================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
[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
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock New York Stock Exchange
------------------ -----------------------------------------------
Title of Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10- K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).Yes _X_ No __.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $2,497,629,542.(1)
-----------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Common Stock $1.00 Par Value 77,394,220
------------------------------- --------------------------------------
Title of Class No. of Shares Outstanding as of 3/1/04
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2004 Annual Meeting of Shareholders.
-----------------------
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Registrant's Common Stock outstanding reduced by the number of
shares of Common Stock held by officers, directors, and shareholders owning 10%
or more of the Registrant's Common Stock, multiplied by $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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EXPLANATORY NOTE
(Amounts in thousands)
We are filing this Amendment No. 1 to our Annual Report on Form 10-K for the
year ended December 31, 2003 as filed with the Securities and Exchange
Commission on March 11, 2004. This Amendment corrects typographical errors
contained in the third chart on page 23 in Item 7, Management's Discussion and
Analysis.
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:
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Net Income
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Community Banks $183,068 $139,560 $ 95,574
Parent/Other 11,219 5,255 7,448
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Consolidated total $194,287 $144,815 $103,022
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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.
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2003 vs. 2002 2002 vs. 2001
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
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Volume Rate Total Volume Rate Total
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(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
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Total interest
Income 265,948 (103,153) 162,795 234,622 (81,872) 152,750
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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
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Total interest
Expense 38,835 (61,685) (22,850) 60,612 (81,037) (20,425)
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Net increase $227,113 ($41,468) $185,645 $174,010 ($835) $173,175
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(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
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Year Ended December 31,
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2003 2002 2001
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(dollars in thousands) Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
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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
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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
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Total loans 6,519,489 398,792 6.12 5,284,213 360,761 6.83 4,151,587 332,780 8.02
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Total earning assets $17,714,708 $931,277 5.26% $12,498,327 $768,482 6.15% $8,666,949 $615,732 7.10%
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Sources of Funds
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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
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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
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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
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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
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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
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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
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Total other 167,949 126,433
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Net Investment Securities
Gains 3,851
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Total Noninterest Income $332,478 $257,466
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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 $4,531 $58.95
Current Rate $4,656 $60.57
Minus 100 basis point $3,924 $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 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(3) Exhibits
Exhibit
Number Description of 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.
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.
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 Amendment No. 1 to its
Annual Report on Form 10-K for the year ended December 31, 2003 to be signed on
its behalf by the undersigned, thereunto duly authorized.
Commerce Bancorp, Inc.
By /s/ Douglas J. Pauls
Date: March 19, 2004 --------------------------------
Douglas J. Pauls
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)