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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File #1-12609
COMMERCE BANCORP, INC.
[LOGO OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
(State of other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification Number)
Commerce Atrium
1701 Route 70 East 08034-5400
Cherry Hill, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 856-751-9000
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
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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 $2,497,629,542.(1)
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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 77,394,220
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Title of Class No. of Shares Outstanding as of 3/1/04
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2004 Annual Meeting of Shareholders.
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(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 $37.10 , the last sale
price for the Registrant's Common Stock on June 30, 2003 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.
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COMMERCE BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
Page
Part I
Item 1. Business..............................................................................................................3
Item 2. Properties...........................................................................................................10
Item 3. Legal Proceedings ...................................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................................................................10
Part II
Item 5. Market for 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 .........................................................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................51
Item 9A. Controls and Procedures..............................................................................................51
Part III
Item 10. Directors and Executive Officers of the Registrant...................................................................51
Item 11. Executive Compensation...............................................................................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................51
Item 13. Certain Relationships and Related Transactions.......................................................................52
Item 14. Principal Accountant Fees and Services...............................................................................52
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .....................................................52
Signatures......................................................................................................................57
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, 2003, the Company had total assets of $22.7 billion,
total loans of $7.4 billion, and total deposits of $20.7 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 four nationally chartered bank subsidiaries:
o Commerce Bank, N.A., Cherry Hill, New Jersey;
o Commerce Bank/Pennsylvania, N.A., Devon, Pennsylvania;
o Commerce Bank/Shore, N.A., Toms River, New Jersey;
o Commerce Bank/Delaware, N.A., Wilmington, Delaware; and
o one New Jersey state chartered bank subsidiary:
o Commerce Bank/North, Ramsey, New Jersey.
These five bank subsidiaries, referred to collectively as the banks, as of
December 31, 2003 had 270 full service retail branch offices 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
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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 branch office network.
Acquisitions
The Company's primary growth strategy is the opening of new full service
branch offices of which 46 opened in 2003 and 40 opened in 2002. The Company
expects to open an additional 50 full service branch offices in 2004. The
Company has also developed its full service branch office network through the
following strategic acquisitions:
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;
o on September 30, 1993, the Company acquired all of the outstanding
shares of The Coastal Bank, Ocean City, New Jersey, which was merged
with and into Commerce NJ;
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;
o on January 15, 1999, the Company acquired Community First Banking
Company, referred to as CFBC, a one-bank holding company headquartered
in Tinton Falls, New Jersey. CFBC's wholly-owned bank subsidiary,
Tinton Falls State Bank, was merged with and into Commerce Shore; 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
branch 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 the most recent of which include
the following:
o in 2001, Fitzsimmons Insurance and Financial Services, Inc., Business
Training Systems, Inc. and Brettler Financial Group, Inc. were
acquired.
o in 2002, Sanford and Purvis, Inc., Upper Montclair, NJ, was acquired.
o in 2003, The Porch Agency, Bridgeton, NJ, was acquired.
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.
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The Banks
As of December 31, 2003, Commerce NJ had total assets of $12.8 billion,
total deposits of $11.5 billion, and total shareholders' equity of $759.0
million; Commerce PA had total assets of $4.6 billion, total deposits of $4.3
billion and total shareholders' equity of $276.8 million; Commerce Shore had
total assets of $2.7 billion, total deposits of $2.4 billion and total
shareholders' equity of $165.5 million; Commerce North had total assets of $2.5
billion, total deposits of $2.3 billion, and total shareholders' equity of
$153.9 million; and Commerce Delaware had total assets of $294.6 million, total
deposits of $272.0 million, and total shareholders' equity of $20.6 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 branches 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.
Commerce NJ provides retail and commercial banking services through 144
retail branch offices in Central and Southern New Jersey, and Metropolitan New
York.; Commerce PA provides retail and commercial banking services through 61
retail branch offices in Philadelphia, Bucks, Chester, Delaware and Montgomery
Counties in Southeastern Pennsylvania; Commerce Shore provides retail and
commercial banking services through 31 retail branch offices in Ocean and
Monmouth Counties, New Jersey; Commerce North provides retail and commercial
banking services through 28 retail branch offices in Bergen and Passaic
Counties, New Jersey; and Commerce Delaware provides retail and commercial
banking services through 6 retail branch offices in New Castle County, 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, consumer loan programs, including installment
loans for home improvement and the purchase of consumer goods and automobiles,
home equity and Visa Gold card 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 19 - Segment Reporting" of the Company's Notes
to Consolidated Financial Statements which appear 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 11 locations in New Jersey, 2 locations in Pennsylvania, and 2
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, including trading, underwriting, and
advisory services. Commerce Capital Markets' principal place of business is
Philadelphia, Pennsylvania, with branch locations in Cherry Hill, South
Plainfield, Ramsey and Toms River, 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. Shore Asset Management Corporation, a Delaware corporation, is a
wholly-owned subsidiary of Commerce Shore that purchases, holds and sells
investments of Commerce
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Shore. 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 and
Commerce Shore that provides business leasing services.
The Company has an equity investment in Pennsylvania Commerce Bancorp,
Inc., Camp Hill, Pennsylvania (12.82% 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.
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.
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 Shore's,
Commerce North's, and Commerce Delaware's legal lending limit to a single
borrower (approximately $127.6 million, $43.3 million, $25.9 million, $24.7
million, and $3.0 million, respectively, as of December 31, 2003) enables the
banks to compete effectively for the business of smaller and mid-sized
businesses. The combined legal lending limit of the Company is $224.5 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
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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. Under the CRA, Commerce NJ, Commerce Delaware and Commerce
North are currently rated "outstanding", while Commerce Shore and Commerce
Pennsylvania are 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.
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 percent 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 Shore, Commerce North, and Commerce Delaware
Commerce NJ, Commerce PA, Commerce Shore, 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 branch
offices 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 branch offices by any New
Jersey state-chartered bank, subject to applicable state law restrictions.
Under present New Jersey law, Commerce NJ, Commerce Shore, and Commerce
North would be permitted to operate offices at any location in New Jersey,
subject to prior regulatory approval. Under present New York law, Commerce NJ
would be permitted to operate offices at any location in New York, subject to
certain home office protection rules and subject to regulatory approval. Under
present Pennsylvania law, Commerce PA would be permitted to operate offices
within any county in Pennsylvania, subject to prior regulatory approval. Under
present Delaware law, Commerce Delaware would be permitted to operate offices 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 to assess an institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution. 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, branches and other deposit facilities,
relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. In addition, under
applicable regulations a bank having a less than satisfactory rating is not
entitled to participate on the bid list for FDIC offerings. For their most
recent examinations, Commerce
7
NJ, Commerce Delaware and Commerce North each received an "outstanding" rating
while Commerce PA and Commerce Shore each received a "satisfactory" rating.
Commerce NJ, Commerce PA, Commerce Shore, 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 Shore, 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 Shore,
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.
Commerce NJ, Commerce PA, Commerce Shore, Commerce North, and Commerce
Delaware are subject to certain limitations on the amount of cash dividends that
they can pay. See Note 18 of the Company's 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.
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
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 public finance 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
8
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.
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, 2003 the Company had in excess of 8,200 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.
9
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 Commerce NJ occupy the majority of this
building.
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 7 - Bank Premises, Equipment and Leases" of the Company's Notes to
Consolidated Financial Statements, which appear elsewhere herein.
Item 3. Legal Proceedings
Other than routine litigation incidental to its business, neither the
Company or any of its subsidiaries, nor any of the Company's or any of its
subsidiaries' properties, are subject to any material legal proceedings, nor are
any such proceedings known to be contemplated.
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 2003.
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 included elsewhere
herein.
See Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 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 18
of the Company's 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.
10
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003
----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Net interest income $ 755,866 $ 572,755 $ 401,326 $ 296,930 $ 244,367
Provision for loan losses 31,850 33,150 26,384 13,931 9,175
Noninterest income 332,478 257,466 196,805 150,760 114,596
Noninterest expense 763,392 579,168 420,036 315,357 252,523
Income before income taxes 293,102 217,903 151,711 118,402 97,265
Net income 194,287 144,815 103,022 80,047 65,960
Balance Sheet Data:
Total assets $22,712,180 $16,403,981 $11,363,703 $8,296,516 $6,635,793
Loans (net) 7,328,519 5,731,856 4,516,431 3,638,580 2,922,706
Securities available for sale 10,650,655 7,806,779 4,152,704 2,021,326 1,664,257
Securities held to maturity 2,490,484 763,026 1,132,172 1,513,456 1,201,892
Trading securities 170,458 326,479 282,811 109,306 117,837
Federal funds sold 52,000 5,300
Deposits 20,701,400 14,548,841 10,185,594 7,387,594 5,608,920
Long-term debt 200,000 200,000 80,500 80,500 80,500
Stockholders' equity 1,277,288 918,010 636,570 492,224 356,756
Per Share Data:
Net income-basic $ 2.73 $ 2.16 $ 1.59 $ 1.30 $ 1.13
Net income-diluted 2.61 2.04 1.51 1.25 1.08
Cash dividends 0.66 0.60 0.55 0.48 0.41
Book value 16.70 13.53 9.70 7.77 6.00
Average shares outstanding:
Basic 71,084 66,795 64,666 61,755 58,310
Diluted 74,462 70,903 68,102 64,223 60,930
Selected Ratios:
Performance
Return on average assets 0.99 % 1.05 % 1.08 % 1.09 % 1.12%
Return on average equity 18.81 18.50 17.64 19.81 19.63
Net interest margin 4.36 4.69 4.76 4.62 4.65
Liquidity and Capital
Average loans to average deposits 36.93 % 42.48 % 48.04 % 52.17 % 50.31%
Dividend payout 24.18 27.78 34.59 37.45 36.64
Stockholders' equity to total assets 5.62 5.60 5.60 5.93 5.38
Risk-based capital:
Tier 1 12.66 11.47 10.81 10.79 11.40
Total 13.62 12.51 11.96 11.92 12.72
Leverage capital 6.61 6.37 6.24 6.92 7.02
Asset Quality
Non-performing assets to total year-end assets 0.10 % 0.11 % 0.16 % 0.20 % 0.18%
Net charge-offs to average loans outstanding 0.16 0.18 0.19 0.11 0.08
Non-performing loans to total
year-end loans 0.29 0.24 0.37 0.37 0.29
Allowance for loan losses to total
end of year loans 1.51 1.56 1.46 1.32 1.30
Allowance for loan losses to non-
performing loans 515.39 640.18 397.73 356.84 442.09
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 2003, the company's total assets grew 38%. The interest rate environment
during the year was difficult for the Company's growth model, with long-term
interest rates reaching historically low levels. The rate environment
contributed to the compression of the Company's net interest margin to 4.36%,
the lowest level in over 10 years. Despite this, the Company was able to grow
revenue 31%, net income 34%, and diluted net income per share by 28%. The
Company also demonstrated its ability to access the capital markets by
successfully completing a $209 million common stock offering in September 2003.
The Company's financial performance for 2003 and projected performance for 2004
are further discussed below.
The 2003 financial highlights are summarized below.
o Net income increased 34% and earnings per share increased 28%.
o Total deposits grew 42% and total loans grew 28%.
o Total revenues (net interest income plus noninterest income) increased 31%.
o Successful completion of common stock offering that produced net proceeds
of approximately $209 million, which will support future growth.
2003 2002 Increase
(amounts in billions)
Total Assets $ 22.7 $ 16.4 38%
Total Loans (net) 7.3 5.7 28%
Total Investments 13.3 8.9 49%
Total Deposits 20.7 14.5 42%
(amounts in millions)
Total Revenues $ 1,088.3 $ 830.2 31%
Net Income 194.3 144.8 34%
Net Income per Share 2.61 2.04 28%
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 $771.5 million of net interest income on a tax
equivalent basis in 2003, an increase of $185.6 million or 32% over 2002. As
more fully depicted in the chart below, the increase in net interest income in
both 2003 and 2002 was almost entirely due to volume increases in the Company's
earning assets.
------------------------------------------------------------
Net Interest Income
(dollars in millions)
------------------------------------------------------------
Volume Rate
Increase Change Total Increase
------------------------------------------------------------
2003 $227.1 ($41.5) $185.6 32%
------------------------------------------------------------
2002 $174.0 ($0.8) $173.2 42%
------------------------------------------------------------
The Company continues to reiterate its future growth targets, which management
expects to meet or exceed.
Growth Actual
Target 2003 Growth
Total Deposits 25% 42%
Comp Store Deposits 18% 27%
Total Revenue 25% 31%
Net Income 25% 34%
Earnings Per Share 20% 28%
The Company completed it plan to open 46 stores in 2003 and plans to open 50
more during 2004. The Company plans to open approximately 40 stores in 2004 in
the metro New York market. This market has seen the highest deposit growth per
branch and management expects these stores to continue to lead the deposit
growth of the Company. The remaining 10 stores will be opened in the metro
Philadelphia market. The Company has previously announced that it expects to
enter the Washington D.C./Northern Virginia market in 2005.
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 industries 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 two policies as being critical: the policies related to
the allowance for loan losses and capitalization of branch costs. The Company,
in consultation with the Audit Committee, has reviewed and approved these
critical accounting policies (further described in Note 1 Significant Accounting
Policies to the Consolidated Financial Statements.)
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 to the
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.
Branch Premises and Equipment. In accordance with accounting principles
generally accepted in the United States, when capitalizing costs for branch
construction, the Company includes the costs of purchasing the land, developing
the site, constructing the building (or leasehold improvements if the property
is leased), and furniture, fixtures and equipment necessary to equip the branch.
All other pre-opening and post-opening costs related to branches are expensed as
incurred.
Segment Reporting
The Company operates one reportable segment of business, Community Banks, as
more fully described in Note 19 to the Consolidated Financial Statements. The
following table summarizes net income by segment for each of the last three
years:
-----------------------------------------------------------
Net Income
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Community Banks $183,068 $139,560 $ 95,574
Parent/Other 11,219 5,255 7,448
-----------------------------------------------------------
Consolidated total $194,287 $144,815 $103,022
-----------------------------------------------------------
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, 2003, 2002 and 2001 and presents the daily average
interest rates earned on assets and the daily average interest rates paid on
liabilities for such periods. During 2003, average interest earning assets
totaled $17.7 billion, an increase of $5.2 billion, or 42% over 2002. This
increase resulted primarily from the increase in the average balance of
investments, which rose $4.0 billion, and the average balance of loans, which
rose $1.2 billion during 2003. 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 $5.2 billion.
Net Interest Margin and Net Interest Income
Net interest margin on a tax equivalent basis was 4.36% for 2003, a decrease of
33 basis points from 2002. The decrease is due to the low interest rate
environment throughout 2003. During the fourth quarter of 2003, the net interest
margin increased by 6 basis points and management expects it to continue
increasing in the first quarter of 2004. 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 2003 was $771.5 million, an increase of $185.6
million, or 32%, over 2002. Interest income on a tax-equivalent basis increased
to $931.3 million from $768.5 million, or 21%. This increase was primarily
related to volume increases in the loan and investment portfolios. Interest
expense for 2003 fell $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 debt instruments.
The tax-equivalent yield on interest earning assets during 2003 was 5.26%, a
decrease of 89 basis points from 6.15% in 2002. The cost of interest-bearing
liabilities decreased 70 basis points in 2003 to 1.11% from 1.81% in 2002. These
decreases resulted primarily from decreased general market interest rates during
2003 as compared to 2002. The cost of total funding sources decreased 56 basis
points in 2003 to 0.90% from 1.46%.
The following table presents the major factors that contributed to the changes
in net interest income for the years ended December 31, 2003 and 2002 as
compared to the respective previous periods.
------------------------------------------------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
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 $186,070 ($65,123) $120,947 $156,146 ($29,870) $126,276
Tax-exempt 6,277 706 6,983 1,968 (214) 1,754
Trading (1,029) (1,527) (2,556) 1,558 253 1,811
Federal
Funds sold (356) (254) (610) (1,802) (3,270) (5,072)
Interest on loans:
Commercial
mortgages 24,352 (10,574) 13,778 31,083 (17,291) 13,792
Commercial 21,154 (6,710) 14,444 16,240 (17,045) (805)
Consumer 24,965 (17,970) 6,995 27,817 (13,936) 13,881
Tax-exempt 4,515 (1,701) 2,814 1,612 (499) 1,113
------------------------------------------------------------------------------------------------------------------------
Total interest
Income 265,948 (103,153) 162,795 234,622 (81,872) 152,750
------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 9,453 (12,089) (2,636) 9,678 (12,093) (2,415)
N.O.W.
Accounts 884 (1,682) (798) 1,128 (2,606) (1,478)
Money
Market plus 16,781 (20,685) (3,904) 17,669 (24,332) (6,663)
Time
Deposits 10,405 (18,077) (7,672) 20,708 (20,730) (22)
Public funds (1,069) (6,711) (7,780) 2,960 (19,455) (16,495)
Other
Borrowed
Money 2,349 (924) 1,425 379 (2,048) (1,669)
Long-term
Debt 32 (1,517) (1,485) 8,090 227 8,317
------------------------------------------------------------------------------------------------------------------------
Total interest
Expense 38,835 (61,685) (22,850) 60,612 (81,037) (20,425)
------------------------------------------------------------------------------------------------------------------------
Net increase $227,113 ($41,468) $185,645 $174,010 ($835) $173,175
------------------------------------------------------------------------------------------------------------------------
(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,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
Investment securities
Taxable $ 10,777,538 $508,758 4.72% $ 6,835,820 $387,811 5.67% $4,083,493 $261,535 6.40%
Tax-exempt 201,775 13,835 6.86 110,235 6,852 6.22 78,572 5,098 6.49
Trading 193,376 9,637 4.98 214,016 12,193 5.70 186,678 10,382 5.56
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 11,172,689 532,230 4.76 7,160,071 406,856 5.68 4,348,743 277,015 6.37
Federal funds sold 22,530 255 1.13 54,043 865 1.60 166,619 5,937 3.56
Loans
Commercial mortgages 2,419,855 152,642 6.31 2,037,091 138,864 6.82 1,581,118 125,072 7.91
Commercial 1,605,845 87,782 5.47 1,219,182 73,338 6.02 949,205 74,143 7.81
Consumer 2,224,197 137,138 6.17 1,815,679 130,143 7.17 1,427,586 116,262 8.14
Tax-exempt 269,592 21,230 7.87 212,261 18,416 8.68 193,678 17,303 8.93
------------------------------------------------------------------------------------------------------------------------------------
Total loans 6,519,489 398,792 6.12 5,284,213 360,761 6.83 4,151,587 332,780 8.02
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $17,714,708 $931,277 5.26% $12,498,327 $768,482 6.15% $8,666,949 $615,732 7.10%
------------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Savings $3,676,147 $27,596 0.75% $ 2,416,884 $ 30,232 1.25% $1,643,145 $ 32,647 1.99%
N.O.W. accounts 468,311 3,358 0.72 344,951 4,156 1.20 251,352 5,634 2.24
Money market plus 6,495,847 47,353 0.73 4,193,963 51,257 1.22 2,748,236 57,920 2.11
Time deposits 2,335,124 53,721 2.30 1,882,823 61,393 3.26 1,247,741 61,415 4.92
Public funds 852,319 12,394 1.45 925,827 20,174 2.18 790,001 36,669 4.64
------------------------------------------------------------------------------------------------------------------------------------
Total deposits 13,827,748 144,422 1.04 9,764,448 167,212 1.71 6,680,475 194,285 2.91
Other borrowed money 423,538 3,263 0.77 118,734 1,839 1.55 94,257 3,508 3.72
Long-term debt 200,000 12,080 6.04 199,464 13,565 6.80 80,500 5,248 6.52
------------------------------------------------------------------------------------------------------------------------------------
Total deposits and interest-
bearing liabilities 14,451,286 159,765 1.11 10,082,646 182,616 1.81 6,855,232 203,041 2.96
Noninterest-bearing funds
(net) 3,263,422 2,415,681 1,811,717
------------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $17,714,708 $159,765 0.90 $12,498,327 $182,616 1.46 $8,666,949 $203,041 2.34
------------------------------------------------------------------------------------------------------------------------------------
Net interest income and
margin tax-equivalent
basis $771,512 4.36 $585,866 4.69 $412,691 4.76
Tax-exempt adjustment 15,646 13,111 11,365
-------- -------- -----------
Net interest income and margin $755,866 4.27% $572,755 4.58% $401,326 4.63%
Other Balances
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 922,188 $630,134 $ 417,110
Other assets 1,053,283 702,898 519,799
Total assets 19,590,319 13,752,237 9,546,794
Demand deposits
(noninterest-bearing) 3,826,885 2,674,233 1,962,354
Other liabilities 279,203 212,775 145,084
Stockholders' equity 1,032,945 782,583 584,124
Notes --Weighted average yields on tax-exempt obligatiohave been computed on a tax-equivalent basis assuming a federal
tax rate of 35%.
--Non-accrual loans have been included in the average loan balance.
--Investment securities include investments available for sale.
--Consumer loans include loans held for sale.
15
Noninterest Income
For 2003, noninterest income totaled $332.5 million, an increase of $75.0
million or 29% from 2002. Deposit charges and service fees had the largest
increase of $29.6 million, or 23%. Other operating income increased by $23.5
million, or 66%, which includes the Company's insurance and capital markets
divisions. Commerce Insurance, the Company's insurance brokerage subsidiary,
recorded increased revenues of $10.6 million, or 19%, while Commerce Capital
Markets generated increased revenues of $7.4 million, or 21%. The increase in
other operating income is more fully depicted in the following chart.
2003 2002
------------- ------------
Deposit Charges & Service Fees $160,678 $131,033
Other Operating Income:
Insurance 66,482 55,875
Capital Markets 42,518 35,082
Loan Brokerage Fees 27,169 18,655
Other 31,780 16,821
------------- ------------
Total other 167,949 126,433
------------- ------------
Net Investment Securities
Gains 3,851
------------- ------------
Total Noninterest Income $332,478 $257,466
------------- ------------
The increase in loan brokerage fees resulted from the volume of mortgage
refinancing activity in 2003 related to historically low long-term interest
rates. Management does not anticipate the same level of refinancing activity and
fees in 2004. Other included gains on sale of loans, primarily SBA loans, which
increased $10.4 million over 2002. Management intends to continue selling the
majority of SBA loans originated in 2004.
Noninterest Expenses
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 branches. With the addition of these new offices, staff, facilities,
marketing, and related expenses rose accordingly. Occupancy costs increased by
70% during 2003. This increase is due to the growth in the metro New York
market, where occupancy costs are higher especially in New York City.
Other noninterest expenses rose $26.0 million, or 21%, to $150.1 million in
2003. The primary increases in other noninterest expenses were increased
business development expenses of $3.3 million to $24.9 million, increased
bank-card related service charges of $3.5 million to $25.4 million, increased
professional services/insurance expenses of $5.5 million to $24.6 million and
increased provisions for non-credit-related losses of $2.4 million to $15.5
million.
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 70.38%, 69.73%, and 70.06%, in 2003,
2002, and 2001, 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 2003 was $98.8 million
compared to $73.1 million in 2002 and $48.7 million in 2001. The effective tax
rate was 33.7%, 33.5% and 32.1% in 2003, 2002, and 2001, respectively. The
increase in the effective income tax rate for 2002 was primarily due to higher
state income taxes under newly enacted tax laws in New Jersey.
Net Income
Net income for 2003 was $194.3 million, an increase of $49.5 million, or 34%
over the $144.8 million recorded for 2002.
Historically, the Company's rate of revenue growth has exceeded the rate of
growth in noninterest expenses, despite the Company's significant investment in
infrastructure and people to support its ongoing branch expansion plans. In
2003, total revenues increased $258.1 million, or 31%, while noninterest
expenses increased $184.2 million or 32%. As previously discussed, the interest
rate environment in 2003 negatively impacted the Company's net interest margin
and revenue growth. Management projects that deposit growth and an improved net
interest margin will positively impact revenues in 2004, and that revenue growth
will exceed the growth in noninterest expenses.
Diluted net income per share of common stock for 2003 was $2.61 compared to
$2.04 per common share for 2002. Diluted net income per share for 2003 reflects
the issuance of 5,000,000 shares of common stock in September 2003.
Return on Average Equity and Average Assets
Two industry measures of the 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
0.99%, 1.05%, and 1.08% for 2003, 2002, and 2001, respectively. 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
18.81%, 18.50%, and 17.64% for 2003, 2002, and 2001, respectively.
16
The Company's ROE excluding the accumulated other comprehensive income component
of stockholders equity (the unrealized appreciation/depreciation of its
available for sale securities) was 19.33%, 20.28%, and 18.33% for 2003, 2002 and
2001 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 1999 through 2003.
---------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial:
Term $1,027,526 842,869 600,374 469,564 393,953
Line of credit 959,158 683,640 556,977 430,811 277,917
Demand 1,077 317 440 1,400 1,328
---------------------------------------------------------------------------------------------------------------
1,987,761 1,526,826 1,157,791 901,775 673,198
Owner-occupied 1,619,079 1,345,306 1,028,408 945,599 634,726
Consumer:
Mortgages
(1-4 family
residential) 918,686 626,652 471,680 351,644 428,453
Installment 138,437 140,493 161,647 154,415 125,856
Home equity 1,405,795 1,139,589 872,974 710,848 621,597
Credit lines 60,579 56,367 43,196 30,254 19,099
---------------------------------------------------------------------------------------------------------------
2,523,497 1,963,101 1,549,497 1,247,161 1,195,005
Commercial real estate:
Investor developer 1,167,672 885,276 799,799 578,982 452,579
Construction 142,567 102,080 47,917 13,743 5,580
---------------------------------------------------------------------------------------------------------------
1,310,239 987,356 847,716 592,725 458,159
---------------------------------------------------------------------------------------------------------------
Total loans $7,440,576 $5,822,589 $4,583,412 $3,687,260 $2,961,088
---------------------------------------------------------------------------------------------------------------
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.
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 two
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, 2003, are summarized in the following table.
-------------------------------------------------------------------------------------
December 31, 2003
-------------------------------------------------------------------------------------
Due in One Due in One to Due in Over
Year or Less Five Years Five Years Total
-------------------------------------------------------------------------------------
(dollars in thousands)
Commercial:
Term $ 336,652 $ 580,584 $ 110,290 $ 1,027,526
Line of credit 920,292 38,866 959,158
Demand 1,077 1,077
-------------------------------------------------------------------------------------
1,258,021 619,450 110,290 1,987,761
Owner-occupied 318,028 969,582 331,469 1,619,079
Consumer:
Mortgages
(1-4 family
residential) 29,471 113,037 776,178 918,686
Installment 47,934 58,183 32,320 138,437
Home equity 113,913 422,044 869,838 1,405,795
Credit lines 21,809 38,770 60,579
-------------------------------------------------------------------------------------
213,127 632,034 1,678,336 2,523,497
Commercial real estate:
Investor developer 309,761 737,201 120,710 1,167,672
Construction 71,968 70,599 142,567
-------------------------------------------------------------------------------------
381,729 807,800 120,710 1,310,239
-------------------------------------------------------------------------------------
Total loans $2,170,905 $3,028,866 $2,240,805 $7,440,576
-------------------------------------------------------------------------------------
Interest rates:
Predetermined $ 575,602 $2,070,183 $1,407,087 $4,052,872
Floating 1,595,303 958,683 833,718 3,387,704
-------------------------------------------------------------------------------------
Total loans $2,170,905 $3,028,866 $2,240,805 $7,440,576
-------------------------------------------------------------------------------------
During 2003, loans increased $1.6 billion, or 28% from $5.8 billion to $7.4
billion. At December 31, 2003, loans represented 36% of total deposits and 33%
of total assets. All segments of the loan portfolio experienced growth in 2003.
During the first three quarters of 2003, increased loan prepayment activity put
pressure on overall loan growth. The prepayment activity slowed during the
fourth quarter and helped result in increased loan growth relative to prior
quarters. Management expects loan growth during 2004 to meet or exceed the
growth in 2003, with commercial loan growth in the metro New York market helping
to drive the growth.
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. Loans to finance owner-occupied properties grew
$273.8 million or 20% during 2003. Commercial loan growth of $460.9 million or
30% was led by activity in the middle market and healthcare sectors. Growth in
consumer loans of $560.4 million, or 29%, was primarily in mortgage and home
equity lending.
17
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, 2003
were $23.6 million or .10% of total assets, as compared to $17.8 million or .11%
of total assets at December 31, 2002.
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, 2003
were $21.7 million as compared to $14.2 million a year ago. During 2003,
consumer non-performing loans increased by approximately $3.5 million of loans
that were part of attempts to defraud the Company and a number of other
financial institutions and mortgage companies. The Company generally places a
loan on non-accrual status and ceases accruing interest when loan payment
performance is deemed unsatisfactory. 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, 2003, loans past due 90 days or more and
still accruing interest amounted to $538 thousand, compared to $620 thousand at
December 31, 2002. Additional loans considered by the Company's internal loan
review department as potential problem loans of $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 $1.8 million at December 31, 2003 as compared to
$3.6 million at December 31, 2002. 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, 1999 through 2003.
-----------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans (1):
Commercial $ 6,867 $ 5,412 $ 6,835 $ 4,955 $ 2,254
Consumer 9,242 2,734 1,484 1,295 674
Real estate
Construction 138 131 1,590 1,459 55
Mortgage 5,494 5,891 6,924 5,840 5,230
-----------------------------------------------------------------------------------------------
Total non-accrual
loans 21,741 14,168 16,833 13,549 8,213
-----------------------------------------------------------------------------------------------
Restructured loans (1):
Commercial 1 5 8 11 277
Real estate mortgage 82 192
-----------------------------------------------------------------------------------------------
Total restructured
loans 1 5 8 93 469
-----------------------------------------------------------------------------------------------
Total non-performing
loans 21,742 14,173 16,841 13,642 8,682
-----------------------------------------------------------------------------------------------
Other real estate 1,831 3,589 1,549 2,959 3,523
-----------------------------------------------------------------------------------------------
Total non-performing
assets(1): $23,573 $17,762 $18,390 $16,601 $12,205
-----------------------------------------------------------------------------------------------
Non-performing
assets as a percent
of total assets 0.10% 0.11% 0.16% 0.20% 0.18%
-----------------------------------------------------------------------------------------------
Loans past due 90
days or more and
still accruing
interest $538 $620 $519 $ 489 $ 499
-----------------------------------------------------------------------------------------------
(1) Interest income of approximately $1,908,000, $1,352,000, $1,092,000,
$1,731,000, and $986,000 would have been recorded in 2003, 2002, 2001,
2000, and 1999 respectively, on non-performing loans in accordance with
their original terms. Actual interest recorded on these loans amounted to
$418,000 in 2003, $275,000 in 2002, $237,000 in 2001, $525,000 in 2000, and
$255,000 in 1999.
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. 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.
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
18
and management, entrance into new geographic markets, changes in credit
concentrations, and national and local economic trends and conditions. 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 2003, net charge-offs amounted to $10.5
million, or .16% of average loans outstanding for the year, compared to $9.4
million, or .18% of average loans outstanding for 2002. During 2003, the Company
recorded provisions of $31.9 million to the allowance for loan losses compared
to $33.2 million for 2002. The Company continued to proactively manage its
exposure to credit risk in 2003. Based upon consistent application of the
Company's reserve methodology, allowance levels increased by $21.3 million to
$122.1 million or 1.51% of total loans at December 31, 2003, but decreased as a
percentage of the total loans due to growth in the portfolio.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
---------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning
of period $90,733 $66,981 $48,680 $38,382 $31,265
Provisions charged to
operating expenses 31,850 33,150 26,384 13,931 9,175
---------------------------------------------------------------------------------------------
122,583 100,131 75,064 52,313 40,440
---------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 669 815 552 313 551
Consumer 584 339 288 249 286
Commercial real
estate 11 176 134 14 132
---------------------------------------------------------------------------------------------
Total recoveries 1,264 1,330 974 576 969
---------------------------------------------------------------------------------------------
Loans charged-off:
Commercial (5,601) (7,181) (5,862) (2,936) (1,599)
Consumer (5,950) (3,514) (2,784) (1,220) (1,078)
Commercial real
estate (239) (33) (411) (53) (350)
---------------------------------------------------------------------------------------------
Total charged-off (11,790) (10,728) (9,057) (4,209) (3,027)
---------------------------------------------------------------------------------------------
Net charge-offs (10,526) (9,398) (8,083) (3,633) (2,058)
---------------------------------------------------------------------------------------------
Balance at end of period $112,057 $90,733 $66,981 $48,680 $38,382
---------------------------------------------------------------------------------------------
Net charge-offs as a
percentage of average
loans outstanding 0.16% 0.18% 0.19% 0.11% 0.08%
---------------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
year-end loans 1.51% 1.56% 1.46% 1.32% 1.30%
---------------------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to
the various categories, owner-occupied is included in commercial real estate.
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,
-------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial $50,400 27% $33,708 26% $24,110 25% $20,396 24% $14,268 23%
Consumer 13,082 34 14,497 34 9,915 34 4,632 34 4,120 40
Commercial real
estate 48,575 39 42,528 40 32,956 41 23,652 42 19,994 37
-------------------------------------------------------------------------------------------------------------------------
$112,057 100% $90,733 100% $66,981 100% $48,680 100% $38,382 100%
-------------------------------------------------------------------------------------------------------------------------
19
Investment Securities
The following table summarizes the book value of securities available for sale
and securities held to maturity by the Company as of the dates shown.
--------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Government agency
and mortgage-backed
obligations $10,511,545 $7,659,737 $3,994,523
Obligations of state and
political subdivisions 30,927 23,185 82,922
Equity securities 16,588 24,054 16,325
Other 91,595 99,803 58,934
--------------------------------------------------------------------------------------------
Securities available
for sale $10,650,655 $7,806,779 $4,152,704
--------------------------------------------------------------------------------------------
U.S. Government agency
and mortgage-backed
obligations $ 2,193,577 $ 624,688 $1,044,266
Obligations of state and
political subdivisions 227,199 91,204 50,602
Other 69,708 47,134 37,304
--------------------------------------------------------------------------------------------
Securities held to
maturity $ 2,490,484 $ 763,026 $1,132,172
--------------------------------------------------------------------------------------------
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 $4.4 billion from $8.9 billion to
$13.3 billion at December 31, 2003. Deposit growth and other funding sources
were used to increase the Company's investment portfolio. The available for sale
portfolio increased $2.8 billion to $10.7 billion, and the securities held to
maturity portfolio increased $1.7 billion to $2.5 billion at year-end 2003. The
portfolio of trading securities decreased $156.0 million from year-end 2002 to
$170.5 million at year-end 2003. During 2003, management determined it was
appropriate to classify a greater portion of its securities purchases as held to
maturity. By the end of 2004, up to a third of the investment portfolio may be
in held to maturity securities.
At December 31, 2003, the average life and duration of the investment portfolio
were approximately 4.9 years and 3.9 years, respectively, as compared to 3.0
years and 2.5 years, respectively, at December 31, 2002. At December 31, 2003
the yield on the portfolio was 4.84%, down from 5.30% at December 31, 2002. The
decrease in yield was due to lower reinvestment rates, which reflect lower
general market interest rates in 2003 as compared to 2002.
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. This repositioning involved sales of
approximately $4.8 billion during 2003. Management expects to continue the
repositioning of the investment portfolio in 2004 as warranted by the changing
interest rate environment.
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 average life of the securities. Changes in the
estimated average life of 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, 2003,
the yield on the investment portfolio was 4.76%, a decrease of 92 basis points
from 5.68% in fiscal 2002. The decrease in yield is a reflection of the general
decline in market interest rates in 2003.
At December 31, 2003, the net unrealized depreciation in securities available
for sale included in stockholders' equity totaled $3.7 million, net of tax,
compared to net unrealized appreciation of $113.6 million, net of tax, at
December 31, 2002.
20
The contractual maturity distribution and weighted average yield of the
Company's investment portfolio (excluding equity and trading securities) at
December 31, 2003, 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.
---------------------------------------------------------------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------------------------------------------------------------
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 $137,589 1.00% $ 1 8.50% $346,674 4.50% $10,027,281 4.95% $10,511,545 4.89%
Obligations of state and
political subdivisions 3,660 7.08 12,739 6.86 7,574 5.83 6,954 6.27 30,927 6.50
Other securities 12,681 5.18 175 3.75 53,121 3.38 25,618 8.60 91,595 5.09
----------------------------------------------------------------------------------------------------------------------------
$153,930 1.49% $12,915 6.82% $407,369 4.38% $10,059,853 4.96% $10,634,067 4.89%
----------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government agency and
mortgage-backed obligations $ 415 7.22% $ 5,005 6.52% $488,141 4.21% $ 1,700,016 4.92% $ 2,193,577 4.77%
Obligations of state and
political subdivisions 99,837 1.18 112 2.17 14,661 7.65 112,589 6.49 227,199 4.11
Other securities 69,708 1.79 69,708 1.79
----------------------------------------------------------------------------------------------------------------------------
$169,960 1.45% $ 5,117 6.43% $502,802 4.31% $ 1,812,605 5.01% $ 2,490,484 4.63%
----------------------------------------------------------------------------------------------------------------------------
Deposits
Total deposits at December 31, 2003 were $20.7 billion, an increase of $6.2
billion or 42% above total deposits of $14.5 billion at December 31, 2002. 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 $5.9 billion from year-end 2002 to year-end 2003.
Total deposits averaged $17.7 billion for 2003, an increase of $5.2 billion or
42% above the 2002 average. The average balance of noninterest-bearing demand
deposits in 2003 was $3.8 billion, a $1.2 billion or 43% increase over the
average balance for 2002. The average total balance of passbook and statement
savings accounts increased $1.3 billion, or 52% compared to the prior year. The
average balance of interest-bearing demand accounts (money market and N.O.W.
accounts) for 2003 was $7.0 billion, a $2.4 billion or 53% increase over the
average balance for the prior year. The average balance of time deposits for
2003 was $3.2 billion, a $378.8 million or 13% increase over the average balance
for 2002. For 2003, the cost of total deposits was 0.82% as compared to 1.34% in
2002.
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 branch locations, extended
hours of operation, free checking accounts (subject to a small minimum balance
requirement) 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 for branches open two years or more at the balance sheet date. At
December 31, 2003, the comparable store deposit growth was 27% and included 184
branches. Management expects strong comparable store deposit growth in 2004 as
additional metro New York stores continue to be added to the calculation.
The average balances and weighted average rates of deposits for each of the
years 2003, 2002, and 2001 are presented below.
-------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Demand deposits:
Noninterest-bearing $ 3,826,885 $ 2,674,233 $1,962,354
Interest-bearing (money market and
N.O.W. accounts) 6,964,158 0.73% 4,538,914 1.22% 2,999,588 2.12%
Savings deposits 3,676,147 0.75 2,416,884 1.25 1,643,145 1.99
Time deposits/public funds 3,187,443 2.07 2,808,650 2.90 2,037,742 4.81
-------------------------------------------------------------------------------------------------------------------------
Total deposits $ 17,654,633 $12,438,681 $8,642,829
-------------------------------------------------------------------------------------------------------------------------
21
The remaining maturity of certificates of deposit for $100,000 or more as of
December 31, 2003, 2002 and 2001 is presented below:
---------------------------------------------------------------------------------------------------------
Maturity 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(dollars in thousands)
3 months or less $1,017,986 $ 950,299 $ 897,304
3 to 6 months 222,740 116,721 137,388
6 to 12 months 112,800 103,449 70,630
Over 12 months 23,272 10,646 6,820
---------------------------------------------------------------------------------------------------------
Total $1,376,798 $1,181,115 $1,112,142
---------------------------------------------------------------------------------------------------------
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, 2003.
-------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gaps
December 31, 2003
-------------------------------------------------------------------------------------------------------
1-90 91-180 181-365 1-5 Beyond
Days Days Days Years 5 Years Total
-------------------------------------------------------------------------------------------------------
(dollars in millions)
Rate sensitive:
Interest-earning
assets
Loans $3,832.1 $108.3 $180.3 $1,926.9 $1,414.1 $7,461.7
Investment
securities 765.7 726.8 1,338.4 6,622.3 3,858.4 13,311.6
-------------------------------------------------------------------------------------------------------
Total interest-
earning assets 4,597.8 835.1 1,518.7 8,549.2 5,272.5 20,773.3
-------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities
Transaction
accounts 4,053.5 8,743.1 12,796.6
Time deposits 1,346.8 717.9 736.7 528.6 3,330.0
Other borrowed
money 311.5 311.5
Long-term debt 200.0 200.0
-------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 5,711.8 717.9 736.7 528.6 8,943.1 16,638.1
-------------------------------------------------------------------------------------------------------
Period gap (1,114.0) 117.2 782.0 8,020.6 (3,670.6) $4,135.2
-------------------------------------------------------------------------------------------------------
Cumulative gap $(1,114.0) $(996.8) $(214.8) $7,805.8 $4,135.2
-------------------------------------------------------------------------------------------
Cumulative gap as a
percentage of total
interest-earning
assets (5.4) % (4.8)% (1.0)% 37.6% 19.9%
-------------------------------------------------------------------------------------------
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.
The Company's Asset/Liability Committee (ALCO) policy has established that
interest income sensitivity will be
22
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, 2003 and 2002 of
a plus 200 and minus 100 basis point change in interest rates.
------------------------------------------------------------
Basis Point Change:
------------------------------------------------------------
Plus 200 Minus 100
------------------------------------------------------------
December 31, 2003:
Twelve Months 1.6% (2.3)%
Twenty Four Months 6.8% (2.3)%
December 31, 2002:
Twelve Months 8.8% (5.4)%
Twenty Four Months 13.5% (7.3)%
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 the
extension of the maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 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, 2003, 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 as permitted by the Company's regulatory
authorities. The studies have consistently confirmed management's assertion that
the Company's core deposits have stable balances over long periods of time, are
generally insensitive to changes in interest rates and have significantly longer
average lives and durations than the Company's loans and investment securities.
Thus, these core deposit balances provide an internal hedge to market value
fluctuations in the Company's fixed rate assets. Management believes the core
deposit premiums produced by its core deposit study and utilized in its market
value of equity model at December 31, 2003 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, 2003:
--------------------------------------------
Average Life
(in years)
--------------------------------------------
Loans 3.5
Investments 4.9
Deposits 13.6
The MVE analyzes both sides of the balance sheet and, as indicated below,
demonstrates the inherent value of the Company's core deposits in a rising rate
environment. As rates rise, the value of the Company's core deposits increases
which 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, 2003 (in
millions, except for per share amounts):
------------------------------------------------------------
Market Value of
Equity Per Share
------------------------------------------------------------
Plus 200 basis point $3,254 $58.95
Current Rate $3,379 $60.57
Minus 100 basis point $2,646 $51.05
Although the use of derivatives in 2003 was minimal, the Company may utilize
interest rate derivatives to manage interest rate risk, including interest rate
swaps, interest rate caps and floors, interest rate forwards, and
exchange-traded futures and options contracts. Further discussion of the
accounting for derivative instruments is included in Note 1 to the consolidated
financial statements.
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 and federal funds sold 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, 2003
the Company had in excess of $9.0 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 2003, 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 2003 to meet short-term liquidity needs. For 2003,
short-term borrowings averaged $423.5 million as compared to $118.7 million in
2002. The average rate on the Company's short-term borrowings was 0.77% and
1.55% during 2003 and 2002, respectively. As of December 31, 2003, short-term
borrowings included $200.0 million of securities sold under agreements to
repurchase at an average rate of 1.27%, compared to $391.6 million at an average
rate of 1.48% as of December 31, 2002.
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 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.
Holders of the Convertible Trust Capital Securities may convert each security
into 0.9478 shares of Company common stock, subject to adjustment, if (1) the
closing sale price of Company common stock for at least 20 trading days in a
period of 30 consecutive trading days ending on the last trading day of any
calendar quarter beginning with the quarter ending June 30, 2003 is more than
110% of the Convertible Trust Capital Securities conversion price ($52.75 at
December 31, 2003) then in effect on the last day of such calendar quarter, (2)
the assigned credit rating by Moody's of the Convertible Trust Capital
Securities is at or below Bal, (3) the Convertible Trust Capital Securities are
called for redemption, or (4) specified corporate transactions have occurred. As
of December 31, 2003, the Convertible Trust Capital Securities were not
convertible.
The Company may force conversion of the Convertible Trust Capital Securities if,
at any time on or after March 11, 2005, the closing sale price of Company common
stock for at least 20 trading days in a period of 30 consecutive trading days
exceeds 120% of the Convertible Trust Capital Securities conversion price
($52.75 at December 31, 2003).
Once any of the above conditions are met, the Convertible Trust Capital
Securities will be convertible into approximately 3.8 million shares of the
Company's common stock. The effect of these securities on diluted earnings per
share is calculated using the if-converted method. Under the if-converted
method, the related interest charges on the Convertible Trust Capital
Securities, adjusted for income taxes, is added back to the numerator and the
common shares to be issued upon conversion are added to the denominator. If any
of the above conditions are met in 2004, the impact of the if-converted method
on diluted earnings per share will not be material.
Stockholders' Equity and Dividends
At December 31, 2003, stockholders' equity totaled $1,277.3 million, up $359.3
million or 39% over stockholders' equity of $918.0 million at December 31, 2002.
This increase was due to the Company's increase in net income for the year and
shares issued under the Company's common stock offering in September, the
dividend reinvestment plan and employee compensation and benefit plans.
Stockholders' equity as a percent of total assets was 5.6% at December 31, 2003
and 2002, respectively.
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 future 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. The Federal Reserve Board is evaluating
the qualification of the Convertible Trust Capital Securities as Tier 1 capital.
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.
24
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
--------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------
Risk based capital ratios:
Tier 1 12.66% 11.47% 4.00% 4.00%
Total capital 13.62 12.51 8.00 8.00
Leverage ratio 6.61 6.37 4.00 4.00
--------------------------------------------------------------------------
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, 2003 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%. If it is determined that the Convertible Trust Capital
Securities no longer qualify as Tier 1 capital, the Company will remain "well
capitalized".
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 paid per
common share for each of the last two years are shown in the table below. As of
February 5, 2004, there were approximately 49,000 holders of record of the
Company's common stock.
------------------------------------------------------------
Common Share Data
------------------------------------------------------------
Market Prices
----------------- Cash Dividends
High Low Per Share
------------------------------------------------------------
2003 Quarter Ended
December 31 $53.30 $47.33 $0.16000
September 30 47.91 37.30 0.17000
June 30 40.67 36.37 0.16000
March 31 45.60 37.74 0.17000
2002 Quarter Ended
December 31 $47.23 $36.42 $0.15000
September 30 47.85 38.88 0.15000
June 30 50.24 43.70 0.15000
March 31 45.05 38.20 0.15000
------------------------------------------------------------
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.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company enters into commitments to extend credit, such as letters of credit,
which are not reflected in the consolidated financial statements. See note 12 to
the Company's consolidated financial statements included elsewhere herein.
The Company has various contractual obligations that may require future cash
payments. The following table presents, as of December 31, 2003, significant
fixed and determinable contractual obligations to third parties by payment date
excluding interest.
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 $ 5,425.9 $11,945.5 $17,371.4
Certificates of deposits 2,801.4 404.1 124.5 3,330.0
Other borrowed money 311.5 311.5
Long-term debt 200.0 200.0
Operating leases 29.0 58.2 57.0 299.0 443.2
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. See notes 4 and 7 to the Company's
consolidated financial statements included elsewhere herein.
Recent Accounting Statements
See note 1 to the Company's consolidated financial statements included elsewhere
herein.
25
Results of Operations - 2002 versus 2001
Net income for 2002 was $144.8 million compared to $103.0 million in 2001.
Diluted net income per common share was $2.04 compared to $1.51 per common share
for the prior year.
Net interest income on a tax-equivalent basis for 2002 amounted to $585.9
million, an increase of $173.2 million, or 42% over 2001.
Interest income on a tax-equivalent basis increased $152.8 million or 25% to
$768.5 million in 2002. This increase was primarily related to volume increases
in the loan and investment portfolios. Interest expense for 2002 decreased $20.4
million to $182.6 million from $203.0 million in 2001. This decrease was
primarily related to decreases in the rates paid on the Company's deposits and
other borrowed money.
The provision for loan losses was $33.2 million in 2002 compared to $26.4
million in the prior year.
For 2002, noninterest income totaled $257.5 million, an increase of $60.7
million or 31% 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 $30.1 million, or 30%, over 2001 due primarily to
higher transaction volumes. Commerce Insurance recorded an increase of $6.1
million in revenues to $55.9 million from $49.8 million in 2001. Commerce
Capital Markets generated noninterest revenues of $35.1 million in 2002, an
increase of $13.1 million from revenues of $22.0 million in 2001. Loan brokerage
fees increased by $7.7 million in 2002.
Noninterest expenses totaled $579.2 million for 2002, an increase of $159.2
million, or 38% over 2001. Contributing to this increase was the addition of 40
new branches. With the addition of these new offices, staff, facilities,
marketing, and related expenses rose accordingly. Salaries and benefits had the
largest increase of $78.9 million during 2002. Other noninterest expenses rose
$37.2 million to $124.1 million in 2002. This increase included increased
bank-card related service charges of $8.3 million, increased business
development expenses of $6.6 million and increased professional
services/insurance expenses of $5.4 million.
Mergers and Acquisitions
During 2003, the Company purchased The Porch Agency, an insurance brokerage
agency. The Company issued approximately 44,000 shares of common stock in
connection with this immaterial acquisition.
---------------------------
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
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
--------------------------------------------------------------------------------------------------------------------------------
December 31
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 910,092 $ 811,434
Federal funds sold
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 910,092 811,434
Loans held for sale 42,769 96,920
Trading securities 170,458 326,479
Securities available for sale 10,650,655 7,806,779
Securities held to maturity 2,490,484 763,026
(market value 2003 -$2,467,192; 2002- $791,889)
Loans 7,440,576 5,822,589
Less allowance for loan losses 112,057 90,733
-----------------------------------------------------------------------------------------------------------
7,328,519 5,731,856
Bank premises and equipment, net 811,451 580,818
Other assets 307,752 286,669
-----------------------------------------------------------------------------------------------------------
Total assets $22,712,180 $16,403,981
--------------------------------------------------------------------------------------------------------------------------------
Liabilities Deposits:
Demand:
Noninterest-bearing $4,574,714 $3,243,091
Interest-bearing 8,574,297 5,635,351
Savings 4,222,282 2,861,677
Time 3,330,107 2,808,722
-----------------------------------------------------------------------------------------------------------
Total deposits 20,701,400 14,548,841
Other borrowed money 311,510 391,641
Other liabilities 221,982 345,489
Long-term debt 200,000 200,000
-----------------------------------------------------------------------------------------------------------
21,434,892 15,485,971
--------------------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, 76,869,415 shares issued (68,043,171 shares in 2002) 76,869 68,043
Equity Capital in excess of par value 866,095 538,795
Retained earnings 347,365 199,604
Accumulated other comprehensive (loss) income (3,702) 113,614
-----------------------------------------------------------------------------------------------------------
1,286,627 920,056
Less treasury stock, at cost, 363,076 shares (209,794 shares in 2002) 9,339 2,046
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,277,288 918,010
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,712,180 $16,403,981
-----------------------------------------------------------------------------------------------------------
See accompanying notes.
27
Consolidated Statements of Income
--------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Interest Interest and fees on loans $391,361 $354,315 $326,723
Income Interest on investment securities 524,015 400,191 271,707
Other interest 255 865 5,937
-------------------------------------------------------------------------------------------------------------
Total interest income 915,631 755,371 604,367
-------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Interest Interest on deposits:
Expense Demand 50,711 55,413 63,554
Savings 27,596 30,232 32,647
Time 66,115 81,567 98,084
-------------------------------------------------------------------------------------------------------------
Total interest on deposits 144,422 167,212 194,285
Interest on other borrowed money 3,263 1,839 3,508
Interest on long-term debt 12,080 13,565 5,248
-------------------------------------------------------------------------------------------------------------
Total interest expense 159,765 182,616 203,041
-------------------------------------------------------------------------------------------------------------
Net interest income 755,866 572,755 401,326
Provision for loan losses 31,850 33,150 26,384
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 724,016 539,605 374,942
--------------------------------------------------------------------------------------------------------------------------------
Noninterest Deposit charges and service fees 160,678 131,033 100,912
Income Other operating income 167,949 126,433 94,913
Net investment securities gains 3,851 980
-------------------------------------------------------------------------------------------------------------
Total noninterest income 332,478 257,466 196,805
-------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and benefits 354,954 276,933 198,034
Expense Occupancy 95,926 56,498 39,152
Furniture and equipment 89,162 66,700 50,724
Office 39,190 31,186 26,808
Marketing 34,075 23,733 18,378
Other 150,085 124,118 86,940
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 763,392 579,168 420,036
-------------------------------------------------------------------------------------------------------------
Income before income taxes 293,102 217,903 151,711
Provision for federal and state income taxes 98,815 73,088 48,689
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Net income $194,287 $144,815 $103,022
-------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent share:
Basic $ 2.73 $ 2.16 $ 1.59
-------------------------------------------------------------------------------------------------------------
Diluted $ 2.61 $ 2.04 $ 1.51
-------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding:
Basic 71,084 66,795 64,666
-------------------------------------------------------------------------------------------------------------
Diluted 74,462 70,903 68,102
-------------------------------------------------------------------------------------------------------------
Cash dividends, common stock $ 0.66 $ 0.60 $ 0.55
-------------------------------------------------------------------------------------------------------------
See accompanying notes.
28
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Operating Net income $194,287 $144,815 $103,022
Activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 31,850 33,150 26,384
Provision for depreciation, amortization
and accretion 132,432 70,462 44,263
Gains on sales of securities available for sale (3,851) (980)
Proceeds from sales of loans held for sale 1,429,072 1,375,768 688,752
Originations of loans held for sale (1,347,347) (1,399,427) (720,222)
Net decrease (increase) in trading securities 156,021 (43,668) (173,505)
Increase in other assets (30,489) (107,483) (91,800)
(Decrease) increase in other liabilities (55,229) 150,194 148,055
Deferred income tax expense (benefit) 15,417 6,359 (4,054)
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 522,163 230,170 19,915
Investing Proceeds from the sales of securities available for sale 4,864,321 1,506,996 381,341
Activities Proceeds from the maturity of securities available for sale 4,828,747 2,413,025 895,077
Proceeds from the maturity of securities held to maturity 613,848 486,292 384,388
Purchase of securities available for sale (12,777,850) (7,437,004) (3,311,356)
Purchase of securities held to maturity (2,342,384) (118,221) (68,420)
Net increase in loans (1,781,455) (1,326,712) (949,552)
Proceeds from sales of loans 125,368 78,138 45,317
Purchases of premises and equipment (300,335) (220,048) (134,048)
-----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (6,769,740) (4,617,534) (2,757,253)
Financing Net increase in demand and savings deposits 5,631,174 3,801,855 2,083,736
Activities Net increase in time deposits 521,385 561,393 714,264
Net (decrease) increase in other borrowed money (80,131) 127,087 (19,160)
Dividends paid (46,525) (39,911) (35,400)
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 116,908 66,809 53,004
Other (5,401) 4,327 2,714
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,346,235 4,641,060 2,799,158
Increase in cash and cash equivalents 98,658 253,696 61,820
Cash and cash equivalents at beginning of year 811,434 557,738 495,918
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $910,092 $811,434 $557,738
-----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $161,637 $185,143 $201,127
Income taxes 62,569 59,644 48,826
See accompanying notes.
29
Consolidated Statements of Changes in Stockholders' Equity
----------------------------------------------------------------------------------------------------------------
Years ended December 31, 2003, 2002 and 2001
Accumulated
(in thousands, except per share amounts) Capital in Other
Excess of Compre-
Common Par Retained Treasury hensive
Stock Value Earnings Stock Income (Loss) Total
-----------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $49,627 $422,375 $27,083 $(1,622) $(5,239) $492,224
Acquisition of insurance brokerage agencies
(108 shares) 108 (885) (777)
-----------------------------------------------------------------------------------------------------------------
As adjusted balance at January 1, 2001 49,735 421,490 27,083 (1,622) (5,239) 491,447
Net income 103,022 103,022
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax $31,924) 20,525 20,525
Reclassification adjustment (pre-tax $735) 478 478
----------
Other comprehensive income 21,003
----------
Total comprehensive income 124,025
Cash dividends paid (35,400) (35,400)
Shares issued under dividend reinvestment and
compensation and benefit plans (2,202 shares) 2,202 50,802 53,004
Restatement of par value (17,865) 17,865
Shares issued pursuant to stock split 31,761 (31,761)
Other 3,501 (7) 3,494
-----------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $65,833 $461,897 $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
$153,397) 97,850 97,850
Reclassification adjustment (pre-tax $0)
----------
Other comprehensive income 97,850
----------
Total comprehensive income 242,665
Cash dividends paid (39,911) (39,911)
Shares issued under dividend reinvestment and
compensation and benefit plans (2,098 shares) 2,098 64,711 66,809
Acquisition of insurance brokerage agency
(113 shares) 113 4,633 4,746
Other (1) 7,554 2 (424) 7,131
-----------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $68,043 $538,795 $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
$146,701) (93,273) (93,273)
Reclassification adjustment (pre-tax $36,988) (24,043) (24,043)
----------
Other comprehensive loss (117,316)
Total comprehensive income 76,971
Cash dividends paid (46,525) (46,525)
Shares issued under dividend reinvestment and
compensation and benefit plans (3,782 shares) 3,782 113,126 116,908
Common stock issued (5,000 shares) 5,000 203,825 208,825
Acquisition of insurance brokerage agency
(44 shares) 44 1,848 1,892
Other 8,501 (1) (7,293) 1,207
-----------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $76,869 $866,095 $347,365 $(9,339) $(3,702) $1,277,288
-----------------------------------------------------------------------------------------------------------------
See accompanying notes.
30
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, including trading, underwriting and
advisory 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.
Investment Securities
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 $13.0
million, $11.5 million, and $10.6 million were recorded in 2003, 2002, and 2001,
respectively, including an unrealized loss of $192,000 at December 31, 2003 and
an unrealized gain of $987,000 at December 31, 2002.
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 certificate method and are included in noninterest
income.
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.
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. Based upon management's
evaluation of the loan portfolio, the allowance is maintained at a level
considered adequate to absorb estimated inherent losses in the loan portfolio.
The level of the allowance is based on an evaluation of the risk characteristics
included in the loan portfolio, including such factors as 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, and other relevant factors, all of which may be susceptible to
significant change.
31
Notes to Consolidated Financial Statements
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 for
financial reporting purposes, and accelerated methods for income tax purposes.
When capitalizing costs for branch construction, the Company includes the costs
of purchasing the land, developing the site, constructing the building (or
leasehold improvements if the property is leased), and furniture, fixtures and
equipment necessary to equip the branch. All other pre-opening and post-opening
costs related to branches are expensed as incurred.
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 $180,000,
$231,000, and $1.7 million related to ORE expenses, net for 2003, 2002, and
2001, respectively.
Intangible Assets
Goodwill and certain other intangible assets, which do not possess finite useful
lives, are not amortized into net income over an estimated life but rather are
tested at least annually for impairment. Intangible assets determined to have
finite lives, $4.4 million at December 31, 2003, 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, 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 2003 and 2002 were
approximately $62.8 million and $39.6 million, respectively.
Derivative Financial Instruments As part of CCMI's broker-dealer activities, the
Company 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 accomodation 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 December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirement of FAS No. 123, "Accounting for Stock-Based
Compensation." This statement is effective for fiscal years ending after
December 15, 2002 and did not have an impact on the financial condition or
operating results of the Company.
32
Notes to Consolidated Financial Statements
The Company will continue to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations to account for its stock-based
compensation plans. If the Company had accounted for stock options under the
fair value provisions of FAS 123, net income and net income per share would have
been as follows (in thousands, except per share amounts):
--------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------------------
Reported net income $194,287 $144,815 $103,022
Less: Stock option compensation expense
determined under fair value method, net of tax (10,048) (8,429) (5,592)
-------- ------- -------
Pro forma net income $184,239 $136,386 $97,430
======== ======== =======
Reported net income per share:
Basic $ 2.73 $ 2.16 $ 1.59
Diluted 2.61 2.04 1.51
Pro forma net income per share:
Basic $ 2.59 $ 2.04 $ 1.51
Diluted 2.47 1.94 1.44
--------------------------------------------------------------------------------------------------------
The fair value of options granted in 2003, 2002, and 2001 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 4.86%,
dividend yields of 1.50% to 2.50%, volatility factors of the expected market
price of the Company's common stock of .304 to .309, and weighted average
expected lives of the options of 4.75 to 5.22 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 April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (FAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain embedded derivatives, and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). This Statement amends FAS 133 to reflect the decisions
made as part of the Derivatives Implementation Group (DIG) and in other FASB
projects or deliberations. FAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of FAS 149 did not have an impact on the Company's
financial condition or operating results.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (FAS
150). This Statement establishes standards for classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. Financial instruments that fall within the scope of FAS 150 are to be
classified as liabilities, or an asset in some circumstances. This statement
became effective upon issuance for financial instruments entered into or
modified after May 31, 2003 and for all financial instruments previously entered
into at the beginning of the first interim period beginning after September 15,
2003. The adoption of FAS 150 did not have an impact on the Company's financial
condition or operating results.
33
Notes to Consolidated Financial Statements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). This Interpretation requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
obligations undertaken. The liability that must be recognized is specifically
related to the obligation to stand ready to perform over the term of the
guarantee. The initial recognition and measurement provisions of this guidance
are effective on a prospective basis for guarantees issued or modified on or
after January 1, 2003. This Interpretation also expands the disclosures that a
guarantor must make about its obligations under certain guarantees. These
disclosure requirements are effective for financial statements of interim or
annual periods ending after October 15, 2002. See Note 12 for further discussion
of the Company's guarantees. The adoption of FIN 45 did not have a material
impact on the Company's financial condition or operating results.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). In December 2003, the FASB decided to
defer the implementation date of FIN 46 to periods ending after March 15, 2004
for all variable interest entities with the exception of special-purpose
entities, which are subject to adoption in periods ending after December 15,
2003. FIN 46 provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests and
results of operations of a VIE need to be included in a company's consolidated
financial statements. FIN 46's consolidation criteria are based on an analysis
of risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. Management does not believe the
application of FIN 46 to any of its various investments or interests, if
required, will have a material impact on the Company's financial condition or
operating results.
During the fourth quarter of 2003, the Company applied the provisions of FIN 46
to its wholly-owned subsidiary business trust, Commerce Capital Trust II, that
has issued convertible trust preferred securities to third party investors. The
Company believes Commerce Capital Trust II qualifies as a special-purpose entity
that falls within the adoption exception noted above. The trusts' only assets
are junior subordinated convertible debentures issued by the Company that were
acquired by the trust using proceeds from the issuance of trust preferred
securities and common stock. These debentures totaled $200.0 million at December
31, 2003. The adoption of FIN 46 has resulted in the deconsolidation of Commerce
Capital Trust II. As a result of deconsolidation, the trust preferred securities
have been re-characterized as "Long-term debt" on the consolidated balance
sheet.
The Company makes investments directly in low-income housing tax credit (LIHTC)
operating partnerships, private venture capital funds and Small Business
Investment Companies (SBIC). The Company has determined these entities do not
meet the consolidation criteria of FIN 46. At December 31, 2003, the Company's
investment in these entities totals $30.1 million.
2. Mergers and Acquisitions
During 2003, the Company purchased The Porch Agency, an insurance brokerage
agency, which was merged with Commerce Insurance. The Company issued
approximately 44,000 shares of common stock in connection with this immaterial
acquisition.
In 2002, the Company purchased Sanford and Purvis, Inc., an insurance brokerage
agency, which was merged with Commerce Insurance. The Company issued
approximately 113,000 shares of common stock in connection with this immaterial
acquisition.
In 2001, the Company purchased Fitzsimmons Insurance and Financial Services,
Inc., Business Training Systems, Inc. and Brettler Financial Group, Inc.,
insurance brokerage agencies, which were merged with Commerce Insurance. The
Company issued approximately 108,000 shares of common stock in connection with
these immaterial acquisitions.
34
Notes to Consolidated Financial Statements
3. 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, 2003 and
2002 follows:
-----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------------------------------
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 $10,528,396 $82,057 $(98,908) $10,511,545 $7,491,768 $172,699 $(4,730) $7,659,737
Obligations of state and
political subdivisions 30,223 821 (117) 30,927 22,041 1,144 23,185
Equity securities 8,571 8,017 16,588 18,898 5,156 24,054
Other 89,372 2,223 91,595 96,291 3,512 99,803
----------------------------------------------------------------------------------------------------------------------------------
Securities available
for sale $10,656,562 $93,118 $(99,025) $10,650,655 $7,628,998 $182,511 $(4,730) $7,806,779
----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agency and
mortgage-backed
obligations $ 2,193,577 $15,209 $(27,088) $ 2,181,698 $ 624,688 $ 27,847 $ 652,535
Obligations of state and
political subdivisions 227,199 30 (11,443) 215,786 91,204 1,041 $ (25) 92,220
Other 69,708 69,708 47,134 47,134
----------------------------------------------------------------------------------------------------------------------------------
Securities held to
maturity $ 2,490,484 $15,239 $(38,531) $ 2,467,192 $ 763,026 $ 28,888 $ (25) $ 791,889
----------------------------------------------------------------------------------------------------------------------------------
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. Management does not believe any individual unrealized loss as of December
31, 2003 represents an other-than-temporary impairment. The unrealized losses on
these securities are caused by the changes in interest rates. The Company
believes it will collect all amounts contractually due on these securities and
that it has the intent and ability to hold these securities until the fair value
is at least equal to the carrying value.
The amortized cost and estimated market value of investment securities (in
thousands) at December 31, 2003, 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 $ 153,408 $ 153,930 $ 169,545 $ 169,545
Due after one year through five years 12,310 12,915 112 112
Due after five years through ten years 59,590 60,695 450,878 435,989
Due after ten years 31,743 32,572 112,589 102,467
Mortgage backed securities 10,390,940 10,373,955 1,757,360 1,759,079
Equity securities 8,571 16,588
----------------------------------------------------------------------------------------------------------
$10,656,562 $10,650,655 $2,490,484 $2,467,192
----------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale during 2003, 2002 and 2001
were $4.86 billion, $1.51 billion and $381.3 million, respectively. Gross gains
of $32.6 million, $6.8 million and $2.2 million were realized on the sales in
2003, 2002, and 2001, respectively, and gross losses of $28.8 million, $6.8
million and $1.2 million were realized in 2003, 2002 and 2001, respectively.
At December 31, 2003 and 2002, investment securities with a carrying value of
$5.0 billion and $2.1 billion, respectively, were pledged to secure deposits of
public funds.
35
Notes to Consolidated Financial Statements
4. Loans
The following is a summary of loans outstanding (in thousands) at December 31,
2003 and 2002:
-------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------------------
Commercial:
Term $1,027,526 $ 842,869
Line of credit 959,158 683,640
Demand 1,077 317
-------------------------------------------------------------------------------------------
1,987,761 1,526,826
Owner-occupied 1,619,079 1,345,306
Consumer:
Mortgages (1-4 family residential) 918,686 626,652
Installment 138,437 140,493
Home equity 1,405,795 1,139,589
Credit lines 60,579 56,367
-------------------------------------------------------------------------------------------
2,523,497 1,963,101
Commercial real estate:
Investor developer 1,167,672 885,276
Construction 142,567 102,080
-------------------------------------------------------------------------------------------
1,310,239 987,356
-------------------------------------------------------------------------------------------
$7,440,576 $5,822,589
-------------------------------------------------------------------------------------------
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, 2003 and 2002:
-------------------------------------------------------------------
December 31,
-------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
Executive officers $ 1.4 $ 0.2
Bancorp directors 22.6 22.1
-------------------------------------------------------------------
$ 24.0 $ 22.3
-------------------------------------------------------------------
In addition, the Company had loans to directors of its subsidiary banks totaling
$121.7 million and $102.5 million at December 31, 2003 and 2002, respectively.
In addition to the services referenced in Note 7, the Company purchased goods
and services, including legal services, from related parties. Such disbursements
aggregated $1.2 million, $5.9 million, and $4.5 million, in 2003, 2002, and
2001, 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.
36
Notes to Consolidated Financial Statements
5. Allowance for Loan Losses
The following is an analysis of changes in the allowance for loan losses (in
thousands) for 2003, 2002 and 2001:
----------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------------------------------------------------------------
Balance, January 1 $ 90,733 $66,981 $48,680
Provision charged to operating expense 31,850 33,150 26,384
Recoveries of loans previously charged off 1,264 1,330 974
Loan charge-offs (11,790) (10,728) (9,057)
----------------------------------------------------------------------------------------------------
Balance, December 31 $112,057 $90,733 $66,981
----------------------------------------------------------------------------------------------------
6. Non-Performing Loans and Other Real Estate
The total of non-performing loans (non-accrual and restructured loans) was $21.7
million and $14.2 million at December 31, 2003 and 2002, respectively.
Non-performing loans of $0.9 million, $3.8 million and $0.9 million net of
charge offs of $0, $0 and $17,000 were transferred to other real estate during
2003, 2002 and 2001, respectively. Other real estate ($1.8 million and $3.6
million at December 31, 2003 and 2002, respectively) is included in other
assets.
At December 31, 2003 and 2002, the recorded investment in loans considered to be
impaired under FASB Statement No. 114 "Accounting by Creditors for Impairment of
a Loan" totaled $15.6 million and $9.0 million, respectively, all of which are
included in non-performing loans. The reserve for loan losses related to
impaired loans totaled approximately $3.5 million and $2.2 million at December
31, 2003 and 2002, 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 $12.3 million and
$10.6 million during 2003 and 2002, respectively. Interest income of
approximately $1.9 million, $1.4 million, and $2.1 million would have been
recorded on non-performing loans (including impaired loans) in accordance with
their original terms in 2003, 2002, and 2001, respectively. Actual interest
income recorded on these loans amounted to $418,000, $275,000, and $237,000
during 2003, 2002, and 2001, respectively.
7. Bank Premises, Equipment, and Leases
A summary of bank premises and equipment (in thousands) is as follows:
------------------------------------------------------------------------------------------
December 31,
---------------------------------
2003 2002
------------------------------------------------------------------------------------------
Land $180,324 $123,880
Buildings 323,810 247,508
Leasehold improvements 128,261 43,130
Furniture, fixtures and equipment 335,579 265,712
Leased property under capital leases 124 124
------------------------------------------------------------------------------------------
968,098 680,354
Accumulated depreciation and amortization (243,809) (181,165)
------------------------------------------------------------------------------------------
724,289 499,189
Premises and equipment in progress 87,162 81,629
------------------------------------------------------------------------------------------
$811,451 $580,818
------------------------------------------------------------------------------------------
At December 31, 2003, the Company leased from various related parties under
separate operating lease agreements the land on which it has constructed 19
offices. 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
$1.9 million, $1.6 million, and $1.8 million in 2003, 2002, and 2001,
respectively. These leases expire periodically beginning in 2005 but are
renewable through 2040.
Total rent expense charged to operations under operating leases was
approximately $33.7 million in 2003, $21.8 million in 2002, and $11.6 million in
2001. Total depreciation expense charged to operations was $69.7 million, $52.7
million and $41.2 million in 2003, 2002 and 2001, respectively.
37
Notes to Consolidated Financial Statements
The future minimum rental commitments, by year, under the non-cancelable leases,
including escalation clauses, are as follows (in thousands) at December 31,
2003:
------------------------------------------------------------------------------
Operating
------------------------------------------------------------------------------
2004 $ 28,987
2005 29,058
2006 29,113
2007 28,249
2008 28,783
Later years 298,998
------------------------------------------------------------------------------
Net minimum lease payments $443,188
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 $6.4 million, $4.6 million, and $2.3
million in 2003, 2002, and 2001, respectively, for such services and related
costs. Additionally, the business received additional revenues for project
management of approximately $3.8 million, $3.5 million, and $1.9 million in
2003, 2002, and 2001, 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. 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.
8. Deposits
The aggregate amount of time certificates of deposits in denominations of
$100,000 or more was $1.4 billion and $1.2 billion at December 31, 2003 and
2002, respectively.
9. Other Borrowed Money
Other borrowed money consists primarily of securities sold under agreements to
repurchase, dollar rolls, federal funds purchased, and lines of credit. The
following table represents information for other borrowed money (in thousands)
at December 31, 2003 and 2002:
----------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
Average Average
Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------
Securities sold under
agreements to repurchase $311,510 1.10% $391,641 1.56%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Average amount outstanding $423,538 0.77% $118,734 1.55%
Maximum month-end balance 1,114,482 391,641
----------------------------------------------------------------------------------------------------
As of December 31, 2003, the Company had a line of credit of $820.7 million from
the Federal Home Loan Bank of New York, a line of credit of $187.7 million from
the Federal Home Loan Bank of Pittsburgh, and a $60.0 million line of credit
from a group of other banks, all of which was available. In addition, CCMI had a
line of credit of $50.0 million from another bank, all of which was available.
10. Long-Term Debt
On July 15, 1993, the Company issued $23.0 million of 8 3/8% subordinated notes
due 2003. All of these notes were redeemed on May 20, 2002 at the stated
liquidation amount ($101 per note) plus accrued interest to May 20, 2002.
In 1997, the Company issued $57.5 million of 8.75% Trust Capital Securities
through Commerce Capital Trust I, a Delaware business trust subsidiary of the
Company. All of these Trust Capital Securities were redeemed on July 1, 2002 at
the stated liquidation amount ($25 per capital security) plus accrued and unpaid
distributions thereon to July 1, 2002.
38
Notes to Consolidated Financial Statements
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 Convertible Trust Capital
Securities mature in 2032. Holders of the Convertible Trust Capital Securities
may convert each security into 0.9478 shares of Company common stock, subject to
adjustment, if (1) the closing sale price of Company common stock for at least
20 trading days in a period of 30 consecutive trading days ending on the last
trading day of any calendar quarter beginning with the quarter ending June 30,
2002 is more than 110% of the Convertible Trust Capital Securities conversion
price ($52.75 at December 31, 2003) then in effect on the last day of such
calendar quarter, (2) the assigned credit rating by Moody's of the Convertible
Trust Capital Securities is at or below Bal, (3) the Convertible Trust Capital
Securities are called for redemption, or (4) specified corporate transactions
have occurred. All $200.0 million of the Convertible Trust Capital Securities
currently qualify as Tier 1 capital for regulatory capital purposes. 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. As of December 31, 2003, the Convertible
Trust Capital Securities were not convertible.
11. Income Taxes
The provision for income taxes consists of the following (in thousands):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Current:
Federal $77,437 $62,660 $52,085
State 5,961 4,069 658
Deferred:
Federal 15,417 6,359 (4,054)
--------------------------------------------------------------------------------
$98,815 $73,088 $48,689
--------------------------------------------------------------------------------
The above provision includes income taxes related to securities gains of $1.3
million, $0 and $400,000 for 2003, 2002 and 2001, respectively.
The provision for income taxes differs from the expected statutory provision as
follows:
---------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------------------
Expected provision at statutory rate: 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt interest on loans (1.5) (1.7) (2.0)
Tax-exempt interest on securities (1.7) (1.8) (1.8)
State income taxes (net of federal benefit) 1.3 1.2 0.3
Other 0.6 0.8 0.6
---------------------------------------------------------------------------------------
33.7% 33.5% 32.1%
---------------------------------------------------------------------------------------
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.
39
Notes to Consolidated Financial Statements
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 2003 and 2002 are as follows (in thousands):
-------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves $38,623 $ 30,960
Intangibles 2,172 2,837
Other reserves 3,951 2,702
Fair value adjustment, available for sale securities 2,206
Other 274
-------------------------------------------------------------------------------------------------
Total deferred tax assets 46,952 36,773
-------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (37,661) (16,157)
Fair value adjustment, available for sale securities (64,167)
Other (4,760) (2,875)
-------------------------------------------------------------------------------------------------
Total deferred tax liabilities (42,421) (83,199)
-------------------------------------------------------------------------------------------------
Net deferred assets (liabilities) $ 4,531 $(46,426)
-------------------------------------------------------------------------------------------------
No valuation allowance was recognized for the deferred tax assets at December
31, 2003 and 2002, respectively.
12. 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, 2003,
the Company had outstanding standby letters of credit in the amount of $602.6
million.
In addition, the Company is committed as of December 31, 2003 to advance $417.9
million on construction loans, $818.9 million on home equity lines of credit and
$1.7 billion on lines of credit. All other commitments total approximately
$452.8 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 $21.3 million at December 31, 2003.
The fair value of the fees associated with standby letters of credit originated
since January 1, 2003, which is the implementation date for the recognition
provisions of FIN 45, have been deferred and recorded in "Other liabilities" on
the consolidated balance sheet. These fees are immaterial to the Company's
consolidated financial statements at December 31, 2003.
13. Common Stock
At December 31, 2003, the Company's common stock had a par value of $1.00. The
Company had 150,000,000 shares authorized as of this date.
During September 2003, the Company completed an offering of 5,000,000 shares of
common stock for aggregate proceeds of approximately $209 million under its
previously filed Form S-3 shelf registration. The proceeds from this offering
will be used to support the Company's future growth.
On December 16, 2003, the Board of Directors declared a cash dividend of $0.19
for each share of common stock outstanding payable January 20, 2004 to
shareholders of record on January 6, 2004.
40
Notes to Consolidated Financial Statements
14. Earnings Per Share
The calculation of earnings per share follows (in thousands, except for per
share amounts):
-------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------
Basic:
Net income applicable to common stock $194,287 $144,815 $103,022
-------------------------------------------------------------------------------------------------
Average common shares outstanding 71,084 66,795 64,666
-------------------------------------------------------------------------------------------------
Net income per common share $2.73 $2.16 $1.59
-------------------------------------------------------------------------------------------------
Diluted:
Net income applicable to common stock
on a diluted basis $194,287 $144,815 $103,022
-------------------------------------------------------------------------------------------------
Average common shares outstanding 71,084 66,795 64,666
Additional shares considered in diluted
computation assuming:
Exercise of stock options 3,378 4,108 3,436
-------------------------------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 74,462 70,903 68,102
-------------------------------------------------------------------------------------------------
Net income per common and common
equivalent share $2.61 $2.04 $1.51
-------------------------------------------------------------------------------------------------
15. Benefit Plans
Employee Stock Option Plan
The Company has the 1997 Employee Stock Option Plan (the Plan) for the officers
and employees of the Company and its subsidiaries as well as a plan for its
non-employee directors. The Plan authorizes the issuance of up to 17,234,000
shares of common stock (as adjusted for stock dividends) upon the exercise of
options. As of December 31, 2003, options to purchase 14,403,096 shares of
common stock have been issued under the Plan. The option price for options
issued under the Plan 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 after December 31, 2002 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, 2001 8,654,050 15.86
Options granted 2,695,050 30.68
Options exercised 1,092,393 14.70
Options canceled 74,017 26.30
Balance at December 31, 2001 10,182,690 19.83
---------------------------------------------------------------------------------------
Options granted 2,088,744 40.40
Options exercised 974,145 18.59
Options canceled 248,736 29.69
Balance at December 31, 2002 11,048,553 23.71
---------------------------------------------------------------------------------------
Options granted 2,674,960 42.48
Options exercised 1,572,220 15.30
Options canceled 193,691 37.55
Balance at December 31, 2003 11,957,602 28.76
---------------------------------------------------------------------------------------
41
Notes to Consolidated Financial Statements
Information concerning options outstanding as of December 31, 2003 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 12/31/2003 Exercise Price
--------------------------------------------------------------------------------------------------------
$4.95 to $10.00 1,138,968 2.3 $ 8.11 1,138,968 $ 8.11
$10.01 to $20.00 2,355,361 5.2 18.01 2,346,624 18.02
$20.01 to $35.00 3,950,328 6.1 26.51 3,455,798 25.96
$35.00 to $49.37 4,512,945 8.7 41.56 1,431,455 40.30
--------------------------------------------------------------------------------------------------------
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 $3.4 million, $2.8 million and $2.2 million for 2003,
2002 and 2001, 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, 2003, the ESOP held 1,533,000 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 in 2003 or 2002. The total expense associated
with the ESOP for 2001 was $100,000.
Post-employment or Post-retirement Benefits
The Company offers no post-employment or post-retirement benefits.
16. 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.
42
Notes to Consolidated Financial Statements
The following table represents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2003 and 2002:
--------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 910,092 $ 910,092 $ 811,434 $ 811,434
Loans held for sale 42,769 42,769 96,920 96,920
Trading securities 170,458 170,458 326,479 326,479
Investment securities 13,141,139 13,117,847 8,569,805 8,598,668
Loans (net) 7,328,519 7,454,910 5,731,856 5,768,650
Financial liabilities:
Deposits 20,701,400 20,724,863 14,548,841 14,576,800
Other borrowed money 311,510 311,510 391,641 391,641
Long-term debt 200,000 239,000 200,000 222,000
--------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letters of credit $ 1,802 $ 1,802 $ 3,685
Commitments to extend credit 1,365 1,324
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. The carrying amount of accrued interest approximates its fair
value.
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.
Notes to Consolidated Financial Statements
17. 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 (in thousands,
except per share amounts):
---------------------------------------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
---------------------------------------------------------------------------------------------------------
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 $ 0.75 $ 0.70 $ 0.65 $ 0.63
Diluted 0.71 0.67 0.63 0.60
2002
Interest income $202,024 $196,775 $188,368 $168,204
Interest expense 42,528 46,221 49,742 44,125
Net interest income 159,496 150,554 138,626 124,079
Provision for loan losses 8,000 8,000 10,250 6,900
Provision for federal and state
income taxes 20,258 19,669 17,763 15,398
Net income 40,574 37,689 34,802 31,750
Net income per common share:
Basic $ 0.60 $ 0.56 $ 0.52 $ 0.48
Diluted 0.57 0.53 0.49 0.45
44
Notes to Consolidated Financial Statements
18. Condensed Financial Statements of the Parent Company and Other Matters
Balance Sheets
---------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002
---------------------------------------------------------------------------------------------------
Assets
Cash $ 2,667 $ 3,034
Securities available for sale 101,589 24,059
Investment in subsidiaries 1,375,806 1,094,635
Other assets 8,843 9,452
---------------------------------------------------------------------------------------------------
$1,488,905 $1,131,180
---------------------------------------------------------------------------------------------------
Liabilities
Other liabilities $ 11,617 $ 13,170
Long-term debt 200,000 200,000
---------------------------------------------------------------------------------------------------
211,617 213,170
---------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 76,869 68,043
Capital in excess of par value 866,095 538,795
Retained earnings 347,365 199,604
Accumulated other comprehensive (loss) income (3,702) 113,614
---------------------------------------------------------------------------------------------------
1,286,627 920,056
Less treasury stock 9,339 2,046
---------------------------------------------------------------------------------------------------
Total stockholders' equity 1,277,288 918,010
---------------------------------------------------------------------------------------------------
$1,488,905 $1,131,180
---------------------------------------------------------------------------------------------------
Statements of Income
--------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001
--------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ 44,500 $ 9,600 $ 22,400
Interest income 476 552 454
Other 1,711 2,826 7,022
--------------------------------------------------------------------------------------------------
46,687 12,978 29,876
--------------------------------------------------------------------------------------------------
Expenses:
Interest expense 12,448 15,554 7,258
Operating expenses 3,877 4,460 3,214
--------------------------------------------------------------------------------------------------
16,325 20,014 10,472
Income (loss) before income taxes and equity
in undistributed income of subsidiaries 30,362 (7,036) 19,404
Income tax benefit 4,971 5,757 1,004
--------------------------------------------------------------------------------------------------
35,333 (1,279) 20,408
Equity in undistributed income of subsidiaries 158,954 146,094 82,614
--------------------------------------------------------------------------------------------------
Net income $194,287 $144,815 $103,022
--------------------------------------------------------------------------------------------------
45
Notes to Consolidated Financial Statements
Statements of Cash Flows
------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001
------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 194,287 $144,815 $103,022
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (158,954) (146,094) (82,614)
Gains on sales of securities available for sale 470
Decrease increase in other assets 609 2,082 4,484
Increase (decrease) in other liabilities 5,946 (11,509) 17,874
------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 41,888 (10,706) 43,236
Investing activities:
Investments in subsidiaries (239,500) (145,520) (62,667)
Proceeds from sale of securities available for sale 3,018 1,828
Proceeds from the maturity of securities available for sale 144,314 95,972 66,422
Purchase of securities available for sale (218,969) (91,414) (66,864)
Other (15) 19 352
------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (314,170) (137,925) (60,929)
Financing activities:
Proceeds from issuance of common stock
under dividend reinvestment and other stock plans 116,908 66,809 53,005
Cash dividends (46,525) (39,911) (35,400)
Issuance of common stock 208,825
Issuance of long-term debt 206,186
Redemption of long-term debt (82,000)
Other (7,293) (421)
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 271,915 150,663 17,605
(Decrease) increase in cash and cash equivalents (367) 2,032 (88)
Cash and cash equivalents at beginning of year 3,034 1,002 1,090
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,667 $ 3,034 $ 1,002
------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,268 $ 13,551 $ 7,089
Income taxes 56,357 56,586 48,616
------------------------------------------------------------------------------------------------------------
46
Notes to Consolidated Financial Statements
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 Shore,
Commerce North and Commerce Delaware can declare dividends in 2004 without
additional approval of approximately $138.1 million, $77.4 million, $43.9
million, $47.4 million and $1.7 million, respectively, plus an additional amount
equal to each bank's net profit for 2004 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, 2003 and 2002, the Company complied with these
guidelines.
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, 2003 and 2002, the Company and each of its subsidiary banks
were categorized as "well-capitalized" under the regulatory framework for prompt
corrective action. As a result of the issuance of FIN 46, the Federal Reserve
Board is evaluating whether deconsolidation of the trust will affect the
qualification of the Convertible Trust Capital Securities as Tier 1 capital. If
it is determined that the Convertible Trust Capital Securities no longer qualify
as Tier 1 capital, the Company will remain "well capitalized". There are no
conditions or events since December 31, 2003 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, 2003, that the Company and its
subsidiaries meet all capital adequacy requirements to which they are subject.
47
Notes to Consolidated Financial Statements
The following table presents the Company's and Commerce NJ's risk-based and
leverage capital ratios at December 31, 2003 and 2002:
-----------------------------------------------------------------------------------------------------------
Per Regulatory Guidelines
-----------------------------------------------------------------------------------------------------------
Actual Minimum "Well Capitalized"
-----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------
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 $769,945 10.81% $284,796 4.00% $427,194 6.00%
Total capital 845,009 11.87 569,592 8.00 711,991 10.00
Leverage ratio 769,945 6.03 510,853 4.00 638,566 5.00
December 31, 2002
Company
Risk based capital ratios:
Tier I $995,826 11.47% $347,373 4.00% $521,059 6.00%
Total capital 1,086,559 12.51 697,746 8.00 868,432 10.00
Leverage ratio 995,826 6.37 625,219 4.00 781,524 5.00
Commerce NJ
Risk based capital ratios:
Tier 1 $526,612 9.77 $215,519 4.00% $323,279 6.00%
Total capital 586,328 10.88 431,039 8.00 538,799 10.00
Leverage ratio 526,612 5.75 366,657 4.00 458,321 5.00
48
Notes to Consolidated Financial Statements
19. Segment Reporting
The Company operates one reportable segment of business, Community Banks, which
includes Commerce NJ, Commerce PA, Commerce Shore, 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
$66.5 million, $55.9 million and $49.8 million in 2003, 2002, and 2001,
respectively, were reported in other operating income), and CCMI (whose
noninterest revenues of $42.5 million, $35.1 million, and $22.8 million in 2003,
2002, and 2001, respectively, were reported in other operating income).
Selected segment information for each of the three years ended December 31 is as
follows (in thousands):
--------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Community Parent/ Community Parent/ Community Parent/
Banks Other Total Banks Other Total Banks Other Total
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $761,530 $(5,664) $755,866 $579,687 $(6,932) $572,755 $ 402,040 $ (714) $ 401,326
Provision for loan
losses 31,850 - 31,850 33,150 - 33,150 26,384 26,384
--------------------------------------------------------------------------------------------------------------------------------
Net interest income
after provision 729,680 (5,664) 724,016 546,537 (6,932) 539,605 375,656 (714) 374,942
Noninterest income 222,967 109,511 332,478 166,384 91,082 257,466 125,418 71,387 196,805
Noninterest expense 676,265 87,127 763,392 500,522 78,646 579,168 358,870 61,166 420,036
--------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 276,382 16,720 293,102 212,399 5,504 217,903 142,204 9,507 151,711
Income tax expense 93,314 5,501 98,815 72,839 249 73,088 46,630 2,059 48,689
--------------------------------------------------------------------------------------------------------------------------------
Net income $183,068 $11,219 $194,287 $139,560 $ 5,255 $144,815 $ 95,574 $ 7,448 $ 103,022
--------------------------------------------------------------------------------------------------------------------------------
Average assets
(in millions) $ 17,754 $ 1,836 $ 19,590 $ 12,192 $ 1,560 $ 13,752 $ 8,548 $ 999 $ 9,547
--------------------------------------------------------------------------------------------------------------------------------
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.
20. Derivative Financial Instruments
As part of CCMI's broker-dealer activities, the Company 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, the Company buys and sells a variety of derivative financial
instruments including futures and option contracts. Market risk includes changes
in interest rates or value fluctuations in the underlying financial instruments.
The Company uses notional (contract) amounts 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)
for the years ended December 31, 2003 and 2002, respectively:
---------------------------------------------------------------------------------------------
Notional Unrealized
Amount Gain (Loss)
Long (Short) Net
---------------------------------------------------------------------------------------------
2003 2002 2003 2002
Municipal bond futures $ - $ 36,500 $ - $ 278
Treasury bond futures (3,000) (60,000) (68) (2,537)
Treasury bond put options (5,000) 45,000 3 (23)
Treasury bond call options (97,500) (105,000) 343 (1,342)
---------------------------------------------------------------------------------------------
Total $ (105,500) $(83,500) $ 278 $(3,624)
---------------------------------------------------------------------------------------------
The average notional amount for futures and options contracts for the years
ended December 31, 2003 and 2002 was $240.9 million and $257.9 million,
respectively. Realized and unrealized gains and losses related to derivative
financial instruments are included in other operating income in the statement of
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,
2003 and 2002, respectively:
--------------------------------------------------------------------------------------------
Notional Estimated
Amount Fair Value
--------------------------------------------------------------------------------------------
2003 2002 2003 2002
Interest Rate Swaps:
Assets $155,635 $109,432 $9,488 $11,164
Liabilities $155,635 109,432 (8,659) (10,338)
--------------------------------------------------------------------------------------------
$ 828 $ 826
--------------------------------------------------------------------------------------------
49
Commerce Bancorp, Inc. and Subsidiaries
Report of Independent Auditors
The Board of Directors and Stockholders
Commerce Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Commerce
Bancorp, Inc. and Subsidiaries as of December 31, 2003 and 2002 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, 2003. 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 auditing standards generally accepted
in the 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. and Subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 16, 2004
50
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 as of the end of the period covered by this
report. Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also
conducted an evaluation of internal control over financial reporting ("Internal
Control") to determine whether any changes in Internal Control occurred during
the quarter (the Company's fourth fiscal quarter in the case of an annual
report) that have materially affected or which are reasonably likely to
materially affect Internal Control. Based on that evaluation, there has been no
such change during the quarter covered by this report.
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 Registrant.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2004 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 to the
Company's definitive proxy statement relating to its 2004 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 to the
Company's definitive proxy statement relating to its 2004 Annual Meeting of
Shareholders, which will be filed with the SEC. The following table details
information regarding the Company's existing equity compensation plans as of
December 31, 2003:
(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 11,957,602 $28.76 2,831,904
security holders
-------------------------------------------------------------------------------------
Equity compensation plans not approved by N/A N/A N/A
security holders
=====================================================================================
Total 11,957,602 $28.76 2,831,904
=====================================================================================
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2004 Annual Meeting of
Shareholders, which will be filed with the SEC.
51
Item 14. Principal Accountant Fees and Services
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement relating to its 2004 Annual Meeting of
Shareholders, which will be filed with the SEC.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following financial statements of Commerce Bancorp, Inc. and
Subsidiaries are filed as part of this Form 10-K in Item 8:
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Report of Independent Auditors
(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 Incorporated by reference from the Company's Annual
Company, as amended. Report on Form 10-K for the fiscal year ended
December 31, 2002.
3.2 By-laws of the Company, as amended. Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2002.
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)
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.
52
Exhibits (continued)
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 branch Registration Statement on Form S-1, and
office 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 branch office in Mt. Holly, New year ended December 31, 1987.
Jersey.
* 10.3 The Company's 1984 Incentive Stock Option Plan. Incorporated by reference from the Company's
Registration Statement on Form S-1, and
Amendments Nos. 1 and 2 thereto (Registration
No. 2-94189)
* 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.
10.5 Lease, dated March 29, 1985, between Commerce PA Incorporated by reference from the Company's
and Devon Properties (Ltd.), and lease dated Registration Statement on Form S-2
September 4, 1985, between Commerce PA and Devon (Registration No. 33-12603)
Properties (Ltd.), relating to Commerce PA's
branch office in Devon, Pennsylvania.
10.6 Assignment of Lease and Assumption Agreement Incorporated by reference from the Company's Annual
dated November 30, 1987, between the Company Report on Form 10-K for the fiscal year ended
and Commerce PA, relating to Commerce PA's December 31, 1987.
branch office in Devon, Pennsylvania.
10.7 Lease between the Company and Astoria Associates, Incorporated by reference from the Company's
relating to the Company's and Commerce NJ's Registration Statement on Form S-2
headquarters facilities. (Registration No. 33-12603)
10.8 Ground lease, dated April 15, 1986, between Incorporated by reference from the Company's
Commerce NJ and U.S. Equities, relating to one of Annual Report on Form 10-K for the fiscal
Commerce NJ" branch offices in Washington year ended December 31, 1988.
Township, New Jersey.
10.9 Ground lease, dated February 1, 1988, between Incorporated by reference from the Company's
Commerce NJ and Diversified Properties of New Annual Report on Form 10-K for the fiscal
Jersey, relating to one of Commerce NJ's branch year ended December 31, 1988.
offices in Washington Township, New Jersey.
53
Exhibits (continued)
10.10 Ground lease, dated February 15, 1998, between Incorporated by reference from the Company's
Commerce NJ and Diversified Properties 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.
branch offices 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.
* 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 and Whiting Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce Shore's branch office in year ended December 31, 1997.
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 branch office 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 branch offices in year ended December 31, 1997.
Gloucester Township, New Jersey.
10.21 Ground lease, dated October 11, 1996 and First Incorporated by reference from the Company's Annual
Lease Amendment dated November 25, 1996 between Report on Form 10-K for the fiscal year ended
Commerce PA and Plymouth Equities, L.L.C., relating December 31, 1997.
to Commerce PA's branch office in Plymouth
Township, PA.
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 branch in Ewing, New Jersey. year ended December 31, 1998.
54
Exhibits (continued)
* 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.
10.24 Ground lease, dated July 31, 1998, between Commerce Incorporated by reference from the Company's Annual
NJ and English Creek Properties, L.L.C., relating Report on Form 10-K for the fiscal year ended
to Commerce NJ's branch in Egg Harbor Township, New December 31, 1998.
Jersey.
10.25 Ground lease, dated November 30, 1998, between Incorporated by reference from the Company's
Commerce Shore and Brick/Burnt Tavern Equities, Annual Report on Form 10-K for the fiscal
L.L.C., relating to Commerce Shore's branch office year ended December 31, 1999.
in Brick, New Jersey.
10.26 Ground lease, dated November 30, 1998, between Incorporated by reference from the Company's
Commerce Shore and Aberdeen Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce Shore's branch office in year ended December 31, 1999.
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 branch office in year ended December 31, 1999.
Hamilton Township, New Jersey.
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 branch office in year ended December 31, 1999.
Abington 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 branch office in Bensalem, year ended December 31, 2000.
Pennsylvania.
10.30 Ground lease, dated June 9, 2000, between Commerce Incorporated by reference from the Company's
NJ and Galloway Equities, L.L.C., relating to Annual Report on Form 10-K for the fiscal
Commerce NJ's branch office in Galloway, New year ended December 31, 2000.
Jersey.
10.31 Ground lease, dated December 11, 2000, between Incorporated by reference from the Company's
Commerce PA and Chadds Ford Equities, L.L.C., Annual Report on Form 10-K for the fiscal
relating to Commerce PA's branch office in Chadds year ended December 31, 2001.
Ford, Pennsylvania.
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 branch office in New year ended December 31, 2001.
Britain 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 branch office in year ended December 31, 2001.
Warminster 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,
relating to Commerce NJ's branch office in 2003.
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,
relating to Commerce PA's branch office in 2003.
Warrington, Pennsylvania.
* 10.36 The Company's Supplemental Executive Retirement
Plan.
55
Exhibits (continued)
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.
(b) Reports on Form 8-K
On October 15, 2003, we filed a Current Report on Form 8-K which included
as exhibits a press release, issued by us on October 15, 2003, announcing
our results for the third quarter of 2003 and certain supplemental
information.
On October 30, 2003, we filed a Current Report on Form 8-K in response to
published articles concerning a possible investigation of the municipal
underwriting business of Commerce Capital Markets, Inc., a subsidiary of
Commerce Bancorp, Inc.
On December 4, 2003, we filed a Current Report on Form 8-K, which included
certain questions and answers regarding corporate information.
(c)(d) 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.
56
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 12, 2004 Chairman of the Board
and President
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 12, 2004
----------------------------------------- (Principal Executive Officer)
Vernon W. Hill, II
/s/ Robert C. Beck Secretary and Director March 12, 2004
-----------------------------------------
Robert C. Beck
/s/ Jack R Bershad Director March 12, 2004
-----------------------------------------
Jack R Bershad
/s/ Joseph Buckelew Director March 12, 2004
-----------------------------------------
Joseph Buckelew
/s/ Donald T. DiFrancesco Director March 12, 2004
-----------------------------------------
Donald T. DiFrancesco
/s/ Morton N. Kerr Director March 12, 2004
-----------------------------------------
Morton N. Kerr
/s/ Steven M. Lewis Director March 12, 2004
-----------------------------------------
Steven M. Lewis
/s/ George E. Norcross, III Director March 12, 2004
-----------------------------------------
George E. Norcross, III
/s/ Joseph J. Plumeri Director March 12, 2004
-----------------------------------------
Joseph J. Plumeri
/s/ Daniel J. Ragone Director March 12, 2004
-----------------------------------------
Daniel J. Ragone
/s/ William A. Schwartz Jr. Director March 12, 2004
-----------------------------------------
William A. Schwartz Jr.
/s/ Joseph T. Tarquini Jr. Director March 12, 2004
-----------------------------------------
Joseph T. Tarquini Jr.
/s/ Frank C. Videon Sr. Director March 12, 2004
-----------------------------------------
Frank C. Videon Sr.
57