FINAL TRANSCRIPT
CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Event Date/Time: Jul. 17. 2006 / 10:00AM ET
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
CORPORATE PARTICIPANTS
Edward Jordan
Commerce Bancorp, Inc. - IR
Vernon Hill
Commerce Bancorp, Inc. - Chairman & CEO
Doug Pauls
Commerce Bancorp, Inc. - CFO
CONFERENCE CALL PARTICIPANTS
Andrew Collins
Piper Jaffray - Analyst
Heather Wolf
Merrill Lynch - Analyst
Kevin St. Pierre
Bernstein - Analyst
Jason Goldberg
Lehman Brothers - Analyst
Adam Barkstrom
Stifel Nicolaus - Analyst
Jennifer Thompson
Oppenheimer Funds - Analyst
Joseph Dickerson
Atlantic Equities - Analyst
Bob Patten
Morgan Keegan - Analyst
Chris Chouinard
Morgan Stanley - Analyst
Meredith Whitney
CIBC World Markets - Analyst
Matthew O'Connor
UBS - Analyst
Gary Townsend
FBR - Analyst
Jordan Hymowitz
Philadelphia Financial - Analyst
Gerard Cassidy
RBC Capital Markets - Analyst
Robert Rutschow
Prudential - Analyst
Andrew Marquardt
Fox-Pitt Kelton - Analyst
Wilson Smith
Boenning & Scattergood Inc. - Analyst
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
PRESENTATION
Operator
Welcome to the Commerce Bancorp first quarter 2006 earnings results conference call. This call is being recorded. At this time
for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Edward Jordan.
Edward Jordan - Commerce Bancorp, Inc. - IR
Good morning, ladies and gentlemen. This is Ed Jordan, Director of Investor Relations. I would like to welcome you to Commerce
Bancorp's second quarter 2006 earnings conference call. We hope that everyone has had an opportunity to read the detailed
press release issued earlier this morning. I would like to remind you that today's conference call is governed by the forward-looking
language appearing at the end of today's earnings release.
With us today is Chairman and CEO Vernon Hill, and our CFO, Doug Pauls. They will provide some overview highlights of the
second quarter, and afterwards, we will open the call for Q&A. At this time, I would like to turn the call over to Chairman Hill.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Good morning everybody, and welcome to the call. I'd like to give you some review of the second quarter results at Commerce.
Deposit growth this quarter and for the prior 12 months continued at its historical rates, despite fierce, somewhat irrational
competition in the marketplace. We're pleased to report that core deposits for the last 12 months were up 24%, or 7.2 billion,
and total deposits were up 7.5 billion, up 25%. As a note, both of those were roughly equal to the 12 months ended June 2005.
Of note, commercial deposits continued to lead our growth, growing 31% to 14.6 billion. We were also pleased to note that,
even in this rate-crazed world, our non-interest demand deposits year-to-year grew 15%. Core deposit growth per store was
19 million and total deposit growth per store was 20 million, both the same as the 12 months ending in June of '05. Of note,
our growth per store for Jane '06, excluding government deposits, was 16 million per store, which is actually 1 million per store
higher than the 12 months ended in June '05. Comparable store deposits were up 17%. And we like to note that despite continued
margin compression, our revenue growth for the first six months of the year was plus 15%.
As most of you know, the second quarter is historically our lowest deposit growth quarter as government deposits reach their
seasonal low. In this quarter, our total deposits grew 938 million despite a reduction of government deposits of 240 million,
some of which we see in the second quarter of each year. This year, as some of the rates reached levels that made no sense for
us, we allowed some of our highest cost government and corporate deposits to [run it off]. As we operate in this somewhat
different world, we have to balance our cost of funds with our deposit growth.
Our net interest margin for the quarter was 3.39, at the high end of our predicted range, but down 14 basis points from the first
quarter. Despite the margin compression, despite the compression in percentage, our margin in real dollars rose 11% for the
quarter and 11% for the year. Net income for the quarter was 79.5 million, roughly equal to the second quarter of '05, while EPS
was $0.41, down 10% from the second quarter of '05. I'd point out to you that last year's second quarter includes 4.7 million of
bond security gains which did not reoccur in 2006.
Yes, we are on the path to open 60 to 65 new stores throughout our nine states in 2006, and no matter what I seem to do, it
will be back-end loaded in the third and fourth quarter. Loans continued their dramatic growth, up 34% on a 12-month basis,
occurring in all types of loans in all of our markets. Consumer credit was up 42%. Our loan to deposit ratio continues to improve,
is now up to 38%.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
I want to point out to you that the metropolitan New York market continues to be our largest and most rapidly growing market.
We now have total deposits in metro New York of 21.3 billion, up 31% on a year-to-year basis. Our metro New York market is
now 49 to 50% larger than our historic market in metro Philadelphia. One number of note to us is our New York City stores grew
in the last 12 months 46 million per store, and we now have $5.6 billion in deposits just in New York City.
As we've fought this yield curve, and somewhat slowed our expense growth, we want to make it clear that we have not impacted
our model, not impacted our brand. And in fact, recently, we were pleased to see that the first-ever J.D. Power's National Retail
Bank Survey ranked Commerce at number one in customer service, both in America and metropolitan New York, of all commercial
banks. While we struggled through this unusual rate environment, it has not shaken our growth and our ability to grow this
company, both deposits, loans and net profits, and we continue to see that the Commerce model gives us a substantial
competitive advantage.
As most of you know, we do not expect to meet our EPS growth target of 18 to 20% in 2006, but we feel very strongly that we
can meet or exceed those targets in 2007 and the years beyond.
At this point, I will turn it over to Doug Pauls, our CFO.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Thank you, Vernon. I'd like to spend a few minutes discussing the margin.
In the second quarter, our margin was 339, at the upper end of the range we disclosed in our 8-K a month ago. The margins are
down 14 basis points from 353 in the first quarter. The decrease on the linked-quarter basis was related to the day count in the
quarter, which we estimate at 3 to 5 basis points, and the shape of the yield curve and some shifting in deposit categories. For
the third and fourth quarters of 2006, we expect our margin to be between 330 and 340%, based on numerous outcome models
that we've run with a range of assumptions. We project to be between 330 and 340 for the remainder of the year, even if the
Fed raises two more times.
We expect to significantly reduce our level of borrowings during the third quarter, and we expect to continue to be disciplined
in our deposit pricing. Both of these actions will help protect our margin in the current rate environment.
For 2007 and beyond, our margin will be impacted by the shape of the yield curve and various scenarios are as follows. An
inverted curve actually had a neutral to a positive impact for us, the primary reason being that many of our index deposits are
tied to the lower of the three-month T-bill, or the 10-year treasury. If the curve were to invert, the cost of our index deposits
would decrease and we would shift all our reinvestment dollars into floating-rate securities. A flat curve is relatively neutral to
us at current rate levels, and a steeper curve has a positive impact as our margin will expand more quickly. The most difficult
environment for us would be a flat curve with short-term rates of 6% or higher.
Regarding investments, we bought a combination of fixed and floating rate securities during the second quarter. Our floating
rate securities now exceed $3 billion and we would anticipate adding more floating rate securities in the second half of the
year.
Asset quality remains exceptional with non-performing loans at 12 basis points, despite the addition of 1 large not-for-profit
hope care relationship which appears adequately secured with minimal loss anticipated. Without the addition of this credit,
non-performing assets would have been 7 basis points. Despite a 54-basis-point drop in our year-over-year margin, we have
held net income flat year-over-year. Again, this reflects the strength of our business model as our continuing ability to grow
deposits overcame rate compression caused by the current rate environment. This also reflects our continued focus on controlling
costs. Non-interest expense growth was 20% for the quarter and 21% for the first six months, in line with our projections.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
If short-term rates had been flat with last year, our net interest income would have grown 24%, in line with our deposit growth.
We point this out because, once the interest rate environment improves, we would expect that relationship to hold true for
future periods.
Our EPS of $0.41 is within the range we projected in our June 8-K. For the third quarter at the current time, we would project
the same range of $0.40 to $0.42. Concerning capital -- we remain well-capitalized by regulatory standards and we have no
plans to issue additional capital in 2006. We recently announced we're reducing the monthly maximum cash contribution in
our dividend reinvestment plan from $10,000 to $2500, and this will reduce our new share count going forward. We project
our leverage ratio should remain at approximately 6% through the end of the year. Any foreseeable capital needs for any reason
would first be met by our ability to issue over 800 million in trust-preferred securities which could be included in tier 1 regulatory
capital.
At this time, we would be happy to answer any questions.
QUESTIONS AND ANSWERS
Operator
(OPERATOR INSTRUCTIONS). Andrew Collins, Piper Jaffray.
Andrew Collins - Piper Jaffray - Analyst
Good morning. Looks like you guys are still seeing pretty decent growth, despite the margin pressure. Just wondering if you
could give us a month-by-month kind of indication about where the margins were, and also what kind of deposit growth we
can expect with munis coming back on line here in the third quarter.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Well, we don't give you a month-by-month margin projection, because the numbers change somewhat. I think we've given
you a pretty good estimate of where we expect our margin to be. As to the third quarter, Doug, help me. Last year's third quarter's
deposit growth was like 2.8 billion or something. It's somewhere between 2.5 and 3 billion, Andy. I don't have the number here
handy. But we would historically expect some number like that.
Andrew Collins - Piper Jaffray - Analyst
And a second, unrelated question, I guess. I've just seen one credit in terms of the corporate side, and yet you did grow your
reserves here slightly. Can we expect more growth in reserves as the just -- I guess as tracking loan growth? Is that how we could
look at it?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes. We want to keep our loan loss reserves where it is or slightly higher. And we have the ability to do that. As to asset quality,
I've always said historically, we should run between 0.1 and 0.2. We've been below 0.1, and even with one credit, we're still at
0.12. So you can -- we don't see any changes in the credit environment right now, and the reserve should stay around where it
is or maybe even higher.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Andrew Collins - Piper Jaffray - Analyst
Great, thank you.
Operator
Heather Wolf, Merrill Lynch.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Heather, before you ask your question, going back to Andy's question -- last year in the third quarter, our deposits grew 2.7
billion.
Heather Wolf - Merrill Lynch - Analyst
Okay, great. One quick question. I haven't gotten the detailed PDF yet and I'm wondering if you can give us some color on why
the fee revenues were so strong.
Doug Pauls - Commerce Bancorp, Inc. - CFO
You're talking about deposit charges and service fees?
Heather Wolf - Merrill Lynch - Analyst
And also the other line item.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Well, deposit charges and service fees is primarily volume-related. And the other line, there's two items that cause a chunk of
that on the year-over-year basis, the first being eMoney revenue, which we purchased in February this year. So their revenue
was not in last year's numbers. And also operating lease revenue is higher, which is just a result of booking more leases.
Heather Wolf - Merrill Lynch - Analyst
Great, thank you. And then just one quick question on the non-interest-bearing deposit growth. I know that it's still pretty strong
at 15%, but it's down quite a bit from last quarter -- I'm sorry. I think year year-over-year number last quarter was 22%. Can you
talk a little bit about maybe some of the trends that you're seeing and (multiple speakers).
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
I think the trends in the market as these rates get very high, the customers, particularly the consumer, are shifting out some of
the very low cost deposits in the yield deposits, and I think that's what we're all seeing in the market. I think that's just the general
shift.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Heather Wolf - Merrill Lynch - Analyst
And do you see any end in sight to that in sight to that?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
I'll have to ask you about that, Heather. We are -- our models, we've adjusted our model so that we do not assume we go back
to the old life. We assume this continues going forward. But really, though, it's hard for me to predict.
Heather Wolf - Merrill Lynch - Analyst
I'm just curious, because your margin forecast of 330 to 340 for the back half of the year would imply that most of that deposit
mix shift has already occurred. So I'm wondering if there's something offsetting that that you expect in the second half of the
year, or if you think that most of the mix shift -- (multiple speakers)
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Heather, a big piece of that is, we're going to reduce the other borrowings.
Heather Wolf - Merrill Lynch - Analyst
Okay. Great, thank you very much.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Kevin St. Pierre, Bernstein.
Kevin St. Pierre - Bernstein - Analyst
Good morning, guys. Just to push that a little further, obviously yes, there's a mix shift going on, and consumer preference is
towards higher-yielding accounts. But if we look at the core -- consumer core deposit total this quarter and we annualize it,
you've got about a 3% run rate this quarter on consumer core deposits. Is it fair to say, or maybe you could characterize what
you're seeing on your consumer customers, in terms of removing deposits from the system and actual outflows of deposits, or
do you think it's rate-driven and they're moving to other competitors?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
You know, Kevin, I'm not a big believer of these linked-quarter numbers. I'm not sure they really tell you too much. But there is
no question that the consumer is much more rate-driven than they were at this time last year. And what's happening here is
there's definitely a slowing down in consumer growth, but we're making up on the commercial side.
Kevin St. Pierre - Bernstein - Analyst
Okay. And on the government side, there appeared to be perhaps maybe a more significant outflow in June than the prior
second quarters, or do you think that was in line with --
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
No, there are some people out there paying irrational rates for the highest marginal dollars, and we deliberately chose not to
match. So a little bit of that is (technical difficulty).
Kevin St. Pierre - Bernstein - Analyst
Okay, thanks very much.
Operator
Jason Goldberg, Lehman Brothers.
Jason Goldberg - Lehman Brothers - Analyst
Thank you. Vernon, you started out the call by using this term fierce and irrational competitive landscape. Can you just talk in
terms of what you guys are doing maybe differently than you would have otherwise in response to that?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
As I just said, Jason, there are some deposit dollars where the prices have gotten too expensive where it doesn't impact our
core relationship with a customer, and we've let it go out on a short-term basis. I personally think that the fact that on June 30
is the FDIC deposit reporting date is not immaterial to this discussion. We've seen people come in and just buy deposits basically
no matter what the price. So banking deposit gathering is always about balancing growth and cost of money, and right now,
we're in one of these periods where some of the deposits at the higher end, non-relationship driven, don't make sense.
Jason Goldberg - Lehman Brothers - Analyst
Okay. And then you mentioned opening 60 to 65 branches this year. I think that's down from 65-plus. Is that tied to the competitive
environment or tied to the (indiscernible) (technical difficulty) and the like?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
It's absolutely not down. I've been giving the range 60 to 70 since the beginning of the year. We'll be somewhere in that range.
It's not a choice by us. It's, as I said before -- first of all, it's not down from what we've been saying at beginning of the year, and
the timing and actual number is land-use driven, not corporate-driven.
Jason Goldberg - Lehman Brothers - Analyst
Okay. And then you mentioned reducing borrowings next quarter. Should we expect a corresponding reduction on the asset
side of the securities portfolio, or I guess what else is going on within the balance sheet?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Our cash flow coming in is going to be used to repay the borrowings, and when they're gone, then we'll go back to buying
securities. So in the third quarter, we would probably buy less securities than historically we might have.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Jason Goldberg - Lehman Brothers - Analyst
Okay. And then lastly, Doug, you talked about 800 million left on the trust preferred side in terms of capital. Can you maybe
just talk about your capital plans this year, or into next?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
We have no plans to raise any form of capital this year. What we do next year depends on how strong the deposit growth is.
Jason Goldberg - Lehman Brothers - Analyst
Great, thank you.
Operator
Adam Barkstrom, Stifel Nicolaus.
Adam Barkstrom - Stifel Nicolaus - Analyst
Good morning. Doug, Heather asked about deposit service charges, and they were up very noticeably during the quarter, I
guess 11.5% sequentially. I guess your comment was, that was volume-driven. I was kind of looking into the numbers. Your
non-interest-bearing deposits were up 3% sequentially, and yet the fees are up 11.5% sequentially. And then if you look at I
guess deposit fees as a percentage of deposits, that went from 95 basis points to basically 100 basis points. So just curious if
you could give any more color there, were there any new fees implemented, programs, et cetera, or tightening up of NSF fees
or -- any further color on that?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Adam, as I said, it's primarily volume related. You know, the numbers I had given Heather were year-over-year stuff. Linked-quarter
can be impacted by a number of things in terms of timing. So it's primarily volume-related.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
But obviously, we have to tweak our fee structure in this environment, but not in a way that could impact our model.
Adam Barkstrom - Stifel Nicolaus - Analyst
And then I guess you were talking about reducing other borrowings going into 3Q. Just curious in 2Q, why did they -- in a period
basis, they went from, what, 870 million to almost 2.5 billion. Just curious what the thinking was behind letting those go up so
much during 2Q.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Some of it, again, is timing on cash flows. And as Vernon said earlier, we let some deposits run out (technical difficulty) initially
we're not projecting. So -- in this environment, we think that the prudent thing to do is pay them down.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Adam Barkstrom - Stifel Nicolaus - Analyst
Okay. Last question --
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
That's it, Adam. Two's the limit, guys. Give us a break. Thanks.
Operator
Jennifer Thompson, Oppenheimer Funds.
Jennifer Thompson - Oppenheimer Funds - Analyst
Good morning. First question, just clarification. I think I missed the comment by Doug regarding $0.40 to $0.42. Was there any
forward guidance there, or were you just talking about the previous guidance for this quarter?
Doug Pauls - Commerce Bancorp, Inc. - CFO
That's the range we're giving for the third quarter, Jenn.
Jennifer Thompson - Oppenheimer Funds - Analyst
Thank you. Also, could you just talk a little bit about expense growth? It looks like you were able to hold it down to 20%
year-over-year. Is that -- are you still comfortable with sort of the previous range that you had given for the full year?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Yes. We had said I think on the first quarter call or maybe the fourth quarter call last year, that we expect our expense growth
to be below last year's rate, which was 22%. So we expect to be below that, despite the addition of Palm Beach County late in
2005 and eMoney early in 2006. So we're still comfortable with that.
Jennifer Thompson - Oppenheimer Funds - Analyst
Great, thanks very much.
Operator
Joseph Dickerson, Atlantic Equities.
Joseph Dickerson - Atlantic Equities - Analyst
Good morning, guys. I just had a quick question on what's driving the strong growth in the commercial business, and if you
could elaborate a little more on that, and as well, if you expect that to have a favorable impact on the margin this year or next,
given the higher yield on those products.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Over the last five or 10 years, particularly the last five years as the bank has gotten much -- remember, we were only 7 billion in
2000. We've built this very strong commercial business in all of our markets with people and products and services. And it has
been really the driving element certainly in the last 18 months or so. So we have a team, we have a model, and being in the
metro New York, particularly New York City market, has had a tremendous impact on our commercial side. It has helped the
margin in the sense that the loan to deposit ratio -- you guys often ask me if the loan to deposit ratio could go up, and I really
didn't think it could. But it has been going up for the last several quarters, primarily driven by the commercial side of the business.
And with it, we're gathering massive commercial deposits, both credit-related and non-credit-related. So I'm very optimistic
that this growth on the commercial side can keep going.
Joseph Dickerson - Atlantic Equities - Analyst
Do you expect it to have a favorable impact on the margin going forward?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
It does have a favorable impact, only in the sense that it raises the loan to deposit rate ratio. So it has a minor favorable impact.
Over time, it should have a major impact.
Joseph Dickerson - Atlantic Equities - Analyst
Thanks.
Operator
Bob Patten, Morgan Keegan.
Bob Patten - Morgan Keegan - Analyst
Good morning, guys. Can you just talk about what your expected behavior of the muni deposit sector is? Obviously, you're
seeing irrational pricing. Is there some thoughts in terms of your strategy to reduce the exposure to that overall group of over
the next year or two, and where do you see that going?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
No, we don't. In fact, the number of new accounts and new relationships we have in all of our markets is going up dramatically.
But even in their core relationships, the accounts where they actually write checks, which is what we call core government, it's
the cash management, some of the municipalities have extra money in those accounts which they want to invest for the highest
rates. Sometimes it doesn't make us -- make sense for us to pay those rates in the short-term. But core government banking is
a major business for us. Our relationship total is going up, and we're absolutely committed to it.
Bob Patten - Morgan Keegan - Analyst
Thanks. Also, could we get a little color on the not-for-profit [NP] that was added in the quarter?
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
One hospital, one hospital. I don't want to go into it anymore, but one hospital -- we don't for foresee it's [at] a loss. And I've
been telling you about loan loss reserves -- I mean, the non-performing -- that we should be in 0.1 to 0.2. Actually, we've been
bouncing below 0.1. It's literally bouncing off the bottom.
Bob Patten - Morgan Keegan - Analyst
Thank you.
Operator
Chris Chouinard, Morgan Stanley.
Chris Chouinard - Morgan Stanley - Analyst
Good morning. I had a quick question about the securities that you've added this quarter. If you could give us a little bit of color
on the yields you're getting on the fixed-rate securities and the floaters that you added, and what percentage of the portfolio
is now floating rate?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Obviously, depending -- the yields are going to be dependent on when we bought them during the quarter. In terms of the
floating rate piece, it's about $3 billion out of the portfolio, so that would be roughly 12 or 13%, I guess, and we expect that to
go up.
Chris Chouinard - Morgan Stanley - Analyst
So you don't know the yields? Sorry.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Well I do know the yields, but we bought them throughout the quarter. We bought similar stuff that we have to what we have
purchased in the prior quarter in terms of the types of securities. So again, we bought securities throughout the 90 days. So it's
going to be depending on the time we buy it.
Chris Chouinard - Morgan Stanley - Analyst
Okay, so -- alright. And separately, could you break out what the unrealized loss is on the health and maturity portfolio? I know
that you guys disclosed it last quarter.
Doug Pauls - Commerce Bancorp, Inc. - CFO
It's on the face of the balance sheet, Chris.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Chris Chouinard - Morgan Stanley - Analyst
I'm sorry, I haven't gone your PDF yet either. I'll take a look at it for that.
Operator
Meredith Whitney, CIBC World Markets.
Meredith Whitney - CIBC World Markets - Analyst
Good morning, I have two questions. My first is -- can you talk about the difference between the DC market and the Florida
market? The Florida market seems to be on fire, and the DC market seems to be continue -- slower on a relative basis than your
other regions. And is it still the land lease problem, or can you clarify that?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
I think your question is wrong there. First of all, there are two different situations. In DC, we've gone in de novo, we only have
eight stores. And actually if you look on a per-store growth basis, in DC it was the highest market we had and (indiscernible) at
55 million a store. Palm Beach is -- we bought seven, opened one, and we're in the business of converting it. I'm reluctant to
make any statements about either one of the markets because I don't have enough time and enough stores and enough people
on the ground. But I would say, Meredith, so far the DC market has been surprisingly good to us. And I just don't have enough
time on the ground in Florida to give you a prediction yet.
Meredith Whitney - CIBC World Markets - Analyst
Okay. And my second question is the same question I asked last quarter, about -- the yield curve environment is the same as
last quarter. Which is, Doug, I think you talked about maybe getting 20 to 40 basis points in additional spread on loan versus
securities investing. And what have you done -- obviously, your loan growth has been great. But in terms of further asset
generation, what sort of efforts have you made on that basis?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Let me answer that question. Obviously, we have a limited capability to buy assets, and our philosophy has been to buy -- make
all the loans that make sense and reinvest the balance in securities, either fixed or floating. The yield right now between the
securities and loans is a dramatic number, but we're not going to make loans just -- irregardless of credit risk. You know, it's a
balance of all these things, Meredith, you know that. Did that answer -- I'm not sure I understood what you asked, I guess.
Meredith Whitney - CIBC World Markets - Analyst
I just asked in terms of -- you're generating obviously more of a loan mix than a securities mix and maybe doing that on a more
aggressive basis, given the yield curve environment.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Oh, I see what you're saying. No, we're really not. Our loan machine is working exactly the way it was a year ago and the year
before, it's just stronger. I will say, general color on the market, we're seeing very liberal credit out there that we pass on, and
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we're seeing very cheap pricing out there. So I'm pretty proud of our loan growth, despite what -- we see some things in the
market that we don't like.
Operator
Matthew O'Connor, UBS.
Matthew O'Connor - UBS - Analyst
Good morning. Could you guys just elaborate a little bit on why the flat yield curve at 6% would be the most painful?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Above 6%, he said. Go ahead, Doug.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Again, at that point, we're assuming it's flat and not inverted, so we would still have some of the pressure in terms of pricing
on our index deposits, and we would get lesser benefit on the asset side on the reinvestment dollars because the curve is
remaining flat.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
I think to the real message there, Matthew, is inverted curve in a relatively short term is not a minus for us because of the way
we have these index deposits priced.
Matthew O'Connor - UBS - Analyst
And can you just remind us the total amount that is indexed?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
About 12 billion.
Matthew O'Connor - UBS - Analyst
And then separately, your securities book extended out only a little bit, despite the pretty meaningful increase that we had on
longer-term rates. Is this about it in terms of the extension? (multiple speakers)
Doug Pauls - Commerce Bancorp, Inc. - CFO
We actually said that before, Matt, that we thought that we had absorbed a lot of the extension, even at the end of last quarter.
And I think your point supports that. The majority of the mortgages underlying our investment portfolio were not refinanceable
three months ago and they're not refinanceable now. So we think we've seen a lot of the expense.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Matthew O'Connor - UBS - Analyst
Lastly, if I may, when the Fed stops and just assuming the curve stays where it is, so call it flat roughly, will the NIM go up over
time, just as assets coming on I assume on the securities book are higher than your average -- just how do you foresee that
situation if we did have a flat yield curve for, say, another year or two?
Doug Pauls - Commerce Bancorp, Inc. - CFO
What you said is exactly correct. Our NIM would go up over time, and then it becomes -- how quickly it goes up becomes a
function of the steepness of the curve.
Matthew O'Connor - UBS - Analyst
Okay. Thank you.
Operator
Gary Townsend, FBR.
Gary Townsend - FBR - Analyst
Good morning, gentlemen. Could you talk about your eMoney Advisor?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes, I'd love to talk about eMoney Advisors. We bought eMoney Advisor at the early part of '06. This is a company that aggregates
a customer's assets and liabilities on one secure Web site, no matter where there housed. And every night, they go out to 4000
providers and update this site. The Company was developed over many years and was sold to the wealth management channel,
primarily life insurance advisors, and it has tens of thousands of users all over America. We bought it for two reasons. One is to
make money, but really, we bought it to adapt it to the bank world where we've adapted it to a product we call the Virtual
Private Banker where we use it for our commercial and higher net worth customers, where all their assets and liabilities
(indiscernible) are housed on one Web site. It's convenience, it's the idea of a commerce convenience taken to the higher net
worth. And so far, we've been very pleased with it.
Gary Townsend - FBR - Analyst
It seems to have stalled, I'm just guessing, a significant part of the increase in your non-interest income in that other line in the
quarter. Is that --?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Is that right, Doug?
Doug Pauls - Commerce Bancorp, Inc. - CFO
It's between 2 or $3 million, year-over-year impact there.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Gary Townsend - FBR - Analyst
Thank you. Could you also discuss -- I didn't quite here this -- how you're planning to slow the growth of your diluted share
count?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Our DRIP raises -- last year's raised about $150 million and includes a component where shareholders can add amounts to their
DRIP purchase, and we're dialing that back. So we'll raise less capital due to DRIP, but we'll also slow the share count.
Gary Townsend - FBR - Analyst
Do you feel comfortable giving an estimate as to what the change would be year from year?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Well, going forward, we're reducing it 75% in terms of the amount of the optional cash payment. So it probably won't be exactly
75% less, Gary, but somewhere in that range.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
75% less what, in real dollars?
Doug Pauls - Commerce Bancorp, Inc. - CFO
In real dollars here.
Gary Townsend - FBR - Analyst
Thank you.
Operator
[Scott Carmel], Philadelphia Financial.
Jordan Hymowitz - Philadelphia Financial - Analyst
Hey, guys, it's actually Jordan Hymowitz. Two quick questions. You mentioned other than the eMoney, that there was an other
-- there was a leasing thing that impacted the other line. Can you explain what that is? I'm not familiar --
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes. When you do lease financing, commercial lease financing, correct me if I'm wrong, Doug, but the income runs right through
the other income, rather than through the interest income line.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Doug Pauls - Commerce Bancorp, Inc. - CFO
Yes, for certain of the leases, the operating leases.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Certain type of leases, the income runs through there.
Jordan Hymowitz - Philadelphia Financial - Analyst
And are you doing more of them this year than last year?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Well, we've been building our commercial leasing business for years; it goes with our commercial business. And, yes, the numbers
are up this year.
Jordan Hymowitz - Philadelphia Financial - Analyst
And then, couldn't it be argued that, just because it goes through one layer and [versus] another that your net interest margin
be actually a little bit wider, because it really is interest income, so to speak?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Absolutely, 100% true.
Jordan Hymowitz - Philadelphia Financial - Analyst
And what number would that be in the quarter again?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
We don't know. We'll go check. But that's a good point, Jordan. I agree with you on this.
Jordan Hymowitz - Philadelphia Financial - Analyst
And my other question is -- your deposit service fees were up 33%, and I think the best way to look at that is in relation to
checking account growth as opposed to deposit growth. So can you say what your checking account, in terms of numbers, was
up year-over-year?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Our total -- account total -- was up 18% on a year-to-year basis. I don't have the checking account number here, but --
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Jordan Hymowitz - Philadelphia Financial - Analyst
So it's about 50% higher. Did you increase average fees year-over-year, or -- ?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
We tweaked the fee. That's all I'm going to say on that. We tweaked the fees.
Jordan Hymowitz - Philadelphia Financial - Analyst
Okay, thank you.
Operator
Gerard Cassidy, RBC Capital Markets.
Gerard Cassidy - RBC Capital Markets - Analyst
Thank you, good morning. A question, Vernon, you touched upon -- on the loan growth, you guys have obviously very strong
loan growth, but the competitive market is challenging out there. I think you used the words -- there's liberal credit and cheap
pricing that you're competing against. What are you guys doing to win that business when you're competing against others
that are offering those types of competitive factors -- (multiple speakers)
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
First of all, the bigger the credit, the more liberal credit, and the more goofy the pricing. So it's in the middle market and upper
middle market. Number two, we've built a tremendous team of people in all of our markets, so they're looking at lots of deals,
and we're picking the ones that make sense. And third, in the end, the middle market borrowers in lower care much more about
the relationship than they do about the pricing. So in many ways, it's our convenience strategy in a different way. But it's mainly
a reflection of the organization and the talent that we have.
Gerard Cassidy - RBC Capital Markets - Analyst
Okay. The second question, circling back to the health care credit you mentioned that went on non-performing status this
quarter, could you share with us how long you've had a relationship with that borrower? And then as part of that, how did you
originally get the relationship -- was it led with a deposit or a loan? And are there others that -- credits that size in the portfolio,
or how many of that size in the portfolio? About (multiple speakers)
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Well, we're not going to discuss the individual credit, that's inappropriate. But as we've said many times (technical difficulty) -as we've said many times, we have a big health care book here in New York, New Jersey and Philadelphia. It's an important part
of our business. And when you make credit, sometimes they don't work. And in our case, we've got 0.12% that don't work.
Gerard Cassidy - RBC Capital Markets - Analyst
Thank you.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Operator
Bob Patten, Morgan Keegan.
Bob Patten - Morgan Keegan - Analyst
I just wanted to circle back. Two quick questions. One, what do you forecast the day count issue to be in third quarter? You gave
the range of the margin, I understand.
Doug Pauls - Commerce Bancorp, Inc. - CFO
3 to 5 basis points again.
Bob Patten - Morgan Keegan - Analyst
And then just on eMoney, following up on Gary's question, what are the other thoughts in terms of the strategy for driving [fee]
revenue growth, and at what point are you going to break out the numbers of [e-revenue] so we can sort of look at the growth
metrics? Example, are you thinking about private labeling, are you thinking about acquisitions to add on for asset management,
or any of the other ancillary sort of -- (multiple speakers)
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes, we're doing all these things -- in the insurance business, in the capital markets business, we're expanding our models and
our presence and looking at things a different way. eMoney is a key component for us in the capital markets business also, it
gives us a tremendous competitive advantage there. And we're doing all those kinds of things. But they're never going to have
a major impact on the results here.
Bob Patten - Morgan Keegan - Analyst
Okay. Any thoughts about private labeling it?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Well, eMoney is private label. That's how eMoney was developed. It's a private-label component. Most of the major life insurance
companies in this country use eMoney in one form or another, and it is private-labeled as their product.
Bob Patten - Morgan Keegan - Analyst
Okay, I guess I was just thinking about using it through other banks.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
We won't be giving it to other banks.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Bob Patten - Morgan Keegan - Analyst
Thanks.
Operator
Robert Rutschow, Prudential.
Robert Rutschow - Prudential - Analyst
Good morning. I just wanted to follow up on the commercial deposits. It sounds like you may be kind of scaling down the growth
there more than -- I guess growth would be slower than it otherwise would, given the pricing going forward.
Doug Pauls - Commerce Bancorp, Inc. - CFO
You mean on commercial loans?
Robert Rutschow - Prudential - Analyst
On the commercial deposits side, in the government deposits.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Well, those are two completely different worlds. I don't think on the commercial deposits that we're ever slowing down, although
we're in a world where you don't take every deposit at the price. At the fringe, at the far fringe of deposit pricing, you have to
say to yourself, is this extra 40 million worth it at this price? We have to be smart about how we price it. But I don't think that
commercial deposit's up 31%, and even 7% linked quarter is reflective of its slowing down, particularly as the base gets bigger
all the time.
Robert Rutschow - Prudential - Analyst
And second, I was just wondering if you could remind us how many branches you expect to open in the DC market, and if that
has changed at all for this year.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
200 eventually for the DC/Baltimore market over time. I don't have the list right now for the rest of the year, but it's somewhere
around 10, I think. All of these opening numbers quarter-by-quarter -- I know you all think I'm nuts on this -- it's all land-use
process-driven. So our -- we have about 175 total deals in all of our states in various forms of approval. But I believe in DC, I'm
going to get about 10 more open this year.
Robert Rutschow - Prudential - Analyst
10 more this year, okay. Thank you.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Operator
Andrew Marquardt, Fox-Pitt Kelton.
Andrew Marquardt - Fox-Pitt Kelton - Analyst
Can you talk about the average life of your deposits kind of by segment, if possible, and help me understand better --
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Sure, we will be happy to send you a deposit life study that we've shared with lots of people. Our average deposit life is about
13 years. Call Ed Jordan, he'll be happy to give you the study. It's been in lots of books and stuff.
Andrew Marquardt - Fox-Pitt Kelton - Analyst
Has that changed with -- how would you break out the index level of 12 billion? Is that very sticky, or how do you think about
the life of those?
Doug Pauls - Commerce Bancorp, Inc. - CFO
It really hasn't changed. We get this study updated every quarter, and the lives really have not changed dramatically.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
But there is a lag effect, there's no question about it. There is a lag effect. But we -- over all these cycles, they do these studies
historically back, forward, every way. And interest rates have historically not been a moving element in life of deposits.
Andrew Marquardt - Fox-Pitt Kelton - Analyst
Thanks. Separately, can you talked about -- or just give us the day count impact that occurred in the first quarter versus fourth?
I assume that that was a help, maybe even greater than the drag over the last quarter or so.
Doug Pauls - Commerce Bancorp, Inc. - CFO
Well, it's about 3 to 5 basis points per day, so just look at the day count. So it would be 6 to 10, I guess.
Andrew Marquardt - Fox-Pitt Kelton - Analyst
Was helped in the first quarter versus fourth?
Doug Pauls - Commerce Bancorp, Inc. - CFO
Versus the fourth, yes.
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Jul. 17. 2006 / 10:00AM, CBH - Q2 2006 Commerce Bancorp, Inc. Earnings Conference Call
Andrew Marquardt - Fox-Pitt Kelton - Analyst
Thank you.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Last one, Wilson Smith.
Wilson Smith - Boenning & Scattergood Inc. - Analyst
Good morning, gentlemen. If I could just follow up a little bit on some of the asset quality -- just two things. You indicated that
the loan loss reserve, you expect to be stable here. What about the loan loss reserve ratio? Do you think that that's going to
hold where you have it now?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes, but the answer -- and historically, it's been up. If you look at the numbers from last year, it's not much different. Our loan
losses and non-accruals are so low that any one number moves it. As I said earlier, it's like bouncing across the bottom. So, as
I've always said, that non-performing should be 0.1 to 0.2, and anything within that range is sort of immaterial.
Wilson Smith - Boenning & Scattergood Inc. - Analyst
Kind of following up on that, could you give us some color overall on your watchlist and so forth, and the direction that's been
going, and -- ?
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Yes, that credit quality going forward looks great. We really have not seen any deterioration in our watchlist, in our consumer
credit numbers. If there's a credit crisis coming out there, we don't see it right now.
Wilson Smith - Boenning & Scattergood Inc. - Analyst
Thank you very much.
Vernon Hill - Commerce Bancorp, Inc. - Chairman & CEO
Thank you all.
Operator
That does conclude today's call. Thank you for your participation, you may disconnect at this time.
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