------------
2004 2003
- ------------------------------------------------------
Consumer $12,227 $ 9,760
Commercial 9,138 6,599
Government 5,292 3,420
- ------------------------------------------------------
Total $26,657 $19,779
- ------------------------------------------------------
Total deposits averaged $24.3 billion for 2004, an increase of $6.6 billion or
37% above the 2003 average. The average balance of noninterest-bearing demand
deposits in 2004 was $5.4 billion, a $1.6 billion or 41% increase over the
average balance for 2003. The average total balance of passbook and statement
savings accounts increased $1.8 billion, or 48% compared to the prior year. The
average balance of interest-bearing demand accounts for 2004 was $10.1 billion,
a $3.1 billion or 44% increase over the average balance for the prior year. The
average balance of time deposits and public funds for 2004 was $3.3 billion, a
$145.8 million or 4% increase over the average balance for 2003. For 2004, the
cost of total deposits was 0.83% as compared to 0.82% in 2003.
The Company believes that its record of sustaining core deposit growth is
reflective of the Company's retail approach to banking which emphasizes a
combination of superior customer service, convenient store locations, extended
hours of operation, free checking accounts (subject to small minimum balance
requirements) and active marketing. This approach is especially reflected in the
Company's comparable store deposit growth. The Company's comparable store
deposit growth is measured as the year over year percentage increase in core
deposits at the balance sheet date. At December 31, 2004, the comparable store
deposit growth for the Company's 224 stores open two years or more was 24% and
for the Company's 270 stores open one year or more was 32%.
The average balances and weighted average rates of deposits for each of the
years 2004, 2003, and 2002 are presented below.
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Demand deposits:
Noninterest-bearing $ 5,408,094 $ 3,826,885 $ 2,674,233
Interest-bearing (money market and
N.O.W. accounts) 10,066,187 0.95% 6,964,158 0.73% 4,538,914 1.22%
Savings deposits 5,446,713 0.86 3,676,147 0.75 2,416,884 1.25
Time deposits/public funds 3,333,220 1.79 3,187,443 2.07 2,808,650 2.90
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $ 24,254,214 $ 17,654,633 $12,438,681
- -------------------------------------------------------------------------------------------------------------------------
21
The remaining maturity of certificates of deposit for $100,000 or more as of
December 31, 2004, 2003 and 2002 is presented below:
- --------------------------------------------------------------------------------
Maturity 2004 2003 2002
- --------------------------------------------------------------------------------
(dollars in thousands)
3 months or less $ 983,909 $1,076,960 $ 983,698
3 to 6 months 182,573 357,810 164,568
6 to 12 months 206,326 322,204 266,779
Over 12 months 457,489 253,477 189,587
- --------------------------------------------------------------------------------
Total $ 1,830,297 $2,010,451 $1,604,632
- --------------------------------------------------------------------------------
Interest Rate Sensitivity and Liquidity
The Company's risk of loss arising from adverse changes in the fair 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 those
policies. The guidelines established by ALCO are reviewed and approved by the
Company's Board of Directors.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
The following table illustrates the GAP position of the Company as of December
31, 2004.
- ------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gaps
31-Dec-04
- -----------------------------------------------------------------------------------------------
Jan-90 91-180 181-365 5-Jan Beyond
Days Days Days Years 5 Years Total
- -----------------------------------------------------------------------------------------------
(dollars in millions)
Rate sensitive:
Interest-earning
assets
Loans $4,762.6 $120.8 $238.7 $2,154.9 $2,189.0 $9,466.0
Investment
securities 1,049.0 993.0 1,829.5 9,158.1 5,647.3 18,676.9
- -----------------------------------------------------------------------------------------------
Total interest-
earning assets 5,811.6 1,113.8 2,068.2 11,313.0 7,836.3 28,142.9
- -----------------------------------------------------------------------------------------------
Interest-bearing
liabilities
Transaction
accounts 5,674.9 12,419.4 18,094.3
Time deposits 1,456.4 456.9 504.0 740.7 3,158.0
Other borrowed
money 661.2 661.2
Long-term debt 200.0 200.0
- -----------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 7,792.5 456.9 504.0 740.7 12,619.4 22,113.5
- -----------------------------------------------------------------------------------------------
Period gap (1,980.9) 656.9 1,564.2 10,572.3 (4,783.1) $6,029.4
- -----------------------------------------------------------------------------------------------
Cumulative gap ($1,980.9) ($1,324.0) $240.2 $10,812.5 $6,029.4
- -----------------------------------------------------------------------------------------------
Cumulative gap as a
percentage of total
interest-earning
assets (7.0%) (4.7%) 0.9% 38.4% 21.4%
- -----------------------------------------------------------------------------------------------
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of 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 minus 100 basis point change during the next year,
with rates remaining constant in the second year.
22
The Company's ALCO policy has established that interest income sensitivity will
be considered acceptable if net income in the above interest rate scenario is
within 10% of net income in the flat rate scenario in the first year and within
15% over the two year time frame. Net income in the flat rate scenario is
projected to increase by approximately 25% per year. The following table
illustrates the impact on projected net income at December 31, 2004 and 2003 of
a plus 200 and minus 100 basis point change in interest rates.
- ------------------------------------------------------------
Basis Point Change:
- ------------------------------------------------------------
Plus 200 Minus 100
- ------------------------------------------------------------
December 31, 2004:
Twelve Months 4.3% (4.2)%
Twenty Four Months 9.0% (9.6)%
December 31, 2003:
Twelve Months 1.6% (2.3)%
Twenty Four Months 6.8% (2.3)%
All of these forecasts are within an acceptable level of interest rate risk per
the policies established by ALCO. In the event the model indicates 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 investment portfolio, the use of risk management strategies such as
interest rate swaps and caps, or fixing the cost of its short-term borrowings.
Many assumptions were used by the Company to calculate the impact of changes in
interest rates, including the proportionate shift in rates. Actual results may
not be similar to the Company's projections due to several factors including the
timing and frequency of rate changes, market conditions and the shape of the
yield curve. In general, a flattening yield curve would result in reduced net
interest income compared to the current flat rate scenario and proportionate
rate shift assumptions. Actual results may also differ due to the Company's
actions, if any, in response to the changing rates.
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 plus
200 and minus 100 basis point change in rates. The Company's ALCO policy
indicates that the level of interest rate risk is unacceptable if the immediate
plus 200 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
December 31, 2004, the market value of equity indicates an acceptable level of
interest rate risk.
The market value of equity model 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. 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. Management believes the core deposit premiums produced by its core
deposit study and utilized in its market value of equity model at December 31,
2004 provide an accurate assessment of the Company's interest rate risk. The
following table depicts the average lives of the Company's loans, investments
and deposits at December 31, 2004:
--------------------------------------------
Average Life
(in years)
--------------------------------------------
Loans 3.5
Investments 3.8
Deposits 14.9
The market value of equity model 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 helps offset the decrease in value of the
Company's fixed rate assets. The following table summarizes the market value of
equity at December 31, 2004 (in millions, except for per share amounts):
- ------------------------------------------------------------
Market Value of
Equity Per Share
- ------------------------------------------------------------
Plus 200 basis point $6,138 $38.21
Current Rate $5,932 $36.93
Minus 100 basis point $5,004 $31.15
Liquidity involves the Company's ability to raise funds to support asset growth
or reduce 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 position, and cash flow from its amortizing investment and
loan portfolios. 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 December 31, 2004 the Company had in excess
of $13.0 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 2004, deposit growth
and short-term borrowings were used to fund growth in the loan portfolio and
purchase additional investment securities.
23
Other Borrowed Money
Other borrowed money, or short-term borrowings, which consist primarily of
securities sold under agreement to repurchase, federal funds purchased, and
lines of credit, were used in 2004 to meet short-term liquidity needs. For 2004,
short-term borrowings averaged $465.1 million as compared to $423.5 million in
2003. The average rate on the Company's short-term borrowings was 1.44% and
0.77% during 2004 and 2003, respectively. At December 31, 2004, short-term
borrowings included $586.2 million of securities sold under agreements to
repurchase at an average rate of 2.28%, compared to $311.5 million at an average
rate of 1.10% as of December 31, 2003.
Long-Term Debt
On March 11, 2002 the Company issued $200 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a Delaware business trust.
The equity in the business trust is netted against the long-term debt on the
Consolidated Balance Sheets. The Convertible Trust Capital Securities mature in
2032. 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. On April 1, 2004, the
Convertible Trust Capital Securities became convertible at the option of the
holder. The holders of the Convertible Trust Capital Securities may convert each
security into 1.8956 shares of Company common stock.
The Company may call the Convertible Trust Capital Securities on or after March
11, 2005, provided various terms and conditions are met, primarily related to
the market price of the Company's common stock. In summary, the Company's common
stock must trade at a price of $31.65 or higher for 20 trading days in a period
of 30 consecutive trading days in order for the Company to force conversion.
As discussed in Note 1 - Significant Accounting Policies of the Notes to
Consolidated Financial Statements, which appears elsewhere herein, the Company
has calculated the effect of these securities on diluted net income per share by
using the if-converted method. Under the if-converted method, the related
interest charges on the Convertible Trust Capital Securities, adjusted for
income taxes, have been added back to the numerator and the common shares to be
issued upon conversion (7.6 million common shares) have been added to the
denominator. Refer to Note 13 - Earnings Per Share of the Notes to Consolidated
Financial Statements, which appears elsewhere herein, for illustration of the
if-converted method.
Stockholders' Equity and Dividends
At December 31, 2004, stockholders' equity totaled $1.7 billion, up $388.4
million or 30% over stockholders' equity of $1.3 billion at December 31, 2003.
This increase was due to the Company's increase in net income for the year, as
well as shares issued under the Company's dividend reinvestment and employee
compensation and benefit plans. Stockholders' equity as a percent of total
assets was 5.5% at December 31, 2004 and 5.6% at December 31, 2003.
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. During September
2003, the Company completed an offering of 5,000,000 shares of common stock for
aggregate proceeds of approximately $209 million under this Form S-3 shelf
registration. The proceeds from this offering are being used to support the
Company's growth.
Risk-based capital standards issued by bank regulatory authorities in the United
States attempt to relate a banking company's capital to the risk profile of its
assets and provide the basis for which all banking companies and banks are
evaluated in terms of capital adequacy. The risk-based capital standards require
all banks to have Tier 1 capital of at least 4% and total capital, including
Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes
stockholders' equity (adjusted for goodwill, other intangibles, and the
unrealized appreciation/depreciation in securities available for sale) plus the
Convertible Trust Capital Securities. Total capital is comprised of all of the
components of Tier 1 capital plus qualifying subordinated debt instruments and
the reserve for possible loan losses.
Banking regulators have also issued leverage ratio requirements. The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted average
assets. The following table provides a comparison of the Company's risk-based
capital ratios and leverage ratio to the minimum regulatory requirements for the
periods indicated.
- ------------------------------------------------------------------
Minimum
Regulatory
December 31, Requirements
- ------------------------------------------------------------------
2004 2003 2004 2003
- ------------------------------------------------------------------
Risk based capital ratios:
Tier 1 12.30% 12.66% 4.00% 4.00%
Total capital 13.25 13.62 8.00 8.00
Leverage ratio 6.19 6.61 4.00 4.00
- ------------------------------------------------------------------
24
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
which became law in December of 1991, required each federal banking agency
including the Board of Governors of the FRB, to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of non-traditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages. This law also requires each federal banking agency,
including the FRB, to specify, by regulation, the levels at which an insured
institution would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized."
At December 31, 2004 the Company's consolidated capital levels and each of the
Company's banking 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%.
The Company's common stock is listed for trading on the New York Stock Exchange
under the symbol CBH. The quarterly market price ranges and dividends declared
per common share (as adjusted for the two-for-one stock split effective March 7,
2005) for each of the last two years are shown in the table below. As of January
27, 2005, there were approximately 58,000 holders of record of the Company's
common stock.
- ------------------------------------------------------------
Common Share Data
- ------------------------------------------------------------
Market Prices Dividends
------------------- Declared
High Low Per Share
- ------------------------------------------------------------
2004 Quarter Ended
December 31 $32.20 $28.16 $0.1100
September 30 28.18 24.12 0.0950
June 30 33.39 27.51 0.0950
March 31 32.94 26.58 0.0950
2003 Quarter Ended
December 31 $26.65 $23.67 $0.0950
September 30 23.96 18.65 0.0825
June 30 20.34 18.19 0.0825
March 31 22.80 18.87 0.0825
- ------------------------------------------------------------
The Company offers a Dividend Reinvestment and Stock Purchase Plan by which
dividends on the Company's common stock and optional monthly cash payments may
be invested in the Company's common Stock at a 3% discount (subject to change)
to the market price and without payment of brokerage commissions.
Contractual Obligations and Commitments
As disclosed in the Notes to Consolidated Financial Statements, which appears
elsewhere herein, the Company has certain obligations and commitments to make
future payments under contracts. At December 31, 2004, the aggregate contractual
obligations and commitments are shown in the following table.
Contractual Obligations Payments Due By Period
- ---------------------------------------------------------------------------------------------------
One to Three to Beyond
One Year Three Five Five
or Less Years Years Years Total
- ---------------------------------------------------------------------------------------------------
(dollars in millions)
Deposits without a stated maturity $ 7,596.9 $16,904.0 $24,500.9
Time deposits 2,417.3 $399.4 $341.30 3,158.0
Other borrowed money 661.2 661.2
Long-term debt 200.0 200.0
Operating leases 36.2 72.7 72.6 372.9 554.4
- --------------------------------------------------------------------------------------------------
Total $10,711.6 $472.1 $413.9 $17,476.9 $29,074.5
- --------------------------------------------------------------------------------------------------
Commitments Expiration by Period
- --------------------------------------------------------------------------------------------------
One to Three to Beyond
One Year Three Five Five
or Less Years Years Years Total
- ---------------------------------------------------------------------------------------------------
(dollars in millions)
Standby letters of credit $ 366.4 $ 188.2 $221.0 $ 11.8 $ 787.4
Lines of credit 1,636.1 164.4 65.0 18.6 1,884.1
Commitments to extend credit:
Construction 209.7 341.8 2.0 4.7 558.2
Home equity 66.2 132.4 132.4 662.1 993.1
Other 420.7 188.1 608.8
- --------------------------------------------------------------------------------------------------
Total $2,699.1 $1,014.9 $420.4 $697.2 $4,831.6
- --------------------------------------------------------------------------------------------------
Related Parties
The Company engaged in certain activities with entities that would be considered
related parties. Management believes disbursements made to related parties were
substantially equivalent to those that would have been paid to unaffiliated
companies for similar goods and services (further discussed in Note 3 - Loans
and Note 6 - Bank Premises, Equipment, and Leases of the Notes to Consolidated
Financial Statements, which appear elsewhere herein).
Recent Accounting Statements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (revised 2004), "Share-Based Payment" (FAS 123R), which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). FAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25), and amends FASB Statement No. 95, "Statement of Cash
Flows" (FAS 95). FAS 123R requires all share-based payments to employees to be
recognized in the income statement based on their fair values and no longer
allows pro forma disclosure as an alternative to reflecting the impact of
share-based payments on net income and earnings per share. FAS 123R must be
adopted no later than July 1, 2005. The Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and
therefore does not recognize compensation expense for employee stock options.
Accordingly, the adoption of FAS 123R will impact the Company's financial
results. While the future impact cannot be predicted, had the Company adopted
FAS 123R in prior periods, the impact would have approximated the impact of FAS
123 as disclosed in Note 1 - Significant Accounting Policies of the Notes to
Consolidated Financial Statements, which appears
25
elsewhere herein. The Company plans to adopt FAS 123R on July 1, 2005.
Results of Operations - 2003 versus 2002
Net income for 2003 was $194.3 million compared to $144.8 million in 2002.
Diluted net income per common share was $1.29 compared to $1.01 per common share
for the prior year.
Net interest income on a tax-equivalent basis for 2003 amounted to $771.5
million, an increase of $185.6 million, or 32% over 2002.
Interest income on a tax-equivalent basis increased $162.8 million or 21% to
$931.3 million in 2003. This increase was primarily related to volume increases
in the loan and investment portfolios. Interest expense for 2003 decreased $22.8
million to $159.8 million from $182.6 million in 2002. This decrease was
primarily related to decreases in the rates paid on the Company's deposits and
other borrowed money.
During 2003, the Company recorded provisions of $31.9 million to the allowance
for loan losses compared to $33.2 million for 2002. At December 31, 2003, the
allowance aggregated $112.1 million or 1.51% of total loans. Despite the $21.3
million or 24% increase in the allowance level during 2003, the allowance as a
percentage of total loans decreased 3%, which was primarily due to significant
growth in the loan portfolio of 28% during the same period. For 2003,
noninterest income totaled $332.5 million, an increase of $75.0 million or 29%
from 2002.
The growth in noninterest income was primarily reflected in increased deposit
and service fees and other operating income, including the Company's insurance
and capital markets divisions. Deposit charges and service fees increased $29.6
million, or 23%, over 2002 due primarily to higher transaction volumes. Commerce
Insurance recorded an increase of $10.6 million in revenues to $66.5 million
from $55.9 million in 2002. Commerce Capital Markets generated noninterest
revenues of $42.5 million in 2003, an increase of $7.4 million from revenues of
$35.1 million in 2002. Loan brokerage fees increased by $8.5 million in 2003.
Noninterest expenses totaled $763.4 million for 2003, an increase of $184.2
million, or 32% over 2002. Contributing to this increase was the addition of 46
new stores. With the addition of these new stores, staff, facilities, marketing,
and related expenses rose accordingly. Salaries and benefits had the largest
increase of $78.0 million during 2003. Other noninterest expenses rose $26.0
million to $150.1 million in 2003. This increase included increased bank-card
related service charges of $3.5 million, increased business development expenses
of $3.3 million and increased professional services/insurance expenses of $5.5
million.
---------------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations; Interest Rate Sensitivity and Liquidity included
elsewhere herein.
26
Commerce Bancorp, Inc.
Report on Management's Assessment of Internal Control Over Financial Reporting
Commerce Bancorp, Inc. is responsible for the preparation, integrity, and fair
presentation of the consolidated financial statements included in this annual
report. The consolidated financial statements and notes included in this annual
report have been prepared in conformity with United States generally accepted
accounting principles and necessarily include some amounts that are based on
management's best estimates and judgments.
We, as management of Commerce Bancorp, Inc., are responsible for establishing
and maintaining effective internal control over financial reporting that is
designed to produce reliable financial statements in conformity with United
States generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are only being
made in accordance with authorizations of management and directors of the
company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements. The system
of internal control over financial reporting as it relates to the financial
statements is evaluated for effectiveness by management and tested for
reliability through a program of internal audits. Actions are taken to correct
potential deficiencies as they are identified.
Any system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of internal control
will provide only reasonable assurance with respect to financial statement
preparation.
Management assessed the Company's system of internal control over financial
reporting as of December 31, 2004, in relation to criteria for effective
internal control over financial reporting as described in Internal Control -
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management concludes that, as of
December 31, 2004, its system of internal control over financial reporting is
effective and meets the criteria of the Internal Control - Integrated Framework.
Ernst & Young LLP, independent registered public accounting firm, has issued an
attestation report on management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004.
/s/ Vernon W. Hill, II
-----------------------------------------------
Vernon W. Hill, II
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Douglas J. Pauls
-----------------------------------------------
Douglas J. Pauls
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 15, 2005
27
Commerce Bancorp, Inc.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on
Effectiveness of Internal Control Over Financial Reporting
Audit Committee of the Board of Directors and the Stockholders of Commerce
Bancorp, Inc.
We have audited management's assessment, included in the accompanying Report on
Management's Assessment of Internal Control Over Financial Reporting, that
Commerce Bancorp, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Commerce Bancorp,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Commerce Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Commerce Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Commerce Bancorp, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004 of
Commerce Bancorp, Inc. and our report dated March 15, 2005, expressed an
unqualified opinion thereon.
Ernst & Young LLP
Philadelphia, Pennsylvania
March 15, 2005
28
Commerce Bancorp, Inc.
Report Ernst & Young LLP, Independent Registreed Public Accounting Firm, on
Consolidated Financial Statements
Audit Committee of the Board of Directors and the Stockholders of Commerce
Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Commerce
Bancorp, Inc. as of December 31, 2004 and 2003 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commerce Bancorp,
Inc. at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Commerce
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 15, 2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Philadelphia, Pennsylvania
March 15, 2005
29
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 1,050,806 $ 910,092
Loans held for sale 44,072 42,769
Trading securities 169,103 170,458
Securities available for sale 8,044,150 10,650,655
Securities held to maturity 10,463,658 2,490,484
(market value 2004 -$10,430,451; 2003- $2,467,192)
Loans 9,454,611 7,440,576
Less allowance for loan losses 135,620 112,057
-----------------------------------------------------------------------------------------------------------
9,318,991 7,328,519
Bank premises and equipment, net 1,059,519 811,451
Other assets 351,346 307,752
-----------------------------------------------------------------------------------------------------------
Total assets $30,501,645 $22,712,180
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities Deposits:
Demand:
Noninterest-bearing $6,406,614 $4,574,714
Interest-bearing 11,604,066 8,574,297
Savings 6,490,263 4,222,282
Time 3,157,942 3,330,107
-----------------------------------------------------------------------------------------------------------
Total deposits 27,658,885 20,701,400
Other borrowed money 661,195 311,510
Other liabilities 315,860 221,982
Long-term debt 200,000 200,000
-----------------------------------------------------------------------------------------------------------
28,835,940 21,434,892
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders'
Equity Common stock, 160,635,618 shares issued (153,738,830 shares in 2003) 160,636 153,739
Capital in excess of par value 951,476 789,225
Retained earnings 543,978 347,365
Accumulated other comprehensive income (loss) 20,953 (3,702)
-----------------------------------------------------------------------------------------------------------
1,677,043 1,286,627
Less treasury stock, at cost, 795,610 shares (726,152 shares in 11,338 9,339
2003)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,665,705 1,277,288
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $30,501,645 $22,712,180
-----------------------------------------------------------------------------------------------------------
See accompanying notes.
30
Consolidated Statements of Income
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $483,186 $ 391,361 $ 354,315
Income Interest on investment securities 754,202 524,015 400,191
Other interest 903 255 865
-------------------------------------------------------------------------------------------------------------
Total interest income 1,238,291 915,631 755,371
-------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Interest Interest on deposits:
Expense Demand 95,253 50,711 55,413
Savings 46,680 27,596 30,232
Time 59,808 66,115 81,567
-------------------------------------------------------------------------------------------------------------
Total interest on deposits 201,741 144,422 167,212
Interest on other borrowed money 6,685 3,263 1,839
Interest on long-term debt 12,080 12,080 13,565
-------------------------------------------------------------------------------------------------------------
Total interest expense 220,506 159,765 182,616
-------------------------------------------------------------------------------------------------------------
Net interest income 1,017,785 755,866 572,755
Provision for loan losses 39,238 31,850 33,150
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 978,547 724,016 539,605
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Deposit charges and service fees 218,126 160,678 131,033
Income Other operating income 154,306 167,949 126,433
Net investment securities gains 2,639 3,851
-------------------------------------------------------------------------------------------------------------
Total noninterest income 375,071 332,478 257,466
-------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and benefits 431,144 354,954 276,933
Expense Occupancy 121,210 95,926 56,498
Furniture and equipment 109,242 89,162 66,700
Office 46,025 39,190 31,186
Marketing 36,236 34,075 23,733
Other 194,921 150,085 124,118
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 938,778 763,392 579,168
-------------------------------------------------------------------------------------------------------------
Income before income taxes 414,840 293,102 217,903
Provision for federal and state income taxes 141,422 98,815 73,088
-------------------------------------------------------------------------------------------------------------
Net income $273,418 $ 194,287 $ 144,815
-------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share:
Basic $ 1.74 $ 1.36 $ 1.08
-------------------------------------------------------------------------------------------------------------
Diluted $ 1.63 $ 1.29 $ 1.01
-------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding:
Basic 156,625 142,169 133,590
-------------------------------------------------------------------------------------------------------------
Diluted 172,603 156,507 149,389
-------------------------------------------------------------------------------------------------------------
Dividends declared, common stock $ 0.40 $ 0.34 $ 0.31
-------------------------------------------------------------------------------------------------------------
See accompanying notes.
31
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Operating Net income $ 273,418 $194,287 $144,815
Activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 39,238 31,850 33,150
Provision for depreciation, amortization
and accretion 133,535 132,432 70,462
Gains on sales of securities (2,639) (3,851)
Proceeds from sales of loans held for sale 750,854 1,554,440 1,416,613
Originations of loans held for sale (752,157) (1,500,289) (1,440,272)
Net decrease (increase) in trading securities 1,355 156,021 (43,668)
Increase in other assets (58,429) (30,489) (107,483)
Increase (decrease) in other liabilities 82,851 (55,229) 150,194
Deferred income tax expense 16,005 15,417 6,359
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 484,031 494,589 230,170
Investing Proceeds from the sales of securities available for sale 2,119,230 4,864,321 1,506,996
Activities Proceeds from the sales of securities held to maturity 125,580
Proceeds from the maturity of securities available for sale 3,876,918 4,828,747 2,413,025
Proceeds from the maturity of securities held to maturity 1,019,449 613,848 486,292
Purchase of securities available for sale (9,304,341) (12,777,850) (7,437,004)
Purchase of securities held to maturity (3,203,025) (2,342,384) (118,221)
Net increase in loans (2,029,710) (1,628,513) (1,248,575)
Capital expenditures (339,956) (300,335) (220,048)
-----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (7,735,855) (6,742,166) (4,617,535)
Financing Net increase in demand and savings deposits 7,129,650 5,631,174 3,801,855
Activities Net (decrease) increase in time deposits (172,165) 521,385 561,393
Net increase (decrease) in other borrowed money 349,685 (80,131) 127,087
Dividends paid (59,205) (46,525) (39,911)
Issuance of common stock 208,825
Issuance of long-term debt 200,000
Redemption of long-term debt (80,500)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 146,057 116,908 66,809
Other (1,484) (5,401) 4,328
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,392,538 6,346,235 4,641,061
Increase in cash and cash equivalents 140,714 98,658 253,696
Cash and cash equivalents at beginning of year 910,092 811,434 557,738
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,050,806 $910,092 $811,434
-----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Interest $ 218,986 $161,637 $185,143
Income taxes 127,538 62,569 59,644
Other noncash activities:
Transfer of securities to securities held to maturity 5,919,301
See accompanying notes.
32
Consolidated Statements of Changes in Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2004, 2003 and 2002
(in thousands, except per share amounts) Accumulated
Other
Capital in Comprehensive
Common Excess of Retained Treasury Income
Stock Par Value Earnings Stock (Loss) Total
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $131,665 $396,065 $94,698 $(1,622) $15,764 $636,570
- -------------------------------------------------------------------------------------------------------------------
Net income 144,815 144,815
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax 97,850 97,850
$153,397)
Reclassification adjustment (pre-tax $0)
-------------
Other comprehensive income 97,850
-------------
Total comprehensive income 242,665
Cash dividends (39,911) (39,911)
Shares issued under dividend reinvestment and
compensation and benefit plans (4,196 shares) 4,196 62,613 66,809
Acquisition of insurance brokerage agency 226 4,520 4,746
(226 shares)
Other (1) 7,554 2 (424) 7,131
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $136,086 $470,752 $199,604 $(2,046) $113,614 $918,010
- -------------------------------------------------------------------------------------------------------------------
Net income 194,287 194,287
Other comprehensive loss, net of tax
Unrealized loss on securities (pre-tax (93,273) (93,273)
$146,701)
Reclassification adjustment (pre-tax $36,988) (24,043) (24,043)
-------------
Other comprehensive loss (117,316)
Total comprehensive income 76,971
Cash dividends (46,525) (46,525)
Shares issued under dividend reinvestment and
compensation and benefit plans (7,564 shares) 7,564 109,344 116,908
Common stock issued (10,000 shares) 10,000 198,825 208,825
Acquisition of insurance brokerage agency (88 88 1,804 1,892
shares)
Other 1 8,500 (1) (7,293) 1,207
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $153,739 $789,225 $347,365 $(9,339) $(3,702) $1,277,288
- -------------------------------------------------------------------------------------------------------------------
Net income 273,418 273,418
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax 1,465 1,465
$3,222)
Reclassification adjustment (pre-tax $35,677) 23,190 23,190
-------------
Other comprehensive income 24,655
Total comprehensive income 298,073
Cash dividends (62,258) (62,258)
Shares issued under dividend reinvestment and
compensation and benefit plans (6,898 shares) 6,898 139,159 146,057
Other (1) 23,092 (14,547) (1,999) 6,545
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $160,636 $951,476 $543,978 $(11,338) $20,953 $1,665,705
===================================================================================================================
See accompanying notes.
33
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. (the Company) and its consolidated subsidiaries. All material intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with the current year presentation.
The Company is a multi-bank holding company headquartered in Cherry Hill, New
Jersey, operating primarily in the metropolitan Philadelphia and metropolitan
New York markets. Through its subsidiaries, the Company provides retail and
commercial banking services, corporate trust services, insurance brokerage
services, and certain securities services.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock Split
Per share data and other appropriate share information for all periods presented
have been restated for the two-for-one stock split in the form of a 100% stock
dividend effective March 7, 2005.
Investment Securities
Investment securities are classified as held to maturity when the Company has
the intent and ability to hold those securities to maturity. Securities held to
maturity are stated at cost and adjusted for accretion of discounts and
amortization of premiums.
Those securities that might be sold in response to changes in market interest
rates, prepayment risk, the Company's income tax position, the need to increase
regulatory capital, or similar other factors are classified as available for
sale. Available for sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported as a component of stockholders' equity.
The amortized cost of debt securities in this category is adjusted for accretion
of discounts and amortization of premiums. Realized gains and losses are
determined on the specific identification method and are included in noninterest
income.
Commerce Capital Markets, Inc. (CCMI) maintains a portfolio of trading account
securities, which are carried at market. Gains and losses, both realized and
unrealized, are included in other operating income. Trading gains of $4.4
million, $13.0 million, and $11.5 million were recorded in 2004, 2003, and 2002,
respectively, including unrealized losses of $85,000 and $192,000 at December
31, 2004 and 2003, respectively.
Loans
Loans are stated at principal amounts outstanding, net of deferred loan
origination fees and costs. Interest income on loans is accrued and credited to
interest income monthly as earned. Loans held for sale are valued on an
aggregate basis at the lower of cost or fair value. Net deferred loan
origination fees and costs are amortized over the estimated lives of the related
loans as an adjustment to the yield.
Loans are placed on a non-accrual status and cease accruing interest when loan
payment performance is deemed unsatisfactory. However, all loans past due 90
days are placed on non-accrual status, unless the loan is both well secured and
in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. The level of the allowance is
based on an evaluation of individual large classified loans and nonaccrual
loans, the Company's historical loss experience and the risk characteristics
included in the loan portfolio. While the allowance for loan losses is
maintained at a level considered to be adequate by management for estimated
losses in the loan portfolio, determination of the allowance is inherently
subjective, as it requires estimates that may be susceptible to significant
change.
34
Notes to Consolidated Financial Statements
Transfers of Financial Assets
The Company accounts for the transfers of financial assets, including sales of
loans, as sales when control over the asset has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase before
their maturity.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation.
Depreciation and amortization are determined on the straight-line method over
the estimated useful lives of the assets for financial reporting purposes, and
accelerated methods for income tax purposes. The estimated useful lives range
from 15 to 40 years for buildings, 3 to 5 years for furniture, fixtures and
equipment and the shorter of the lease terms or the estimated useful lives of
leasehold improvements. When capitalizing costs for store 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 store. Depreciation
charges commence the month in which the store opens. All other pre-opening and
post-opening costs related to stores are expensed as incurred.
Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan is reported in other assets at
the lower of cost or fair value less disposition costs. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to ORE and recorded
at the lower of cost or fair value less disposition costs based on their
appraised value at the date actually or constructively received. Losses arising
from the acquisition of such property are charged against the allowance for loan
losses. Subsequent adjustments to the carrying values of ORE properties are
charged to operating expense. Included in other noninterest expense is $916,000,
$357,000, and $923,000 related to ORE expenses for 2004, 2003, and 2002,
respectively.
Other Investments
The Company makes investments directly in low-income housing tax credit (LIHTC)
operating partnerships, private venture capital funds and Small Business
Investment Companies (SBIC). At December 31, 2004 and 2003, the Company's
investment in these entities totaled $46.8 million and $30.1 million,
respectively. The majority of these investments are accounted for under the
equity method of accounting.
Intangible Assets
Goodwill and certain other intangible assets, which do not possess finite useful
lives, are not amortized into net income but rather are tested at least annually
for impairment. Intangible assets determined to have finite lives, $3.8 million
and $4.4 million at December 31, 2004 and 2003, respectively, are amortized over
their estimated useful lives, generally 10-15 years, and also continue to be
subject to impairment testing. The excess of cost over fair value of net assets
acquired (goodwill) is included in other assets and amounted to $5.5 million at
December 31, 2004 and 2003.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
The provision for income taxes is based on current taxable income. Deferred
income taxes are provided on temporary differences between amounts reported for
financial statement and tax purposes.
Restriction on Cash and Due From Banks
The Banks are required to maintain reserve balances with the Federal Reserve
Bank. The weighted average amount of the reserve balances for 2004 and 2003 were
approximately $110.8 million and $62.8 million, respectively.
35
Notes to Consolidated Financial Statements
Derivative Financial Instruments
As part of CCMI's broker-dealer activities, CCMI maintains a trading securities
portfolio for distribution to customers in order to meet those customers' needs.
Derivative instruments, primarily interest rate futures and options, are used in
order to reduce the exposure to interest rate risk relating to the trading
portfolio. These contracts are carried at fair value with changes in fair value
included in other operating income and recorded in the same period as changes in
fair value of the trading portfolio. As an accommodation to its loan customers,
the Company enters into interest rate swap agreements. The Company minimizes its
risk by matching these positions with a counterparty. These swaps are carried at
fair value with changes in fair value included in noninterest income.
Recent Accounting Statements
In September 2004, the EITF reached a consensus on Issue 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share." Issue 04-8
addresses the effect of contingently convertible debt instruments (Co-Cos) on
diluted EPS. The EITF defines Co-Cos as instruments that are convertible into
common stock if one or more specified contingencies occur and at least one of
the contingencies is based on the market price of the Company's common stock
(market price contingency). Issue 04-8 requires that Co-Cos be included in
diluted earnings per share computations (if dilutive) regardless of whether the
market price trigger has been met. This consensus must be applied by restating
all periods during which the Co-Co was outstanding. The Company adopted Issue
04-8 during the fourth quarter of 2004. Prior period diluted EPS calculations
have been restated using the if-converted method for the periods since March
2002, which is when the Convertible Trust Capital Securities were issued. The
adoption of Issue 04-8 decreased previously reported diluted EPS by $0.02 and
$0.01 per share for the years ended 2003 and 2002, respectively.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (revised 2004), "Share-Based Payment" (FAS 123R), which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123). FAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25), and amends FASB Statement No. 95, "Statement of Cash
Flows" (FAS 95). FAS 123R requires all share-based payments to employees to be
recognized in the income statement based on their fair values and no longer
allows pro forma disclosure as an alternative to reflecting the impact of
share-based payments on net income and earnings per share. FAS 123R must be
adopted no later than July 1, 2005 and permits public companies to adopt its
requirements using one of two methods: modified prospective or modified
retrospective. A modified prospective method recognizes compensation cost
beginning with the effective date of adoption for all share-based payments
granted after the effective date and all awards granted prior to the effective
date, but that remain unvested on the effective date. A modified retrospective
method includes the requirements of the modified prospective method but also
permits entities to restate prior period presentations. The Company plans to
adopt FAS 123R on July 1, 2005 but has yet to decide on a method of adoption.
The Company currently accounts for share-based payments to employees using APB
25's intrinsic value method and therefore does not typically recognize
compensation expense for employee stock options. Accordingly, the adoption of
FAS 123R will impact the Company's financial results. While the future impact of
FAS 123R cannot be predicted, had the Company adopted FAS 123R in prior periods,
the impact would have approximated the impact of FAS 123 as described in the
disclosure of pro forma net income and pro forma net income per share below.
As stated above, the Company continued to follow APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations to account for its
stock-based compensation plans during 2004. 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):
36
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Reported net income $273,418 $194,287 $144,815
Less: Stock option compensation expense
determined under fair value method, net of tax (11,849) (10,048) (8,429)
- -----------------------------------------------------------------------------------------------------------
Pro forma net income, basic 261,569 184,239 136,386
Add: Interest expense on Convertible Trust
Capital Securities, net of tax 7,852 7,852 6,543
- -----------------------------------------------------------------------------------------------------------
Pro forma net income, diluted $269,421 $192,091 $142,929
- -----------------------------------------------------------------------------------------------------------
Reported net income per share:
Basic $ 1.74 $ 1.36 $ 1.08
Diluted 1.63 1.29 1.01
Pro forma net income per share:
Basic $ 1.67 $ 1.30 $ 1.02
Diluted 1.56 1.23 0.96
- -----------------------------------------------------------------------------------------------------------
The fair value of options granted in 2004, 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 1.33% to 2.50%, volatility factors of the expected market
price of the Company's common stock of .255 to .304, and weighted average
expected lives of the options of 4.75 to 5.27 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.
In March 2004, the EITF reached a consensus on Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments."
Issue 03-1 provides guidance that should be used to determine when an investment
is considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. Issue 03-1 also includes accounting
considerations subsequent to recognition of an other-than-temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. In September 2004, the FASB
deferred the implementation date of the provisions that relate to measurement
and recognition of other-than-temporary impairments. The disclosure requirements
of Issue 03-1 were effective for fiscal years ending after December 15, 2003.
The Company is continuing to monitor the status of Issue 03-1 but does not
expect it to have a material impact on the results of operations of the Company.
37
Notes to Consolidated Financial Statements
2. Investment Securities
A summary of the amortized cost and market value of securities available for
sale and securities held to maturity (in thousands) at December 31, 2004 and
2003 follows:
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency
and mortgage backed
obligations $7,884,113 $40,141 ($21,438) $7,902,816 $10,528,396 $82,057 ($98,908) $10,511,545
Obligations of state and 87,605 305 87,910 30,223 821 (117) 30,927
political subdivisions
Equity securities 10,129 13,174 23,303 8,571 8,017 16,588
Other 29,312 809 30,121 89,372 2,223 91,595
- ----------------------------------------------------------------------------------------------------------------------------------
Securities available
for sale $8,011,159 $54,429 ($21,438) $8,044,150 $10,656,562 $93,118 ($99,025) $10,650,655
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency
and mortgage backed
obligations $9,967,041 $43,982 ($81,028) $9,929,995 $2,193,577 $15,209 ($27,088) $2,181,698
Obligations of state and
political subdivisions 398,963 3,867 (28) 402,802 227,199 30 (11,443) 215,786
Other 97,654 97,654 69,708 69,708
- ----------------------------------------------------------------------------------------------------------------------------------
Securities held to
maturity $10,463,658 $47,849 ($81,056) $10,430,451 $2,490,484 $15,239 ($38,531) $2,467,192
- ----------------------------------------------------------------------------------------------------------------------------------
The Company's investment portfolio consists primarily of U.S. Government agency
and mortgage-backed obligations. These securities have little, if any, credit
risk since they are either backed by the full faith and credit of the U.S.
Government, or are guaranteed by an agency of the U.S. Government, or are AAA
rated.
During the fourth quarter of 2004, the Company transferred $5.9 billion of
securities classified as available for sale to the held to maturity
classification based on the Company's anticipated liquidity needs and expected
annual cash flow from deposit growth and bond and loan prepayments. The
aggregate market value of the securities transferred equaled their book value,
with no effect on stockholders' equity, regulatory capital or results of
operations.
The amortized cost and estimated market value of investment securities (in
thousands) at December 31, 2004, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because obligors
have the right to repay obligations without prepayment penalties.
- ----------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
- ----------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------
Due in one year or less $ 67,554 $ 67,611 $ 370,058 $ 370,058
Due after one year through five years 414,301 413,011 4,326 4,419
Due after five years through ten years 24,294 23,964 437,565 426,977
Due after ten years 101,433 102,193 150,929 153,859
Mortgage backed securities 7,393,448 7,414,068 9,500,780 9,475,138
Equity securities 10,129 23,303
- ----------------------------------------------------------------------------------------------------------
$ 8,011,159 $ 8,044,150 $10,463,658 $10,430,451
- ----------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale during 2004, 2003 and 2002
were $2.1 billion, $4.9 billion and $1.5 billion, respectively. Gross gains of
$16.7 million, $32.6 million and $6.8 million were realized on the sales in
2004, 2003, and 2002, respectively, and gross losses of $14.1 million, $28.8
million and $6.8 million were realized in 2004, 2003 and 2002, respectively.
At December 31, 2004 and 2003, investment securities with a carrying value of
$6.2 billion and $5.0 billion, respectively, were pledged to secure deposits of
public funds.
38
Notes to Consolidated Financial Statements
The unrealized losses and related fair value of investments with unrealized
losses less than 12 months and those with unrealized losses 12 months or longer
(in thousands) as of December 31, 2004 are shown below.
----------------------------------------------------------------------------------------------------------
Less than 12 months 12 months or more Totals
----------------------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government agency and
mortgage-
backed obligations $3,536,608 $19,935 $ 258,250 $ 1,503 $3,794,858 $21,438
----------------------------------------------------------------------------------------------------------
Securities available
for sale $3,536,608 $19,935 $ 258,250 $ 1,503 $3,794,858 $21,438
----------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Government agency and
mortgage-
backed obligations $2,955,299 $33,930 $2,678,126 $ 47,098 $5,633,425 $81,028
Obligations of state and
political subdivisions 2,469 22 810 6 3,279 28
----------------------------------------------------------------------------------------------------------
Securities held to
maturity $2,957,768 $33,952 $2,678,936 $ 47,104 $5,636,704 $81,056
----------------------------------------------------------------------------------------------------------
Management does not believe any individual unrealized loss as of December 31,
2004 represents an other-than-temporary impairment. The unrealized losses on
these securities are caused by the changes in general market interest rates. The
Company believes it will collect all amounts contractually due on these
securities as it has the ability to hold these securities until the fair value
is at least equal to the carrying value. The duration and average life of
securities with unrealized losses at December 31, 2004 was 3.43 years and 4.09
years, respectively.
During 2004, $1.4 billion of securities were sold which had unrealized losses at
December 31, 2003. Gross gains and losses on these securities were $2.5 million
and $14.0 million, respectively.
3. Loans
The following is a summary of loans outstanding (in thousands) at December 31,
2004 and 2003:
- ------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------
Commercial:
Term $1,283,476 $1,027,526
Line of credit 1,168,542 959,158
Demand 1,077
- ------------------------------------------------------------------------
2,452,018 1,987,761
Owner-occupied 1,998,203 1,619,079
Consumer:
Mortgages (1-4 family residential) 1,340,009 918,686
Installment 132,646 138,437
Home equity 1,799,841 1,405,795
Credit lines 69,079 60,579
- ------------------------------------------------------------------------
3,341,575 2,523,497
Commercial real estate:
Investor developer 1,455,891 1,167,672
Construction 206,924 142,567
- ------------------------------------------------------------------------
1,662,815 1,310,239
- ------------------------------------------------------------------------
$9,454,611 $7,440,576
- ------------------------------------------------------------------------
39
Notes to Consolidated Financial Statements
Loans to executive officers and directors of the Company and its subsidiaries,
and companies with which they are associated, are made in the ordinary course of
business and on substantially the same terms as comparable unrelated
transactions. The following table summarizes the Company's related party loans
(in millions) at December 31, 2004 and 2003:
----------------------------------------------------------
December 31,
----------------------------------------------------------
2004 2003
----------------------------------------------------------
Executive officers $ 1.6 $ 1.4
Bancorp directors 6.4 22.6
----------------------------------------------------------
$ 8.0 $ 24.0
----------------------------------------------------------
In addition, the Company had loans to directors of its subsidiary banks totaling
$89.8 million and $121.7 million at December 31, 2004 and 2003, respectively.
In addition to the services referenced in Note 6 - Bank Premises, Equipment, and
Leases, the Company purchased goods and services, including legal services, from
related parties. Such disbursements aggregated $1.9 million, $1.2 million, and
$5.9 million, in 2004, 2003, and 2002, respectively. Management believes
disbursements made to related parties were substantially equivalent to those
that would have been paid to unaffiliated companies for similar goods and
services.
4. Allowance for Loan Losses
The following is an analysis of changes in the allowance for loan losses (in
thousands) for 2004, 2003 and 2002:
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Balance, January 1 $112,057 $ 90,733 $66,981
Provision charged to operating expense 39,238 31,850 33,150
Recoveries of loans previously charged off 2,175 1,264 1,330
Loan charge-offs (17,850) (11,790) (10,728)
- --------------------------------------------------------------------------------
Balance, December 31 $135,620 $112,057 $90,733
- --------------------------------------------------------------------------------
5. Non-Performing Loans and Other Real Estate
Total non-performing loans (non-accrual and restructured loans) were $32.8
million and $21.7 million at December 31, 2004 and 2003, respectively.
Non-performing loans of $2.0 million and $0.9 million were transferred to other
real estate during 2004 and 2003, respectively. Other real estate ($0.6 million
and $1.8 million at December 31, 2004 and 2003, respectively) is included in
other assets.
At December 31, 2004 and 2003, the recorded investment in loans considered to be
impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of
a Loan" totaled $13.4 million and $15.6 million, respectively, all of which are
included in non-performing loans. The reserve for loan losses related to
impaired loans totaled approximately $4.1 million and $3.5 million at December
31, 2004 and 2003, respectively. As permitted, all homogenous smaller balance
consumer and residential mortgage loans are excluded from individual review for
impairment. The majority of impaired loans were measured using the fair market
value of collateral. Impaired loans averaged approximately $14.5 million and
$12.3 million during 2004 and 2003, respectively. Interest income of
approximately $2.9 million, $1.9 million, and $1.4 million would have been
recorded on non-performing loans (including impaired loans) in accordance with
their original terms in 2004, 2003, and 2002, respectively. Actual interest
income recorded on these loans amounted to $1.1 million, $418 thousand, and $275
thousand during 2004, 2003, and 2002, respectively.
40
Notes to Consolidated Financial Statements
6. Bank Premises, Equipment, and Leases
A summary of bank premises and equipment (in thousands) is as follows:
- --------------------------------------------------------------------------
December 31,
-------------------------------
2004 2003
- --------------------------------------------------------------------------
Land $ 239,639 $180,324
Buildings 444,152 323,810
Leasehold improvements 161,220 128,261
Furniture, fixtures and equipment 433,581 335,579
Leased property under capital leases 124 124
- --------------------------------------------------------------------------
1,278,716 968,098
Accumulated depreciation and amortization (328,831) (243,809)
- --------------------------------------------------------------------------
949,885 724,289
Premises and equipment in progress 109,634 87,162
- --------------------------------------------------------------------------
$1,059,519 $811,451
- --------------------------------------------------------------------------
At December 31, 2004, the Company leased from various related parties under
separate operating lease agreements the land on which it has constructed 18
stores. Rents paid under these agreements represent market rates, are supported
by independent appraisals and approved by the independent members of the Board
of Directors. The aggregate annual rental under these leases was approximately
$1.7 million, $1.9 million, and $1.6 million in 2004, 2003, and 2002,
respectively. These leases expire periodically beginning in 2005 but are
renewable through 2042.
Total rent expense charged to operations under operating leases was
approximately $40.1 million in 2004, $33.7 million in 2003, and $21.8 million in
2002. Total depreciation expense charged to operations was $91.9 million, $69.7
million and $52.7 million in 2004, 2003 and 2002, respectively.
The future minimum rental commitments, by year, under the non-cancelable leases,
including escalation clauses, are as follows (in thousands) at December 31,
2004:
- ----------------------------------------------------------
Operating
- ----------------------------------------------------------
2005 $ 36,159
2006 36,813
2007 35,937
2008 36,396
2009 36,206
Later years 372,917
- ----------------------------------------------------------
Net minimum lease payments $ 554,428
- ----------------------------------------------------------
The Company has obtained architectural design and facilities management services
for over 25 years from a business owned by the spouse of the Chairman of the
Board of the Company. The Company spent $6.5 million, $6.4 million, and $4.6
million in 2004, 2003, and 2002, respectively, for such services and related
costs. Additionally, the business received additional revenues for project
management of approximately $0.1 million, $3.8 million, and $3.5 million in
2004, 2003, and 2002, respectively, on furniture and facility purchases made
directly by the Company. In 2003, the Board approved the transfer, without cost,
into the Company of the project management services, which was completed during
2004. The business will continue to provide architectural and design services to
the Company. Management believes these disbursements were substantially
equivalent to those that would have been paid to unaffiliated companies for
similar services. The Board of Directors believes this arrangement has been an
important factor in the success of the Commerce brand.
7. Deposits
The aggregate amount of time certificates of deposits in denominations of
$100,000 or more was $1.8 billion and $2.0 billion at December 31, 2004 and
2003, respectively.
41
Notes to Consolidated Financial Statements
8. Other Borrowed Money
Other borrowed money consists primarily of securities sold under agreements to
repurchase, federal funds purchased, and lines of credit. The following table
represents information for other borrowed money (in thousands) at December 31,
2004 and 2003:
- --------------------------------------------------------------------------------
December 31,
----------------------------------------------
2004 2003
----------------------------------------------
Average Average
Amount Rate Amount Rate
- --------------------------------------------------------------------------------
Securities sold under
agreements to repurchase $586,195 2.28% $ 311,510 1.10%
Federal funds purchased 75,000 2.46%
- --------------------------------------------------------------------------------
Total $661,195 2.30% $ 311,510 1.10%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average amount outstanding $465,137 1.44% $ 423,538 0.77%
Maximum month-end balance 944,040 1,114,482
- --------------------------------------------------------------------------------
As of December 31, 2004, the Company had a line of credit of $1.1 billion from
the Federal Home Loan Bank of New York, a line of credit of $361.1 million from
the Federal Home Loan Bank of Pittsburgh, and a $80.0 million line of credit
from a group of other banks, all of which was available.
9. Long-Term Debt
On March 11, 2002 the Company issued $200.0 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a newly formed Delaware
business trust subsidiary of the Company. The equity in the business trust is
netted against the long-term debt on the Consolidated Balance Sheets. The
Convertible Trust Capital Securities mature in 2032. All $200.0 million of the
Convertible Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes. The net proceeds of this offering were used for general
corporate purposes.
On April 1, 2004, the Convertible Trust Capital Securities became convertible at
the option of the holder. Holders of the Convertible Trust Capital Securities
may convert each security into 1.8956 shares of Company common stock.
The Company may call the Convertible Trust Capital Securities on or after March
11, 2005, provided various terms and conditions are met, primarily related to
the market price of the Company's common stock. In summary, the Company's common
stock must trade at a price of $31.65 or higher for 20 trading days in a period
of 30 consecutive trading days in order for the Company to force conversion.
As previously discussed in Note 1 - Significant Accounting Policies, the Company
has calculated the effect of these securities on diluted net income per share by
using the if-converted method. Under the if-converted method, the related
interest charges on the Convertible Trust Capital Securities, adjusted for
income taxes, have been added back to the numerator and the common shares to be
issued upon conversion (7.6 million common shares) have been added to the
denominator. Refer to Note 13 - Earnings Per Share for illustration of the
if-converted method.
10. Income Taxes
The provision for income taxes consists of the following (in thousands):
- --------------------------------------------------------------------------------
December 31,
-------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------
Current:
Federal $118,301 $77,437 $62,660
State 7,116 5,961 4,069
Deferred:
Federal 16,005 15,417 6,359
- -------------------------------------------------------------------------------
$141,422 $98,815 $73,088
- -------------------------------------------------------------------------------
The above provision includes income taxes of $900,000, $1.3 million, and $0 for
2004, 2003, and 2002, respectively, related to securities gains.
42
Notes to Consolidated Financial Statements
The provision for income taxes differs from the expected statutory provision as
follows:
- --------------------------------------------------------------------------------
December 31,
----------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Expected provision at statutory rate: 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt interest on loans (1.2) (1.5) (1.7)
Tax-exempt interest on securities (1.4) (1.7) (1.8)
State income taxes (net of federal benefit) 1.1 1.3 1.2
Other 0.6 0.6 0.8
- --------------------------------------------------------------------------------
34.1% 33.7% 33.5%
- --------------------------------------------------------------------------------
The amount payable for federal income taxes during 2004 was reduced by
approximately $22.6 million, which related to the exercise of stock options.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 2004 and 2003 are as follows (in thousands):
- --------------------------------------------------------------------------------
December 31,
---------------------
2004 2003
- --------------------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves $ 47,069 $38,623
Intangibles 1,913 2,172
Other reserves 7,742 3,951
Fair value adjustment, available for sale securities 2,206
- --------------------------------------------------------------------------------
Total deferred tax assets 56,724 46,952
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (64,503) (37,661)
Fair value adjustment, available for sale securities (12,038)
Other (5,901) (4,760)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (82,442) (42,421)
- --------------------------------------------------------------------------------
Net deferred (liabilities) assets $(25,718) $ 4,531
- --------------------------------------------------------------------------------
No valuation allowance was recognized for the deferred tax assets at December
31, 2004 or 2003.
11. Commitments, Letters of Credit and Guarantees
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit, which are not reflected in the
accompanying consolidated financial statements. These arrangements have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Company's normal credit policies. Collateral is obtained
based on management's credit assessment of the borrower. At December 31, 2004,
the Company had outstanding standby letters of credit in the amount of $787.4
million. Fees associated with standby letters of credit have been deferred and
recorded in other liabilities on the Consolidated Balance Sheets. These fees are
immaterial to the Company's consolidated financial statements at December 31,
2004.
In addition, the Company is committed as of December 31, 2004 to advance $558.2
million on construction loans, $993.1 million on home equity lines of credit and
$1.9 billion on other lines of credit. All other commitments total approximately
$608.8 million. The Company anticipates no material losses as a result of these
transactions.
The Company has commitments to fund LIHTC partnerships, private venture capital
funds and SBICs that total approximately $20.6 million at December 31, 2004.
43
Notes to Consolidated Financial Statements
12. Common Stock
At December 31, 2004, the Company's common stock had a par value of $1.00. The
Company is authorized to issue 500,000,000 shares as of this date.
On December 21, 2004, the Board of Directors declared a cash dividend of $0.11
for each share of common stock outstanding payable January 20, 2005 to
stockholders of record on January 6, 2005.
On February 15, 2005, the Board of Directors declared a two-for-one stock split
in the form of a 100% stock dividend distributed on March 7, 2005 to
stockholders of record on February 25, 2005.
13. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
-----------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
2004 2003 2002
-----------------------------------------------------------------------------------------
Basic:
Net income applicable to common stock $273,418 $194,287 $144,815
-----------------------------------------------------------------------------------------
Average common shares outstanding 156,625 142,169 133,590
-----------------------------------------------------------------------------------------
Net income per common share $ 1.74 $ 1.36 $ 1.08
-----------------------------------------------------------------------------------------
Diluted:
Net income applicable to common stock
on a diluted basis $273,418 $194,287 $144,815
Add: Interest expense on Convertible Trust Capital
Securities 7,852 7,852 6,544
-----------------------------------------------------------------------------------------
$281,270 $202,139 $151,359
-----------------------------------------------------------------------------------------
Average common shares outstanding 156,625 142,169 133,590
Additional shares considered in diluted
computation assuming:
Exercise of stock options 8,396 6,756 8,217
Conversion of trust capital securities 7,582 7,582 7,582
-----------------------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 172,603 156,507 149,389
-----------------------------------------------------------------------------------------
Net income per common and common
equivalent share
$ 1.63 $ 1.29 $ 1.01
-----------------------------------------------------------------------------------------
44
Notes to Consolidated Financial Statements
14. Benefit Plans
Stock Option Plans
In 2004, the Board of Directors adopted and Company shareholders approved the
2004 Employee Stock Option Plan (the 2004 Plan) for the officers and employees
of the Company and its subsidiaries. The 2004 Plan authorizes the issuance of up
to 30,000,000 shares of common stock (as adjusted for all stock splits and stock
dividends) upon the exercise of options. As of December 31, 2004, options to
purchase 200,628 shares of common stock have been issued under the 2004 Plan. In
addition to the 2004 Plan, the Company has the 1997 Employee Stock Option Plan
(the 1997 Plan) for the officers and employees of the Company and its
subsidiaries as well as a plan for its non-employee directors. The 1997 Plan
authorizes the issuance of up to 34,470,308 shares of common stock (as adjusted
for all stock splits and stock dividends) upon the exercise of options. As of
December 31, 2004, options to purchase 34,470,108 shares of common stock have
been issued under the 1997 Plan. The option price for options issued under the
1997 and 2004 Plans must be at least equal to 100% of the fair market value of
the Company's common stock as of the date the option is granted. All options
granted will vest evenly over four years from the date of grant. The options
expire not later than 10 years from the date of grant. In addition, there are
options outstanding from prior stock option plans of the Company, which were
granted under similar terms. No additional options may be issued under these
prior plans.
Information concerning option activity for the periods indicated is as follows:
------------------------------------------------------------------------------
Shares Under Weighted Average
Option Exercise Price
------------------------------------------------------------------------------
Balance at January 1, 2002 20,365,380 $ 9.92
Options granted 4,177,488 20.20
Options exercised 1,948,290 9.30
Options canceled 497,472 14.85
Balance at December 31, 2002 22,097,106 11.86
------------------------------------------------------------------------------
Options granted 5,349,920 21.24
Options exercised 3,144,440 7.65
Options canceled 387,382 18.78
Balance at December 31, 2003 23,915,204 14.38
------------------------------------------------------------------------------
Options granted 6,112,444 29.37
Options exercised 3,064,024 12.39
Options canceled 439,488 24.92
Balance at December 31, 2004 26,524,136 17.89
------------------------------------------------------------------------------
Additional information concerning options outstanding as of December 31, 2004 is
as follows:
-------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Exercisable Weighted
Range of Number Remaining Average as of Average
Exercise prices Outstanding Contractual Life Exercise Price 12/31/2004 Exercise Price
-------------------------------------------------------------------------------------------------
$2.48 to $5.00 1,657,938 1.4 $ 4.15 1,657,938 $ 4.15
$5.01 to $10.00 3,909,602 4.1 8.95 3,909,602 8.95
$10.01 to $17.50 6,924,300 5.0 13.18 6,454,760 13.03
$17.51 to $25.00 8,253,302 7.7 20.79 3,872,830 20.47
$25.01 to $32.15 5,778,994 9.1 29.37
-------------------------------------------------------------------------------------------------
45
Notes to Consolidated Financial Statements
Employee 401(k) Plan
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code. The plan allows all eligible employees to defer a percentage of
their income on a pretax basis through contributions to the plan. Under the
provisions of the plan, the Company may match a percentage of the employees'
contributions subject to a maximum limit. The charge to operations for Company
matching contributions was $3.3 million, $3.4 million and $2.8 million for 2004,
2003 and 2002, respectively. As part of the 401(k) plan, the Company maintains
an Employee Stock Ownership Plan (ESOP) component for all eligible employees. As
of December 31, 2004, the ESOP held 2,895,960 shares of the Company's common
stock, all of which were allocated to participant accounts. Employer
contributions are determined at the discretion of the Board of Directors. No
contribution expense was recorded for the ESOP in 2004 or 2003.
Supplemental Executive Retirement Plan
Effective January 1, 2004, the Company's Board of Directors formalized a
Supplemental Executive Retirement Plan (SERP), which was previously approved
January 1, 1992, for certain designated executives in order to provide
supplemental retirement income. The SERP is a defined contribution plan, is
unfunded, and contributions will be made at the Company's discretion. For the
year ended December 31, 2004, the Company expensed $7.2 million for the SERP.
Post-employment or Post-retirement Benefits
The Company offers no post-employment or post-retirement benefits.
15. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
(FAS 107), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
FAS 107 excludes certain financial instruments and all non-financial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following table represents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2004 and 2003:
- ----------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 1,050,806 $ 1,050,806 $ 910,092 $ 910,092
Loans held for sale 44,072 44,072 42,769 42,769
Trading securities 169,103 169,103 170,458 170,458
Investment securities 18,507,808 18,474,601 13,141,139 13,117,847
Loans (net) 9,318,991 9,422,638 7,328,519 7,454,910
Financial liabilities:
Deposits 27,658,885 27,662,167 20,701,400 20,724,863
Other borrowed money 661,195 661,195 311,510 311,510
Long-term debt 200,000 255,000 200,000 239,000
- ----------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letters of credit $ 2,163 $ 2,163 $ 1,802 $ 1,802
Commitments to extend credit 2,163 1,365
Refer to Note 19 - Derivative Financial Instruments for fair value information
on derivative financial instruments.
46
Notes to Consolidated Financial Statements
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, loans held for sale and trading securities: The
carrying amounts reported approximate those assets' fair value.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans receivable were estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loans with significant collectibility
concerns were fair valued on a loan-by-loan basis utilizing a discounted cash
flow method.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest-bearing and noninterest-bearing checking, passbook savings, and certain
types of money market accounts) are, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
of deposit to a schedule of aggregated expected monthly maturities on time
deposits.
Other borrowed money: The carrying amounts reported approximate fair value.
Long-term debt: Current quoted market prices were used to estimate fair value.
Off-balance sheet liabilities: Off-balance sheet liabilities of the Company
consist of letters of credit, loan commitments and unfunded lines of credit.
Fair values for the Company's off-balance sheet liabilities are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
47
Notes to Consolidated Financial Statements
16. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the
Company which, in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentation.
---------------------------------------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
---------------------------------------------------------------------------------------------------------
(dollars in thousands)
---------------------------------------------------------------------------------------------------------
2004
Interest income $353,395 $320,814 $292,030 $272,052
Interest expense 74,953 56,432 47,281 41,840
Net interest income 278,442 264,382 244,749 230,212
Provision for loan losses 8,240 10,750 10,748 9,500
Provision for federal and state
Income taxes 38,424 36,493 33,786 32,719
Net income 75,118 70,090 66,235 61,975
Net income per common share:
Basic $ 0.47 $ 0.45 $ 0.42 $ 0.40
Diluted 0.44 0.42 0.40 0.37
2003
Interest income $256,125 $233,901 $218,744 $206,861
Interest expense 41,001 39,792 39,440 39,532
Net interest income 215,124 194,109 179,304 167,329
Provision for loan losses 10,800 7,250 6,900 6,900
Provision for federal and state
income taxes 29,321 25,231 22,779 21,484
Net income 56,606 49,474 45,317 42,890
Net income per common share:
Basic $ 0.37 $ 0.35 $ 0.33 $ 0.31
Diluted 0.35 0.33 0.31 0.30
48
Notes to Consolidated Financial Statements
17. Condensed Financial Statements of the Parent Company and Other Matters
Balance Sheets
- --------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------
Assets
Cash $ 5,524 $ 2,667
Securities available for sale 63,310 101,589
Investment in subsidiaries 1,828,492 1,375,806
Other assets 21,896 8,843
- -------------------------------------------------------------------------------------
$ 1,919,222 $ 1,488,905
- -------------------------------------------------------------------------------------
Liabilities
Other liabilities $ 53,517 $ 11,617
Long-term debt 200,000 200,000
- -------------------------------------------------------------------------------------
253,517 211,617
- -------------------------------------------------------------------------------------
Stockholders' equity
Common stock 160,636 153,739
Capital in excess of par value 951,476 789,225
Retained earnings 543,978 347,365
Accumulated other comprehensive income (loss) 20,953 (3,702)
- -------------------------------------------------------------------------------------
1,677,043 1,286,627
Less treasury stock 11,338 9,339
- -------------------------------------------------------------------------------------
Total stockholders' equity 1,665,705 1,277,288
- -------------------------------------------------------------------------------------
$ 1,919,222 $ 1,488,905
- -------------------------------------------------------------------------------------
Statements of Income
- -----------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ 20,000 $ 44,500 $ 9,600
Interest income 499 476 552
Other 8,028 1,711 2,826
- -----------------------------------------------------------------------------------------
28,527 46,687 12,978
- -----------------------------------------------------------------------------------------
Expenses:
Interest expense 12,448 12,448 15,554
Operating expenses 10,370 3,877 4,460
- -----------------------------------------------------------------------------------------
22,818 16,325 20,014
Income (loss) before income taxes and equity
in undistributed income of subsidiaries 5,709 30,362 (7,036)
Income tax benefit (5,025) (4,971) (5,757)
- -----------------------------------------------------------------------------------------
10,734 35,333 (1,279)
Equity in undistributed income of subsidiaries 262,684 158,954 146,094
- -----------------------------------------------------------------------------------------
Net income $ 273,418 $ 194,287 $144,815
- -----------------------------------------------------------------------------------------
49
Notes to Consolidated Financial Statements
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Operating activities:
Net income $273,418 $ 194,287 $144,815
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for depreciation, amortization and accretion 189 212 197
Undistributed income of subsidiaries (262,684) (158,954) (146,094)
(Increase) decrease increase in other assets (13,278) 384 1,857
Increase (decrease) in other liabilities 45,072 5,946 (11,509)
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 42,717 41,875 (10,734)
Investing activities:
Investments in subsidiaries (168,700) (239,500) (145,520)
Proceeds from sale of securities available for sale 3,018
Proceeds from the maturity of securities available for sale 198,000 144,327 96,000
Purchase of securities available for sale (154,528) (218,984) (91,395)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (125,228) (314,157) (137,897)
Financing activities:
Proceeds from issuance of common stock
under dividend reinvestment and other stock plans 146,057 116,908 66,809
Dividends paid (59,205) (46,525) (39,911)
Issuance of common stock 208,825
Issuance of long-term debt 206,186
Redemption of long-term debt (82,000)
Other (1,484) (7,293) (421)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 85,368 271,915 150,663
Increase (decrease) in cash and cash equivalents 2,857 (367) 2,032
Cash and cash equivalents at beginning of year 2,667 3,034 1,002
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,524 $ 2,667 $ 3,034
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,268 $ 12,268 $ 13,551
Income taxes 121,766 56,357 56,586
- -----------------------------------------------------------------------------------------------------------
Holders of common stock of the Company are entitled to receive dividends when
declared by the Board of Directors out of funds legally available. Under the New
Jersey Business Corporation Act, the Company may pay dividends only if it is
solvent and would not be rendered insolvent by the dividend payment and only to
the extent of surplus (the excess of the net assets of the Company over its
stated capital).
The approval of the Comptroller of the Currency is required for a national bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds net profits (as defined) for that year combined with its retained net
profits for the preceding two calendar years. New Jersey state banks are subject
to similar dividend restrictions. Commerce NJ, Commerce PA, Commerce North and
Commerce Delaware can declare dividends in 2005 without additional approval of
approximately $258.5 million, $91.3 million, $69.3 million and $5.2 million,
respectively, plus an additional amount equal to each bank's net profit for 2005
up to the date of any such dividend declaration.
The Federal Reserve Act requires the extension of credit by any of the Company's
banking subsidiaries to certain affiliates, including Commerce Bancorp, Inc.
(parent), be secured by readily marketable securities, that extension of credit
to any one affiliate be limited to 10% of the capital and capital in excess of
par or stated value, as defined, and that extensions of credit to all such
affiliates be limited to 20% of capital and capital in excess of par or stated
value. At December 31, 2004 and 2003, the Company complied with these
guidelines.
50
Notes to Consolidated Financial Statements
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific guidelines that involve quantitative measures of
the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
As of December 31, 2004 and 2003, the Company and each of its subsidiary banks
were categorized as "well-capitalized" under the regulatory framework for prompt
corrective action. There are no conditions or events since December 31, 2004
that management believes have changed any subsidiary bank's capital category.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiaries to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to risk-based assets
(as defined) and of Tier I capital to average assets (as defined), or leverage.
Management believes, as of December 31, 2004, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
The following table presents the Company's and Commerce NJ's risk-based and
leverage capital ratios at December 31, 2004 and 2003. The 2003 ratios for
Commerce NJ have been adjusted to reflect the consolidation of Commerce Shore
during 2004.
- ------------------------------------- ------------------------ ---------------------------------------------
Per Regulatory Guidelines
- ------------------------------------- ------------------------ ---------------------- ----------------------
Actual Minimum "Well Capitalized"
- ------------------------------------- ------------------------ ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------- ------------- ---------- ----------- ---------- ------------ ---------
December 31, 2004
Company
Risk based capital ratios:
Tier I $1,835,484 12.30% $596,834 4.00% $895,251 6.00%
Total capital 1,977,032 13.25 1,193,668 8.00 1,492,086 10.00
Leverage ratio 1,835,484 6.19 1,187,037 4.00 1,483,796 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $1,249,535 11.37% $439,695 4.00% $659,543 6.00%
Total capital 1,354,466 12.32 879,390 8.00 1,099,238 10.00
Leverage ratio 1,249,535 6.01 831,711 4.00 1,039,638 5.00
December 31, 2003
Company
Risk based capital ratios:
Tier I $1,471,131 12.66% $464,961 4.00% $697,442 6.00%
Total capital 1,583,188 13.62 929,922 8.00 1,162,403 10.00
Leverage ratio 1,471,131 6.61 890,390 4.00 1,112,987 5.00
Commerce NJ Risk based capital ratios:
Tier 1 $ 931,981 11.07% $336,641 4.00% $504,962 6.00%
Total capital 1,017,498 12.09 673,282 8.00 841,603 10.00
Leverage ratio 931,981 6.07 614,020 4.00 767,526 5.00
51
Notes to Consolidated Financial Statements
18. Segment Reporting
The Company operates one reportable segment of business, Community Banks, which
includes Commerce NJ, Commerce PA, Commerce North, and Commerce Delaware.
Through its Community Banks, the Company provides a broad range of retail and
commercial banking services, and corporate trust services. Parent/Other includes
the holding company, Commerce Insurance (whose revenues of $72.5 million, $66.5
million and $55.9 million in 2004, 2003, and 2002, respectively, were reported
in other operating income), and CCMI (whose noninterest revenues of $28.1
million, $42.5 million, and $35.1 million in 2004, 2003, and 2002, respectively,
were reported in other operating income).
Selected segment information for each of the three years ended December 31 is as
follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/ Community Parent/
Banks Other Total Banks Other Total Banks Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income
(expense)
$1,024,092 ($6,307) $1,017,785 $ 761,530 ($ 5,664) $ 755,866 $ 579,687 ($ 6,932) $ 572,755
Provision for loan
losses 39,238 -- 39,238 31,850 -- 31,850 33,150 -- 33,150
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income
after provision 984,854 (6,307) 978,547 729,680 (5,664) 724,016 546,537 (6,932) 539,605
Noninterest income 267,912 107,159 375,071 222,967 109,511 332,478 166,384 91,082 257,466
Noninterest expense 846,421 92,357 938,778 676,265 87,127 763,392 500,522 78,646 579,168
- ----------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 406,345 8,495 414,840 276,382 16,720 293,102 212,399 5,504 217,903
Income tax expense 138,879 2,543 141,422 93,314 5,501 98,815 72,839 249 73,088
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 267,466 $ 5,952 $ 273,418 $ 183,068 $ 11,219 $ 194,287 $ 139,560 $ 5,255 $ 144,815
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets
(in millions) $ 24,452 $ 2,167 $ 26,619 $ 17,754 $ 1,836 $ 19,590 $ 12,192 $ 1,560 $ 13,752
- ----------------------------------------------------------------------------------------------------------------------------------
The financial information for each segment is reported on the basis used
internally by the Company's management to evaluate performance. Measurement of
the performance of each segment is based on the management structure of the
Company and is not necessarily comparable with financial information from other
entities. The information presented is not necessarily indicative of the
segment's results of operations if each of the Community Banks were independent
entities.
52
Notes to Consolidated Financial Statements
19. Derivative Financial Instruments
As part of CCMI's broker-dealer activities, CCMI maintains a trading securities
portfolio for distribution to its customers in order to meet those customers'
needs. In order to reduce the exposure to market risk relating to the inventory,
CCMI buys and sells derivative financial instruments, primarily interest rate
futures and option contracts. Market risk includes changes in interest rates or
value fluctuations in the underlying financial instruments. Notional (contract)
amounts are used to measure derivative activity. Notional amounts are not
included on the balance sheet, as those amounts are not actually paid or
received at settlement. The following table reflects the open commitments for
futures and options and the associated unrealized gains (losses) (in thousands)
at December 31, 2004 and 2003:
Notional
Amount Net Unrealized
Long (Short) Gain (Loss)
-----------------------------------------------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------------------------------------------
Treasury bond futures $ 28,800 $ (3,000) $ 28 $ (68)
Treasury bond put options 20,000 (5,000) (62) 3
Treasury bond call options (123,500) (97,500) (525) 343
-----------------------------------------------------------------------------------------------
Total $(74,700) $(105,500) $ (559) $ 278
-----------------------------------------------------------------------------------------------
The average notional amount for futures and options contracts for the years
ended December 31, 2004 and 2003 was $293.5 million and $240.9 million,
respectively. Realized and unrealized gains and losses on derivative financial
instruments are included in other operating income.
As an accommodation to its loan customers, the Company enters into interest rate
swap agreements. The Company minimizes its risk by matching the positions with a
counter party. These swaps are carried at fair value with changes in fair value
included in other operating income.
The following table discloses the notional amounts and related fair value of the
Company's interest rate swap positions (dollars in thousands) at December 31,
2004 and 2003:
------------------------------------------------------------------------------
Notional Estimated
Amount Fair Value
------------------------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------
Interest Rate Swaps:
Assets $179,744 $155,635 $7,363 $9,487
Liabilities 179,744 155,635 (6,537) (8,659)
------------------------------------------------------------------------------
$ 826 $ 828
------------------------------------------------------------------------------
As part of the Company's residential mortgage activities, the Company enters
into interest rate lock commitments with its customers. The interest rate lock
commitments on residential mortgage loans intended to be held for sale are
considered free standing derivative instruments. The option to sell the mortgage
loans at the time the commitments are made are also free standing derivative
instruments. The change in fair value of these derivative instruments due to
changes in interest rates tend to offset each other.
53
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company, under supervision and with the participation of its
management, including its principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934 (Exchange Act). Based on
this evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective as
of December 31, 2004. There were no significant changes in the Company's
disclosure controls and procedures during 2004. The Report on Management's
Assessment of Internal Control Over Financial Reporting is provided on page 27.
The attestation report of Ernst & Young LLP, the Company's independent
registered public accounting firm, regarding the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004 is provided on
page 28.
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. 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 to enhance, where necessary its procedures
and controls.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information called for by this item is incorporated by reference from
the Company's definitive proxy statement relating to its 2005 Annual Meeting of
Shareholders, which will be filed with the SEC.
The Company has adopted a Code of Ethics for Senior Financial Officers that
applies to its principal executive officer, principal financial officer,
principal accounting officer, controller and any other person performing similar
functions and a Code of Business Conduct and Ethics that applies to all of its
directors and employees, including, without limitation, its principal executive
officer, principal financial officer, principal accounting officer and all of
its employees performing financial or accounting functions. The Company's Code
of Ethics for Senior Financial Officers and Code of Business Conduct and Ethics
are posted on its website, www.commerceonline.com. The Company intends to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of its Code of Ethics for Senior
Financial Officers by posting such information on its website at the location
specified above.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference from
the Company's definitive proxy statement relating to its 2005 Annual Meeting of
Shareholders, which will be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information called for by this item is incorporated by reference from
the Company's definitive proxy statement relating to its 2005 Annual Meeting of
Shareholders, which will be filed with the SEC.
54
The following table details information regarding the Company's existing equity compensation plans as of December 31, 2004:
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights in column (a))
------------------------- ------------------------- ---------------------------------
Equity compensation plans approved by 26,524,136 $17.89 30,526,324
security holders
------------------------- ------------------------- ---------------------------------
Equity compensation plans not approved by N/A N/A N/A
security holders
========================= ========================= =================================
Total 26,524,136 $17.89 30,526,324
========================= ========================= =================================
Item 13. Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference from
the Company's definitive proxy statement relating to its 2005 Annual Meeting of
Shareholders, which will be filed with the SEC.
Item 14. Principal Accountant Fees and Services
The information called for by this item is incorporated by reference from
the Company's definitive proxy statement relating to its 2005 Annual Meeting of
Shareholders, which will be filed with the SEC.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following financial statements of Commerce Bancorp, Inc.
filed as part of this Form 10-K in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(a)(2) Schedules
All schedules have been omitted since the required information is
included in the financial statements or the notes thereto, or is not
applicable.
(a)(3) Exhibits
Exhibit
Number Description of Exhibit Location
-------- ---------------------- --------
3.1 Restated Certificate of Incorporation of the
Company, as amended.
3.2 By-laws of the Company, as amended. Incorporated by reference from the Company's
Form 10-Q for the quarter ended June 30, 2004.
4.1 Certificate of Trust of Commerce Capital Trust II, Incorporated by reference from the Company's
a Delaware statutory trust, filed March 4, 2002. Registration Statement of Form S-3
(Registration No. 333-87512)
55
Exhibits (continued)
4.2 Declaration of Trust of Commerce Capital Trust II, Incorporated by reference from the Company's
dated as of March 4, 2002 among Commerce Bancorp, Registration Statement of Form S-3
Inc., as Depositor, The Bank of New York, as (Registration No. 333-87512)
Property Trustee, The Bank of New York (Delaware),
as Delaware Trustee and the Administrative
Trustees named therein.
4.3 Amended and Restated Declaration of Trust of Incorporated by reference from the Company's
Commerce Capital Trust II, dated as of March 11, Registration Statement of Form S-3
2002, among Commerce Bancorp, Inc., as Sponsor, (Registration No. 333-87512)
The Bank of New York, as Property Trustee, The
Bank of New York (Delaware), as Delaware Trustee,
the Administrative Trustees, and the holders from time
to time of unindividual beneficial interests in the
assets of the Trust, including form of 5.95%
Convertible Trust Preferred Security.
4.4 Indenture, dated as of March 11, 2002, between Incorporated by reference from the Company's
Commerce Bancorp, Inc. and The Bank of New York as Registration Statement of Form S-3
Debenture Trustee, including form of 5.95% Junior (Registration No. 333-87512)
Subordinated Convertible Debenture due March 11,
2032.
4.5 Registration Rights Agreement, dated March 11, Incorporated by reference from the Company's
2002, among Commerce Bancorp, Inc., and Commerce Registration Statement of Form S-3
Capital Trust II, as issuers, and Merrill Lynch & (Registration No. 333-87512)
Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of itself and as
representative of the other initial purchasers.
4.6 Guarantee Agreement, dated as of March 11, 2002, Incorporated by reference from the Company's
between Commerce Bancorp, Inc. and The Bank of New Registration Statement of Form S-3
York, as Guarantee Trustee. (Registration No. 333-87512)
10.1 Ground lease, dated July 1, 1984, among Commerce Incorporated by reference from the Company's
NJ and Group Four Equities, relating to the store Registration Statement on Form S-1, and
in Gloucester Township, New Jersey. Amendments Nos. 1 and 2 thereto (Registration
No. 2-94189)
10.2 Ground lease, dated April 15, 1986, between Incorporated by reference from the Company's
Commerce NJ and Mount Holly Equities, relating to Annual Report on Form 10-K for the fiscal
Commerce NJ's store in Mt. Holly, New Jersey. year ended December 31, 1987.
* 10.4 The Company's Employee Stock Ownership Plan. Incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.
10.10 Ground lease, dated February 15, 1988, between Incorporated by reference from the Company's
Commerce NJ and Holly Ravine Equities of New Annual Report on Form 10-K for the fiscal
Jersey, relating to one of the Commerce NJ's year ended December 31, 1988.
stores in Cherry Hill, New Jersey.
* 10.11 The Company's 1989 Stock Option Plan for Incorporated by reference from the Company's
Non-Employee Directors. Registration Statement on Form S-2 and
Amendments Nos. 1 and 2 thereto (Registration
No. 33-31042)
* 10.12 A copy of employment contracts with Vernon W. Incorporated by reference from the Company's
Hill, II, C. Edward Jordan, Jr., and Peter Annual Report on Form 10-K for the fiscal
Musumeci, Jr., dated January 2, 1992. year ended December 31, 1991.
56
Exhibits (continued)
* 10.13 A copy of the Retirement Plan for Outside Incorporated by reference from the Company's
Directors of Commerce Bancorp, Inc. Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
* 10.14 The Company's 1994 Employee Stock Option Plan. Incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
* 10.15 The Company's 1997 Employee Stock Option Plan. Incorporated by reference from the Company's
Definitive Proxy Statement for its 1997
Annual Meeting of Shareholders, Exhibit A
thereto.
* 10.16 A copy of employment contracts with Dennis M. Incorporated by reference from the Company's
DiFlorio and Robert D. Falese dated January 1, Annual Report on Form 10-K for the fiscal
1998. year ended December 31, 1997.
10.17 Ground lease, dated June 1, 1994, between Commerce Incorporated by reference from the Company's
NJ and Absecon Associates, L.L.C., relating to Annual Report on Form 10-K for the fiscal
Commerce NJ's branch office in Absecon, New Jersey. year ended December 31, 1997.
10.18 Ground lease, dated September 11, 1995, between Incorporated by reference from the Company's
Commerce Shore (merged with and into Commerce NJ Annual Report on Form 10-K for the fiscal
in 2004) and Whiting Equities, L.L.C., relating to year ended December 31, 1997.
Commerce Shore's stores in Manchester Township,
New Jersey.
10.19 Ground lease, dated November 1, 1995, between Incorporated by reference from the Company's
Commerce NJ and Evesboro Associates, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce NJ's stores in Evesham year ended December 31, 1997.
Township, New Jersey.
10.20 Ground lease, dated October 1, 1996, between Incorporated by reference from the Company's
Commerce NJ and Triad Equities, L.L.C., relating Annual Report on Form 10-K for the fiscal
to one of Commerce NJ's stores in Gloucester year ended December 31, 1997.
Township, New Jersey.
10.22 Ground lease, dated January 16, 1998, between Incorporated by reference from the Company's
Commerce NJ and Ewing Equities, L.L.C., relating Annual Report on Form 10-K for the fiscal
to Commerce NJ's store in Ewing, New Jersey. year ended December 31, 1998.
* 10.23 The Company's 1998 Stock Option Plan for Incorporated by reference from the Company's
Non-Employee Directors. Definitive Proxy Statement for its 1998
Annual Meeting of Shareholders, Exhibit A
thereto.
10.25 Ground lease, dated November 30, 1998, between Incorporated by reference from the Company's
Commerce Shore (merged with and into Commerce NJ Annual Report on Form 10-K for the fiscal
in 2004) and Brick/Burnt Tavern Equities, L.L.C., year ended December 31, 1999.
relating to Commerce Shore's stores in Brick, New
Jersey.
10.26 Ground lease, dated November 30, 1998, between Incorporated by reference from the Company's
Commerce Shore (merged with and into Commerce NJ Annual Report on Form 10-K for the fiscal
in 2004) and Aberdeen Equities, L.L.C., relating year ended December 31, 1999.
to Commerce Shore's store in Aberdeen, New Jersey.
10.27 Ground lease, dated November 30, 1998, between Incorporated by reference from the Company's
Commerce NJ and Hamilton/Wash Properties, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce NJ's store in Hamilton year ended December 31, 1999.
Township, New Jersey.
57
Exhibits (continued)
10.28 Ground lease, dated April 2, 1999, between Incorporated by reference from the Company's
Commerce PA and Abington Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce PA's store in Abington year ended December 31, 1999.
Township, Pennsylvania.
10.29 Ground lease, dated October 1999, between Commerce Incorporated by reference from the Company's
PA and Bensalem Equities, L.L.C., relating to Annual Report on Form 10-K for the fiscal
Commerce PA's store in Bensalem, Pennsylvania. year ended December 31, 2000.
10.32 Ground lease, dated March 10, 2000, between Incorporated by reference from the Company's
Commerce PA and Chalfont Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce PA's store in New Britain year ended December 31, 2001.
Township, Pennsylvania.
10.33 Ground lease, dated January 4, 2001, between Incorporated by reference from the Company's
Commerce PA and Warminster Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce PA's store in Warminster year ended December 31, 2001.
Township, Pennsylvania.
10.34 Ground lease dated January 1, 2001, between Incorporated by reference to the Company's
Commerce NJ and Willingboro Equities, L.L.C., Form 10-Q for the quarter ended March 31, 2003.
relating to Commerce NJ's store in Willingboro,
New Jersey.
10.35 Ground lease dated November 27, 2001, between Incorporated by reference to the Company's
Commerce PA and Warrington Equities, L.L.C., Form 10-Q for the quarter ended March 31, 2003.
relating to Commerce PA's store in Warrington,
Pennsylvania.
* 10.36 The Company's Supplemental Executive Retirement Incorporated by reference from the Company's
Plan. Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.
* 10.37 The Company's 2004 Employee Stock Option Plan. Incorporated by reference from the Company's
Form 10-Q for the quarter ended June 30, 2004.
21.1 Subsidiaries of the Company. Incorporated by reference from PART 1, Item
1. "BUSINESS" of this Report on Form 10-K.
23.1 Consent of Ernst & Young LLP.
31.1 Certification of the Company's Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of the Company's Chief Executive
Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensation plan or arrangement.
58
(c) Exhibits and Financial Statement Schedules
All other exhibits and schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission
are not required under the related instruction or are inapplicable and,
therefore, have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
By /s/ Vernon W. Hill, II
------------------------------------------------
Vernon W. Hill, II
Date: March 16, 2005 Chairman of the Board and President
(Principal Executive Officer)
By /s/ Douglas J. Pauls
------------------------------------------------
Douglas J. Pauls
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Vernon W. Hill, II Chairman of the Board, President and Director March 16, 2005
- ----------------------------------------------- (Principal Executive Officer)
Vernon W. Hill, II
/s/ Robert C. Beck Director March 16, 2005
- -----------------------------------------------
Robert C. Beck
/s/ Jack R Bershad Director March 16, 2005
- -----------------------------------------------
Jack R Bershad
/s/ Joseph Buckelew Director March 16, 2005
- -----------------------------------------------
Joseph Buckelew
/s/ Donald T. DiFrancesco Director March 16, 2005
- -----------------------------------------------
Donald T. DiFrancesco
/s/ John K. Lloyd Director March 16, 2005
- -----------------------------------------------
John K. Lloyd
/s/ Morton N. Kerr Director March 16, 2005
- -----------------------------------------------
Morton N. Kerr
/s/ Steven M. Lewis Director March 16, 2005
- -----------------------------------------------
Steven M. Lewis
/s/ George E. Norcross, III Director March 16, 2005
- -----------------------------------------------
George E. Norcross, III
Director March 16, 2005
- -----------------------------------------------
Joseph J. Plumeri
/s/ Daniel J. Ragone Director March 16, 2005
- -----------------------------------------------
Daniel J. Ragone
/s/ William A. Schwartz Jr. Director March 16, 2005
- -----------------------------------------------
William A. Schwartz Jr.
/s/ Joseph T. Tarquini Jr. Director March 16, 2005
- -----------------------------------------------
Joseph T. Tarquini Jr.
59