-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TfaMu8PfGpufFnHnZsDiI+U8SCuxhYiaE8gNWSGSJpcnYyJwhpt4d27o9UkBWGXN NORLcUmqNnZCvBJLlM1igg== 0000950159-04-000746.txt : 20040809 0000950159-04-000746.hdr.sgml : 20040809 20040809170429 ACCESSION NUMBER: 0000950159-04-000746 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCE BANCORP INC /NJ/ CENTRAL INDEX KEY: 0000715096 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222433468 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12069 FILM NUMBER: 04962118 BUSINESS ADDRESS: STREET 1: COMMERCE ATRIUM STREET 2: 1701 RTE 70 E CITY: CHERRY HILL STATE: NJ ZIP: 08034-5400 BUSINESS PHONE: 8567519000 MAIL ADDRESS: STREET 1: 1701 ROUTE 70 EAST CITY: CHERRY HILL STATE: NJ ZIP: 08034-5400 10-Q 1 commerce10q6-30.txt 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 June 30, 2004 -------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File #1-12069 ---------- [COMMERCE BANCORP LOGO 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 78,585,388 - -------------------------------------------------------------------------------- (Title of Class) (No. of Shares Outstanding as of August 2, 2004) COMMERCE BANCORP, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (unaudited) June 30, 2004 and December 31, 2003...................................1 Consolidated Statements of Income (unaudited) Three months ended June 30, 2004 and June 30, 2003 and six months ended June 30, 2004 and June 30, 2003......................2 Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2004 and June 30, 2003......................3 Consolidated Statement of Changes in Stockholders' Equity (unaudited) Six months ended June 30, 2004........................................4 Notes to Consolidated Financial Statements (unaudited)................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation...................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........22 Item 4. Controls and Procedures..............................................22 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................23 Item 2. Changes in Securities, Use of Proceeds and Purchases of Certain Equity Securities by the Issuer and Others...................23 Item 4. Submission of Matters to a Vote of Security Holders..................24 Item 6. Exhibits and Reports on Form 8-K.....................................25 COMMERCE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)
------------------------------------------------------------------------------------------------ June 30, December 31, --------------------------------- (dollars in thousands) 2004 2003 ------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 1,081,459 $ 910,092 Federal funds sold 8,500 -------------- -------------- Cash and cash equivalents 1,089,959 910,092 Loans held for sale 41,047 42,769 Trading securities 182,105 170,458 Securities available for sale 12,131,104 10,650,655 Securities held to maturity 3,772,204 2,490,484 (market value 06/04-$3,696,221; 12/03-$2,467,192) Loans 8,330,456 7,440,576 Less allowance for loan losses 124,688 112,057 -------------- -------------- 8,205,768 7,328,519 Bank premises and equipment, net 906,455 811,451 Other assets 410,029 307,752 -------------- -------------- $ 26,738,671 $ 22,712,180 ============== ============== Liabilities Deposits: Demand: Noninterest-bearing $ 5,622,574 $ 4,574,714 Interest-bearing 9,632,178 8,574,297 Savings 5,597,767 4,222,282 Time 3,209,229 3,330,107 -------------- -------------- Total deposits 24,061,748 20,701,400 Other borrowed money 944,040 311,510 Other liabilities 204,768 221,982 Long-term debt 200,000 200,000 -------------- -------------- 25,410,556 21,434,892 Stockholders' Common stock, 78,658,414 shares Equity issued (76,869,415 shares at December 31, 2003) 78,658 76,869 Capital in excess of par value 936,539 866,095 Retained earnings 446,260 347,365 Accumulated other comprehensive loss (122,003) (3,702) -------------- -------------- 1,339,454 1,286,627 Less treasury stock, at cost, 397,859 shares issued (363,076 shares at December 31, 2003) 11,339 9,339 -------------- -------------- Total stockholders' equity 1,328,115 1,277,288 -------------- -------------- $ 26,738,671 $ 22,712,180 ============== ==============
See accompanying notes. 1 COMMERCE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
--------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------------------- (dollars in thousands, except per share amounts) 2004 2003 2004 2003 --------------------------------------------------------------------------------------------------------- Interest Interest and fees on loans $113,947 $ 95,548 $ 222,160 $188,669 income Interest on investments 177,929 123,098 341,428 236,759 Other interest 154 98 494 177 ------------- ------------ ------------ ------------ Total interest income 292,030 218,744 564,082 425,605 ------------- ------------ ------------ ------------ Interest Interest on deposits: expense Demand 18,729 11,961 34,672 24,358 Savings 10,216 6,754 18,002 13,109 Time 14,264 17,387 28,907 34,233 ------------- ------------ ------------ ------------ Total interest on deposits 43,209 36,102 81,581 71,700 Interest on other borrowed money 1,052 318 1,500 1,232 Interest on long-term debt 3,020 3,020 6,040 6,040 ------------- ------------ ------------ ------------ Total interest expense 47,281 39,440 89,121 78,972 ------------- ------------ ------------ ------------ Net interest income 244,749 179,304 474,961 346,633 Provision for loan losses 10,748 6,900 20,248 13,800 ------------- ------------ ------------ ------------ Net interest income after provision for loan losses 234,001 172,404 454,713 332,833 Noninterest Deposit charges and service fees 52,717 38,765 98,198 73,607 income Other operating income 38,923 43,388 79,250 84,748 Net investment securities gains 635 1,217 1,059 1,081 ------------- ------------ ------------ ------------ Total noninterest income 92,275 83,370 178,507 159,436 ------------- ------------ ------------ ------------ Noninterest Salaries and benefits 104,110 86,338 201,450 168,420 expense Occupancy 27,949 22,695 56,059 43,183 Furniture and equipment 27,001 20,556 51,180 41,782 Office 10,920 9,233 21,840 18,419 Marketing 9,278 9,198 17,974 14,474 Other 46,997 39,658 90,002 73,521 ------------- ------------ ------------ ------------ Total noninterest expenses 226,255 187,678 438,505 359,799 ------------- ------------ ------------ ------------ Income before income taxes 100,021 68,096 194,715 132,470 Provision for federal and state income taxes 33,786 22,779 66,505 44,263 ------------- ------------ ------------ ------------ Net income $ 66,235 $ 45,317 $ 128,210 $ 88,207 ============= ============ ============ ============ Net income per common and common equivalent share: Basic $ 0.85 $ 0.65 $ 1.65 $ 1.28 Diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23 Average common and common equivalent shares outstanding: Basic 77,980 69,193 77,572 68,758 Diluted 86,260 72,128 85,893 71,944 Cash dividends, common stock $ 0.19 $ 0.16 $ 0.38 $ 0.33
See accompanying notes. 2
COMMERCE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) ---------------------------------------------------------------------------------------------------- Six Months Ended June 30, ------------------------------- (dollars in thousands) 2004 2003 ---------------------------------------------------------------------------------------------------- Operating Net income $ 128,210 $ 88,207 activities Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 20,248 13,800 Provision for depreciation, amortization and accretion 63,429 60,943 Gain on sales of securities available for sale (1,059) (1,081) Proceeds from sales of loans held for sale 408,006 854,984 Originations of loans held for sale (406,284) (849,349) Net (increase) decrease in trading securities (11,647) 117,028 Increase in other assets, net (35,859) (18,039) Decrease in other liabilities (14,414) (13,724) ---------------------------------------------------------------------------------------------------- Net cash provided by operating activities 150,630 252,769 Investing Proceeds from the sales of securities available for sale 1,656,912 2,072,409 activities Proceeds from the maturity of securities available for sale 2,228,796 2,493,675 Proceeds from the maturity of securities held to maturity 407,486 279,923 Purchase of securities available for sale (5,569,909) (7,207,889) Purchase of securities held to maturity (1,690,817) (358,633) Net increase in loans (897,497) (561,249) Capital expenditures (136,731) (151,499) ---------------------------------------------------------------------------------------------------- Net cash used by investing activities (4,001,760) (3,433,263) Financing Net increase in demand and savings deposits 3,481,226 2,848,174 activities Net (decrease) increase in time deposits (120,878) 390,067 Net increase in other borrowed money 632,530 116,334 Dividends paid (29,315) (22,569) Proceeds from issuance of common stock under dividend reinvestment and other stock plans 69,433 52,251 Other (1,999) (1,312) ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 4,030,997 3,382,945 Increase in cash and cash equivalents 179,867 202,451 Cash and cash equivalents at beginning of year 910,092 811,434 ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,089,959 $ 1,013,885 ==================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 89,705 $ 79,741 Income taxes 63,339 36,462
See accompanying notes. 3
COMMERCE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) Six months ended June 30, 2004 (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Capital in Accumulated Excess of Other Common Par Retained Treasury Comprehensive Stock Value Earnings Stock Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2003 $76,869 $866,095 $347,365 $ (9,339) $ (3,702) $1,277,288 Net income 128,210 128,210 Other comprehensive income(loss), net of tax Unrealized loss on securities (pre-tax $217,801) (139,612) (139,612) Reclassification adjustment (pre-tax $32,786) 21,311 21,311 ------------ Other comprehensive income (loss) (118,301) Total comprehensive income 9,909 Cash dividends paid (29,315) (29,315) Shares issued under dividend reinvestment and compensation and benefit plans (1,789 shares) 1,789 67,644 69,433 Other 2,800 (2,000) 800 - ------------------------------------------------------------------------------------------------------------------------------------ Balances at June 30, 2004 $78,658 $936,539 $446,260 $(11,339) $(122,003) $1,328,115 ====================================================================================================================================
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 prepared 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 and six months ended June 30, 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. Legal Proceedings On June 29, 2004 the U.S. Attorney General indicted two officers of the Company's Philadelphia bank subsidiary in connection with its investigation of certain Philadelphia city government officials. The Company confirms that neither it, nor any of its subsidiaries or other officers and employees are targets of the investigation. The Company has fully cooperated with this investigation and believes it will have no material negative financial impact on the Company. During July 2004, class action complaints were filed in the United States District Court for the District of New Jersey and the Eastern District of Pennsylvania against the Company and certain Company (or subsidiary) current and former officers and directors. The complaints allege that the defendants violated the federal securities laws, specifically Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. The plaintiffs seek unspecified damages on behalf of a purported class of purchasers of the Company's securities during various periods. The Company believes that the complaints against it are without merit and intends to vigorously defend itself. C. 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. 5 D. 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 June 30, 2004 and December 31, 2003, Bank premises and equipment in progress was $87.6 million and $87.2 million, respectively. E. 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. In accordance with FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), the Company defers the fees associated with standby letters of credit and records them in "Other liabilities" on the consolidated balance sheet. These fees are immaterial to the Company's consolidated financial statements at June 30, 2004. F. Comprehensive Income (Loss) Total comprehensive income (loss), which for the Company included net income and changes in unrealized gains and losses on the Company's available for sale securities, amounted to $(133.8) million and $41.6 million, respectively, for the three months ended June 30, 2004 and 2003. For the six months ended June 30, 2004 and 2003, total comprehensive income was $9.9 million and $64.1 million, respectively. G. 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 June 30, 2004 and December 31, 2003, the Company's investment in these entities totaled $38.8 million and $30.1 million, respectively. 6 H. 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 Six Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------- Reported net income $66,235 $45,317 $128,210 $88,207 Less: Stock option compensation expense determined under fair value method, net of tax (3,090) (2,233) (6,510) (4,613) --------------- --------------- -------------- --------------- Pro forma net income, basic $63,145 $43,084 $121,700 $83,594 =============== =============== Add: Interest expense on Convertible Trust Capital Securities, net of tax 1,963 3,926 --------------- -------------- Pro forma net income, diluted $65,108 $125,626 =============== ============== Reported net income per share: Basic $ 0.85 $ 0.65 $ 1.65 $ 1.28 Diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23 Pro forma net income per share: Basic $ 0.81 $ 0.62 $ 1.57 $ 1.22 Diluted $ 0.75 $ 0.60 $ 1.46 $ 1.16 - -------------------------------------------------------------------------------------------------------------------
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. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. 7 I. 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 June 30, 2004 June 30, 2003 Community Parent/ Community Parent/ Banks Other Total Banks Other Total - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 246,385 $ (1,636) $ 244,749 $ 180,729 $ (1,425) $ 179,304 Provision for loan losses 10,748 - 10,748 6,900 6,900 ----------------------------------------------------------------------------------- Net interest income after provision 235,637 (1,636) 234,001 173,829 (1,425) 172,404 Noninterest income 66,836 25,439 92,275 56,009 27,361 83,370 Noninterest expense 203,155 23,100 226,255 166,136 21,542 187,678 ----------------------------------------------------------------------------------- Income before income taxes 99,318 703 100,021 63,702 4,394 68,096 Income tax expense 33,917 (131) 33,786 21,317 1,462 22,779 ----------------------------------------------------------------------------------- Net income $ 65,401 $ 834 $ 66,235 $ 42,385 $ 2,932 $ 45,317 =================================================================================== Average assets (in millions) $ 23,778 $ 2,044 $ 25,822 $ 16,715 $ 1,784 $ 18,499 =================================================================================== - ------------------------------------------------------------------------------------------------------------------------- Six Months Ended Six Months Ended June 30, 2004 June 30, 2003 - ------------------------------------------------------------------------------------------------------------------------- Community Parent/ Community Parent/ Banks Other Total Banks Other Total - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 478,221 $ (3,260) $ 474,961 $ 348,958 $ (2,325) $ 346,633 Provision for loan losses 20,248 20,248 13,800 13,800 ----------------------------------------------------------------------------------- Net interest income after provision 457,973 (3,260) 454,713 335,158 (2,325) 332,833 Noninterest income 124,969 53,538 178,507 106,004 53,432 159,436 Noninterest expense 392,508 45,997 438,505 315,586 44,213 359,799 ----------------------------------------------------------------------------------- Income before income taxes 190,434 4,281 194,715 125,576 6,894 132,470 Income tax expense 65,124 1,381 66,505 42,292 1,971 44,263 ----------------------------------------------------------------------------------- Net income $ 125,310 $ 2,900 $ 128,210 $ 83,284 $ 4,923 $ 88,207 =================================================================================== Average assets (in millions) $ 22,596 $ 2,060 $ 24,656 $ 15,858 $ 1,812 $ 17,670 ===================================================================================
8 J. Net Income Per Share
The calculation of net income per share follows (in thousands, except for per share amounts): - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------------- Basic: Net income available to common shareholders - basic $66,235 $45,317 $128,210 $88,207 ============== ============= =============== ============== Average common shares outstanding 77,980 69,193 77,572 68,758 ============== ============= =============== ============== Net income per common share - basic $ 0.85 $ 0.65 $ 1.65 $ 1.28 ============== ============= =============== ============== Diluted: Net income $66,235 $45,317 $128,210 $88,207 Add interest expense on Convertible Trust Capital Securities, net of tax 1,963 3,926 -------------- ------------- --------------- -------------- Net income available to common shareholders - diluted $68,198 $45,317 $132,136 $88,207 ============== ============= =============== ============== Average common shares outstanding 77,980 69,193 77,572 68,758 Additional shares considered in diluted computation assuming: Exercise of stock options 4,489 2,935 4,530 3,186 Conversion of Convertible Trust Capital Securities 3,791 3,791 -------------- ------------- --------------- -------------- Average common shares outstanding - diluted 86,260 72,128 85,893 71,944 ============== ============= =============== ============== Net income per common share - diluted $ 0.79 $ 0.63 $ 1.54 $ 1.23 ============== ============= =============== ==============
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operation - ------------ Executive Summary - ----------------- During the first six months of 2004, the Company experienced strong deposit growth and positive operating leverage as year over year revenue growth of 29% exceeded non-interest expense growth of 22% during the same period. Total assets grew to $26.7 billion, an increase of 35% over June 30, 2003, while total deposits grew 35%. Net income increased 46% to $66.2 million and 45% to $128.2 million during the second quarter and first six months of 2004, respectively, as compared to the same periods in 2003. Diluted net income per share increased by 25% to $0.79 and $1.54 during the second quarter and first six months of 2004, respectively, as compared the same periods in 2003. The net income per share calculations for 2004 include 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 calculations for 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 first six months of 2004, 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 June 30, 2004, stockholders' equity totaled $1.3 billion or 4.97% 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 Commerce Bancorp and Commerce N.A.'s risk-based and leverage ratios at June 30, 2004 and 2003:
Per Regulatory Guidelines -------------------------------------------------- Actual Minimum "Well Capitalized" Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- June 30, 2004: Commerce Bancorp Risk based capital ratios: Tier 1 $1,640,555 12.37% $530,388 4.00% $795,582 6.00% Total capital 1,765,243 13.31 1,060,776 8.00 1,325,970 10.00 Leverage ratio 1,640,555 6.33 1,036,022 4.00 1,295,028 5.00 Commerce N.A. Risk based capital ratios: Tier 1 $1,088,255 11.16% $390,195 4.00% $585,292 6.00% Total capital 1,184,593 12.14 780,389 8.00 975,486 10.00 Leverage ratio 1,088,255 6.03 722,139 4.00 902,674 5.00
10
Per Regulatory Guidelines -------------------------------------------------- Actual Minimum "Well Capitalized" Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- June 30, 2003: Commerce Bancorp Risk based capital ratios: Tier 1 $1,110,820 11.13% $399,313 4.00% $598,970 6.00% Total capital 1,210,138 12.12 798,627 8.00 998,283 10.00 Leverage ratio 1,110,820 6.04 735,335 4.00 919,169 5.00 Commerce N.A. Risk based capital ratios: Tier 1 $756,909 10.29% $294,114 4.00% $441,171 6.00% Total capital 832,704 11.32 588,228 8.00 735,285 10.00 Leverage ratio 756,909 5.75 526,680 4.00 658,349 5.00
At June 30, 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 June 30, 2004, the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. Deposits - -------- Total deposits at June 30, 2004 were $24.1 billion, up $6.3 billion, or 35% over total deposits of $17.8 billion at June 30, 2003, and up by $3.4 billion, or 16% from year-end 2003. Deposit growth during the first six 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 25% at June 30, 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. 11 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 June 30, 2004 and 2003 of a plus 200 and minus 100 basis point change in interest rates. ------------------------------------------------------------------------ Basis Point Change ------------------------------------------------------------------------ Plus 200 Minus 100 ------------------------------------------------------------------------ June 30, 2004: Twelve Months 4.06% 1.45% Twenty Four Months 11.38% (0.31)% June 30, 2003: Twelve Months 1.34% (9.47)% Twenty Four Months 11.09% (15.03)% 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 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 June 30, 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 June 30, 2004, the average life of the Company's deposits was 13.3 years. Thus, these core deposit balances provide an internal hedge to market value fluctuations in the Company's fixed rate assets. 12 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 June 30, 2004 (in millions, except for per share amounts): ---------------------------------------------------------------------- Market Value Of Equity Per Share ---------------------------------------------------------------------- Plus 200 basis points $5,569 $70.81 Current Rate $5,906 $75.09 Minus 100 basis points $5,347 $67.97 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 or Federal Home Loan Bank advances. As of June 30, 2004 the Company had in excess of $11.8 billion in immediately available liquidity which includes securities that could be used for collateralized borrowings, cash on hand, and borrowing capacities under existing lines of credit. During the first six months of 2004, deposit growth and short-term borrowings were used to fund growth in the loan portfolio and purchase additional investment securities. Short-Term Borrowings - --------------------- Short-term borrowings, or other borrowed money, consist primarily of securities sold under agreements to repurchase and overnight lines of credit, and are used to meet short-term funding needs. At June 30, 2004, short-term borrowings aggregated $944.0 million and had an average rate of 1.68%, as compared to $311.5 million at an average rate of 0.77% at December 31, 2003. The increase in short-term borrowings primarily occurred towards the end of the second quarter, as the Company took advantage of an opportunity to purchase investments by pre-funding anticipated deposit growth. The Company anticipates the short-term borrowings will be paid down during the third quarter of 2004. Interest Earning Assets - ----------------------- The Company's cash flow from deposit growth and repayments from its investment portfolio totaled approximately $6.0 billion for the first six months of 2004. This significant cash flow provides the Company with ongoing reinvestment opportunities as interest rates change. For the six month period ended June 30, 2004, interest earning assets increased $3.7 billion from $20.8 billion to $24.5 billion. This increase was primarily in investment securities and the loan portfolio as described below. 13 Loans - ----- During the first six months of 2004, loans increased $889.9 million from $7.4 billion to $8.3 billion. All segments of the loan portfolio experienced growth in the first six 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. June 30, December 31, --------------------------------------- 2004 2003 --------------------------------------- (in thousands) Commercial: Term $ 1,111,848 $ 1,027,526 Line of credit 1,046,104 959,158 Demand 1,077 ----------------- --------------------- 2,157,952 1,987,761 Owner-occupied 1,805,336 1,619,079 ----------------- --------------------- 3,963,288 3,606,840 Consumer: Mortgages (1-4 family residential) 1,111,049 918,686 Installment 134,710 138,437 Home equity 1,573,454 1,405,795 Credit lines 65,421 60,579 ----------------- --------------------- 2,884,634 2,523,497 Commercial real estate: Investor developer 1,308,103 1,167,672 Construction 174,431 142,567 ----------------- --------------------- 1,482,534 1,310,239 ----------------- --------------------- Total loans $ 8,330,456 $ 7,440,576 ================= ===================== Investments - ----------- In total, for the first six months of 2004, securities increased $2.8 billion from $13.3 billion to $16.1 billion. The available for sale portfolio increased $1.4 billion to $12.1 billion at June 30, 2004 from $10.7 billion at December 31, 2003, and the securities held to maturity portfolio increased $1.3 million to $3.8 billion at June 30, 2004 from $2.5 billion at year-end 2003. The portfolio of trading securities increased $11.6 million from year-end 2003 to $182.1 million at June 30, 2004. At June 30, 2004, the average life of the investment portfolio was approximately 5.19 years, and the duration was approximately 4.20 years. The yield on the total portfolio decreased slightly from 4.86% at December 31, 2003 to 4.79% at June 30, 2004. 14 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.
----------------------------------------------------- ----------------------------------------------------- At June 30, 2004 At December 31, 2003 ----------------------------------------------------- ----------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ----------------------------------------------------- ----------------------------------------------------- U.S. Government agency and mortgage-backed $12,172,873 $29,290 $(227,915) $11,974,248 $10,528,396 $82,057 $(98,908) $10,511,545 obligations Obligations of state and political subdivisions 104,281 548 (1,708) 103,121 30,223 821 (117) 30,927 Other 44,874 8,861 53,735 97,943 10,240 108,183 ----------------------------------------------------- ----------------------------------------------------- Securities available $12,322,028 $38,699 $(229,623) $12,131,104 $10,656,562 $93,118 $(99,025) $10,650,655 for sale ----------------------------------------------------- ----------------------------------------------------- U.S. Government agency and mortgage-backed $3,424,051 $ 9,310 $(77,506) $3,355,855 $2,193,577 $15,209 $(27,088) $2,181,698 obligations Obligations of state and 258,985 (7,787) 251,198 227,199 30 (11,443) 215,786 political subdivisions Other 89,168 89,168 69,708 69,708 ----------------------------------------------------- ----------------------------------------------------- Securities held to maturity $3,772,204 $ 9,310 $(85,293) $3,696,221 $2,490,484 $15,239 $(38,531) $2,467,192 ----------------------------------------------------- -----------------------------------------------------
Gross gains and losses on securities sold during the second quarter of 2004 were $635 thousand and $0, respectively. For the first six months of 2004, gross gains and losses on securities sold amounted to $12.8 million and $11.8 million, respectively. As of August 6, 2004, with the yield on the 10 year Treasury Note at 4.22%, the after-tax depreciation of the Company's available for sale portfolio was approximately $6.6 million. Detailed below is information regarding the composition and characteristics of the Company's investment portfolio, excluding trading securities, as of June 30, 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) $4,349 4.88% $ 101.17 4.39 5.58 Collateralized Mortgage Obligations (AAA Rated) 10,226 4.85 100.84 4.04 4.97 U.S. Government agencies/Other 1,328 4.01 100.24 4.79 5.56 --------------- ------------ --------------- ------------- -------------- Total $15,903 4.79% $ 100.88 4.20 5.19 =============== ============ =============== ============= ==============
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. 15 Net Income - ---------- Net income for the second quarter of 2004 was $66.2 million, an increase of $20.9 million or 46% over the $45.3 million recorded for the second quarter of 2003. Net income for the first six months of 2004 totaled $128.2 million, an increase of $40.0 million or 45% from $88.2 million in the first six months of 2003. On a per share basis, diluted net income for the second quarter and first six months of 2004 was $0.79 and $1.54 per common share compared to $0.63 and $1.23 per common share for the same periods in 2003. Net income per share for the second quarter and first six months 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 second quarter of 2004 were 1.03% and 19.86%, respectively, compared to 0.98% and 17.91%, respectively, for the same 2003 period. ROA and ROE for the first six months of 2004 were 1.04% and 18.87%, respectively, compared to 1.00% and 17.92%, respectively, for the same 2003 period. The increases in both ROA and ROE are due to net income growth that has exceeded growth in average assets and average equity during the three month and six month periods ended June 30, 2004 as compared to the same periods in 2003. As noted above, net income has grown 46% and 45% during the second quarter and first six months of 2004, respectively, as compared to the same 2003 periods. Average assets and average equity have grown 40% and 32%, respectively, from June 30, 2003 to June 30, 2004. Net Interest Income - ------------------- Net interest income totaled $244.7 million for the second quarter of 2004, an increase of $65.4 million or 36% from $179.3 million in the second quarter of 2003. Net interest income for the first six months of 2004 was $475.0 million, up $128.4 million or 37% from $346.6 million for the first six months of 2003. The increases in net interest income for the quarter and first six months of 2004 were due to the volume increases in interest earning assets resulting from the Company's strong, low-cost core deposit growth. The increase in net interest income on a tax equivalent basis is shown below (in thousands).
Net Interest Income --------------------------------------------------------------------- Volume Rate Total % 2004 vs. 2003 Increase Change Increase Increase --------------------------------------------------------------------------------------------------- Quarter Ended June 30 $72,797 ($6,873) $65,924 36% Six Months Ended June 30 $142,325 ($13,124) $129,201 36%
The net interest margin for the second quarter of 2004 was 4.29% down 10 basis points from the 4.39% margin for the first quarter of 2004. The decrease in the margin was attributed primarily to a decrease in the yield on the investment portfolio of 10 basis points, which was caused by the spike in mortgage-backed security prepayments experienced in the second quarter. The following table sets forth balance sheet items on a daily average basis for the three months ended June 30, 2004, March 31, 2004 and June 30, 2003 and presents the daily average interest earned on assets and paid on liabilities for such periods. 16
Average Balances and Net Interest Income ----------------------------------------------------------------------------------------------------- June 2004 March 2004 June 2003 ---------------------------------- -------------------------------- ------------------------------- Average Average Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------------------------------- -------------------------------- ------------------------------- Earning Assets - ------------------------------- Investment securities Taxable $14,747,643 $ 173,678 4.74% $13,295,903 $ 159,648 4.83% $10,026,080 $119,147 4.77% Tax-exempt 290,200 4,465 6.19 256,628 3,860 6.05 192,892 3,689 7.67 Trading 174,578 2,075 4.78 161,701 2,065 5.14 158,297 2,389 6.05 ------------- -------------------- -------------------------------- ------------------------------- Total investment securities 15,212,421 180,218 4.76 13,714,232 165,573 4.86 10,377,269 125,225 4.84 Federal funds sold 62,357 154 0.99 144,297 340 0.95 32,095 97 1.21 Loans Commercial mortgages 3,021,768 45,333 6.03 2,793,159 42,782 6.16 2,319,945 37,156 6.42 Commercial 1,961,351 25,477 5.22 1,878,353 24,535 5.25 1,552,400 21,587 5.58 Consumer 2,767,826 39,079 5.68 2,603,037 36,936 5.71 2,109,143 33,336 6.34 Tax-exempt 335,505 6,243 7.48 337,313 6,092 7.26 264,737 5,338 8.09 ------------- -------------------- -------------------------------- ------------------------------- Total loans 8,086,450 116,132 5.78 7,611,862 110,345 5.83 6,246,225 97,417 6.26 ------------- -------------------- -------------------------------- ------------------------------- Total earning assets $23,361,228 $296,504 5.10% $21,470,391 $ 276,258 5.17% $16,655,589 $222,739 5.36% ============= ============= ============= Sources of Funds - ------------------------------- Interest-bearing liabilities Regular savings $5,276,657 $ 10,216 0.78% $4,492,847 $ 7,786 0.70% $3,477,229 $ 6,754 0.78% Interest bearing demand 9,643,771 18,729 0.78 8,986,070 15,943 0.71 6,427,333 11,961 0.75 Time deposits 2,507,526 11,378 1.82 2,430,589 11,323 1.87 2,313,690 14,093 2.44 Public funds 856,683 2,886 1.35 968,513 3,320 1.38 878,005 3,294 1.50 ------------- ----------- -------- ------------ ------------------- ------------ -------- --------- Total deposits 18,284,637 43,209 0.95 16,878,019 38,372 0.91 13,096,257 36,102 1.11 Other borrowed money 523,931 1,052 0.81 174,746 448 1.03 278,780 318 0.46 Long-term debt 200,000 3,020 6.07 200,000 3,020 6.07 200,000 3,020 6.06 ------------- ----------- -------- ------------ ---------- -------- ------------ -------- --------- Total deposits and interest-bearing liabilities 19,008,568 47,281 1.00 17,252,765 41,840 0.98 13,575,037 39,440 1.17 Noninterest-bearing funds (net) 4,352,660 4,217,626 3,080,552 ------------- ----------- -------- ------------ ---------- -------- ------------ -------- --------- Total sources to fund earning assets $23,361,228 47,281 0.81 $21,470,391 41,840 0.78 $16,655,589 39,440 0.95 ============= ----------- -------- ============ ---------- -------- ============ -------- --------- Net interest income and margin tax-equivalent basis $249,223 4.29% $ 234,418 4.39% $183,299 4.41% =========== ======== ========== ======== ======== ========= Other Balances - ------------------------------- Cash and due from banks $1,163,942 $1,007,182 $945,600 Other assets 1,419,098 1,129,880 994,784 Total assets 25,822,157 23,491,544 18,498,841 Total deposits 23,541,453 21,478,730 16,734,886 Demand deposits (noninterest- bearing) 5,256,816 4,600,711 3,638,629 Other liabilities 222,779 253,890 273,183 Stockholders' equity 1,333,994 1,384,178 1,011,992
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. 17 Noninterest Income - ------------------ Noninterest income totaled $92.3 million for the second quarter of 2004, an increase of $8.9 million or 11% from $83.4 million in the second quarter of 2003. Noninterest income for the first six months of 2004 increased to $178.5 million from $159.4 million in the first six months of 2003, a 12% increase. During the second quarter and first six months of 2004, the increases of 11% and 12%, respectively, were primarily due to increased deposit charges and services fees, which rose $13.9 million, or 36%, and $24.6 million, or 33%, over the second quarter and first six months of 2003, respectively. The increases in deposit charges and services fees are attributable to the Company's 35% deposit growth rate during this same period. These increases were offset by decreases in both Commerce Capital Markets, Inc. (CCMI) revenues and loan brokerage fees, which decreased in total by $6.9 million, or 40%, and $12.0 million, or 34%, during the second quarter and first six months of 2004, respectively, compared to the same periods in 2003. The decrease in CCMI revenues was related primarily to volatility in interest rates during the second quarter of 2004 and the resulting impact on the trading and sales function. The decrease in loan brokerage fees resulted from declines in mortgage refinancing activity during 2004.
Three Months Ended Six Months Ended ------------------------------------ -------------------------------------- 6/30/04 6/30/03 % Increase 6/30/04 6/30/03 % Increase ------------------------------------ -------------------------------------- (Dollars in thousands) (Dollars in thousands) Deposit charges & service fees $52,717 $38,765 36% $98,198 $73,607 33% Other operating income: Insurance 18,570 17,190 8 36,906 33,245 11 Capital Markets 6,622 9,695 (32) 16,349 19,698 (17) Loan Brokerage Fees 3,725 7,545 (51) 6,778 15,468 (56) Other 10,006 8,958 12 19,217 16,337 18 ---------- ---------- --------- ----------- ----------- ---------- Total other 38,923 43,388 (10) 79,250 84,748 (6) ---------- ---------- --------- ----------- ----------- ---------- Net investment securities gains 635 1,217 (48) 1,059 1,081 (2) ---------- ---------- --------- ----------- ----------- ---------- Total non-interest income $92,275 $83,370 11% $178,507 $159,436 12% ========== ========== ========= =========== =========== ==========
Noninterest Expense - ------------------- For the second quarter of 2004, noninterest expense totaled $226.3 million, an increase of $38.6 million or 21% over the same period in 2003. For the first six months of 2004, noninterest expense totaled $438.5 million, an increase of $78.7 million or 22% over $359.8 million for the first six months of 2003. Contributing to this increase was new branch activity over the past twelve months, with the number of branches increasing from 243 at June 30, 2003 to 289 at June 30, 2004. With the addition of these new offices, staff, facilities, and related expenses rose accordingly. Other noninterest expenses rose $7.3 million during the second quarter of 2004 over the same period in 2003 and $16.5 million during the first six months of 2004 over the same period in 2003. These increases resulted primarily from higher bank card-related service charges, increased business development expenses, and increased provisions for non-credit-related losses. The Company continued to experience positive operating leverage in the second quarter, as revenue growth of 28% exceeded non-interest expense growth of 21%. 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 the growth in non-interest expenses in these markets is declining in 2004. 18 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 67.5% for the first six months of 2004 as compared to 71.3% for the same 2003 period. This improvement in the operating efficiency ratio is due to the positive operating leverage ratio discussed above. 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 June 30, 2004 were $30.4 million, or 0.11% of total assets compared to $23.6 million or 0.10% of total assets at December 31, 2003 and $24.1 million or 0.12% of total assets at June 30, 2003. Total non-performing loans (non-accrual loans and restructured loans, excluding loans past due 90 days or more and still accruing interest) at June 30, 2004 were $29.7 million or 0.36% of total loans compared to $21.7 million or 0.29% of total loans at December 31, 2003 and $22.5 million or 0.35% of total loans at June 30, 2003. At June 30, 2004, loans past due 90 days or more and still accruing interest amounted to $318 thousand compared to $538 thousand at December 31, 2003 and $434 thousand at June 30, 2003. Additional loans considered as potential problem loans by the Company's internal loan review department ($38.1 million at June 30, 2004) have been evaluated as to risk exposure in determining the adequacy of the allowance for loan losses. The increase in commercial non-accrual loans during 2004 is the result of four credits that experienced difficulties in the first quarter of 2004 and were in the process of collection and/or liquidation at the end of the second quarter. This increase in commercial non-accrual loans has led to the overall increase in non-performing assets noted during the first six months of 2004. Total non-performing assets and loans past due 90 days or more decreased slightly from March 31, 2004 to June 30, 2004 primarily as a result of collections on existing commercial non-accrual loans. 19 The following summary presents information regarding non-performing loans and assets as of June 30, 2004 and the preceding four quarters (dollar amounts in thousands).
June 30, March 31, December 31, September 30, June 30, 2004 2004 2003 2003 2003 --------------------------------------------------------------------------- Non-accrual loans: Commercial $17,382 $19,701 $ 6,867 $ 7,295 $ 7,049 Consumer 11,675 9,984 9,242 8,295 9,517 Commercial real estate: Construction 138 Mortgage 675 810 5,494 7,502 5,970 --------------------------------------------------------------------------- Total non-accrual loans 29,732 30,495 21,741 23,092 22,536 --------------------------------------------------------------------------- Restructured loans: Commercial 1 1 1 2 3 Consumer Commercial real estate: Construction Mortgage --------------------------------------------------------------------------- Total restructured loans 1 1 1 2 3 --------------------------------------------------------------------------- Total non-performing loans 29,733 30,496 21,742 23,094 22,539 --------------------------------------------------------------------------- Other real estate 653 1,890 1,831 1,670 1,540 --------------------------------------------------------------------------- Total non-performing assets 30,386 32,386 23,573 24,764 24,079 --------------------------------------------------------------------------- Loans past due 90 days or more and still accruing 318 696 538 649 434 --------------------------------------------------------------------------- Total non-performing assets and loans past due 90 days or more $30,704 $33,082 $24,111 $25,413 $24,513 =========================================================================== Total non-performing loans as a percentage of total period-end loans 0.36% 0.39% 0.29% 0.34% 0.35% Total non-performing assets as a percentage of total period-end assets 0.11% 0.13% 0.10% 0.12% 0.12% Total non-performing assets and loans past due 90 days or more as a percentage of total period-end assets 0.11% 0.13% 0.11% 0.12% 0.12% Allowance for loan losses as a percentage of total non-performing loans 419% 385% 515% 449% 441% Allowance for loan losses as a percentage of total period-end loans 1.50% 1.51% 1.51% 1.52% 1.56% Total non-performing assets and loans past due 90 days or more as a percentage of stockholders' equity and allowance for loan losses 2% 2% 2% 2% 2%
20 The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data (dollar amounts in thousands).
Year Three Months Ended Six Months Ended Ended 06/30/04 06/30/03 06/30/04 06/30/03 12/31/03 ------------ ----------- ------------ ------------ ------------ Balance at beginning of period $117,329 $94,731 $112,057 $90,733 $90,733 Provisions charged to operating expenses 10,748 6,900 20,248 13,800 31,850 ------------ ----------- ------------ ------------ ------------ 128,077 101,631 132,305 104,533 122,583 Recoveries on loans charged-off: Commercial 104 141 260 345 669 Consumer 101 146 371 277 584 Commercial real estate 1 - 48 - 11 ------------ ----------- ------------ ------------ ------------ Total recoveries 206 287 679 622 1,264 Loans charged-off: Commercial (2,587) (1,197) (4,880) (3,065) (5,601) Consumer (1,004) (1,390) (1,776) (2,755) (5,950) Commercial real estate (4) (13) (1,640) (17) (239) ------------ ----------- ------------ ------------ ------------ Total charge-offs (3,595) (2,600) (8,296) (5,837) (11,790) ------------ ----------- ------------ ------------ ------------ Net charge-offs (3,389) (2,313) (7,617) (5,215) (10,526) ------------ ----------- ------------ ------------ ------------ Balance at end of period $124,688 $99,318 $124,688 $99,318 $112,057 ============ =========== ============ ============ ============ Net charge-offs as a percentage of average loans outstanding 0.17% 0.15% 0.19% 0.17% 0.16% Net reserve additions $ 7,359 $ 4,587 $12,631 $8,585 $21,324
During the first six months of 2004, there was an increase in commercial and commercial real estate loan charge-offs. These increases are related to a large credit that experienced difficulties during the first quarter of 2004 and another credit with both a real estate as well as a commercial component. The real estate component of this credit was sold and resulted in a $1.5 million charge-off. Consumer loan charge-offs continued to decrease during the first six months of 2004, Consumer loan charge-offs during 2003 reflect charge-offs which arose as a result of attempts to defraud the Company and several other financial institutions and mortgage companies. The net reserve additions for the first six months and second quarter of 2004 are reflective of the increases in the non-performing assets since December 31, 2003 and increases in the overall loan portfolio. The Company considers the allowance for loan losses of $124.7 million adequate to cover probable losses inherent in the loan portfolio at June 30, 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. 21 Forward-Looking Statements - -------------------------- The Company may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this Form 10-Q), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company's control). The words "may", "could", "should", "would", believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the "FRB"); inflation; interest rates, market and monetary fluctuations; the timely development of competitive new products and services by the Company and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services for the Company's products and services and vice versa; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; future acquisitions; the expense savings and revenue enhancements from acquisitions being less than expected; the growth and profitability of the Company's noninterest or fee income being less than expected; 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 22 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 information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. During the quarter ended June 30, 2004, there has not occurred any significant change in Internal Controls that has materially affected or is reasonably likely to materially affect Internal Controls. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- On June 29, 2004 the U.S. Attorney General indicted two officers of the Company's Philadelphia bank subsidiary in connection with its investigation of certain Philadelphia city government officials. The Company confirms that neither it, nor any of its subsidiaries or other officers and employees are targets of the investigation. The Company has fully cooperated with this investigation and believes it will have no material negative financial impact on the Company. During July 2004, class action complaints were filed in the United States District Court for the District of New Jersey and the Eastern District of Pennsylvania against the Company and certain Company (or subsidiary) current and former officers and directors. The complaints allege that the defendants violated the federal securities laws, specifically Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. The plaintiffs seek unspecified damages on behalf of a purported class of purchasers of the Company's securities during various periods. The Company believes that the complaints against it are without merit and intends to vigorously defend itself. Item 2. Changes in Securities, Use of Proceeds and Purchases of Certain Equity - ------------------------------------------------------------------------------ Securities by the Issuer and Others - ----------------------------------- There were no purchases of equity securities by the Company during the second quarter of 2004. 23 Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- The Annual Meeting of the Registrant's Shareholders was held on June 11, 2004. Proxies representing 70,951,587 shares were received (total shares outstanding as of the record date were 77,907,957). The items of business acted upon at the Annual Meeting were (i) the election of 13 directors for one year terms; (ii) approval of the Commerce Bancorp, Inc.'s 2004 Employee Stock Option Plan; (iii) approval of the amendment to Bancorp's Restated Certificate of Incorporation to increase the number of shares of Common Stock that Bancorp is authorized to issue by 350,000,000 shares; and (iv) approval of the appointment of Ernst & Young LLP as Bancorp's independent auditors for the fiscal year ending December 31, 2004. The number of votes cast for, against, or withheld, as well as the number of abstentions and broker non-votes was as follows: (i) Election of directors: Name of (Withhold Authority) Nominee For Against - ------- --- ------- Vernon W. Hill, II 69,187,219 1,764,368 Robert C. Beck 64,560,038 6,391,549 Jack R Bershad 65,585,542 5,366,045 Joseph E. Buckelew 69,073,581 1,878,006 Donald T. DiFrancesco 64,468,447 6,483,140 John P. Ferguson 70,034,043 917,544 Morton N. Kerr 66,435,444 4,516,143 Steven M. Lewis 69,277,641 1,673,946 George E. Norcross, III 68,958,279 1,993,308 Joseph J. Plumeri, II 70,024,804 926,783 Daniel J. Ragone 67,905,369 3,046,218 William A. Schwartz, Jr. 70,034,493 917,094 Joseph T. Tarquini, Jr. 68,144,986 2,806,601 (ii) Approval of Commerce Bancorp, Inc.'s 2004 Employee Stock Option: Broker For Against Abstain Non-Vote --- ------- ------- -------- 28,378,564 21,971,757 284,459 27,273,177 (iii) Approval of the amendment to Bancorp's Restated Certificate of Incorporation to increase the number of shares of Common Stock that Bancorp is authorized to issue by 350,000,000 shares: Broker For Against Abstain Non-Vote --- ------- ------- -------- 52,451,292 18,288,419 211,876 6,956,370 (iv) Approval of the appointment of Ernst & Young LLP as Bancorp's independent auditors for the fiscal year ending December 31, 2004: Broker For Against Abstain Non-Vote --- ------- ------- -------- 70,146,667 631,760 173,161 6,956,369 24 Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- Exhibits - -------- Exhibit 3.2 By-laws of the Company, as amended. Exhibit 10.37 The Company's 2004 Employee Stock Option Plan. 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 April 13, 2004, we filed a Current Report on Form 8-K which included as exhibits a press release, issued by us on April 13, 2004, announcing our results for the first quarter of 2004 and certain supplemental information. On June 2, 2004, we filed a Current Report on Form 8-K, which included certain questions and answers regarding corporate information. On June 29, 2004, we filed a Current Report on Form 8-K, which announced the indictment of two officers of the Company in connection with the U.S. Attorney General's investigation of certain Philadelphia government officials. 25 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) AUGUST 9, 2004 /s/ DOUGLAS J. PAULS - ------------------- ---------------------------------- (Date) DOUGLAS J. PAULS SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 26 EX-3.(II) 2 commerce10qex3-2.txt COMMERCE BANCORP, INC. BYLAWS ARTICLE I. NAME AND SEAL. Section 101. Name. The name of the Corporation is COMMERCE BANCORP, INC. Section 102. State of Incorporation. The Corporation has been incorporated under the laws of the State of New Jersey. Section 103. Seal. The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation, the year of its organization, the words "Corporate Seal", and the name of the State of Incorporation. The seal may be used by any person authorized by the Board of Directors of the Corporation or by these Bylaws by causing the seal or a facsimile thereof to be impressed or affixed, or in any manner reproduced. ARTICLE II. REGISTERED AND PRINCIPAL OFFICES. Section 201. Registered Office. The registered office of the Corporation in the State of Incorporation shall be at Commerce Plaza, 336 Route 70, Marlton, New Jersey 08053. Section 202. Offices. The principal office of the Corporation and any other offices of the Corporation shall located at such places, within and without the State of Incorporation, as the Board of Directors may from time to time determine or as the business of the Corporation may require, and as may be permitted by law. ARTICLE III. MEETINGS OF SHAREHOLDERS. Section 301. Place of Meetings. All meetings of the shareholders shall be held at such place or places, within or without the State of Incorporation, as shall be determined by the Board of Directors from time to time. Section 302. Annual Meetings. The regular annual meeting of the shareholders shall be held on the second Tuesday of April of each year at which time they shall elect Directors and transact such other business as may properly be brought before the meeting. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable statute or regulation. Section 303. Special Meetings. Special meetings of the shareholders may be called at any time by the President, or the Board of Directors or by the shareholders entitled to cast at least one-third of the votes which all shareholders are entitled to cast at the particular meeting. At any time, upon such written request for a special meeting, it shall be the duty of the Secretary to fix a date for the meeting, to be held not more than sixty (60) days after receipt of the request, and to give due notice thereof. If the Secretary shall neglect or refuse to fix the date and give notice, the person or persons making the request may do so. Section 304. Notice of Meetings. Written notice of every annual and special meeting of shareholders, stating the time, place and purpose thereof, shall be given as herein provided (by, or at the direction of, the person authorized to call the meeting) to each shareholder of record entitled to vote at the meeting, at least ten (10) days prior to the day named for the meeting, unless a greater period of notice is required by statute in a particular case. When a meeting is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at any adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. Section 305. Quorum. A majority of the outstanding shares, represented in person or by proxy, at a shareholders' meeting duly called shall constitute a quorum for the transaction of business except as otherwise provided by law or by resolution of the Board of Directors prior to such meeting. If however, such quorum shall not be present, those present thereat may adjourn the meeting to such time and place as they may determine, but in the case of any meeting called for the election of Directors, those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing Directors. Section 306. Voting. Each shareholder shall be entitled to one (1) vote, in person or by proxy, for each full share having voting power standing registered in his name on the tenth (10th) day preceding the meeting of shareholders exclusive of the day of such meeting, or on such other record date (not more than fifty (50) days preceding the date of such meeting) as the Board of Directors shall fix prior to such record date. Section 307. Vote by Ballot. Upon the demand of any shareholder made before the voting begins, the vote for Directors and the vote upon any other question or matter before a meeting, shall be by ballot. Section 308. Proxy Voting. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing subscribed by such shareholder and delivered to the Secretary at the meeting. No unrevoked proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein, but in no event more than three years. Section 309. Unpaid Shares. No share upon which any installment is due the corporation and unpaid shall be voted at any meeting. Section 310. Voting List. The officer or agent having charge of the transfer books shall make and certify a complete list of the shareholders entitled to vote at the meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each, which list shall be produced and kept open at the time and place of the meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof (kept at the registered office of the Corporation) shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book, or to vote in person or by proxy, at any meeting of shareholders. 2 Section 311. Informal Action by Unanimous Consent. Unless the Board of Directors shall otherwise expressly direct, any action which may be taken at a meeting of the shareholders may be taken without a meeting and without notice or a waiver of notice, if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Corporation. Section 312. Informal Action by Less Than Unanimous Consent. Unless the Board of Directors shall otherwise expressly direct, any action which may be taken at a meeting of the shareholders or of a class of shareholders, other than the annual election of directors, may be taken without a meeting, if a consent or consents in writing to such action, setting forth the action so taken, shall be (1) signed by shareholders entitled to cast such a percentage of the number of votes which all such shareholders are entitled to cast thereon as is required by law for the taking of action at a meeting of the shareholders or of a class of shareholders and (2) filed with the Secretary of the Corporation. In no case, however, shall such percentage be less than the larger of (1) two-thirds of the total number of votes which all shareholders of the Corporation or of a class of shareholders are entitled by the Articles to cast upon such action, or (2) the minimum percentage of the vote required by law, if any, for the proposed corporate action. Such action shall not become effective until after at least ten days' written notice of such action shall have been given to each shareholder of record entitled to vote thereon. This section shall not be applicable to any action with respect to any plan of merger or plan of consolidation to which Section 14A:10-3 of the New Jersey Business Corporation Act is applicable. ARTICLE IV. DIRECTORS AND BOARD MEETINGS. Section 401. Management by Board of Directors. The business, property and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 402. Nomination for Directors. Written nominations for directors to be elected at an annual meeting of shareholders must be submitted to the Secretary of the Corporation not later than the close of business on the fifth business day immediately preceding the date of the meeting. All late nominations shall be rejected. Section 403. Number of Directors. The Board of Directors shall consist of not less than five (5) nor more than twenty-five (25) directors. Within these limits the number of Directors shall be as established by resolution of a majority of the full Board of Directors, provided, however, that no reduction in the number of Directors shall in any way affect the terms of Directors then in office. Section 404. Qualifications of Directors. The Directors need not be residents of the State in which this Corporation is incorporated or shareholders in the Corporation. Section 405. Election of Directors. The Directors shall be elected by the shareholders at the annual meeting of shareholders of the Corporation. Each Director shall be elected for the term of one year, and until his successor shall be elected and shall qualify. 3 Section 406. Vacancies. If the office of any Director shall become vacant by reason of death, resignation, disqualification or other cause, such vacancy or vacancies, including vacancies resulting from an increase in the number of Directors, shall be filled by a majority of the remaining members of the Board, though less than a quorum. Each person so elected by the Board of Directors to fill a vacancy shall be a Director until his or her successor is elected by the shareholders who may make such election at the next annual meeting of shareholders, or at any earlier special meeting of the shareholders duly called for that purpose, and until such successor shall qualify. Section 407. Removal of Directors. The entire Board of Directors, or any individual director may be removed from office without assigning any cause by the vote of shareholders entitled to cast at least a majority of the votes which all shareholders would be entitled to cast at any annual election of such directors. In case the Board or any one or more directors be so removed, new directors may be elected at the same meeting. The Board of Directors, by unanimous consent, may remove or suspend a director, pending a final determination, for any proper cause. Section 408. Resignations. Any Director may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 409. Compensation of Directors. The compensation, if any, of Directors shall be as determined by the Board of Directors. In addition to compensation, if any, for services as a Director, a Director may serve the Corporation in other capacities and receive separate compensation therefor. Section 410. Place of Board Meetings. Regular meetings of the Board of Directors shall be at 336 Route 70, Marlton, New Jersey 08053. Section 411. Regular Meetings. Regular meetings of the Board of Directors shall be held in each year at such times as the Board of Directors may provide from time to time, by resolution with appropriate notice to the members of the Board of Directors. Section 412. Special Meetings. Unless the Board of Directors shall otherwise direct, special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board or the President of the Corporation on appropriate verbal or written notice to each Director, which notice shall, in any event, be given at least twenty-four (24) hours before the time for which the meeting is scheduled. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of a majority of the Board of Directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or outside the State of Incorporation, as the place for holding any special meeting of the Board of Directors called by them. Any business may be transacted at a special meeting. Section 413. Notice of Meetings. Unless otherwise required by law or these Bylaws, neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Notwithstanding anything herein to the contrary, no action of the Board of Directors or corporate action taken pursuant 4 thereto shall be deemed unauthorized solely because the provisions of this Article concerning notice of Directors' meetings have not been complied with, provided that said Board action is taken in a meeting at which a quorum of Directors is present, and such action is approved or subsequently ratified by a majority of Directors then in office. Section 414. Quorum. A majority of the Directors in office shall be necessary to constitute a quorum for the transaction of business, except when otherwise provided by law; but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. The acts of a majority of the Directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. Section 415. Informal Action by Board of Directors Without Meeting. Any action which may be taken at a meeting of the Board of Directors may be taken without a meeting and without notice or a waiver of notice, if a consent in writing, setting forth the action so taken or the action to be taken by the Corporation, shall be signed by all the Directors and shall be filed with the Secretary of the Corporation. Section 416. Presence at Meetings. Any one or more Directors may participate in a meeting of the Board or a committee of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and any person so participating shall be deemed present at the meeting for all purposes. Section 417. Reports and Records. The reports of officers and committees and the records of the proceedings of all committees shall be filed with the Secretary of the Board and presented to the Board of Directors at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. When a director shall request it, the vote of each director upon a particular question shall be recorded in the minutes. Section 418. Committees. The following committees shall be established by the Board of Directors in addition to any other committee the Board of Directors may in its discretion establish: 1. Executive Committee 2. Audit Committee Section 419. Executive Committee. The Executive Committee shall consist of at least three members of which the majority must be directors. A majority of the members of the Executive Committee shall constitute a quorum. Meetings of the Committee may be called at any time by the Chairman or Secretary of the Committee, and shall be called whenever two more members of the Committee so request in writing. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation between the dates of regular meetings of the Board. Section 420. Audit Committee. The Audit Committee shall consist of at least three directors. Meetings of the Committee may be called at any time by the Chairman of the 5 Committee, and shall be called whenever two or more members of the Committee so request in writing. A majority of the members of the Committee shall constitute a quorum. The Committee shall supervise the audit of the books and affairs of the Corporation. Section 421. Appointment of Committee Members. At the first meeting of the Board of Directors after the annual meeting of shareholders, the Board of Directors shall appoint, the members of the Executive Committee, Audit Committee and any other Committees, to serve until the next annual meeting of shareholders. Section 422. Organization and Proceedings. Each committee shall effect its own organization by the appointment of a Chairman and such other officers as it may deem necessary. A record of the proceedings of all committees shall be kept and filed and presented as provided in Section 417 of these Bylaws. ARTICLE V. OFFICERS, AGENTS AND EMPLOYEES. Section 501. Executive Officers. The executive officers of the Corporation shall be elected annually by the Board of Directors and shall be a Chairman of the Board of Directors, a President, a Secretary and a Treasurer. One or more Vice Presidents, and such other officers and assistant officers also may be elected or appointed as the Board of Directors may authorize from time to time. Any two offices, except those of President and Vice President or President and Secretary, may be filled by the same person. In addition to the powers and duties prescribed by these Bylaws, the officers and assistant officers shall have such authority and shall perform such duties as from time to time shall be prescribed by the Board. The officers and assistant officers of the Corporation shall hold office until their successors are chosen and have qualified, unless they are sooner removed from office provided by these Bylaws. The Board of Directors may add to the title of any officer or assistant officer a word or words descriptive of his powers or the general character of his duties. If the office of any officer or assistant officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. Section 502. Agents or Employees. The Board of Directors may by resolution designate the officer or officers who shall have authority to appoint such agents or employees as the needs of the Corporation may require. In the absence of such designation this function may be performed by the President and may be delegated by him to others in whole or in part. Section 503. Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or by authority conferred by resolution of the Board. The Board also may fix the salaries and other compensation of assistant officers, agents and employees of the corporation, but in the absence of such action this function shall be performed by the President or by others under his supervision. Section 504. Removal of Officers, Agents or Employees. Any officer, assistant officer, agent or employee of the Corporation may be removed or his authority revoked by resolution of the Board of Directors with or without cause, but such removal or revocation shall be without prejudice to the rights, if any, of the person so removed, to received compensation or other benefits in accordance with the terms of existing contracts. Any agent or employee of the 6 Corporation likewise may be removed by the President or, subject to his supervision, by the person having authority with respect to the appointment of such agent or employee. Section 505. Chairman of the Board. The Chairman of the Board shall prescribe the duties of the other officers and employees and see to the proper performance thereof. He or she shall preside at all meetings of the Board. The Chairman of the Board shall be responsible for having all orders and resolutions of the Board of Directors carried into effect. As authorized by the Board of Directors, he or she shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other officer or agent of the Corporation by the Board of Directors or by the Chairman of the Board. In the absence of the Chairman of the Board, the President shall preside at meetings of the Board. In general, the Chairman of the Board shall perform all the acts and exercise all the authorities and duties incident to his office or as prescribed by the Board of Directors. Section 506. President. The President shall perform such duties as are incident to his office or prescribed by the Board of Directors or by the Chairman of the Board. As authorized by the Board of Directors, he or she shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all instruments requiring such execution, except to the extent that signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. The President may be a member of the Board of Directors. Section 507. Vice Presidents. The Vice Presidents shall perform such duties and do such acts as may be prescribed by the Board of Directors, the Chairman of the Board, or the President. Subject to the provisions of this Section, the Vice Presidents, in order of their seniority, shall perform the duties and have the powers of the President in the event of his absence or disability or his refusal to act. Section 508. Secretary. The Secretary shall act under the direction of the President. Unless a designation to the contrary is made at a meeting, the Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all of the proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required by these Bylaws or otherwise. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the President or the Board of Directors. The Secretary shall keep in safe custody the seal of the corporation, and, when authorized by the Board of Directors, the Chairman of the Board or the President, cause it to be affixed to any instruments requiring it. Section 509. Treasurer; Powers and Duties. The Treasurer shall be the chief financial officer and shall cause full and accurate accounts of receipts and disbursements to be kept in books belonging to the Corporation. He shall see to the deposit of all moneys and other valuable effects in the name and to the credit of the Corporation in such depositary or depositaries as may be designated by the Board of Directors, subject to disbursement or disposition upon orders signed in such manner as the Board of Directors shall prescribe. He shall render to the President and to the directors, at the regular meetings of the Board or whenever the President or the Board may require it, an account of all his transactions as Treasurer and of the results of operations and 7 financial condition of the corporation. If required by the Board, the Treasurer shall give the Corporation a bond in such sum, and with such surety or sureties as may be satisfactory to the Board for the faithful discharge of the duties of his office, and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, records, money, and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 510. Assistant Officers. Unless otherwise provided by the Board of Directors, each assistant officer shall perform such duties as shall be prescribed by the Board of Directors, the Chairman of the Board, the President or the officer to whom he is an assistant. In the event of the absence or disability of an officer or his refusal to act, his assistant officers shall, in the order of their seniority, have the powers and authority of such officer. Section 511. Delegation of Officers' Duties. Any officer may delegate duties to his assistant (if any) appointed by the Board; and in case of the absence of any officer or assistant officer of the corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may delegate or authorize the delegation of his powers or duties, for the time being, to any person. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS. Section 601. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 8 Section 602. The Corporation may indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the court of the county in which the registered office of the Corporation is located or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 603. The indemnification provided for in the preceding sections shall be paid by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or other agent is proper under the circumstances because he has met the applicable standard of conduct set forth in each section, this determination to be made by the Board of Directors by majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or in any other manner authorized by law which the Board of Directors shall direct; provided, however, that to the extent that a director, officer, employee or agent has been successful on the merits or otherwise in defense of any such suit, action or proceeding, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 604. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 603 of this Article upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall be ultimately determined that he is entitled to be indemnified by the Corporation as authorized in this Article. Section 605. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 606. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as 9 such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section. ARTICLE VII. FINANCIAL REPORTS TO SHAREHOLDERS. Section 701. No Annual Report Required. Unless required by law, it is hereby expressly provided that the Directors of this Corporation shall not be required (pursuant to any statutory provision or requirement of law applicable in the absence of this express provision), to send or cause to be sent to the shareholders of this Corporation any annual financial report. Section 702. Option Financial Reports. Nothing in these Bylaws shall be construed to prohibit the Board of Directors, the President, or other duly authorized officers from sending financial or other reports to the shareholders on an annual basis or from time to time, in such form as they may deem necessary or advisable in their discretion. It is hereby expressly provided that such reports need not be prepared by an independent public or certified accountant. ARTICLE VIII. RELATION OF DIRECTORS AND OFFICERS TO CORPORATION. Section 801. Fiduciary Relationship. Officers and Directors of the Corporation shall stand in and have a fiduciary relation to the Corporation, and shall discharge the duties of their respective positions in good faith and with that diligence, care and skill which ordinarily prudent men and women would exercise under similar circumstances. ARTICLE IX. CORPORATION RECORDS. Section 901. Proceedings of Shareholders and Directors. There shall be kept at the registered office of the Corporation an original or duplicate record of the proceedings of the shareholders and of the Directors, and the original or a copy of its Bylaws, including all amendments or alterations thereof to date, together with other necessary and appropriate corporate records. Section 902. Shareholders Right to Examine Corporate Records. Every shareholder shall, upon written demand in accordance with Section 14A:5-28 of the New Jersey Business Corporation Act, have a right to examine, in person or by agent or attorney, during the usual business hours for any proper purpose reasonably related to such person's interests as shareholder, the share register, books or records of account, and records of the proceedings of the shareholders and Board of Directors, and make copies of extracts therefrom provided, however, that the Board of Directors shall be entitled to exercise such specific rights as the Corporation may have under the law to keep confidential such records which contain business secrets, the disclosure of which would be injurious to the best interests of the Corporation and its shareholders. If any attorney or other agent shall be the person who seeks the right to inspection, the demand shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the Corporation at its registered office in the State of New Jersey or at its principal place of business. ARTICLE X. SHARES OF CAPITAL STOCK. 10 Section 1001. Share Certificates. Every shareholder in the Corporation shall be entitled to receive a certificate representing the shares owned by him. Said share certificates shall be numbered and registered in the books of the Corporation, as they are issued. Section 1002. Contents of Share Certificates. Said share certificates shall state: (1) the name of the State of Incorporation; (2) the name of the registered holder of the shares represented thereby; (3) the number and class of shares and the designation of the series, if any, which the certificate represents; and (4) the par value of each share represented, or a statement that the shares are without par value. If the Corporation is authorized to issue more than one (1) class of stock, then upon the face or back of the certificate there shall be set forth (or a statement shall appear that the Corporation will furnish to any shareholder, upon request and without charge) a full summary statement of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued and, if the Corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series. Section 1003. Signatures on Share Certificates. Each such certificate shall be signed by the President or Vice President, and by the Secretary or Treasurer (or Assistant Secretary or Assistant Treasurer), or by such other officers as may be designated by the Board of Directors, and sealed with the corporate seal of the Corporation. If a certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of any such authorized officer may be facsimile. In case any officer who has signed, or whose facsimile signature has been used on, any certificate or certificates shall cease to be such officer of the Corporation, before such certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Section 1004. Lost or Destroyed Certificates. Any person claiming a share certificate to be lost or destroyed shall make an affidavit or affirmation of that fact and, in the manner and to the extent required by the Board of Directors, shall advertise the same, give the Corporation a bond of indemnity with sufficient surety to protect the Corporation or any person injured by the issue of a new certificate from any liability or expense which it or they may incur by reason of the fact that the original certificate remains outstanding, whereupon a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to be lost or destroyed, but always to the approval of the Board of Directors. Section 1005. Transfer of Shares. All transfers of shares of the Corporation shall be made upon the books of the Corporation upon surrender to the Corporation or the transfer agent of the Corporation of a certificate or certificates for shares, duly endorsed by the person named in the certificate or by attorney, lawfully constituted in writing, or accompanied by proper evidence of succession, assignment or authority to transfer. Thereupon, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificates and record the transaction upon its books. 11 Section 1006. Agreements Restricting Transfer of Shares. The Board of Directors may authorize the Corporation to become party to agreements with shareholders and others relating to transfer, repurchase, and issuance, of shares of stock of the Corporation; provided, however, that such agreement must be filed with the Corporation and all share certificates affected thereby shall have clearly imprinted thereon a legend containing such agreement or referring thereto. Section 1007. Registered Shareholders. The Corporation may treat the person registered on its book as the holder of any shares as the absolute owner thereof, and as the one entitled to vote such shares and receive dividends thereon. Section 1008. Determination of Shareholders of Record. The Board of Directors may fix a time not more than fifty (50) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of shares. In such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting, or to receive payment of such dividends, or to receive such allotment or rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the Corporation against transfer of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten (10) days before the closing thereof to each shareholder of record at the address appearing on the records of the Corporation or supplied by him to the Corporation for the purpose of notice. While the stock transfer books of the Corporation are closed, no transfer of shares shall be made thereon. Unless a record date is fixed for the determination of shareholders entitled to receive notice of, or vote at, a shareholders' meeting, transferees of shares which are transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or vote at such meeting. Section 1009. Voting Trusts. Unless the laws of the State of Incorporation or the Articles of Incorporation of this Corporation shall otherwise provide, two (2) or more shareholders of this Corporation may, by agreement in writing, transfer their shares to any corporation or person for the purpose of vesting in the transferee or transferees all voting or other rights pertaining to such shares for a period not exceeding ten (10) years, and upon the terms and conditions stated in the agreement. Section 1010. Consideration For Capital Stock. The Board of Directors of the Corporation shall issue from time to time, the authorized shares of capital stock of the Corporation for cash, real property, tangible or intangible personal property, including stock of another corporation or for such property as in the discretion of the Board of Directors may seem for the best interests of the Corporation consistent with the Business Corporation Act of New Jersey. ARTICLE XI. DIVIDENDS AND OTHER DISTRIBUTIONS TO SHAREHOLDERS. 12 Section 1101. Dividends. Subject to applicable law of the State of Incorporation, and in accordance with the provisions thereof at the pertinent applicable time, the Board of Directors of the Corporation may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in cash or property other than its own shares, except when the Corporation is insolvent, or when the payment thereof would render the Corporation insolvent, or when the declaration or payment thereof would be contrary to any restriction contained in the Articles of Incorporation, but (1) Dividends may be declared and paid in cash or property only out of unreserved and unrestricted earned surplus of the Corporation, except as otherwise provided by statute; and (2) No dividends shall be paid which would reduce the remaining net assets of the Corporation below the aggregate preferential amount payable in the event of voluntary liquidation to the holders of shares having preferential rights to the assets of the Corporation in the event of liquidation. Section 1102. Distribution of Shares of the Corporation. The Board of Directors of the Corporation may, from time to time, distribute pro rata to holders of any class or classes of its issued shares, treasury shares and authorized but unissued shares, but (1) If distribution is made, in the Corporation's authorized but unissued shares having a par value, there shall be transferred to stated capital at the time of such distribution an amount of surplus at least equal to the aggregate par value of the shares so issued; (2) The amount per share so transferred to stated capital, or the fact that there was no such transfer, shall be disclosed to the shareholders receiving such distribution concurrently with the distribution thereof; and (3) No distribution of shares of any class shall be made to holders of shares of any other class unless the articles so provide or such distribution is authorized by the affirmative vote or written consent of the holders of a majority of the outstanding shares of the class in which the distribution is to be made. In lieu of issuing fractional shares in any such distribution, the Corporation may pay in cash the fair value thereof, as determined by the Board of Directors, to shareholders entitled thereto. Section 1103. Reserves. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors, from time to time, in their absolute discretion determine as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for the purchase of additional property, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation. The Board of Directors may abolish or modify any such reserve. Section 1104. Distributions in Partial Liquidation. The Board of Directors of the Corporation may, from time to time, distribute to the shareholders in partial liquidation, out of 13 unrestricted capital surplus of the Corporation, a portion of its assets in cash or property, subject to the following conditions: (1) No such distribution shall be made at a time when the Corporation is insolvent or when such distribution would render the Corporation insolvent; (2) No such distribution shall be made unless such distribution shall have been authorized by the prior affirmative vote, obtained within one (l) year of such distribution, of the holders of at least a majority of the outstanding shares of each class, whether or not entitled to vote thereon by the provisions of the articles; (3) No such distribution shall be made to the holders of any class of shares unless all cumulative dividends accrued on all classes of shares entitled to preferential dividends, prior to dividends on the shares to the holders of which such distribution is to be made, shall have been fully paid; (4) No such distribution shall be made to the holders of any class of shares which would reduce the remaining net assets of the Corporation below the aggregate preferential amount payable in event of voluntary liquidation to the holders of shares having preferential rights to the assets of the Corporation in the event of liquidation; and (5) Each such distribution, when made, shall be identified as a distribution in partial liquidation and the amount per share disclosed to the shareholders receiving the same concurrently with the distribution thereof. ARTICLE XII. MISCELLANEOUS. Section 1201. Fiscal Year. The fiscal year of the Corporation shall begin on the 1st day of January in each year and end on the 31st day of December in each year. Section 1202. Signing Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer, officers, or other person or persons as the Board of Directors may from time to time designate. Section 1203. Designation of Presiding and Recording Officers. The Chairman of the Board of Directors shall preside at any meeting of Directors or shareholders, as the case may be, and shall have the right to designate any person, whether or not an officer, director or shareholder to record the proceedings of, such meeting. Section 1204. Written Notice of Meetings. Whenever written notice is required to be given to any person pursuant to law, the Articles of Incorporation or these Bylaws, it may be given to such person, either personally or by sending a copy thereof through the mail, or by telegram, charges prepaid, to his address appearing on the books of the Corporation, or to his business or other address supplied by him to the Corporation for the purpose of notice. If the notice is sent by mail or by telegraph, it shall deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to 14 such person. Such notice shall specify the place, day and hour of the meeting and, in case of a special meeting of the shareholders, the general nature of the business to be transacted. Section 1205. Waver of Notice. Whenever any written notice is required to be given pursuant to law, by the Articles of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of shareholders, neither the business to be transacted at, nor the purpose of, the meeting need be specified in the waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 1206. Text of Proposed Resolution in Written Notice. Whenever the language of a proposed resolution is included in a written notice to shareholders, the shareholders meeting considering the resolution may adopt it, with such clarifying or other amendments as do not enlarge its original purpose, without further notice to shareholders not present in person or by proxy. Section 1207. Interpretation of Bylaws. All words, terms and provisions of these Bylaws shall be defined by and in accordance with the New Jersey Business Corporation Act as that Act and these Bylaws are interpreted by the Corporation's counsel. Section 1208. Absentee Participation in Meetings. One or more Directors may participate in a meeting of the Board of Directors, or of a committee of the Board, by means of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. Section 1209. Severability. If any provision of these Bylaws becomes illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. ARTICLE XIII. AMENDMENTS. Section 1301. Amendment by Shareholders. These Bylaws may be altered, amended or repealed by a majority vote of all of the shares of stock of the Corporation issued and outstanding and entitled to vote at any annual or special meetings of the shareholders duly convened after appropriate notice to the shareholders of such proposed alteration, amendment or repeal. Section 1302. Amendment by the Board of Directors. These Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board duly convened after appropriate notice to the Directors of such proposed alteration, amendment or repeal. Section 1303. Recording Amendments and Alterations. The text of all amendments and alterations to these Bylaws shall be attached to the Bylaws with a notation of the date of each 15 such amendment or alteration and a notation of whether such amendment or alteration was adopted by the shareholders or the Board of Directors. ARTICLE XIV. ADOPTION OF BYLAWS RECORD OR AMENDMENT. Section 1401. These Bylaws have been adopted and filed with the undersigned on the 21st day of December, 1982, and shall be effective as of this date. /s/ ROBERT C. BECK ---------------------------------------------- ROBERT C. BECK, Secretary Section 1402. Amendments to Bylaws.
Section Amended Date Amended Adopted By - --------------- ------------ ---------- Repeal of Sections 601 May 5, 1987 Shareholders through 606, inclusive Adoption of new Article VI, May 5, 1987 Shareholders Sections 601 through 605, inclusive, attached hereto as Exhibit "A" Adoption of new Section 402, attached April 20, 2004 Board of Directors hereto as Exhibit "B"
16 Exhibit "A" ----------- AMENDMENT AND RESTATEMENT TO ARTICLE VI OF THE BYLAWS OF COMMERCE BANCORP, INC. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS. SECTION 601. The Corporation shall, to the fullest extent now or hereafter permitted by the New Jersey Business Corporation Act, as amended from time to time, indemnify any director or officer of the Corporation. The right to indemnification conferred by this Section 601 shall include the right to be paid by the Corporation for expenses incurred in defending any action, suit or proceeding in advance of its final disposition, subject to the receipt by the Corporation of such undertakings as might be required of an indemnittee by the New Jersey Business Corporation Act. SECTION 602. The Board of Directors by resolution adopted in each specific instance may similarly indemnify any person other than a director or officer of the Corporation for liabilities incurred by him in connection with services rendered by him at the request of the Corporation or any of its subsidiaries. SECTION 603. The provisions of this Article VI shall be applicable to all actions, suits or proceedings commenced after its adoption, whether such arise out of acts or omissions which occurred prior to or subsequent to such adoption and shall continue as to a person who has ceased to be a director or officer or to render services at the request of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person. The rights of indemnification provided for herein shall not be deemed the exclusive rights to which any director, officer, employee or agent of the Corporation may be entitled under the certificate of incorporation, an agreement, vote of stockholders, or otherwise. SECTION 604. In any action by an indemnitee to enforce a right to indemnification hereunder or by the Corporation to recover advances made hereunder, the burden of proving that the indemnitee is not titled to be indemnified shall be on the Corporation. In such an action, neither the failure of the Corporation (including its Board, independent legal counsel or stockholders) to have made a determination that indemnification is proper, nor a determination by the Corporation that indemnification is improper, shall create a presumption that the indemnitee is not entitled to be indemnified or, in the case of such an action brought by the indemnitee, be a defense thereto. If successful in whole or in part in such an action, an indemnitee shall be entitled to be paid also the expense (including reasonable attorneys fees) of prosecuting or defending same. SECTION 605. Any repeal or modification of this Article VI by the directors or stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. Exhibit "B" ----------- AMENDMENT AND RESTATEMENT TO ARTICLE IV OF THE BYLAWS OF COMMERCE BANCORP, INC. Section 402. Nomination for Directors. Nominations for directors to be elected may be made at a meeting of shareholders only by the Board of Directors of the Corporation (or any committee thereof), or a shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the procedure set forth in this Section 402. Written nominations by shareholders for directors to be elected at a meeting of shareholders which have not previously been approved by the Board of Directors must be submitted to the Secretary of the Corporation, not later than (i) the latest date upon which shareholder proposals must be submitted to the Corporation for inclusion in the Corporation's proxy statement relating to such meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or other applicable rules or regulations under the federal securities laws, or if no such rules apply, at least 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders, 30 days prior to the printing of the Corporation's proxy materials with respect to such meeting or if no such proxy materials are being distributed to shareholders, at least the close of business on the fifth day following the date on which notice of such meeting is first given to shareholders. Each nomination is required to set forth: (1) the name and address of the shareholder making the nomination and the person or persons nominated; (2) a representation that the shareholder is a holder of record of capital stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the person or persons nominated; (3) a description of all arrangements and understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination was made by the shareholder; (4) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Nominating and Governance Committee of the Board of Directors; and (5) the consent of each nominee to serve as a director of the Corporation if so elected. EX-10 3 commerce10qex10-37.txt EXHIBIT 10.37 COMMERCE BANCORP, INC. 2004 EMPLOYEE STOCK OPTION PLAN 1. Purpose of Plan The purpose of the 2004 Employee Stock Option Plan (the "Plan") is to provide additional incentive to officers and other key employees of Commerce Bancorp, Inc. ("Commerce") and each present or future parent or subsidiary corporation by encouraging them to invest in shares of common stock, par value $1.00 per share ("Common Stock"), of Commerce and thereby acquire a proprietary interest in Commerce and an increased personal interest in Commerce's continued success and progress, to the mutual benefit of officers, employees and shareholders. 2. Aggregate Number of Shares 15,000,000 shares of Commerce Common Stock shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of Commerce by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee (defined in Section 4(a)), deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Committee. Reacquired shares of Commerce Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Shares of Commerce Common Stock subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. No individual may receive options under the Plan for more than 50% of the total number of shares of Commerce Common Stock authorized for issuance under this Plan. 3. Class of Persons Eligible to Receive Options All officers and key employees of Commerce and of any present or future Commerce parent or subsidiary corporation are eligible to receive an option or options under this Plan. The individuals who shall, in fact, receive an option or options shall be selected by the Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. 4. Administration of Plan (a) This Plan shall be administered by the Compensation Committee ("Committee") appointed by Commerce's Board of Directors provided, however, that at the option of the Board of Directors, the Plan may be administered by the Board of Directors of Commerce at any time and from time to time. The Committee shall consist of a minimum of three members of the Board of Directors, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended 1 or any future corresponding rule, except that the failure of the Committee or of the Board of Directors for any reason to be composed solely of Non-Employee Directors shall not prevent an option from being considered granted under this Plan. The Committee, in addition to its other authority and subject to the provisions of this Plan, shall determine which individuals shall be granted an option or options, whether the option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as such terms are defined in Section 5(a)), the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. The term "Committee," as used in this Plan and the options granted hereunder, refers to the Committee or to the Board of Directors, if the Board elects to administer the Plan as provided above. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of any authority or discretion granted in connection with the Plan to the Committee or the Board of Directors, or for the acts or omissions of any other members of the Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option" is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of Commerce's Common Stock on the date of the grant of the option as determined by the Committee in accordance with its interpretation of the requirements of Section 422 of the Code and the regulations thereunder. The option price for Non-Qualified Stock Options issued under this Plan shall also be equal to at least the fair market value (as defined below) of Commerce's Common 2 Stock on the date of the grant of the option as determined by the Committee. If an Incentive Stock Option is granted to an individual who, at the time the option is granted, owns stock possessing more than 10 percent of the total combined voting power of all shares of stock of Commerce or any parent or subsidiary corporation of Commerce (a "10% Shareholder"), the option price shall not be less than 110 percent of the fair market value of Commerce's Common Stock on the date of grant of the option and such option shall not be exercisable after the expiration of five years from the date the option is granted, all as more fully set forth in Section 422 of the Code and the regulations promulgated thereunder. The fair market value of Commerce's Common Stock on any particular date shall mean the last reported sale price of a share of Commerce's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the New York Stock Exchange, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the New York Stock Exchange, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined in good faith by the Committee to equal the fair market value per share of the Common Stock. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Shareholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, modify or amend any of the option terms contained in Appendix I for any particular optionee, provided that the option as modified or amended satisfies the requirements of Section 422 of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422 of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, modify or amend any of the option terms contained in Appendix II for any particular optionee, including, without limitation, the extent of the assignability and/or transferability of such option. (d) Neither Commerce nor any of its current or future parent, subsidiaries or 3 affiliates, nor their officers, directors, shareholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event: (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." 6. Modification, Amendment, Suspension and Termination Options shall not be granted pursuant to this Plan after the expiration of ten years from the date the Plan is adopted by the Board of Directors of Commerce. The Board of Directors reserves the right at any time, and from time to time, to modify or amend this Plan in any way, or to suspend or terminate it, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; provided, however, that such action shall not affect options granted under the Plan prior to the actual date on which such action occurred. If a modification or amendment of this Plan is required by the Code or the regulations thereunder to be approved by the shareholders of Commerce in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422 of the Code and regulations thereunder) pursuant to the modified or amended Plan, such modification or amendment shall also be approved by the shareholders of Commerce in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed modification, amendment, suspension or termination for shareholder approval, such submission shall not require any future modifications, amendments, suspensions or terminations (whether or not relating to the same provision or subject matter) to be similarly submitted for shareholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by Commerce's Board of Directors, subject however to approval by the holders of Commerce Common Stock in the manner as prescribed in the Code and the regulations thereunder. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of Commerce or any present or future parent, affiliated or subsidiary corporation or interfere in any way with the rights of Commerce or any present or future parent, affiliated or subsidiary corporation to terminate his employment in any way. (b) Corporate action constituting an offer of stock for sale to any employee under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the employee, regardless of when the option is actually delivered to the employee or acknowledged or agreed to by him. (c) The terms "parent corporation" and "subsidiary corporation" as used 4 throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the respective meanings ascribed to such terms when contained in Section 422(b) of the Code and the regulations thereunder, and Commerce shall be deemed to be the grantor corporation for purposes of applying such meanings. (d) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (e) The use of the masculine pronoun shall include the feminine gender whenever appropriate. 5 APPENDIX I INCENTIVE STOCK OPTION To: ___________________________________________________________________________ Name _______________________________________________________________________________ Address Date of Grant: ___________________________________ You are hereby granted an option, effective as of the date hereof, to purchase ______ shares of Common Stock, par value $1.00 per share, ("Common Stock") of Commerce Bancorp, Inc. ("Commerce") at a price of _____ per share pursuant to the Commerce 2004 Employee Stock Option Plan (the "Plan") adopted by the Commerce Board of Directors effective __________, 2004. Your option price is intended to equal at least the fair market value of Commerce Common Stock as of the date hereof; provided, however, that if, at the time this option is granted, you own stock possessing more than 10% of the total combined voting power of all shares of stock of Commerce or any parent or subsidiary corporation of Commerce (a "10% Shareholder"), your option price is intended to be at least 110% of the fair market value of Commerce Common Stock as of the date hereof. Except as provided below, no option may be exercised within one year from the date of grant. Options held more than one year may be exercised based upon option holding period pursuant to the following schedule: Option Holding Period Vesting Schedules --------------------- ----------------- 0-1 year - 0% 1-2 years - 25% 2-3 years - 50% 3-4 years - 75% 6 More than four years - 100% This option shall terminate and is not exercisable after the expiration of ten years from the date of its grant (five years from the date of grant if, at the time of the grant, you are a 10% Shareholder) (the "Scheduled Termination Date"), except as hereafter provided. To the extent this option does not quality as an incentive stock option for any reason, it shall be considered a non-qualified stock option. In the event of a "change of control" (as hereafter defined) of Commerce, your option may, from and after the date of the change of control (but in no event later than the Scheduled Termination Date), and notwithstanding the second paragraph of this option, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for any changes in the outstanding Commerce Common Stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). A "change of control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of Commerce; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of Commerce; or 3. Any other event deemed to constitute a "change in control" by the Board of Directors. You may exercise your option by giving written notice to the Secretary of Commerce on forms supplied by Commerce at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of Commerce, which will be valued by the Secretary of Commerce at the fair market value per share of Commerce Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the date of delivery of such certificates to Commerce, accompanied by an assignment of the stock to Commerce; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of Commerce valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of Commerce, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable or determines that such taxes are due and payable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by Commerce or a Commerce parent or subsidiary 7 corporation is terminated, whether such termination is voluntary or not, other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Commerce subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Commerce subsidiary corporation, unless you are on that date transferred to Commerce or another Commerce subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from Commerce to a Commerce subsidiary corporation, or vice versa, or from one Commerce subsidiary corporation to another Commerce subsidiary corporation. Anything in this option to the contrary notwithstanding, your option will terminate immediately if your employment is terminated for cause (as determined by Commerce in its sole and absolute discretion). Your employment shall be deemed to have been terminated for cause if you are terminated due to, among other reasons, (i) your willful misconduct or gross negligence, (ii) your material breach of any agreement with Commerce or (iii) your failure to render satisfactory services to Commerce. If you die while employed by Commerce or a Commerce parent or subsidiary corporation, your legatee(s), distributee(s), executor(s) or administrator(s), as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with Commerce or a Commerce parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your legatee, distributee, executor, administrator, guardian or custodian must present proof of his authority satisfactory to Commerce prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of Commerce by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Committee. Unless specifically authorized by the Board of Directors, the Committee or a designee thereof, this option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Such transfer permitted by the Board of 8 Directors, the Committee or a designee thereof may be on a general or specific basis, and may impose conditions and limitations on any permitted transferability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of Commerce. Commerce reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which Commerce deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of Commerce in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as Commerce may deem necessary or desirable; or (c) During any period of time in which Commerce deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause Commerce to be legally obligated to issue or sell more shares than Commerce is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by Commerce in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until Commerce has registered its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to Commerce to the effect that the proposed transaction will be exempt from such registration. The optionee shall 9 execute such instruments, representations, acknowledgements and agreements as Commerce may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to Commerce that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to Commerce that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of Commerce and you that this option shall, if possible, be an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "Incentive Stock Option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between Commerce and you with respect to the subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon Commerce unless in writing and signed by the President of Commerce. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of New Jersey. Please sign the copy of this option and return it to Commerce's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. COMMERCE BANCORP, INC. 10 By:_________________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. ___________________________________ ____________________________________ (Signature) (Date) APPENDIX II NON-QUALIFIED STOCK OPTION To: ___________________________________________________________________________ Name _______________________________________________________________________________ Address Date of Grant: ___________________________________ You are hereby granted an option, effective as of the date hereof, to purchase ______ shares of Common Stock, par value $1.00 per share ("Common Stock"), of Commerce Bancorp, Inc. ("Commerce") at a price of _____ per share pursuant to the Commerce 2004 Employee Stock Option Plan (the "Plan") adopted by the Commerce Board of Directors effective __________, 2004. Except as provided below, no option may be exercised within one year from the date of grant. Options held more than one year may be exercised based upon option holding period pursuant to the following schedule: Option Holding Period Vesting Schedule --------------------- ---------------- 11 0-1 year - 0% 1-2 years - 25% 2-3 years - 50% 3-4 years - 75% More than four years - 100% This option shall terminate and is not exercisable after the expiration of ten years from the date of its grant (the "Scheduled Termination Date"), except as hereafter provided. In the event of a "change of control" (as hereafter defined) of Commerce, your option may, from and after the date of the change of control (but in no event later than the Scheduled Termination Date), and notwithstanding the second paragraph of this option, be exercised for up to 100% of the total number of shares then subject to the option minus the number of shares previously purchased upon exercise of the option (as adjusted for any changes in the outstanding Commerce Common Stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances). A "change of control" shall be deemed to have occurred upon the happening of any of the following events: 1. A change within a twelve-month period in a majority of the members of the board of directors of Commerce; 2. A change within a twelve-month period in the holders of more than 50% of the outstanding voting stock of Commerce; or 3. Any other event deemed to constitute a "change in control" by the Board of Directors. You may exercise your option by giving written notice to the Secretary of Commerce on forms supplied by Commerce at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check and includes cash received from a stock brokerage firm in a so-called "cashless exercise"; (b) (unless prohibited by the Committee) certificates representing shares of Common Stock of Commerce, which will be valued by the Secretary of Commerce at the fair market value per share of Commerce's Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the date of delivery of such certificates to Commerce, accompanied by an assignment of the stock to Commerce; or (c) (unless prohibited by the Committee) any combination of cash and Common Stock of Commerce valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of Commerce, 12 including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable or determines that such taxes are due and payable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by Commerce or a Commerce parent or subsidiary corporation is terminated, whether such termination is voluntary or not, other than by reason of disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or death, in which case your option will terminate one year from the date of termination of employment due to disability or death (but in no event later than the Scheduled Termination Date). After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Commerce subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Commerce subsidiary corporation, unless you are on that date transferred to Commerce or another Commerce subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from Commerce to a Commerce subsidiary corporation, or vice versa, or from one Commerce subsidiary corporation to another Commerce subsidiary corporation. Anything in this option to the contrary notwithstanding, your option will terminate immediately if your employment is terminated for cause (as determined by Commerce in its sole and absolute discretion). Your employment shall be deemed to have been terminated for cause if you are terminated due to, among other reasons, (i) your willful misconduct or gross negligence, (ii) your material breach of any agreement with Commerce or (iii) your failure to render satisfactory services to Commerce. If you die while employed by Commerce or a Commerce parent or subsidiary corporation, your legatee(s), distributee(s), executor(s) or administrator(s), as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment with Commerce or a Commerce parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your legatee, distributee, executor, administrator, guardian or custodian must present proof of his authority satisfactory to Commerce prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of Commerce by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be appropriately adjusted in a manner to be determined 13 in the sole discretion of the Committee. Unless specifically authorized by the Board of Directors, the Committee or a designee thereof, this option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Such transfer permitted by the Board of Directors, the Committee or a designee thereof may be on a general or specific basis, and may impose conditions and limitations on any permitted transferability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a shareholder of Commerce. Commerce reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which Commerce deems, in its sole discretion, that such would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the shareholders of Commerce in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as Commerce may deem necessary or desirable; or (c) During any period of time in which Commerce deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause Commerce to be legally obligated to issue or sell more shares than Commerce is legally entitled to issue or sell. (d) Until you have paid or made suitable arrangements to pay (which may include payment through the surrender of Common Stock, unless prohibited by the Committee) (i) all federal, state and local income tax withholding required to be withheld by Commerce in connection with the option exercise and (ii) the employee's portion of other federal, state and local payroll and other taxes due in connection with the option exercise. (e) Until Commerce has registered its Common Stock under the Securities Exchange Act of 1934, as amended. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and 14 not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to Commerce to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgements and agreements as Commerce may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to Commerce that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of any opinion of counsel acceptable to Commerce that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of Commerce and you that this option shall not be an "Incentive Stock Option" as that term is used in Section 422 of the Code and the regulations thereunder. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between Commerce and you with respect to the subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon Commerce unless in writing and signed by the President of Commerce. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the State of New Jersey. Please sign the copy of this option and return it to Commerce's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. 15 COMMERCE BANCORP, INC. By:_________________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it, hereby signify my understanding of, and my agreement with, its terms and conditions. ___________________________________ ____________________________________ (Signature) (Date) 16 EX-31 4 commerce10qex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Vernon W. Hill, II, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Intentionally Omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Vernon W. Hill, II Date: August 9, 2004 - ------------------------ Chairman, President and Chief Executive Officer [END OF CERTIFICATION] 27 EX-31 5 commerce10qex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Douglas J. Pauls, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Intentionally Omitted] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Douglas J. Pauls Date: August 9, 2004 - --------------------- Senior Vice President and Chief Financial Officer [END OF CERTIFICATION] 28 EX-32 6 commerce10qex32.txt Exhibit 32 ---------- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), each of the undersigned officers of Commerce Bancorp, Inc. (the "Company"), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2004 (the "Report") that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: August 9, 2004 /s/ Vernon W. Hill, II -------------------------- Vernon W. Hill, II Chief Executive Officer Date: August 9, 2004 /s/ Douglas J. Pauls -------------------------- Douglas J. Pauls Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. 29 -----END PRIVACY-ENHANCED MESSAGE-----