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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________

Commission File #1-12069


(Exact name of registrant as specified in its charter)

New Jersey
22-2433468
(State or other jurisdiction of
(IRS Employer Identification
incorporation or organization)
Number)
                                  
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey    08034-5400
(Address of Principal Executive Offices)                 (Zip Code)

(856) 751-9000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
Yes    
No __

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
 
 
Yes    
No __

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock
162,091,631
(Title of Class)
(No. of Shares Outstanding as of May 2, 2005)
 
 
 
 



COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX



Page
     
 
     
   
 
     
   
 
     
   
   
 
     
   
 
     
 
     
 
 
     
     
     
 
     
     
     
     






 

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
   
March 31,
 
December 31,
 
(dollars in thousands)
 
2005
 
2004
 
Assets
             
               
Cash and due from banks
 
$
1,066,051
 
$
1,050,806
 
Federal funds sold
   
10,000
       
Cash and cash equivalents
   
1,076,051
   
1,050,806
 
Loans held for sale
   
64,087
   
44,072
 
Trading securities
   
206,113
   
169,103
 
Securities available for sale
   
7,950,643
   
8,044,150
 
Securities held to maturity
   
11,292,995
   
10,463,658
 
(market value 03/05-$11,114,510; 12/04-$10,430,451)
             
Loans
   
9,975,893
   
9,454,611
 
Less allowance for loan losses
   
139,289
   
135,620
 
     
9,836,604
   
9,318,991
 
Bank premises and equipment, net
   
1,077,488
   
1,059,519
 
Other assets
   
365,995
   
351,346
 
Total assets
 
$
31,869,976
 
$
30,501,645
 
               
               
Liabilities
             
               
Deposits:
             
Demand:
             
Noninterest-bearing
 
$
6,877,932
 
$
6,406,614
 
Interest-bearing
   
12,402,424
   
11,604,066
 
Savings
   
6,811,580
   
6,490,263
 
Time
   
3,396,022
   
3,157,942
 
Total deposits
   
29,487,958
   
27,658,885
 
Other borrowed money
   
136,251
   
661,195
 
Other liabilities
   
339,808
   
315,860
 
Long-term debt
   
200,000
   
200,000
 
     
30,164,017
   
28,835,940
 
               
Stockholders' Equity
             
 
             
Common stock, 162,430,559 shares
             
issued (160,635,618 shares in 2004)
   
162,431
   
160,636
 
Capital in excess of par value
   
988,848
   
951,476
 
Retained earnings
   
603,338
   
543,978
 
Accumulated other comprehensive (loss) income
   
(35,927
)
 
20,953
 
     
1,718,690
   
1,677,043
 
               
Less treasury stock, at cost, 838,758 shares
             
issued (795,610 shares in 2004)
   
12,731
   
11,338
 
Total stockholders' equity
   
1,705,959
   
1,665,705
 
               
Total liabilities and stockholders’ equity
 
$
31,869,976
 
$
30,501,645
 
               
See accompanying notes.

1

 
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

   
Three Months Ended
March 31,
 
(dollars in thousands, except per share amounts)
 
2005
 
2004
 
           
Interest income
             
               
Interest and fees on loans
 
$
145,218
 
$
108,213
 
Interest on investment securities
   
224,946
   
163,499
 
Other interest
   
316
   
340
 
Total interest income
   
370,480
   
272,052
 
               
Interest expense
             
               
Interest on deposits:
             
Demand
   
46,671
   
15,943
 
Savings
   
19,080
   
7,786
 
Time
   
18,398
   
14,643
 
Total interest on deposits
   
84,149
   
38,372
 
Interest on other borrowed money
   
4,410
   
448
 
Interest on long-term debt
   
3,020
   
3,020
 
Total interest expense
   
91,579
   
41,840
 
               
Net interest income
   
278,901
   
230,212
 
Provision for loan losses
   
6,250
   
9,500
 
Net interest income after provision for loan losses
   
272,651
   
220,712
 
               
Noninterest income
             
               
Deposit charges and service fees
   
59,964
   
45,481
 
Other operating income
   
42,617
   
40,327
 
Net investment securities gains
   
1,108
   
424
 
Total noninterest income
   
103,689
   
86,232
 
               
               
Noninterest expense
             
               
Salaries and benefits
   
119,301
   
97,340
 
Occupancy
   
37,993
   
28,110
 
Furniture and equipment
   
28,926
   
24,179
 
Office
   
12,677
   
10,920
 
Marketing
   
5,801
   
8,696
 
Other
   
53,708
   
43,005
 
Total noninterest expense
   
258,406
   
212,250
 
               
Income before income taxes
   
117,934
   
94,694
 
Provision for federal and state income taxes
   
40,797
   
32,719
 
Net income
 
$
77,137
 
$
61,975
 
               
               
Net income per common and common equivalent share:
             
Basic
 
$
0.48
 
$
0.40
 
Diluted
 
$
0.45
 
$
0.37
 
Average common and common equivalent
shares outstanding:
             
Basic
   
160,798
   
154,328
 
Diluted
   
176,323
   
171,065
 
Dividends declared, common stock
 
$
0.11
 
$
0.09
 
               
See accompanying notes.

2

 

COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
Three Months Ended
March 31,
 
(dollars in thousands)
   
2005
   
2004
 
Operating activities
             
               
Net income
 
$
77,137
 
$
61,975 
 
Adjustments to reconcile net income to net cash
             
provided by operating activities:
             
Provision for loan losses
   
6,250
   
9,500 
 
Provision for depreciation, amortization and accretion
   
37,173
   
27,294 
 
Gains on sales of securities
   
(1,108
)
 
(424)
Proceeds from sales of loans held for sale
   
158,738
   
191,621
 
Originations of loans held for sale
   
(178,753
)
 
(183,786)
 
Net increase in trading securities
   
(37,010
)
 
(63,901)
 
Decrease (increase) in other assets
   
17,549
   
(25,765)
 
Increase in other liabilities
   
23,778
   
62,857
 
Net cash provided by operating activities
   
103,754
   
79,371
 
               
Investing activities
             
               
Proceeds from the sales of securities available for sale
   
188,152
   
1,561,581
 
Proceeds from the maturity of securities available for sale
   
734,296
   
758,400
 
Proceeds from the maturity of securities held to maturity
   
493,650
   
167,248
 
Purchase of securities available for sale
   
(925,038
)
 
(3,519,396)
 
Purchase of securities held to maturity
   
(1,326,375
)
 
(548,888)
 
Net increase in loans
   
(523,863
)
 
(351,791)
 
Capital expenditures
   
(43,626
)
 
(65,181)
 
Net cash used by investing activities
   
(1,402,804
)
 
(1,998,027)
 
               
Financing activities
             
               
Net increase in demand and savings deposits
   
1,590,993
   
2,030,603
 
Net increase in time deposits
   
238,080
   
150,675
 
Net decrease in other borrowed money
   
(524,944
)
 
(173,532)
 
Dividends paid
   
(17,604
)
 
(14,547)
 
Proceeds from issuance of common stock under
             
dividend reinvestment and other stock plans
   
39,164
   
45,261
 
Other
   
(1,394
)
 
(1,999)
 
Net cash provided by financing activities
   
1,324,295
   
2,036,461
 
               
Increase in cash and cash equivalents
   
25,245
   
117,805
 
Cash and cash equivalents at beginning of period
   
1,050,806
   
910,092
 
Cash and cash equivalents at end of period
 
$
1,076,051
 
$
1,027,897
 
               
               
Supplemental disclosures of cash flow information:
             
Cash paid during the period for:
             
Interest
 
$
91,295
 
$
40,935
 
Income taxes
   
374
   
5,402
 
See accompanying notes.



3



COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)

Three months ended March 31, 2005
                         
(in thousands)
                         
                   
Accumulated
     
       
Capital in
         
Other
     
   
Common
 
Excess of
 
Retained
 
Treasury
 
Comprehensive
     
 
 
Stock
 
Par Value
 
Earnings
 
Stock
 
Income (Loss)
 
Total
 
                           
Balances at December 31, 2004
 
$
160,636
 
$
951,476
 
$
543,978
 
$
(11,338
)
$
20,953
 
$
1,665,705
 
Net income
               
77,137
               
77,137
 
Other comprehensive loss, net of tax
                                     
Unrealized loss on securities (pre-tax $88,963)
                           
(56,710
)
 
(56,710
)
Reclassification adjustment (pre-tax $262)
                           
(170
)
 
(170
)
Other comprehensive loss
                                 
(56,880
)
Total comprehensive income
                                 
20,257
 
Cash dividends
               
(17,774
)
             
(17,774
)
Shares issued under dividend reinvestment
                                     
and compensation and benefit plans (1,795 shares)
   
1,795
   
37,369
                     
39,164
 
Other
         
3
   
(3
)
 
(1,393
)
       
(1,393
)
Balances at March 31, 2005
 
$
162,431
 
$
988,848
 
$
603,338
 
$
(12,731
)
$
(35,927
)
$
1,705,959
 
                                       
                                       
See accompanying notes.


 

4



COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A. Consolidated Financial Statements

The consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 1 - Significant Accounting Policies of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature.

These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the registrant's Annual Report on Form 10-K for the year ended December 31, 2004. The results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

The consolidated financial statements include the accounts of Commerce Bancorp, Inc. and its consolidated subsidiaries. All material intercompany transactions have been eliminated. Certain amounts from prior years have been reclassified to conform with 2005 presentation.

Per share data and other appropriate share information for 2004 have been restated for the two-for-one stock split in the form of a 100% stock dividend effective March 7, 2005.

B. 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 Delaware business trust. 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.

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 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.

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 I - Net Income Per Share for illustration of the if-converted method.
 
5

 

C.
Bank Premises and Equipment
 
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. As of March 31, 2005 and December 31, 2004, bank premises and equipment in progress was $109.4 million and $109.6 million, respectively.

D. Commitments and Other

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and unadvanced loan commitments. Management does not anticipate any material losses as a result of these transactions. 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 March 31, 2005.

E. Comprehensive Income

Total comprehensive income, which for the Company included net income and changes in unrealized gains and losses on the Company's available for sale securities, amounted to $20.3 million and $143.8 million, respectively, for the three months ended March 31, 2005 and 2004. 

F. New Accounting Standards

On April 14, 2005 the Securities and Exchange Commission (SEC) delayed the implementation date of FASB Statement No. 123R, “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 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 net income per share. FAS 123R permits public companies to adopt its requirements using one of two methods for adoption: 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 unvested awards granted prior to the effective date. A modified retrospective method includes the requirements of the modified prospective method but also permits entities to restate prior period presentations. FAS 123R was originally required to be adopted no later than July 1, 2005; however, due to the SEC’s deferral of the implementation date, the Company must now adopt no later than January 1, 2006. The Company plans to adopt FAS 123R on January 1, 2006 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 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 for the periods presented, 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 in Note G - - Stock-Based Compensation.

 
6

 

G.
Stock-Based Compensation
 
As stated in Note F - New Accounting Standards, the Company continued to follow APB 25 and related Interpretations to account for its stock-based compensation plans through the first three months of 2005. If the Company had accounted for stock options under the fair value provisions of FAS 123, net income and net income per share would have been as follows (in thousands, except per share amounts):

   
Three Months Ended
March 31,
 
   
2005
 
2004
 
     
Reported net income
 
$
77,137
 
$
61,975
 
Less: Stock option compensation expense
             
determined under fair value method, net of tax
   
(4,031
)
 
(3,420
)
Pro forma net income, basic
 
$
73,106
 
$
58,555
 
Add: Interest expense on Convertible Trust
             
Capital Securities, net of tax
   
1,963
   
1,963
 
Pro forma net income, diluted
 
$
75,069
 
$
60,518
 
               
Reported net income per share:
             
Basic
 
$
0.48
 
$
0.40
 
Diluted
   
0.45
   
0.37
 
               
Pro forma net income per share:
             
Basic
 
$
0.45
 
$
0.38
 
Diluted
 
$
0.43
 
$
0.35
 
               

The fair value of options granted in 2005 and 2004 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 4.05% to 3.09%, dividend yields of 1.47% to 1.33%, volatility factors of the expected market price of the Company's common stock of .267 to .255 and weighted average expected lives of the options of 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.
 
7


 
 
H.
Segment Information
 
The Company operates one reportable segment of business, Community Banks, which includes all of the Company’s banking subsidiaries. Through its Community Banks, the Company provides a broad range of retail and commercial banking services and corporate trust services. Parent/Other includes the holding company, Commerce Insurance Services, Inc. and Commerce Capital Markets, Inc.

Selected segment information is as follows (in thousands):
 
                           
   
Three Months Ended
March 31, 2005
 
Three Months Ended
March 31, 2004
 
   
Community
 
Parent/
     
Community
 
Parent/
     
   
Banks
 
Other
 
Total
 
Banks
 
Other
 
Total
 
Net interest income
 
$
280,955
 
$
(2,054
)
$
278,901
 
$
231,836
 
$
(1,624
)
$
230,212
 
Provision for loan losses
   
6,250
   
-
   
6,250
   
9,500
   
-
   
9,500
 
Net interest income after provision
   
274,705
   
(2,054
)
 
272,651
   
222,336
   
(1,624
)
 
220,712
 
Noninterest income
   
75,296
   
28,393
   
103,689
   
58,133
   
28,099
   
86,232
 
Noninterest expense
   
236,769
   
21,637
   
258,406
   
189,353
   
22,897
   
212,250
 
Income before income taxes
   
113,232
   
4,702
   
117,934
   
91,116
   
3,578
   
94,694
 
Income tax expense
   
39,092
   
1,705
   
40,797
   
31,207
   
1,512
   
32,719
 
Net income
 
$
74,140
 
$
2,997
 
$
77,137
 
$
59,909
 
$
2,066
 
$
61,975
 
                                       
                                       
Average assets (in millions)
 
$
28,714
 
$
2,383
 
$
31,097
 
$
21,416
 
$
2,076
 
$
23,492
 
                             

I. Net income Per Share

The calculation of net income per share follows (in thousands, except for per share amounts):

   
Three Months Ended
March 31,
 
   
2005
 
2004
 
           
Basic:
             
Net income available to common shareholders - basic
 
$
77,137
 
$
61,975
 
               
Average common shares outstanding - basic
   
160,798
   
154,328
 
               
Net income per common share - basic
 
$
0.48
 
$
0.40
 
               
               
Diluted:
             
Net income
 
$
77,137
 
$
61,975
 
Add interest expense on Convertible Trust Capital Securities,
             
net of tax
   
1,963
   
1,963
 
Net income available to common shareholders - diluted
 
$
79,100
 
$
63,938
 
               
               
Average common shares outstanding
   
160,798
   
154,328
 
Additional shares considered in diluted computation assuming:
             
Exercise of stock options
   
7,943
   
9,155
 
Conversion of Convertible Trust Capital Securities
   
7,582
   
7,582
 
               
Average common shares outstanding - diluted
   
176,323
   
171,065
 
               
Net income per common share - diluted
 
$
0.45
 
$
0.37
 
               


8


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Executive Summary

During the first quarter of 2005, the Company experienced strong deposit growth, the primary driver of the Company’s success. Total assets grew to $31.9 billion, an increase of 28% over March 31, 2004, while total deposits grew 29%. Net income increased 24% to $77.1 million despite margin compression caused by the existing interest rate environment. Diluted net income per share was $.45, up 22%, from $.37 for the three months ended March 31, 2004.

Per share data and other appropriate share information for 2004 have been restated for the two-for-one stock split in the form of a 100% stock dividend effective March 7, 2005.

The Company has identified the policy related to the allowance for loan losses as being critical. The foregoing critical accounting policy is more fully described in the Company’s annual report on Form 10-K for the year ended December 31, 2004. During the current quarter, there were no material changes to the estimates or methods by which estimates are derived with regard to the policy related to the allowance for loan losses.

Capital Resources

At March 31, 2005, stockholders' equity totaled $1.7 billion or 5.35% of total assets, compared to $1.7 billion or 5.46% of total assets at December 31, 2004.

The Company and its subsidiaries are subject to risk-based capital standards issued by bank regulatory authorities. Under these standards, Tier 1 capital includes stockholders’ equity, as adjusted for certain items. The Company makes two adjustments in calculating regulatory capital. The first adjustment is to exclude from capital the unrealized appreciation or depreciation in its available for sale securities portfolio. The second adjustment is to add to capital the Convertible Trust Capital Securities. Total capital is comprised of all the components of Tier 1 capital plus the allowance for loan losses.

The following table presents the Company’s and Commerce NJ’s risk-based and leverage ratios at March 31, 2005 and 2004. The 2004 ratios for Commerce NJ have been adjusted to reflect the consolidation of Commerce Shore during 2004 (amounts in thousands).

           
Per Regulatory Guidelines
 
   
Actual
 
Minimum
 
"Well Capitalized"
 
   
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
                           
March 31, 2005:
                         
Company
                                     
Risk based capital ratios:
                                     
Tier 1
 
$
1,932,767
   
 12.46%
 
$
620,292
   
 4.00%
 
$
930,437
   
 6.00%
 
Total capital
   
2,077,393
   
13.40
   
1,240,583
   
8.00
   
1,550,729
   
10.00
 
Leverage ratio
   
1,932,767
   
6.22
   
1,243,373
   
4.00
   
1,554,216
   
5.00
 
Commerce NJ
                                     
Risk based capital ratios:
                                     
Tier 1
 
$
1,317,351
   
 11.50%
 
$
458,018
   
 4.00%
 
$
687,027
   
 6.00%
 
Total capital
   
1,424,084
   
12.44
   
916,036
   
8.00
   
1,145,045
   
10.00
 
Leverage ratio
   
1,317,351
   
6.01
   
877,124
   
4.00
   
1,096,404
   
5.00
 
                                       

9



           
Per Regulatory Guidelines
 
   
Actual
     
Minimum
 
"Well Capitalized"
 
   
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
                           
March 31, 2004:
                                     
Company
                                     
Risk based capital ratios:
                                     
Tier 1
 
$
1,564,769
   
  12.70%
 
$
493,027
   
  4.00%
 
$
739,540
   
 6.00%
 
Total capital
   
1,682,098
   
13.65
   
986,053
   
8.00
   
1,232,567
   
10.00
 
Leverage ratio
   
1,564,769
   
6.68
   
937,630
   
4.00
   
1,172,037
   
5.00
 
Commerce NJ
                                     
Risk based capital ratios:
                                     
Tier 1
 
$
985,163
   
  11.04%
 
$
356,863
   
  4.00%
 
$
535,295
   
 6.00%
 
Total capital
   
1,075,718
   
12.06
   
713,726
   
8.00
   
892,158
   
10.00
 
Leverage ratio
   
985,163
   
6.14
   
641,893
   
4.00
   
802,366
   
5.00
 

At March 31, 2005, the Company's consolidated capital levels and each of the Company's bank subsidiaries met the regulatory definition of a "well capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%. Management believes that as of March 31, 2005, the Company and its subsidiaries meet all capital adequacy requirements to which they are subject.

Deposits

Total deposits at March 31, 2005 were $29.5 billion, up $6.6 billion, or 29% over total deposits of $22.9 billion at March 31, 2004, and up by $1.8 billion, or 7% from year-end 2004. Deposit growth during the first three months of 2005 included core deposit growth in all product and customer categories. The Company regards core deposits as all deposits other than public certificates of deposit. Core deposit growth by type of customer is as follows (in millions):

   
March 31, 2005
 
% of
Total
 
March 31, 2004
 
% of
Total
 
Annual Growth %
 
                       
Consumer
 
$
12,681
   
45%
 
$
10,511
   
48%
 
 
21%
 
                                 
Commercial
   
10,150
   
36
   
7,575
   
35
   
34
 
                                 
Government
   
5,227
   
19
   
3,620
   
17
   
44
 
                                 
Total
 
$
28,058
   
100%
 
$
21,706
   
100%
 
 
29%
 
                                 

Comparable store core deposit growth is measured as the year over year percentage increase in core deposits at the balance sheet date. At March 31, 2005, the comparable store core deposit growth for stores open two years or more was 22% and for stores open one year or more was 29%.

Interest Rate Sensitivity and Liquidity

The Company's risk of loss arising from adverse changes in the fair market value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Company's asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The guidelines established by ALCO are reviewed and approved by the Company's Board of Directors.
 
 
10


Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of the Company's interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.

The Company's income simulation model analyzes interest rate sensitivity by projecting net income over the next 24 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Company's model projects a proportionate plus 200 and minus 100 basis point change during the next year, with rates remaining constant in the second year. The Company's ALCO policy has established that interest income sensitivity will be considered acceptable if net income in the above interest rate scenario is within 10% of net income in the flat rate scenario in the first year and within 15% over the 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 March 31, 2005 and 2004 of a plus 200 and minus 100 basis point change in interest rates.

   
Basis Point Change
 
   
Plus 200
 
Minus 100
 
       
March 31, 2005:
             
Twelve Months
   
4.46
%
 
(2.87
)%
Twenty Four Months
   
7.58
%
 
(8.66
)%
               
March 31, 2004:
             
Twelve Months
   
0.98
%
 
(7.81
)%
Twenty Four Months
   
10.22
%
 
(7.15
)%
               

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 and minus 100 basis point change would result in the loss of 45% or more of the excess of market value over book value in the current rate scenario. At March 31, 2005, the market value of equity model indicates an acceptable level of interest rate risk.


11


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. At March 31, 2005, the average life of the Company’s core deposit transaction accounts was 15.0 years.
 
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 March 31, 2005 (in millions, except for per share amounts):

   
Market Value
     
   
Of Equity
 
Per Share
 
               
Plus 200 basis point
 
$
6,878
 
$
42.34
 
               
Current Rate
 
$
6,648
 
$
40.93
 
               
Minus 100 basis point
 
$
5,715
 
$
35.19
 

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 March 31, 2005 the Company had in excess of $13.7 billion in immediately available liquidity which includes unpledged securities that could be used for collateralized borrowings, cash on hand, and borrowing capacities under existing lines of credit. During the first three months of 2005, deposit growth, short-term borrowings and maturing investment securities were used to fund growth in the loan portfolio and purchase additional investment securities.

Short-Term Borrowings

Short-term borrowings, or other borrowed money, consist primarily of securities sold under agreements to repurchase and overnight lines of credit, and are used to meet short-term funding needs. During the first three months of 2005, the Company reduced its short-term borrowings, primarily through increased deposits. At March 31, 2005, short-term borrowings aggregated $136.3 million and had an average rate of 2.48%, as compared to $661.2 million at an average rate of 2.30% at December 31, 2004.

Interest Earning Assets

The Company’s cash flow from deposit growth and repayments from its investment portfolio totaled approximately $3.1 billion for the first three months of 2005. This significant cash flow provides the Company with ongoing reinvestment opportunities as interest rates change. For the three month period ended March 31, 2005, interest earning assets increased $1.3 billion from $28.2 billion to $29.5 billion. This increase was primarily in investment securities and the loan portfolio as described below.


12


Loans

During the first three months of 2005, loans increased $521.3 million from $9.5 billion to $10.0 billion. All segments of the loan portfolio experienced growth in the first three months of 2005.

The following table summarizes the loan portfolio of the Company by type of loan as of the dates shown.

   
March 31,
 
December 31,
 
   
2005
 
2004
 
   
(in thousands)
 
Commercial:
             
Term
 
$
1,376,663
 
$
1,283,476
 
Line of credit
   
1,221,096
   
1,168,542
 
     
2,597,759
   
2,452,018
 
               
Owner-occupied
   
2,100,289
   
1,998,203
 
     
4,698,048
   
4,450,221
 
               
Consumer:
             
Mortgages (1-4 family residential)
   
1,447,365
   
1,340,009
 
Installment
   
134,965
   
132,646
 
Home equity
   
1,845,963
   
1,799,841
 
Credit lines
   
70,405
   
69,079
 
     
3,498,698
   
3,341,575
 
Commercial real estate:
             
Investor developer
   
1,553,908
   
1,455,891
 
Construction
   
225,239
   
206,924
 
     
1,779,147
   
1,662,815
 
Total loans
 
$
9,975,893
 
$
9,454,611
 
 
Investments
 
In total, for the first three months of 2005, securities increased $772.8 million from $18.7 billion to $19.4 billion. The available for sale portfolio remained at $8.0 billion during the first three months of 2005 and the held to maturity portfolio increased $829.3 million to $11.3 billion at March 31, 2005 from $10.5 billion at year-end 2004. The portfolio of trading securities increased $37.0 million from year-end 2004 to $206.1 million at March 31, 2005.



13


 

Detailed below is information regarding the composition and characteristics of the Company’s investment portfolio, excluding trading securities, as of March 31, 2005.

               
   
Available
 
Held to
     
Product Description
 
For Sale
 
Maturity
 
Total
 
   
(in millions)
 
Mortgage-backed Securities:
                   
Federal Agencies Pass Through
                   
Certificates (AAA Rated)
 
$
1,666
 
$
2,491
 
$
4,157
 
                     
Collateralized Mortgage
                   
Obligations (AAA Rated)
   
5,887
   
7,811
   
13,698
 
                     
U.S. Government agencies/Other
   
398
   
991
   
1,389
 
                     
Total
 
$
7,951
 
$
11,293
 
$
19,244
 
                     
Duration (in years)
   
3.02
   
4.17
   
3.69
 
Average Life (in years)
   
3.62
   
5.16
   
4.52
 
Quarterly Average Yield
   
4.90
%
 
4.92
%
 
4.91
%
                     
 
At March 31, 2005, the after tax depreciation of the Company’s available for sale portfolio was $35.9 million.

The Company’s mortgage-backed securities (MBS) portfolio comprises 92% of the total investment portfolio. The MBS portfolio consists of Federal Agencies Pass-Through Certificates and Collateralized Mortgage Obligations (CMO’s) which are issued by federal agencies and other private sponsors. The Company’s investment policy does not permit investments in inverse floaters, IO’s, PO’s and other similar issues.

A summary of the amortized cost and market value of securities available for sale and securities held to maturity (in thousands) at March 31, 2005 and December 31, 2004 follows:

       
   
At March 31, 2005
 
   
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
 
Market
Value
 
U.S. Government agency and mortgage-backed obligations
 
$
7,956,392
 
$
12,742
 
$
(81,539
)
$
7,887,595
 
Obligations of state and political subdivisions
   
9,555
   
103
         
9,658
 
Equity securities
   
9,679
   
11,859
         
21,538
 
Other
   
31,251
   
601
         
31,852
 
Securities available for sale
 
$
8,006,877
 
$
25,305
 
$
(81,539
)
$
7,950,643
 
                           
U.S. Government agency and mortgage-backed obligations
 
$
10,768,421
 
$
11,441
 
$
(191,641
)
$
10,588,221
 
Obligations of state and political subdivisions
   
431,850
   
1,856
   
(141
)
 
433,565
 
Other
   
92,724
               
92,724
 
Securities held to  maturity
 
$
11,292,995
 
$
13,297
 
$
(191,782
)
$
11,114,510
 



14



   
At December 31, 2004
 
   
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
 
Market
Value
 
U.S. Government agency and mortgage-backed obligations
 
$
7,884,113
 
$
40,141
 
$
(21,438
)
$
7,902,816
 
Obligations of state and political subdivisions
   
87,605
   
305
         
87,910
 
Equity securities
   
10,129
   
13,174
         
23,303
 
Other
   
29,312
   
809
         
30,121
 
Securities available for sale
 
$
8,011,159
 
$
54,429
 
$
(21,438
)
$
8,044,150
 
                           
U.S. Government agency and mortgage-backed obligations
 
$
9,967,041
 
$
43,982
 
$
(81,028
)
$
9,929,995
 
Obligations of state and political subdivisions
   
398,963
   
3,867
   
(28
)
 
402,802
 
Other
   
97,654
               
97,654
 
Securities held to  maturity
 
$
10,463,658
 
$
47,849
 
$
(81,056
)
$
10,430,451
 

Gross gains and losses on securities sold during the first quarter of 2005 were $1.1 million and $23 thousand, respectively.

During the first quarter of 2005, $69.4 million of securities were sold which had unrealized losses at December 31, 2004. Gross gains and losses on these securities sold were $172 thousand and $23 thousand, respectively.

Net Income

Net income for the first quarter of 2005 was $77.1 million, an increase of $15.1 million or 24% over the $62.0 million recorded for the first quarter of 2004. On a per share basis, diluted net income for the first quarter of 2005 was $0.45 per common share compared to $0.37 per common share for the first quarter of 2004.

Return on average assets (ROA) and return on average equity (ROE) for the first quarter of 2005 were 0.99% and 17.98%, respectively, compared to 1.06% and 17.91%, respectively, for the same 2004 period. The decrease in ROA was primarily due to average asset growth of 32% exceeding net income growth, which was impacted by net interest margin compression due to the flattening yield curve.


15


Net Interest Income

Net interest income totaled $278.9 million for the first quarter of 2005, an increase of $48.7 million or 21% from $230.2 million in the first quarter of 2004. The increase in net interest income was due to the Company’s continued ability to grow deposits as well as its loan and investment portfolios, offset by rate changes due to the existing interest rate environment.

On a tax equivalent basis, the Company recorded $283.0 million in net interest income in the first quarter of 2005, an increase of $48.6 million or 21% over the first quarter of 2004. As shown below, the increase in net interest income on a tax equivalent basis was due to volume increases in the Company’s earning assets, which were fueled by the Company’s continued growth of low-cost core deposits (in millions).

                     
Quarter Ended
 
Volume
 
Rate
 
Total
  %    
March 31
 
Increase
 
Change
 
Increase
   Increase    
                     
2005 vs. 2004
 
$
70.6
 
 
($22.0)
 
$
48.6
 
 
21% 
 
 
                             
 
 
The net interest margin for the first quarter of 2005 was 4.04%, down 35 basis points from the margin for the first quarter of 2004 and down 12 basis points from the margin for the fourth quarter of 2004. The decrease in the net interest margin was primarily due to the flattening yield curve.

The following table sets forth balance sheet items on a daily average basis for the three months ended March 31, 2005, December 31, 2004 and March 31, 2004 and presents the daily average interest earned on assets and paid on liabilities for such periods.





16


 
 


Average Balances and Net Interest Income

   
March 2005
 
December 2004
 
March 2004
 
   
Average
     
Average
 
Average
     
Average
 
Average
     
Average
 
(dollars in thousands)
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Earning Assets
                                     
Investment securities
                                                       
Taxable
 
$
18,192,721
 
$
221,886
   
4.95
%
$
17,294,817
 
$
211,263
   
4.86
%
$
13,295,903
 
$
159,648
   
4.83
%
Tax-exempt
   
405,771
   
3,313
   
3.31
   
457,654
   
5,628
   
4.89
   
256,628
   
3,860
   
6.05
 
Trading
   
111,732
   
1,395
   
5.06
   
180,711
   
2,898
   
6.38
   
161,701
   
2,065
   
5.14
 
Total investment securities
   
18,710,224
   
226,594
   
4.91
   
17,933,182
   
219,789
   
4.88
   
13,714,232
   
165,573
   
4.86
 
Federal funds sold
   
50,311
   
316
   
2.55
   
54,620
   
261
   
1.90
   
144,297
   
340
   
0.95
 
Loans
                                                       
Commercial mortgages
   
3,527,626
   
55,095
   
6.33
   
3,357,348
   
52,747
   
6.25
   
2,793,159
   
42,782
   
6.16
 
Commercial
   
2,327,438
   
35,581
   
6.20
   
2,186,627
   
31,852
   
5.80
   
1,878,353
   
24,535
   
5.25
 
Consumer
   
3,423,574
   
49,974
   
5.92
   
3,233,755
   
47,550
   
5.85
   
2,603,037
   
36,936
   
5.71
 
Tax-exempt
   
391,510
   
7,028
   
7.28
   
350,414
   
6,429
   
7.30
   
337,313
   
6,092
   
7.26
 
Total loans
   
9,670,148
   
147,678
   
6.19
   
9,128,144
   
138,578
   
6.04
   
7,611,862
   
110,345
   
5.83
 
Total earning assets
 
$
28,430,683
 
$
374,588
   
5.35
%
$
27,115,946
 
$
358,628
   
5.26
%
$
21,470,391
 
$
276,258
   
5.17
%
                                                         
Sources of Funds
                                                       
Interest-bearing liabilities
                                                       
Savings
 
$
6,558,587
 
$
19,080
   
1.18
%
$
6,289,379
 
$
16,270
   
1.03
%
$
4,492,847
 
$
7,786
   
0.70
%
Interest-bearing demand
   
11,924,947
   
46,671
   
1.59
   
11,348,516
   
36,042
   
1.26
   
8,986,070
   
15,943
   
0.71
 
Time deposits
   
2,566,074
   
13,740
   
2.17
   
2,472,670
   
12,436
   
2.00
   
2,430,589
   
11,323
   
1.87
 
Public funds
   
781,282
   
4,658
   
2.42
   
888,209
   
4,255
   
1.91
   
968,513
   
3,320
   
1.38
 
Total deposits
   
21,830,890
   
84,149
   
1.56
   
20,998,774
   
69,003
   
1.31
   
16,878,019
   
38,372
   
0.91
 
                                                         
Other borrowed money
   
703,223
   
4,410
   
2.54
   
545,073
   
2,930
   
2.14
   
174,746
   
448
   
1.03
 
Long-term debt
   
200,000
   
3,020
   
6.12
   
200,000
   
3,020
   
6.01
   
200,000
   
3,020
   
6.07
 
Total deposits and interest-bearing
                                                       
liabilities
   
22,734,113
   
91,579
   
1.63
   
21,743,847
   
74,953
   
1.37
   
17,252,765
   
41,840
   
0.98
 
Noninterest-bearing funds (net)
   
5,696,570
               
5,372,099
               
4,217,626
             
Total sources to fund earning assets
 
$
28,430,683
   
91,579
   
1.31
 
$
27,115,946
   
74,953
   
1.10
 
$
21,470,391
   
41,840
   
0.78
 
                                                         
Net interest income and
                                                       
margin tax-equivalent basis
       
$
283,009
   
4.04
%
     
$
283,675
   
4.16
%
     
$
234,418
   
4.39
%
                                                         
Other Balances
                                                       
Cash and due from banks
 
$
1,180,375
             
$
1,223,722
             
$
1,007,182
             
Other assets
   
1,625,412
               
1,522,258
               
1,129,880
             
Total assets
   
31,096,724
               
29,725,307
               
23,491,544
             
Total deposits
   
28,220,513
               
27,105,818
               
21,478,730
             
Demand deposits (noninterest-
bearing)
   
6,389,623
               
6,107,044
               
4,600,711
             
Other liabilities
   
256,677
               
248,762
               
253,890
             
Stockholders' equity
   
1,716,311
               
1,625,654
               
1,384,178
             

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.



17



Noninterest Income
 
Noninterest income totaled $103.7 million for the first quarter of 2005, an increase of $17.5 million or 20% from $86.2 million in the first quarter of 2004. Deposit charges and service fees increased $14.5 million, or 32%, during the first quarter of 2005 as compared to the same period in 2004, primarily due to the Company’s growth in deposits. Other operating income, which includes the Company’s insurance and capital markets divisions, increased by $2.3 million, or 6%. The increase in other operating income in more fully depicted in the following chart (in thousands).
 

   
Three Months Ended
 
   
March 31,
 
   
2005
 
2004
 
Other operating income:
             
Insurance
 
$
19,789
 
$
18,336
 
Capital Markets
   
6,441
   
9,727
 
Loan brokerage fees
   
2,759
   
3,053
 
Other
   
13,628
   
9,211
 
Total other
 
$
42,617
 
$
40,327
 
 
 
Commerce Capital Markets, Inc. (CCMI) revenues decreased $3.3 million, or 34%, during the first quarter of 2005 as compared to the same period in 2004, which was related in part to the Company’s decision to exit the negotiated government public finance business during the third quarter of 2004 as well as decreased municipal trading results. All other operating income increased $4.4 million, or 48%, primarily due to increased gains on sale of SBA loans, letter of credit fees, revenues generated by the Company’s leasing division and income from other investments.

Noninterest Expense

For the first quarter of 2005, noninterest expense totaled $258.4 million, an increase of $46.2 million, or 22%, over the same period in 2004. Contributing to this increase was new store activity over the past twelve months, with the number of stores increasing from 278 at March 31, 2004 to 319 at March 31, 2005. With the addition of these new offices, staff, facilities, and related expenses rose accordingly.

Other noninterest expense increased $10.7 million, or 25%, over the first quarter of 2004. The increase in other noninterest expense is depicted in the following chart (in thousands).
 

   
Three Months Ended
 
   
March 31,
 
   
2005
 
2004
 
Other noninterest expense:
             
Business development costs
 
$
7,115
 
$
5,996
 
Bank-card related service charges
   
10,914
   
7,523
 
Professional services/Insurance
   
9,786
   
7,357
 
Provisions for non-credit-related losses
   
7,672
   
5,403
 
Other
   
18,221
   
16,726
 
Total other
 
$
53,708
 
$
43,005
 
 
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 overall growth.

The Company's operating efficiency ratio (noninterest expenses, less other real estate expense, divided by net interest income plus noninterest income excluding non-recurring gains) was 67.70% for the first three months of 2005 as compared to 67.12% for the same 2004 period. The Company's efficiency ratio remains above its peer group primarily due to its aggressive growth expansion activities.
 
 
 
18


Loan and Asset Quality

Total non-performing assets (non-performing loans and other real estate, excluding loans past due 90 days or more and still accruing interest) at March 31, 2005 were $32.8 million, or 0.10% of total assets compared to $33.5 million or 0.11% of total assets at December 31, 2004 and $32.4 million or 0.13% of total assets at March 31, 2004.

Total non-performing loans (non-accrual loans and restructured loans, excluding loans past due 90 days or more and still accruing interest) at March 31, 2005 were $32.0 million or 0.32% of total loans compared to $32.8 million or 0.35% of total loans at December 31, 2004 and $30.5 million or 0.39% of total loans at March 31, 2004. At March 31, 2005, loans past due 90 days or more and still accruing interest amounted to $233 thousand compared to $602 thousand at December 31, 2004 and $696 thousand at March 31, 2004. Additional loans considered as potential problem loans by the Company's internal loan review department ($34.7 million at March 31, 2005, compared to $37.7 million at December 31, 2004 and $35.8 million at March 31, 2004) have been evaluated as to risk exposure in determining the adequacy of the allowance for loan losses.

During the first quarter of 2005, consumer non-accrual loans decreased by $1.4 million, which primarily related to a partial charge-off on one loan for $550 thousand and two smaller loans for approximately $600 thousand that were paid off during the quarter. The decrease in consumer non-accrual loans led to the overall decrease in non-performing assets during the first three months of 2005. The overall asset quality of the Company, as measured in terms of non-performing assets to total assets, coverage ratios and non-performing assets to stockholders’ equity, remained strong.


19


The following summary presents information regarding non-performing loans and assets as of March 31, 2005 and the preceding four quarters (dollar amounts in thousands).

   
March 31,
2005
 
December 31,
2004
 
September 30,
2004
 
June 30,
2004
 
March 31,
2004
 
Non-accrual loans:
                     
Commercial
 
$
18,376
 
$
17,874
 
$
22,647
 
$
17,382
 
$
19,701
 
Consumer
   
8,723
   
10,138
   
9,784
   
11,675
   
9,984
 
Real estate:
                               
Construction
   
178
                         
Mortgage
   
1,290
   
1,317
   
1,251
   
675
   
810
 
Total non-accrual loans
   
28,567
   
29,329
   
33,682
   
29,732
   
30,495
 
                                 
Restructured loans:
                               
Commercial
   
3,422
   
3,518
   
3,614
   
1
   
1
 
Total restructured loans
   
3,422
   
3,518
   
3,614
   
1
   
1
 
                                 
Total non-performing loans
   
31,989
   
32,847
   
37,296
   
29,733
   
30,496
 
                                 
Other real estate
   
777
   
626
   
972
   
653
   
1,890
 
                                 
Total non-performing assets
   
32,766
   
33,473
   
38,268
   
30,386
   
32,386
 
                                 
Loans past due 90 days or more
                               
and still accruing
   
233
   
602
   
614
   
318
   
696
 
                                 
Total non-performing assets and
                               
loans past due 90 days or more
 
$
32,999
 
$
34,075
 
$
38,882
 
$
30,704
 
$
33,082
 
                                 
                                 
Total non-performing loans as a
                               
percentage of total period-end loans
   
0.32
%
 
0.35
%
 
0.42
%
 
0.36
%
 
0.39
%
                                 
Total non-performing assets as a
                               
percentage of total period-end assets
   
0.10
%
 
0.11
%
 
0.13
%
 
0.11
%
 
0.13
%
                                 
Total non-performing assets and loans
                               
past due 90 days or more as a
                               
percentage of total period-end assets
   
0.10
%
 
0.11
%
 
0.14
%
 
0.11
%
 
0.13
%
                                 
Allowance for loan losses as a percentage
                               
of total non-performing loans
   
435
%
 
413
%
 
353
%
 
419
%
 
385
%
                                 
Allowance for loan losses as a percentage
                               
of total period-end loans
   
1.40
%
 
1.43
%
 
1.48
%
 
1.50
%
 
1.51
%
                                 
Total non-performing assets and loans
                               
past due 90 days or more as a
                               
percentage of stockholders' equity and
                               
allowance for loan losses
   
2
%
 
2
%
 
2
%
 
2
%
 
2
%


20


The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data (in thousands):

   
Three Months Ended
 
Year Ended
 
   
March 31,
 
December 31,
 
   
2005
 
2004
 
2004
 
Balance at beginning of period
 
$
135,620
 
$
112,057
 
$
112,057
 
Provisions charged to operating expenses
   
6,250
   
9,500
   
39,238
 
     
141,870
   
121,557
   
151,295
 
                     
Recoveries of loans previously charged-off:
                   
Commercial
   
651
   
156
   
1,000
 
Consumer
   
833
   
270
   
1,123
 
Commercial real estate
   
50
   
47
   
52
 
Total recoveries
   
1,534
   
473
   
2,175
 
                     
Loans charged-off:
                   
Commercial
   
(2,602
)
 
(2,293
)
 
(9,416
)
Consumer
   
(1,487
)
 
(772
)
 
(6,733
)
Commercial real estate
   
(26
)
 
(1,636
)
 
(1,701
)
Total charge-offs
   
(4,115
)
 
(4,701
)
 
(17,850
)
Net charge-offs
   
(2,581
)
 
(4,228
)
 
(15,675
)
                     
Balance at end of period
 
$
139,289
 
$
117,329
 
$
135,620
 
                     
                     
Net charge-offs as a percentage of average loans outstanding
   
0.11
%
 
0.22
%
 
0.19
%
                     
Net Reserve Additions
 
$
3,669
 
$
5,272
 
$
23,563
 

Net charge-offs as a percentage of average loans outstanding during the first three months of 2005 decreased to 0.11% as compared to 0.22% for the same period in 2004. This decrease was primarily attributable to an increase in total recoveries of loans previously charged-off of $1.1 million. Also contributing to the decrease in net charge-offs as a percentage of average loans oustanding was a slight decrease in total charge-offs. Commercial and consumer loan charge-offs increased by $1.0 million during the first three months of 2005 which were offset by a decrease in commercial real estate charge-offs of $1.6 million. Commercial real estate charge-offs during the first three months of 2004 reflected one large credit for $1.6 million. The net reserve additions for the first three months of 2005 were reflective of the overall credit quality of the Company’s loan portfolio.

The Company considers the allowance for loan losses of $139.3 million adequate to cover probable losses inherent in the loan portfolio at March 31, 2005. 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.


21


Forward-Looking Statements

The Company may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this Form 10-Q), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company's control). The words "may", "could", "should", "would", believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB"); inflation; interest rates, market and monetary fluctuations; the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; future acquisitions; the expense savings and revenue enhancements from acquisitions being less than expected; the growth and profitability of the Company's noninterest or fee income being less than expected; 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 success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company cautions 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 Form 10-Q 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.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation, Interest Rate Sensitivity and Liquidity.


22


Item 4. Controls and Procedures

Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report, the Company has evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").

Limitations on the Effectiveness of Controls. The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its "internal controls and procedures for financial reporting" ("Internal Controls") will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Disclosure Controls are effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to the Company during the period when its periodic reports are being prepared.

During the quarter ended March 31, 2005, there has not occurred any change in Internal Controls that has materially affected or is reasonably likely to materially affect Internal Controls.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

During July and August 2004, six class action complaints were filed in the United States District Court for the District of New Jersey and the Eastern District of Pennsylvania against the Company and certain Company (or subsidiary) current and former officers and directors. All class action complaints have been consolidated in the United States District Court for the District of New Jersey, Camden Division. 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.


23


Item 2. Purchases of Certain Equity Securities by the Issuer and Affiliated Purchasers

   
(a)
 
(b)
 
(c)
 
(d)
 
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
January 1 to January 31, 2005
   
43,298
 
$
32.23
             
February 1 to February 28, 2005
                         
March 1 to March 31, 2005
                         
Total
   
43,298
 
$
32.23
             
 
(1) Purchases were made by the Company for the payment of income taxes on the exercise of stock options by an executive officer.

Item 6. Exhibits


Exhibits
   
     
Exhibit 31.1
 
Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 31.2
 
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 32
 
Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


24


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

 
COMMERCE BANCORP, INC.
 
(Registrant)




May 9, 2005
/s/ DOUGLAS J. PAULS
(Date)
DOUGLAS J. PAULS
 
SENIOR VICE PRESIDENT AND
 
CHIEF FINANCIAL OFFICER
 
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)