UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File #0-12069
COMMERCE BANCORP
[GRAPHIC OMITTED]
(Exact name of registrant as specified in its charter)
New Jersey 22-2433468
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
Commerce Atrium, 1701 Route 70 East, Cherry Hill, New Jersey 08034-5400
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(856) 751-9000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 77,915,974
--------------------------------------------------------------------------------
(Title of Class) (No. of Shares Outstanding
as of May 3, 2004)
COMMERCE BANCORP, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
March 31, 2004 and December 31, 2003.......................................................1
Consolidated Statements of Income (unaudited)
Three months ended March 31, 2004 and
March 31, 2003.............................................................................2
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2004 and
March 31, 2003.............................................................................3
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
Three months ended March 31, 2004..........................................................4
Notes to Consolidated Financial Statements (unaudited).....................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.........................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................20
Item 4. Controls and Procedures...................................................................20
PART II. OTHER INFORMATION
Item 2. Purchases of Certain Equity Securities by the Issuer and Others...........................21
Item 6. Exhibits and Reports on Form 8-K..........................................................21
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
------------------------------------------------------------------------------------------------
March 31, December 31,
---------------------------------
(dollars in thousands) 2004 2003
------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 971,897 $ 910,092
Federal funds sold 56,000
-------------- --------------
Cash and cash equivalents 1,027,897 910,092
Loans held for sale 34,934 42,769
Trading securities 234,359 170,458
Securities available for sale 11,972,943 10,650,655
Securities held to maturity 2,871,593 2,490,484
(market value 03/04-$2,884,803; 12/03-$2,467,192)
Loans 7,788,139 7,440,576
Less allowance for loan losses 117,329 112,057
-------------- --------------
7,670,810 7,328,519
Bank premises and equipment, net 856,634 811,451
Other assets 286,081 307,752
-------------- --------------
$ 24,955,251 $ 22,712,180
============== ==============
Liabilities Deposits:
Demand:
Noninterest-bearing $ 5,092,813 $ 4,574,714
Interest-bearing 9,313,838 8,574,297
Savings 4,995,245 4,222,282
Time 3,480,782 3,330,107
-------------- --------------
Total deposits 22,882,678 20,701,400
Other borrowed money 137,978 311,510
Other liabilities 282,039 221,982
Long-term debt 200,000 200,000
-------------- --------------
23,502,695 21,434,892
Stockholders' Common stock, 78,120,321shares
Equity issued (76,869,415 shares in 2003) 78,120 76,869
Capital in excess of par value 912,905 866,095
Retained earnings 394,794 347,365
Accumulated other comprehensive income (loss) 78,076 (3,702)
-------------- --------------
1,463,895 1,286,627
Less treasury stock, at cost, 397,859 shares
issued (363,076 shares in 2003) 11,339 9,339
-------------- --------------
Total stockholders' equity 1,452,556 1,277,288
-------------- --------------
$ 24,955,251 $ 22,712,180
============== ==============
See accompanying notes.
1
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
-----------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
(dollars in thousands, except per share amounts) 2004 2003
-----------------------------------------------------------------------------------------------
Interest Interest and fees on loans $ 108,213 $ 93,121
income Interest on investments 163,499 113,661
Other interest 340 79
-------------- --------------
Total interest income 272,052 206,861
-------------- --------------
Interest Interest on deposits:
expense Demand 15,943 12,397
Savings 7,786 6,355
Time 14,643 16,846
-------------- --------------
Total interest on deposits 38,372 35,598
Interest on other borrowed money 448 914
Interest on long-term debt 3,020 3,020
-------------- --------------
Total interest expense 41,840 39,532
-------------- --------------
Net interest income 230,212 167,329
Provision for loan losses 9,500 6,900
-------------- --------------
Net interest income after provision for loan losses 220,712 160,429
Noninterest Deposit charges and service fees 45,481 34,842
income Other operating income 40,327 41,360
Net investment securities gains (losses) 424 (136)
-------------- --------------
Total noninterest income 86,232 76,066
-------------- --------------
Noninterest Salaries and benefits 97,340 82,082
expense Occupancy 28,110 20,488
Furniture and equipment 24,179 21,226
Office 10,920 9,186
Marketing 8,696 5,276
Other 43,005 33,863
-------------- --------------
Total noninterest expenses 212,250 172,121
-------------- --------------
Income before income taxes 94,694 64,374
Provision for federal and state income taxes 32,719 21,484
-------------- --------------
Net income $61,975 $ 42,890
============== ==============
Net income per common and common equivalent share:
Basic $ 0.80 $ 0.63
Diluted $ 0.75 $ 0.60
Average common and common equivalent shares outstanding:
Basic 77,164 68,318
Diluted 85,532 71,785
Cash dividends, common stock $ 0.19 $ 0.17
See accompanying notes.
2
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
(dollars in thousands) 2004 2003
----------------------------------------------------------------------------------------------------
Operating Net income $ 61,975 $ 42,890
activities Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 9,500 6,900
Provision for depreciation, amortization and accretion 27,294 27,459
(Gain) loss on sales of securities available for sale (424) 136
Proceeds from sales of loans held for sale 146,528 421,783
Originations of loans held for sale (152,154) (380,093)
Net (increase) decrease in trading securities (63,901) 120,848
Increase in other assets, net (25,765) (31,746)
Increase (decrease) in other liabilities 62,857 (42,450)
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,910 165,727
Investing Proceeds from the sales of securities available for sale 1,561,581 752,240
activities Proceeds from the maturity of securities available for sale 758,400 1,087,641
Proceeds from the maturity of securities held to maturity 167,248 135,436
Purchase of securities available for sale (3,519,396) (2,929,021)
Purchase of securities held to maturity (548,888) (299,839)
Net increase in loans (383,423) (222,739)
Proceeds from sales of loans 45,093 48,999
Capital expenditures (65,181) (70,165)
----------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,984,566) (1,497,448)
Financing Net increase in demand and savings deposits 2,030,603 1,315,649
activities Net increase in time deposits 150,675 367,411
Net decrease in other borrowed money (173,532) (282,019)
Dividends paid (14,547) (11,213)
Proceeds from issuance of common stock under
dividend reinvestment and other stock plans 45,261 25,588
Other (1,999) (1,308)
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,036,461 1,414,108
Increase in cash and cash equivalents 117,805 82,387
Cash and cash equivalents at beginning of year 910,092 811,434
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,027,897 $ 893,821
====================================================================================================
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $ 40,935 $ 39,586
Income taxes 5,402
----------------------------------------------------------------------------------------------------
See accompanying notes.
3
COMMERCE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Three months ended March 31, 2004
(in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Capital in Accumulated
Excess of Other
Common Par or Retained Treasury Comprehensive
Stock Stated Value Earnings Stock Income Total
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $76,869 $866,095 $347,365 $ (9,339) $ (3,702) $1,277,288
Net income 61,975 61,975
Other comprehensive income, net of tax
Unrealized gain on securities (pre-tax $96,281) 60,467 60,467
Reclassification adjustment (pre-tax $32,786) 21,311 21,311
-------------
Other comprehensive income 81,778
Total comprehensive income 143,753
Cash dividends paid (14,547) (14,547)
Shares issued under dividend reinvestment
and compensation and benefit plans (1,251 shares) 1,251 44,010 45,261
Other 2,800 1 (2,000) 801
---------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2004 $78,120 $912,905 $394,794 $(11,339) $78,076 $1,452,556
=================================================================================================================================
See accompanying notes.
4
COMMERCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Consolidated Financial Statements
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements were compiled in
accordance with the accounting policies set forth in note 1 (Significant
Accounting Policies) of the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003. The accompanying consolidated financial statements reflect all adjustments
that are, in the opinion of management, necessary to reflect a fair statement of
the results for the interim periods presented. Such adjustments are of a normal
recurring nature.
These consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the registrant's
Annual Report on Form 10-K for the year ended December 31, 2003. The results for
the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
The consolidated financial statements include the accounts of Commerce Bancorp,
Inc. and its consolidated subsidiaries. All material intercompany transactions
have been eliminated. Certain amounts from prior years have been reclassified to
conform with 2004 presentation.
B. Long Term Debt
On April 1, 2004, the Company's $200.0 million of 5.95% Convertible Trust
Capital Securities, recorded on the consolidated balance sheet as long term
debt, became convertible at the option of the holder. The holders of the
Convertible Trust Capital Securities may convert each security into 0.9478
shares of Company common stock. The Company has calculated the effect of these
securities on diluted net income per share by using the if-converted method.
Under the if-converted method, the related interest charges on the Convertible
Trust Capital Securities, adjusted for income taxes, have been added back to the
numerator and the common shares to be issued upon conversion have been added to
the denominator.
The Convertible Trust Capital Securities were issued on March 11, 2002 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.
C. Bank Premises and Equipment
In accordance with accounting principles generally accepted in the United
States, when capitalizing costs for branch construction, the Company includes
the costs of purchasing the land, developing the site, constructing the building
(or leasehold improvements if the property is leased), and furniture, fixtures
and equipment necessary to equip the branch. All other pre-opening and
post-opening costs related to branches are expensed as incurred. As of March 31,
2004 and December 31, 2003, Bank premises and equipment in progress was $96.9
million and $87.2 million, respectively.
D. Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments.
Management does not anticipate any material losses as a result of these
transactions.
5
E. Comprehensive Income
Total comprehensive income, which for the Company included net income and
changes in unrealized gains and losses on the Company's available for sale
securities, amounted to $143.8 million and $22.5 million, respectively, for the
three months ended March 31, 2004 and 2003.
F. New Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). In December 2003, the FASB deferred 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
were subject to adoption in periods ending after December 15, 2003. This
interpretation 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. The adoption of FIN 46 did not have a material impact on
the Company's financial condition or operating results.
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 March 31, 2004, the Company's
investment in these entities totaled $38.8 million.
G. Stock-Based Compensation
The Company follows 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, "Accounting for Stock-Based Compensation", net
income and net income per share would have been as follows (in thousands, except
per share amounts):
------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------------
Reported net income $61,975 $42,890
Less: Stock option compensation expense
determined under fair value method, net of tax (3,420) (2,380)
------- -------
Pro forma net income, basic $58,555 $40,510
Add: Interest expense on Convertible Trust
Capital Securities, net of tax 1,963
-------
Pro forma net income, diluted $60,518 $40,510
Reported net income per share:
Basic $ 0.80 $ 0.63
Diluted 0.75 0.60
Pro forma net income per share:
Basic $ 0.76 $ 0.59
Diluted 0.71 0.57
------------------------------------------------------------------------------------
The fair value of options granted in 2004 and 2003 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 3.09% to 3.00%, dividend yields
of 1.33% to 1.50%, volatility factors of the expected market price of the
Company's common stock of .255 to .304 and weighted average expected lives of
the options of 5.27 and 5.22 years.
6
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.
H. Segment Information
The Company operates one reportable segment of business, Community Banks, which
includes all of the Company's banking subsidiaries. Through its Community Banks,
the Company provides a broad range of retail and commercial banking services,
and corporate trust services. Parent/Other includes the holding company,
Commerce Insurance Services, Inc. and Commerce Capital Markets, Inc.
Selected segment information is as follows (in thousands):
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
Community Parent/ Community Parent/
Banks Other Total Banks Other Total
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 231,836 $ (1,624)$ 230,212 $ 168,229 $ (900)$ 167,329
Provision for loan losses 9,500 - 9,500 6,900 - 6,900
-----------------------------------------------------------------------------------
Net interest income after provision 222,336 (1,624) 220,712 161,329 (900) 160,429
Noninterest income 58,133 28,099 86,232 49,995 26,071 76,066
Noninterest expense 189,353 22,897 212,250 149,450 22,671 172,121
-----------------------------------------------------------------------------------
Income before income taxes 91,116 3,578 94,694 61,874 2,500 64,374
Income tax expense 31,207 1,512 32,719 20,975 509 21,484
-----------------------------------------------------------------------------------
Net income $ 59,909 $ 2,066 $ 61,975 $ 40,899 $ 1,991 $ 42,890
===================================================================================
Average assets (in millions) $ 21,416 $ 2,076 $ 23,492 $ 14,993 $ 1,839 $ 16,832
===================================================================================
7
I. Net income Per Share
The calculation of net income per share follows (in thousands, except for per
share amounts):
Three Months Ended
March 31,
-----------------------------------------
2004 2003
------------------ -------------------
Basic:
Net income available to common shareholders - basic $61,975 $42,890
================== ===================
Average common shares outstanding 77,164 68,318
================== ===================
Net income per common share - basic $ 0.80 $ 0.63
================== ===================
Diluted:
Net income $61,975 $42,890
Add interest expense on Convertible Trust Capital Securities,
net of tax 1,963
------------------ -------------------
Net income available to common shareholders - diluted $63,938 $42,890
================== ===================
Average common shares outstanding 77,164 68,318
Additional shares considered in diluted computation assuming:
Exercise of stock options 4,577 3,467
Conversion of Convertible Trust Capital Securities 3,791
------------------ -------------------
Average common shares outstanding - diluted 85,532 71,785
================== ===================
Net income per common share - diluted $ 0.75 $ 0.60
================== ===================
8
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
Executive Summary
-----------------
During the first quarter of 2004, the Company experienced strong deposit growth
and positive operating leverage as year over year revenue growth of 30% exceeded
non-interest expense growth of 23%. Total assets grew to $25.0 billion, an
increase of 40% over March 31, 2003, while total deposits grew 41%. Net income
increased 44% to $62.0 million and diluted net income per share increased 25% to
$.75 during the first quarter of 2004 as compared to the first quarter of 2003.
The net income per share calculation for the first quarter of 2004 includes 5.0
million shares issued in connection with the Company's September 2003 secondary
offering and an additional 3.8 million shares assuming the conversion of the
Company's Convertible Trust Capital Securities, neither of which were included
in the calculation for the first quarter of 2003.
The Company has identified two critical accounting policies: the policies
related to the allowance for loan losses and capitalization of branch costs. The
foregoing critical accounting policies are more fully described in the Company's
annual report on Form 10-K for the year ended December 31, 2003. During the
current quarter, there were no material changes to the estimates or methods by
which estimates are derived with regard to the critical accounting policies.
Capital Resources
-----------------
At March 31, 2004, stockholders' equity totaled $1.5 billion or 5.82% of total
assets, compared to $1.3 billion or 5.62% of total assets at December 31, 2003.
The Company and its subsidiaries are subject to risk-based capital standards
issued by bank regulatory authorities. Under these standards, Tier 1 capital
includes stockholders' equity, as adjusted for certain items. The Company makes
two significant adjustments in calculating regulatory capital. The first
adjustment is to exclude from capital the unrealized appreciation or
depreciation in its available for sale securities portfolio. The second
adjustment is to add to capital the Convertible Trust Capital Securities. Total
capital is comprised of all the components of Tier 1 capital plus the allowance
for loan losses.
The table below presents the Commerce Bancorp and Commerce N.A.'s risk-based and
leverage ratios at March 31, 2004 and 2003:
Per Regulatory Guidelines
---------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
March 31, 2004:
---------------
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,564,769 12.70% $493,027 4.00% $739,540 6.00%
Total capital 1,682,098 13.65 986,053 8.00 1,232,567 10.00
Leverage ratio 1,564,769 6.68 937,630 4.00 1,172,037 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $808,896 10.73% $301,573 4.00% $452,360 6.00%
Total capital 887,959 11.78 603,146 8.00 753,933 10.00
Leverage ratio 808,896 6.03 536,607 4.00 670,759 5.00
9
Per Regulatory Guidelines
---------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
March 31, 2003:
---------------
Commerce Bancorp
Risk based capital ratios:
Tier 1 $1,050,051 11.25% $373,411 4.00% $560,117 6.00%
Total capital 1,144,782 12.26 746,823 8.00 933,529 10.00
Leverage ratio 1,050,051 6.28 668,655 4.00 835,819 5.00
Commerce N.A.
Risk based capital ratios:
Tier 1 $567,037 9.83% $230,644 4.00% $345,966 6.00%
Total capital 630,037 10.93 461,288 8.00 576,610 10.00
Leverage ratio 567,037 5.53 410,116 4.00 512,645 5.00
At March 31, 2004, the Company's consolidated capital levels and each of the
Company's bank subsidiaries met the regulatory definition of a "well
capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%,
a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital
ratio exceeding 10%. Management believes that as of March 31, 2004, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject. As a result of the issuance of FIN 46, the Federal Reserve Board is
evaluating whether deconsolidation of Commerce Capital Trust II will affect the
qualification of the Convertible Trust Capital Securities as Tier 1 capital. On
May 6, 2004 the Federal Reserve Board issued a proposed ruling that would retain
trust preferred securities in the Tier 1 capital of bank holding companies,
subject to certain limitations. Based on the proposed ruling, the Convertible
Trust Capital Securities will retain the qualification 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."
Deposits
--------
Total deposits at March 31, 2004 were $22.9 billion, up $6.7 billion, or 41.4%
over total deposits of $16.2 billion at March 31, 2003, and up by $2.2 billion,
or 10.6% from year-end 2003. Deposit growth during the first three months of
2004 included core deposit growth in all categories as well as growth from the
public sector. Same-store core deposit growth is measured as the year over year
percentage increase in core deposits for branches open two years or more at the
balance sheet date. The Company experienced same-store core deposit growth of
24% at March 31, 2004.
Interest Rate Sensitivity and Liquidity
---------------------------------------
The Company's risk of loss arising from adverse changes in the fair market value
of financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income, while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with these
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
Management considers the simulation of net interest income in different interest
rate environments to be the best indicator of the Company's interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
10
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate plus 200 and minus 100 basis point change during the next year,
with rates remaining constant in the second year. The Company's ALCO policy has
established that interest income sensitivity will be considered acceptable if
net income in the above interest rate scenario is within 10% of net income in
the flat rate scenario in the first year and within 15% over the two year time
frame. Net income in the flat rate scenario is projected to increase by
approximately 25% per year. The following table illustrates the impact on
projected net income at March 31, 2004 and 2003 of a plus 200 and minus 100
basis point change in interest rates.
--------------------------------------------------------------------------
Basis Point Change
--------------------------------------------------------------------------
Plus 200 Minus 100
--------------------------------------------------------------------------
March 31, 2004:
Twelve Months 0.98% (7.81)%
Twenty Four Months 10.22% (7.15)%
March 31, 2003:
Twelve Months 7.78% (2.35)%
Twenty Four Months 13.83% (4.65)%
All of these net income projections are within an acceptable level of interest
rate risk pursuant to the policy established by ALCO.
In the event the Company's interest rate risk models indicate an unacceptable
level of risk, the Company could undertake a number of actions that would reduce
this risk, including the sale of a portion of its available for sale portfolio,
the use of risk management strategies such as interest rate swaps and caps, or
the extension of the maturities of its short-term borrowings.
Management also monitors interest rate risk by utilizing a market value of
equity model (MVE). The model assesses the impact of a change in interest rates
on the market value of all the Company's assets and liabilities, as well as any
off balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate plus
200 and minus 100 basis point change in rates. The Company's ALCO policy
indicates that the level of interest rate risk is unacceptable if the immediate
plus 200 and minus 100 basis point change would result in the loss of 45% or
more of the excess of market value over book value in the current rate scenario.
At March 31, 2004, the market value of equity model indicates an acceptable
level of interest rate risk.
The MVE reflects certain estimates and assumptions regarding the impact on the
market value of the Company's assets and liabilities given an immediate plus 200
or minus 100 basis point change in interest rates. One of the key assumptions is
the market value assigned to the Company's core deposits, or the core deposit
premium. Utilizing an independent consultant, the Company has completed and
updated comprehensive core deposit studies in order to assign its own core
deposit premiums as permitted by the Company's regulatory authorities. The
studies have consistently confirmed management's assertion that the Company's
core deposits have stable balances over long periods of time, are generally
insensitive to changes in interest rates and have significantly longer average
lives and durations than the Company's loans and investment securities. At March
31, 2004, the average life of the Company's deposits was 13.5 years. Thus, these
core deposit balances provide an internal hedge to market value fluctuations in
the Company's fixed rate assets.
11
The MVE analyzes both sides of the balance sheet and, as indicated below,
demonstrates the inherent value of the Company's core deposits in a rising rate
environment. As rates rise, the value of the Company's core deposits increases
which offsets the decrease in value of the Company's fixed rate assets. The
following table summarizes the market value of equity at March 31, 2004 (in
millions, except for per share amounts):
--------------------------------------------------------------------
Market Value
Of Equity Per Share
--------------------------------------------------------------------
Plus 200 basis point $4,934 $63.17
Current Rate $4,918 $62.96
Minus 100 basis point $3,890 $49.80
Liquidity involves the Company's ability to raise funds to support asset growth
or decrease assets to meet deposit withdrawals and other borrowing needs, to
maintain reserve requirements and to otherwise operate the Company on an ongoing
basis. The Company's liquidity needs are primarily met by growth in core
deposits, its cash and federal funds sold position, cash flow from its
amortizing investment and loan portfolios, as well as the use of short-term
borrowings, as required. If necessary, the Company has the ability to raise
liquidity through collateralized borrowings, FHLB advances, or the sale of its
available for sale investment portfolio. As of March 31, 2004 the Company had in
excess of $11.5 billion in immediately available liquidity which includes
securities that could be sold or used for collateralized borrowings, cash on
hand, and borrowing capacities under existing lines of credit. During the first
three months of 2004, deposit growth was used to fund growth in the loan
portfolio and purchase additional investment securities.
Short-Term Borrowings
---------------------
Short-term borrowings, or other borrowed money, consist primarily of securities
sold under agreements to repurchase and overnight lines of credit, and are used
to meet short term funding needs. During the first three months of 2004, the
Company reduced its short-term borrowings, primarily through increased deposits.
At March 31, 2004, short-term borrowings aggregated $138.0 million and had an
average rate of 0.76%, as compared to $311.5 million at an average rate of 0.77%
at December 31, 2003.
Interest Earning Assets
-----------------------
The Company's cash flow from deposit growth and repayments from its investment
portfolio totaled approximately $3.1 billion for the first three months of 2004.
This significant cash flow provides the Company with ongoing reinvestment
opportunities as interest rates change. For the three month period ended March
31, 2004, interest earning assets increased $2.2 billion from $20.8 billion to
$23.0 billion. This increase was primarily in investment securities and the loan
portfolio as described below.
12
Loans
-----
During the first three months of 2004, loans increased $347.6 million from $7.4
billion to $7.8 billion. All segments of the loan portfolio experienced growth
in the first three months of 2004, including loans secured by commercial real
estate properties, commercial loans, and consumer loans.
The following table summarizes the loan portfolio of the Company by type of loan
as of the dates shown.
March 31, December 31,
---------------------------------------
2004 2003
---------------------------------------
(in thousands)
Commercial:
Term $1,071,736 $ 1,027,526
Line of credit 960,080 959,158
Demand 1,080 1,077
----------------- ---------------------
2,032,896 1,987,761
Owner-occupied 1,710,098 1,619,079
----------------- ---------------------
3,742,994 3,606,840
Consumer:
Mortgages (1-4 family residential) 984,415 918,686
Installment 135,406 138,437
Home equity 1,485,055 1,405,795
Credit lines 59,081 60,579
----------------- ---------------------
2,663,957 2,523,497
Real estate:
Investor developer 1,236,862 1,167,672
Construction 144,326 142,567
----------------- ---------------------
1,381,188 1,310,239
----------------- ---------------------
Total loans $7,788,139 $ 7,440,576
================= =====================
Investments
-----------
In total, for the first three months of 2004, securities increased $1.8 billion
from $13.3 billion to $15.1 billion. The available for sale portfolio increased
$1.3 billion to $12.0 billion at March 31, 2004 from $10.7 billion at December
31, 2003, and the securities held to maturity portfolio increased $381.1 million
to $2.9 billion at March 31, 2004 from $2.5 billion at year-end 2003. The
portfolio of trading securities increased $63.9 million from year-end 2003 to
$234.4 million at March 31, 2004.
The portfolio is comprised primarily of high quality US Government agency and
mortgage-backed obligations. During the first quarter of 2004, the Company
continued its ongoing review and repositioning of the portfolio to adjust for
current and anticipated interest rate and yield curve levels. This repositioning
of the portfolio involved sales of approximately $1.6 billion for the first
quarter. This repositioning helped reduce the duration of the total portfolio to
2.74 years at March 31, 2004 from 3.93 years at December 31, 2003. The duration
of the available for sale portfolio was reduced to 2.55 years at March 31, 2004
from 3.78 years at December 31, 2003. The yield on the total portfolio decreased
slightly from 4.86% at December 31, 2003 to 4.81% at March 31, 2004.
13
The following table summarizes the book value of securities available for sale
and securities held to maturity by the Company as of the dates shown.
March 31, December 31,
---------------------------------
2004 2003
---------------------------------
(dollars in thousands)
U.S. Government agency and mortgage backed obligations $11,736,718 $10,511,545
Obligations of state and political subdivisions 33,415 30,927
Other 202,810 108,183
---------------------------------
Securities available for sale $11,972,943 $10,650,655
=================================
U.S. Government agency and mortgage backed obligations $2,545,263 $2,193,577
Obligations of state and political subdivisions 252,081 227,199
Other 74,249 69,708
---------------------------------
Securities held to maturity $2,871,593 $2,490,484
=================================
Detailed below is information regarding the composition and characteristics of
the Company's investment portfolio, excluding trading securities, as of March
31, 2004.
Average Average Average Average
Product Description Amount Yield Book Price Duration Life
-------------------------------------------------------------------------------------------------------------------
(in millions) (in years)
Mortgage-backed Securities:
Federal Agencies Pass Through
Certificates (AAA Rated) $ 4,412 5.04% $101.2 2.87 3.44
Collateralized Mortgage
Obligations (AAA Rated) 9,161 4.80 101.0 2.46 2.89
U.S. Government agencies/Other 1,271 4.00 99.6 4.57 5.43
--------------- ------------ --------------- ------------- --------------
Total $ 14,844 4.81% $101.0 2.74 3.25
=============== ============ =============== ============= ==============
The Company's mortgage-backed securities (MBS) portfolio comprises 91% of the
total investment portfolio. The MBS portfolio consists of Federal Agencies
Pass-Through Certificates and Collateralized Mortgage Obligations (CMO's) which
are issued by federal agencies and other private sponsors. The Company's
investment policy does not permit investments in inverse floaters, IO's, PO's
and other similar issues.
Net Income
----------
Net income for the first quarter of 2004 was $62.0 million, an increase of $19.1
million or 44.5% over the $42.9 million recorded for the first quarter of 2003.
On a per share basis, diluted net income for the first quarter of 2004 was $0.75
per common share compared to $0.60 per common share for the first quarter of
2003. Net income per share in the first quarter of 2004 reflects the addition of
5.0 million shares from the secondary offering in September 2003 and 3.8 million
shares assuming conversion of the Convertible Trust Capital Securities.
Return on average assets (ROA) and return on average equity (ROE) for the first
quarter of 2004 were 1.06% and 17.91%, respectively, compared to 1.02% and
17.94%, respectively, for the same 2003 period.
14
Net Interest Income
-------------------
Net interest income totaled $230.2 million for the first quarter of 2004, an
increase of $62.9 million or 37.6% from $167.3 million in the first quarter of
2003. The increase in net interest income was due primarily to the Company's
continued ability to grow deposits and its loan and investment portfolios.
As shown below, the increase in net interest income on a tax equivalent basis
was due to volume increases in the Company's earning assets, which were fueled
by the Company's continued growth of low-cost core deposits (in millions).
Net Interest Income
---------------------------------------------------------------------
Quarter Ended Volume Rate Total %
March 31 Increase Change Increase Increase
----------------------------------------------------------------------------------------------
2004 vs. 2003 $69.7 ($6.4) $ 63.3 37 %
The net interest margin for the first quarter of 2004 was 4.39%, down 20 basis
points from the margin for the first quarter of 2003 and up 12 basis points from
the margin for the fourth quarter of 2003. The increase in the net interest
margin over the fourth quarter of 2003 was due primarily to an increase in the
yield on interest earning assets of 10 basis points.
The following table sets forth balance sheet items on a daily average basis for
the three months ended March 31, 2004, December 31, 2003 and March 31, 2003 and
presents the daily average interest earned on assets and paid on liabilities for
such periods.
15
Average Balances and Net Interest Income
-----------------------------------------------------------------------------------------------------
March 2004 December 2003 March 2003
---------------------------------- ------------------------------- ---------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------- ------------------------------- ---------------------------------
Earning Assets
-------------------------
Investment securities
Taxable $13,295,903 $ 159,648 4.83% $12,743,163 $148,537 4.62% $ 8,681,675 $109,916 5.13%
Tax-exempt 256,628 3,860 6.05 242,901 3,829 6.25 140,307 2,545 7.36
Trading 161,701 2,065 5.14 190,658 1,917 3.99 270,299 3,215 4.82
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total investment securities 13,714,232 165,573 4.86 13,176,722 154,283 4.65 9,092,281 115,676 5.16
Federal funds sold 144,297 340 0.95 20,435 50 0.97 27,154 80 1.19
Loans
Commercial mortgages 2,793,159 42,782 6.16 2,655,510 41,172 6.15 2,177,008 35,125 6.54
Commercial 1,878,353 24,535 5.25 1,760,615 23,285 5.25 1,495,312 20,943 5.68
Consumer 2,603,037 36,936 5.71 2,444,764 35,773 5.81 2,075,983 33,719 6.59
Tax-exempt 337,313 6,092 7.26 283,291 5,497 7.70 258,614 5,129 8.04
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total loans 7,611,862 110,345 5.83 7,144,180 105,727 5.87 6,006,917 94,916 6.41
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total earning assets $21,470,391 $ 276,258 5.17% $20,341,337 $260,060 5.07% $ 15,126,352 $210,672 5.65%
============ ============ ==============
Sources of Funds
-------------------------
Interest-bearing liabilities
Regular savings $4,492,847 $ 7,786 0.70% $4,251,627 $ 7,597 0.71% $ 3,021,219 $ 6,355 0.85%
N.O.W. accounts 607,603 1,052 0.70 546,350 937 0.68 403,415 813 0.82
Money market plus 8,378,467 14,891 0.71 7,684,235 13,326 0.69 5,472,788 11,584 0.86
Time deposits 2,430,589 11,323 1.87 2,403,680 12,049 1.99 2,148,534 13,731 2.59
Public funds 968,513 3,320 1.38 923,561 3,151 1.35 793,437 3,115 1.59
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total deposits 16,878,019 38,372 0.91 15,809,453 37,060 0.93 11,839,393 35,598 1.22
Other borrowed money 174,746 448 1.03 411,079 921 0.89 272,304 914 1.36
Long-term debt 200,000 3,020 6.07 200,000 3,020 5.99 200,000 3,020 6.12
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total deposits and
interest-bearing
liabilities 17,252,765 41,840 0.98 16,420,532 41,001 0.99 12,311,697 39,532 1.30
Noninterest-bearing funds (net) 4,217,626 3,920,805 2,814,655
------------ ----------- ------- ------------ ------- ------- -------------- -------- -----
Total sources to fund earning
assets $21,470,391 41,840 0.78 $20,341,337 41,001 0.80 $ 15,126,352 39,532 1.06
============ ----------- ------- ============ ------- ------- ============== -------- -----
Net interest income and
margin tax-equivalent basis $234,418 4.39% $219,059 4.27% $171,140 4.59%
=========== ======= ======== ======= ========= ======
Other Balances
-------------------------
Cash and due from banks $1,007,182 $ 905,464 $ 865,209
Other assets 1,129,880 1,101,329 933,321
Total assets 23,491,544 22,241,356 16,831,542
Total deposits 21,478,730 20,171,403 15,033,367
Demand deposits (noninterest-
bearing) 4,600,711 4,361,950 3,193,974
Other liabilities 253,890 232,037 369,691
Stockholders' equity 1,384,178 1,226,837 956,180
Notes
- Weighted average yields on tax-exempt obligations have been computed
on a tax-equivalent basis assuming a federal tax rate of 35%.
- Non-accrual loans have been included in the average loan balance
- Investment securities includes investments available for sale.
- Consumer loans include mortgage loans held for sale.
16
Noninterest Income
------------------
Noninterest income totaled $86.2 million for the first quarter of 2004, an
increase of $10.1 million or 13.3% from $76.1 million in the first quarter of
2003. The increase was primarily due to increased deposit charges and service
fees, which rose $10.6 million over the first quarter of 2003 primarily due to
higher transaction volumes. The decrease in loan brokerage fees of $4.9 million
resulted from a decline in mortgage refinancing activity.
Three Months Ended
(dollars in thousands) March 31, 2004 March 31, 2003
-------------------------------
Deposit charges & service fees $45,481 $34,842
Other operating income:
Insurance 18,336 16,055
Capital markets 9,727 10,003
Loan brokerage fees 3,053 7,923
Other 9,211 7,379
-------------------------------
Total other 40,327 41,360
Net investment securities gains/(losses) 424 (136)
-------------------------------
Total non-interest income $86,232 $76,066
===============================
Noninterest Expense
-------------------
For the first quarter of 2004, noninterest expense totaled $212.3 million, an
increase of $40.1 million or 23.3% over the same period in 2003. Contributing to
this increase was new branch activity over the past twelve months, with the
number of branches increasing from 226 at March 31, 2003 to 278 at March 31,
2004. With the addition of these new offices, staff, facilities, and related
expenses rose accordingly. Other noninterest expenses rose $9.1 million over the
first quarter of 2003. This increase resulted primarily from higher bank
card-related service charges, increased business development expenses, and
increased provisions for non-credit-related losses.
The Company experienced positive operating leverage in the first quarter, as
year over year revenue growth of 30% exceeded non-interest expense growth of
23%. Non-interest expense growth during the first quarter of 2004 was 3%
compared to the fourth quarter of 2003. One important factor influencing the
growth in non-interest expenses is that the Company absorbed significant
start-up expenses related to the New York City and Long Island markets in prior
years. As a result, the impact of growth in non-interest expenses in these
markets is expected to decline throughout 2004.
The Company's operating efficiency ratio (noninterest expenses, less other real
estate expense, divided by net interest income plus noninterest income excluding
non-recurring gains) was 67.12% for the first three months of 2004 as compared
to 70.58% for the same 2003 period. The Company's efficiency ratio remains above
its peer group primarily due to its aggressive growth expansion activities.
Loan and Asset Quality
----------------------
Total non-performing assets (non-performing loans and other real estate,
excluding loans past due 90 days or more and still accruing interest) at March
31, 2004 were $32.4 million, or 0.13% of total assets compared to $23.6 million
or 0.10% of total assets at December 31, 2003 and $22.5 million or 0.13% of
total assets at March 31, 2003.
Total non-performing loans (non-accrual loans and restructured loans, excluding
loans past due 90 days or more and still accruing interest) at March 31, 2004
were $30.5 million or 0.39% of total loans compared to $21.7 million or 0.29% of
total loans at December 31, 2003 and $19.0 million or 0.32% of total loans at
March 31, 2003. At March 31, 2004, loans past due 90 days or more and still
accruing interest amounted to $696 thousand compared to $538 thousand at
December 31, 2003 and $376 thousand at March 31, 2003. Additional loans
considered as potential problem loans by the Company's internal loan review
department ($35.8 million at March 31, 2004) have been evaluated as to risk
exposure in determining the adequacy of the allowance for loan losses.
17
The following summary presents information regarding non-performing loans and
assets as of March 31, 2004 and the preceding four quarters (dollar amounts in
thousands).
March 31, December 31, September 30, June 30, March 31,
2004 2003 2003 2003 2003
---------------------------------------------------------------------------
Non-accrual loans:
Commercial $19,701 $ 6,867 $ 7,295 $ 7,049 $ 4,874
Consumer 9,984 9,242 8,295 9,517 9,860
Real estate:
Construction 138
Mortgage 810 5,494 7,502 5,970 4,249
---------------------------------------------------------------------------
Total non-accrual loans 30,495 21,741 23,092 22,536 18,983
---------------------------------------------------------------------------
Restructured loans:
Commercial 1 1 2 3 4
Consumer
Real estate:
Construction
Mortgage
---------------------------------------------------------------------------
Total restructured loans 1 1 2 3 4
---------------------------------------------------------------------------
Total non-performing loans 30,496 21,742 23,094 22,539 18,987
---------------------------------------------------------------------------
Other real estate 1,890 1,831 1,670 1,540 3,553
---------------------------------------------------------------------------
Total non-performing assets 32,386 23,573 24,764 24,079 22,540
---------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing 696 538 649 434 376
---------------------------------------------------------------------------
Total non-performing assets and
loans past due 90 days or more $33,082 $24,111 $25,413 $24,513 $22,916
===========================================================================
Total non-performing loans as a
percentage of total period-end loans 0.39% 0.29% 0.34% 0.35% 0.32%
Total non-performing assets as a
percentage of total period-end assets 0.13% 0.10% 0.12% 0.12% 0.13%
Total non-performing assets and loans
past due 90 days or more as a
percentage of total period-end assets 0.13% 0.11% 0.12% 0.12% 0.13%
Allowance for loan losses as a percentage
of total non-performing loans 385% 515% 449% 441% 499 %
Allowance for loan losses as a percentage
of total period-end loans 1.51% 1.51% 1.52% 1.56% 1.58%
Total non-performing assets and loans
past due 90 days or more as a
percentage of stockholders' equity and
allowance for loan losses 2% 2% 2% 2% 2%
18
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data: (dollar amounts in thousands)
Three Months Ended Year Ended
------------------------------ ---------------
March 31, March 31, December 31,
2004 2003 2003
-------------- -------------- ---------------
Balance at beginning of period $112,057 $90,733 $90,733
Provisions charged to operating expenses 9,500 6,900 31,850
-------------- -------------- ---------------
121,557 97,633 122,583
Recoveries on loans charged-off:
Commercial 156 204 669
Consumer 270 131 584
Real estate 47 11
-------------- -------------- ---------------
Total recoveries 473 335 1,264
Loans charged-off:
Commercial (2,293) (1,868) (5,601)
Consumer (772) (1,365) (5,950)
Real estate (1,636) (4) (239)
-------------- -------------- ---------------
Total charge-offs (4,701) (3,237) (11,790)
-------------- -------------- ---------------
Net charge-offs (4,228) (2,902) (10,526)
-------------- -------------- ---------------
Balance at end of period $117,329 $94,731 $112,057
============== ============== ===============
Net charge-offs as a percentage of
average loans outstanding 0.22% 0.19% 0.16%
Net Reserve Additions $ 5,272 $ 3,998 $21,324
The Company considers the allowance for loan losses of $117.3 million adequate
to cover probable losses inherent in the loan portfolio at March 31, 2004. The
Company's determination of the level of the allowance for loan losses rests upon
various judgments and assumptions surrounding the risk characteristics included
in the loan portfolio. Such risk characteristics include changes in levels and
trends of charge-offs, delinquencies, and nonaccrual loans, trends in volume and
terms of loans, changes in underwriting standards and practices, portfolio mix,
tenure of loan officers and management, entrance into new geographic markets,
changes in credit concentrations, and national and local economic trends and
conditions, and other relevant factors, all of which may be susceptible to
significant change.
Forward-Looking Statements
--------------------------
The Company may from time to time make written or oral "forward-looking
statements", including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Form 10-Q), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "FRB"); inflation; interest rates,
market and monetary fluctuations; the timely development of competitive new
19
products and services by the Company and the acceptance of such products and
services by customers; the willingness of customers to substitute competitors'
products and services for the Company's products and services and vice versa;
the impact of changes in financial services' laws and regulations (including
laws concerning taxes, banking, securities and insurance); technological
changes; future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
See Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation, Interest Rate Sensitivity and Liquidity.
Item 4. Controls and Procedures
-----------------------
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the period covered by this quarterly report, the Company has
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. The Company
conducts periodic evaluations of its internal controls to enhance, where
necessary, its procedures and controls.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective in reaching a reasonable level of assurance that management is timely
alerted to material information relating to the Company during the period when
its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Quarterly Report, there have been
no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
20
PART II. OTHER INFORMATION
Item 2. Purchases of Certain Equity Securities by the Issuer and Others
---------------------------------------------------------------
(a) (b) (c) (d)
Total Number of
Period Shares Purchased as Maximum Number of
Total Number of Part of Publicly Shares that May Yet
Shares Average Price Announced Plans or Be Purchased Under
Purchased (1) Paid per Share Programs the Plans or Programs
----------------- ------------------- ---------------------- ----------------------
January 1 to January 31, 2004 34,783 $57.50
February 1 to February 29, 2004
March 1 to March 31, 2004
----------------- ------------------- ---------------------- ----------------------
Total 34,783 $57.50
----------------- ------------------- ---------------------- ----------------------
(1) Purchases were made by the Company for the payment of income taxes on the exercise of stock options by an executive officer.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
Exhibit 3.1 Restated Certificate of Incorporation 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).
Exhibit 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).
Exhibit 31.1 Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Reports on Form 8-K
-------------------
On January 15, 2004, we filed a Current Report on Form 8-K which included as
exhibits a press release, issued by us on January 15, 2004, announcing our
results for the fourth quarter of 2004 and certain supplemental information.
On March 3, 2004, we filed a Current Report on Form 8-K, which included certain
questions and answers regarding corporate information.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCE BANCORP, INC.
--------------------------------
(Registrant)
May 10, 2004 /s/ DOUGLAS J. PAULS
-------------------- --------------------------------
(Date) DOUGLAS J. PAULS
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
22