**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**WASHINGTON,
D.C. 20549**


**Form
10-Q**





(X)  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934


For
the quarterly period ended March
31, 2005


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











(Exact
name of registrant as specified in its charter)





New
      Jersey
    22-2433468(State
      or other jurisdiction of
    (IRS
      Employer Identificationincorporation
      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.




YesX
    No
      __





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).


YesX
    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
    162,091,631(Title
      of Class)
    (No.
      of Shares Outstanding as of May 2, 2005)





















**COMMERCE
BANCORP, INC. AND SUBSIDIARIES**


INDEX











PART I.
    FINANCIAL INFORMATION
    PageItem 1.
    Financial StatementsConsolidated Balance Sheets (unaudited)March 31, 2005 and December 31, 2004
    1Consolidated Statements of Income
      (unaudited)Three months ended March 31, 2005 and March 31,
      2004
    2Consolidated Statements of Cash Flows
      (unaudited)Three months ended March 31, 2005 andMarch 31, 2004
    3Consolidated Statement of Changes in Stockholders’ Equity
      (unaudited)Three months ended March 31, 2005
    4Notes to Consolidated Financial Statements
      (unaudited)
    5Item 2.
    Management's Discussion and Analysis of
      FinancialCondition and Results of Operation
    9Item 3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    22Item 4.
    Controls and Procedures
    23PART II.
    OTHER INFORMATIONItem 1.
    Legal Proceedings
    23Item 2.
    Purchases of Certain Equity Securities by the Issuer and
      Affiliated Purchasers
    24Item 6.
    Exhibits
    24
























**PART
1.****FINANCIAL
INFORMATION**





**Item
1.**  **Financial
Statements**


**COMMERCE
BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
BALANCE SHEETS**


(unaudited)


**March
      31,**
    
    **December
      31,**(dollars
      in thousands)
    
    **2005**
    
    **2004****Assets**Cash
      and due from banks
    
    **$**
    **1,066,051**
    
    $
    1,050,806Federal
      funds sold
    
    
    **10,000**Cash
      and cash equivalents
    
    
    **1,076,051**
    
    
    1,050,806Loans
      held for sale
    
    
    **64,087**
    
    
    44,072Trading
      securities
    
    
    **206,113**
    
    
    169,103Securities
      available for sale
    
    
    **7,950,643**
    
    
    8,044,150Securities
      held to maturity
    
    
    **11,292,995**
    
    
    10,463,658(market
      value 03/05-$11,114,510; 12/04-$10,430,451)Loans
    
    
    **9,975,893**
    
    
    9,454,611Less
      allowance for loan losses
    
    
    **139,289**
    
    
    135,620**9,836,604**
    
    
    9,318,991Bank
      premises and equipment, net
    
    
    **1,077,488**
    
    
    1,059,519Other
      assets
    
    
    **365,995**
    
    
    351,346Total
      assets
    
    **$**
    **31,869,976**
    
    $
    30,501,645**Liabilities**Deposits:Demand:Noninterest-bearing
    
    **$**
    **6,877,932**
    
    $
    6,406,614Interest-bearing
    
    
    **12,402,424**
    
    
    11,604,066Savings
    
    
    **6,811,580**
    
    
    6,490,263Time
    
    
    **3,396,022**
    
    
    3,157,942Total
      deposits
    
    
    **29,487,958**
    
    
    27,658,885Other
      borrowed money
    
    
    **136,251**
    
    
    661,195Other
      liabilities
    
    
    **339,808**
    
    
    315,860Long-term
      debt
    
    
    **200,000**
    
    
    200,000**30,164,017**
    
    
    28,835,940**Stockholders'
      **Equity********Common
      stock, 162,430,559 sharesissued
      (160,635,618 shares in 2004)
    
    
    **162,431**
    
    
    160,636Capital
      in excess of par value
    
    
    **988,848**
    
    
    951,476Retained
      earnings
    
    
    **603,338**
    
    
    543,978Accumulated
      other comprehensive (loss) income
    
    
    **(35,927**
    )
    
    20,953**1,718,690**
    
    
    1,677,043Less
      treasury stock, at cost, 838,758 sharesissued
      (795,610 shares in 2004)
    
    
    **12,731**
    
    
    11,338Total
      stockholders' equity
    
    
    **1,705,959**
    
    
    1,665,705Total
      liabilities and stockholders’ equity
    
    **$**
    **31,869,976**
    
    $
    30,501,645


See
accompanying notes.





1




COMMERCE BANCORP, INC. AND
SUBSIDIARIES


**CONSOLIDATED STATEMENTS OF INCOME**


(unaudited)





**Three
      Months Ended**
      **March
      31,**(dollars
      in thousands, except per share amounts)
    
    **2005**
    
    **2004****Interest
      income**Interest
      and fees on loans
    
    **$**
    **145,218**
    
    $
    108,213Interest
      on investment securities
    
    
    **224,946**
    
    
    163,499Other
      interest
    
    
    **316**
    
    
    340Total
      interest income
    
    
    **370,480**
    
    
    272,052**Interest
      expense**Interest
      on deposits:Demand
    
    
    **46,671**
    
    
    15,943Savings
    
    
    **19,080**
    
    
    7,786Time
    
    
    **18,398**
    
    
    14,643Total
      interest on deposits
    
    
    **84,149**
    
    
    38,372Interest
      on other borrowed money
    
    
    **4,410**
    
    
    448Interest
      on long-term debt
    
    
    **3,020**
    
    
    3,020Total
      interest expense
    
    
    **91,579**
    
    
    41,840Net
      interest income
    
    
    **278,901**
    
    
    230,212Provision
      for loan losses
    
    
    **6,250**
    
    
    9,500Net
      interest income after provision for loan losses
    
    
    **272,651**
    
    
    220,712**Noninterest
      income**Deposit
      charges and service fees
    
    
    **59,964**
    
    
    45,481Other
      operating income
    
    
    **42,617**
    
    
    40,327Net
      investment securities gains
    
    
    **1,108**
    
    
    424Total
      noninterest income
    
    
    **103,689**
    
    
    86,232**Noninterest
      expense**Salaries
      and benefits
    
    
    **119,301**
    
    
    97,340Occupancy
    
    
    **37,993**
    
    
    28,110Furniture
      and equipment
    
    
    **28,926**
    
    
    24,179Office
    
    
    **12,677**
    
    
    10,920Marketing
    
    
    **5,801**
    
    
    8,696Other
    
    
    **53,708**
    
    
    43,005Total
      noninterest expense
    
    
    **258,406**
    
    
    212,250Income
      before income taxes
    
    
    **117,934**
    
    
    94,694Provision
      for federal and state income taxes
    
    
    **40,797**
    
    
    32,719Net
      income
    
    **$**
    **77,137**
    
    $
    61,975Net
      income per common and common equivalent share:Basic
    
    **$**
    **0.48**
    
    $
    0.40Diluted
    
    **$**
    **0.45**
    
    $
    0.37Average
      common and common equivalent
      shares
      outstanding:Basic
    
    
    **160,798**
    
    
    154,328Diluted
    
    
    **176,323**
    
    
    171,065Dividends
      declared, common stock
    
    **$**
    **0.11**
    
    $
    0.09


See
accompanying notes.





2




COMMERCE BANCORP, INC. AND
SUBSIDIARIES




**CONSOLIDATED STATEMENTS OF CASH FLOWS**


(unaudited)





**Three
      Months Ended**
      **March
      31,**(dollars
      in thousands)
    
    
    **2005**
    
    
    **2004****Operating
      activities**Net
      income
    
    **$**
    **77,137**
    
    $
    61,975Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
    
    
    **6,250**
    
    
    9,500Provision
      for depreciation, amortization and accretion
    
    
    **37,173**
    
    
    27,294Gains
      on sales of securities
    
    
    **(1,108**
    **)**
    
    (424)Proceeds
      from sales of loans held for sale
    
    
    **158,738**
    
    
    191,621Originations
      of loans held for sale
    
    
    **(178,753**
    **)**
    
    (183,786)Net
      increase in trading securities
    
    
    **(37,010**
    **)**
    
    (63,901)Decrease
      (increase) in other assets
    
    
    **17,549**
    
    
    (25,765)Increase
      in other liabilities
    
    
    **23,778**
    
    
    62,857Net
      cash provided by operating activities
    
    
    **103,754**
    
    
    79,371**Investing
      activities**Proceeds
      from the sales of securities available for sale
    
    
    **188,152**
    
    
    1,561,581Proceeds
      from the maturity of securities available for sale
    
    
    **734,296**
    
    
    758,400Proceeds
      from the maturity of securities held to maturity
    
    
    **493,650**
    
    
    167,248Purchase
      of securities available for sale
    
    
    **(925,038**
    **)**
    
    (3,519,396)Purchase
      of securities held to maturity
    
    
    **(1,326,375**
    **)**
    
    (548,888)Net
      increase in loans
    
    
    **(523,863**
    **)**
    
    (351,791)Capital
      expenditures
    
    
    **(43,626**
    **)**
    
    (65,181)Net
      cash used by investing activities
    
    
    **(1,402,804**
    **)**
    
    (1,998,027)**Financing
      activities**Net
      increase in demand and savings deposits
    
    
    **1,590,993**
    
    
    2,030,603Net
      increase in time deposits
    
    
    **238,080**
    
    
    150,675Net
      decrease in other borrowed money
    
    
    **(524,944**
    **)**
    
    (173,532)Dividends
      paid
    
    
    **(17,604**
    **)**
    
    (14,547)Proceeds
      from issuance of common stock underdividend
      reinvestment and other stock plans
    
    
    **39,164**
    
    
    45,261Other
    
    
    **(1,394**
    **)**
    
    (1,999)Net
      cash provided by financing activities
    
    
    **1,324,295**
    
    
    2,036,461Increase
      in cash and cash equivalents
    
    
    **25,245**
    
    
    117,805Cash
      and cash equivalents at beginning of period
    
    
    **1,050,806**
    
    
    910,092Cash
      and cash equivalents at end of period
    
    **$**
    **1,076,051**
    
    $
    1,027,897Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
    
    **$**
    **91,295**
    
    $
    40,935Income
      taxes
    
    
    **374**
    
    
    5,402


See
accompanying notes.










3





**COMMERCE
BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY**


(unaudited)





Three
      months ended March 31, 2005*(in
      thousands)***Accumulated****Capital
      in**
    
    
    
    
    
    **Other****Common**
    
    **Excess
      of**
    
    **Retained**
    
    **Treasury**
    
    **Comprehensive****Stock**
    
    **Par
      Value**
    
    **Earnings**
    
    **Stock**
    
    **Income
      (Loss)**
    
    **Total****Balances
      at December 31, 2004**
    
    **$**
    **160,636**
    
    **$**
    **951,476**
    
    **$**
    **543,978**
    
    $
    **(11,338**
    **)**
    **$**
    **20,953**
    
    **$**
    **1,665,705**Net
      income
    
    
    
    
    
    
    
    
    77,137
    
    
    
    
    
    
    
    
    77,137Other
      comprehensive loss, net of taxUnrealized
      loss on securities (pre-tax $88,963)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,710
    )
    
    (56,710
    )Reclassification
      adjustment (pre-tax $262)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170
    )
    
    (170
    )Other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,880
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,257Cash
      dividends
    
    
    
    
    
    
    
    
    (17,774
    )
    
    
    
    
    
    
    
    (17,774
    )Shares
      issued under dividend reinvestmentand
      compensation and benefit plans (1,795 shares)
    
    
    1,795
    
    
    37,369
    
    
    
    
    
    
    
    
    
    
    
    39,164Other
    
    
    
    
    
    3
    
    
    (3
    )
    
    (1,393
    )
    
    
    
    
    (1,393
    )**Balances
      at March 31, 2005**
    
    **$**
    **162,431**
    
    **$**
    **988,848**
    
    **$**
    **603,338**
    
    **$**
    **(12,731**
    **)**
    **$**
    **(35,927**
    **)**
    **$**
    **1,705,959**


See
accompanying notes.













4





**COMMERCE BANCORP, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


(unaudited)





**A.**  **Consolidated
Financial Statements**





The
consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements were compiled in
accordance with the accounting policies set forth in Note 1 - Significant
Accounting Policies of the Notes to Consolidated Financial Statements included
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2004. 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, 2004. The results for the
three months ended March 31, 2005 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2005.





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 2005 presentation.





Per
share data and other appropriate share information for 2004 have been restated
for the two-for-one stock split in the form of a 100% stock dividend effective
March 7, 2005.





**B.**  **Long
Term Debt**





On
March 11, 2002 the Company issued $200.0 million of 5.95% Convertible Trust
Capital Securities through Commerce Capital Trust II, a Delaware business trust.
The Convertible Trust Capital Securities mature in 2032. All $200.0 million of
the Convertible Trust Capital Securities qualify as Tier 1 capital for
regulatory capital purposes.





On
April 1, 2004, the Convertible Trust Capital Securities became convertible at
the option of the holder. Holders of the Convertible Trust Capital Securities
may convert each security into 1.8956 shares of Company common stock.





The
Company may call the Convertible Trust Capital Securities provided various terms
and conditions are met, primarily related to the market price of the Company’s
common stock. In summary, the Company’s common stock must trade at a price of
$31.65 or higher for 20 trading days in a period of 30 consecutive trading days
in order for the Company to force conversion.





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 (7.6 million common shares) have been added to the
denominator. Refer to Note I - Net Income Per Share for illustration of the
if-converted method.




5




**C.**
    **Bank
      Premises and Equipment**


When
capitalizing costs for store 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 store. Depreciation charges commence the month
in which the store opens. All other pre-opening and post-opening costs related
to stores are expensed as incurred. As of March 31, 2005 and December 31, 2004,
bank premises and equipment in progress was $109.4 million and $109.6 million,
respectively.





**D.**  **Commitments
and Other**





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. Fees associated with standby letters of credit have been deferred
and recorded in “Other liabilities” on the Consolidated Balance Sheets. These
fees are immaterial to the Company’s consolidated financial statements at March
31, 2005.





**E.**  **Comprehensive
Income**





Total
comprehensive income, which for the Company included net income and changes in
unrealized gains and losses on the Company's available for sale securities,
amounted to $20.3 million and $143.8 million, respectively, for the three months
ended March 31, 2005 and 2004.





**F.**  **New
Accounting Standards**





On
April 14, 2005 the Securities and Exchange Commission (SEC) delayed the
implementation date of FASB Statement No. 123R, “Share-Based Payment” (FAS
123R), which is a revision of FASB Statement No. 123, “Accounting for
Stock-Based Compensation” (FAS 123). FAS 123R supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB 25), and amends FASB Statement
No. 95, “Statement of Cash Flows”. FAS 123R requires all share-based payments to
employees to be recognized in the income statement based on their fair values
and no longer allows pro forma disclosure as an alternative to reflecting the
impact of share-based payments on net income and net income per share. FAS 123R
permits public companies to adopt its requirements using one of two methods for
adoption: modified prospective or modified retrospective. A modified prospective
method recognizes compensation cost beginning with the effective date of
adoption for all share-based payments granted after the effective date and all
unvested awards granted prior to the effective date. A modified retrospective
method includes the requirements of the modified prospective method but also
permits entities to restate prior period presentations. FAS 123R was originally
required to be adopted no later than July 1, 2005; however, due to the SEC’s
deferral of the implementation date, the Company must now adopt no later than
January 1, 2006. The Company plans to adopt FAS 123R on January 1, 2006 but has
yet to decide on a method of adoption.





The
Company currently accounts for share-based payments to employees using APB 25’s
intrinsic value method and therefore does not recognize compensation expense for
employee stock options. Accordingly, the adoption of FAS 123R will impact the
Company’s financial results. While the future impact of FAS 123R cannot be
predicted, had the Company adopted FAS 123R for the periods presented, the
impact would have approximated the impact of FAS 123 as described in the
disclosure of pro forma net income and pro forma net income per share in Note G
- Stock-Based Compensation.







6




**G.**
    **Stock-Based
      Compensation**


As
stated in Note F - New Accounting Standards, the Company continued to follow APB
25 and related Interpretations to account for its stock-based compensation plans
through the first three months of 2005. If the Company had accounted for stock
options under the fair value provisions of FAS 123, net income and net income
per share would have been as follows (in thousands, except per share
amounts):





**Three
      Months Ended**
      **March
      31,****2005**
    
    **2004**Reported
      net income
    
    $
    77,137
    
    $
    61,975Less:
      Stock option compensation expensedetermined
      under fair value method, net of tax
    
    
    (4,031
    )
    
    (3,420
    )Pro
      forma net income, basic
    
    $
    73,106
    
    $
    58,555Add:
      Interest expense on Convertible TrustCapital
      Securities, net of tax
    
    
    1,963
    
    
    1,963Pro
      forma net income, diluted
    
    $
    75,069
    
    $
    60,518Reported
      net income per share:Basic
    
    $
    0.48
    
    $
    0.40Diluted
    
    
    0.45
    
    
    0.37Pro
      forma net income per share:Basic
    
    $
    0.45
    
    $
    0.38Diluted
    
    $
    0.43
    
    $
    0.35





The
fair value of options granted in 2005 and 2004 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 4.05% to 3.09%, dividend yields
of 1.47% to 1.33%, volatility factors of the expected market price of the
Company's common stock of .267 to .255 and weighted average expected lives of
the options of 5.27 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









**H.**
    **Segment
      Information**


The
Company operates one reportable segment of business, Community Banks, which
includes all of the Company’s banking subsidiaries. Through its Community Banks,
the Company provides a broad range of retail and commercial banking services and
corporate trust services. Parent/Other includes the holding company, Commerce
Insurance Services, Inc. and Commerce Capital Markets, Inc.





Selected
segment information is as follows (in thousands):





**Three
      Months Ended**
      **March
      31, 2005**
    
    **Three
      Months Ended**
      **March
      31, 2004****Community**
    
    **Parent/**
    
    
    
    **Community**
    
    **Parent/****Banks**
    
    **Other**
    
    **Total**
    
    **Banks**
    
    **Other**
    
    **Total**Net
      interest income
    
    $
    280,955
    
    $
    (2,054
    )
    $
    278,901
    
    $
    231,836
    
    $
    (1,624
    )
    $
    230,212Provision
      for loan losses
    
    
    6,250
    
    
    -
    
    
    6,250
    
    
    9,500
    
    
    -
    
    
    9,500Net
      interest income after provision
    
    
    274,705
    
    
    (2,054
    )
    
    272,651
    
    
    222,336
    
    
    (1,624
    )
    
    220,712Noninterest
      income
    
    
    75,296
    
    
    28,393
    
    
    103,689
    
    
    58,133
    
    
    28,099
    
    
    86,232Noninterest
      expense
    
    
    236,769
    
    
    21,637
    
    
    258,406
    
    
    189,353
    
    
    22,897
    
    
    212,250Income
      before income taxes
    
    
    113,232
    
    
    4,702
    
    
    117,934
    
    
    91,116
    
    
    3,578
    
    
    94,694Income
      tax expense
    
    
    39,092
    
    
    1,705
    
    
    40,797
    
    
    31,207
    
    
    1,512
    
    
    32,719Net
      income
    
    $
    74,140
    
    $
    2,997
    
    $
    77,137
    
    $
    59,909
    
    $
    2,066
    
    $
    61,975Average
      assets (in millions)
    
    $
    28,714
    
    $
    2,383
    
    $
    31,097
    
    $
    21,416
    
    $
    2,076
    
    $
    23,492





**I.**  **Net
income Per Share**





The
calculation of net income per share follows (in thousands, except for per share
amounts):





**Three
      Months Ended**
      **March
      31,****2005**
    
    **2004****Basic:**Net
      income available to common shareholders - basic
    
    $
    77,137
    
    $
    61,975Average
      common shares outstanding - basic
    
    
    160,798
    
    
    154,328Net
      income per common share - basic
    
    $
    0.48
    
    $
    0.40**Diluted:**Net
      income
    
    $
    77,137
    
    $
    61,975Add
      interest expense on Convertible Trust Capital Securities,net
      of tax
    
    
    1,963
    
    
    1,963Net
      income available to common shareholders - diluted
    
    $
    79,100
    
    $
    63,938Average
      common shares outstanding
    
    
    160,798
    
    
    154,328Additional
      shares considered in diluted computation assuming:Exercise
      of stock options
    
    
    7,943
    
    
    9,155Conversion
      of Convertible Trust Capital Securities
    
    
    7,582
    
    
    7,582Average
      common shares outstanding - diluted
    
    
    176,323
    
    
    171,065Net
      income per common share - diluted
    
    $
    0.45
    
    $
    0.37








8





**Item 2.**  **Management's
Discussion and Analysis of Financial Condition and Results of
Operation**





**Executive
Summary**





During
the first quarter of 2005, the Company experienced strong deposit growth, the
primary driver of the Company’s success. Total assets grew to $31.9 billion, an
increase of 28% over March 31, 2004, while total deposits grew 29%. Net income
increased 24% to $77.1 million despite margin compression caused by the existing
interest rate environment. Diluted net income per share was $.45, up 22%, from
$.37 for the three months ended March 31, 2004.





Per
share data and other appropriate share information for 2004 have been restated
for the two-for-one stock split in the form of a 100% stock dividend effective
March 7, 2005.





The
Company has identified the policy related to the allowance for loan losses as
being critical. The foregoing critical accounting policy is more fully described
in the Company’s annual report on Form 10-K for the year ended December 31,
2004. During the current quarter, there were no material changes to the
estimates or methods by which estimates are derived with regard to the policy
related to the allowance for loan losses.





**Capital
Resources**





At
March 31, 2005, stockholders' equity totaled $1.7 billion or 5.35% of total
assets, compared to $1.7 billion or 5.46% of total assets at December 31,
2004.





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
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
following table presents the Company’s and Commerce NJ’s risk-based and leverage
ratios at March 31, 2005 and 2004. The 2004 ratios for Commerce NJ have been
adjusted to reflect the consolidation of Commerce Shore during 2004 (amounts in
thousands).





Per
      Regulatory GuidelinesActual
    
    Minimum
    
    "Well
      Capitalized"Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio**March
      31, 2005:**CompanyRisk
      based capital ratios:Tier
      1
    
    $
    1,932,767
    
    
    12.46%
    
    $
    620,292
    
    
    4.00%
    
    $
    930,437
    
    
    6.00%Total
      capital
    
    
    2,077,393
    
    
    13.40
    
    
    1,240,583
    
    
    8.00
    
    
    1,550,729
    
    
    10.00Leverage
      ratio
    
    
    1,932,767
    
    
    6.22
    
    
    1,243,373
    
    
    4.00
    
    
    1,554,216
    
    
    5.00Commerce
      NJRisk
      based capital ratios:Tier
      1
    
    $
    1,317,351
    
    
    11.50%
    
    $
    458,018
    
    
    4.00%
    
    $
    687,027
    
    
    6.00%Total
      capital
    
    
    1,424,084
    
    
    12.44
    
    
    916,036
    
    
    8.00
    
    
    1,145,045
    
    
    10.00Leverage
      ratio
    
    
    1,317,351
    
    
    6.01
    
    
    877,124
    
    
    4.00
    
    
    1,096,404
    
    
    5.00





9








Per
      Regulatory GuidelinesActual
    
    
    
    Minimum
    
    "Well
      Capitalized"Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio**March
      31, 2004:**CompanyRisk
      based capital ratios:Tier
      1
    
    $
    1,564,769
    
    
    12.70%
    
    $
    493,027
    
    
    4.00%
    
    $
    739,540
    
    
    6.00%Total
      capital
    
    
    1,682,098
    
    
    13.65
    
    
    986,053
    
    
    8.00
    
    
    1,232,567
    
    
    10.00Leverage
      ratio
    
    
    1,564,769
    
    
    6.68
    
    
    937,630
    
    
    4.00
    
    
    1,172,037
    
    
    5.00Commerce
      NJRisk
      based capital ratios:Tier
      1
    
    $
    985,163
    
    
    11.04%
    
    $
    356,863
    
    
    4.00%
    
    $
    535,295
    
    
    6.00%Total
      capital
    
    
    1,075,718
    
    
    12.06
    
    
    713,726
    
    
    8.00
    
    
    892,158
    
    
    10.00Leverage
      ratio
    
    
    985,163
    
    
    6.14
    
    
    641,893
    
    
    4.00
    
    
    802,366
    
    
    5.00





At
March 31, 2005, the Company's consolidated capital levels and each of the
Company's bank subsidiaries met the regulatory definition of a "well
capitalized" financial institution, i.e., a leverage capital ratio exceeding 5%,
a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital
ratio exceeding 10%. Management believes that as of March 31, 2005, the Company
and its subsidiaries meet all capital adequacy requirements to which they are
subject.





**Deposits**





Total
deposits at March 31, 2005 were $29.5 billion, up $6.6 billion, or 29% over
total deposits of $22.9 billion at March 31, 2004, and up by $1.8 billion, or 7%
from year-end 2004. Deposit growth during the first three months of 2005
included core deposit growth in all product and customer categories. The Company
regards core deposits as all deposits other than public certificates of deposit.
Core deposit growth by type of customer is as follows (in
millions):





**March
      31, 2005**
    
    **%
      of**
      **Total**
    
    **March
      31, 2004**
    
    **%
      of**
      **Total**
    
    **Annual
      Growth %**Consumer
    
    $
    12,681
    
    
    45%
    
    $
    10,511
    
    
    48%
    
    
    21%Commercial
    
    
    10,150
    
    
    36
    
    
    7,575
    
    
    35
    
    
    34Government
    
    
    5,227
    
    
    19
    
    
    3,620
    
    
    17
    
    
    44Total
    
    $
    28,058
    
    
    100%
    
    $
    21,706
    
    
    100%
    
    
    29%





Comparable
store core deposit growth is measured as the year over year percentage increase
in core deposits at the balance sheet date. At March 31, 2005, the comparable
store core deposit growth for stores open two years or more was 22% and for
stores open one year or more was 29%.





**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
and approved by the Company's Board of Directors.








10





Management
believes that the simulation of net interest income in different interest rate
environments provides the most meaningful measure 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.





The
Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate plus 200 and minus 100 basis point change during the next year,
with rates remaining constant in the second year. The Company's ALCO policy has
established that interest income sensitivity will be considered acceptable if
net income in the above interest rate scenario is within 10% of net income in
the flat rate scenario in the first year and within 15% over the two year time
frame. Net income in the flat rate scenario is projected to increase by
approximately 25% per year. The following table illustrates the impact on
projected net income at March 31, 2005 and 2004 of a plus 200 and minus 100
basis point change in interest rates.





**Basis
      Point Change****Plus
      200**
    
    **Minus
      100**March
      31, 2005:Twelve
      Months
    
    
    4.46
    %
    
    (2.87
    )%Twenty
      Four Months
    
    
    7.58
    %
    
    (8.66
    )%March
      31, 2004:Twelve
      Months
    
    
    0.98
    %
    
    (7.81
    )%Twenty
      Four Months
    
    
    10.22
    %
    
    (7.15
    )%





All
of these forecasts are within an acceptable level of interest rate risk per the
policies established by ALCO. In the event the model indicates an unacceptable
level of risk, the Company could undertake a number of actions that would reduce
this risk, including the sale of a portion of its available for sale investment
portfolio, the use of risk management strategies such as interest rate swaps and
caps, or fixing the cost of its short-term borrowings.





Many
assumptions were used by the Company to calculate the impact of changes in
interest rates, including the proportionate shift in rates. Actual results may
not be similar to the Company’s projections due to several factors including the
timing and frequency of rate changes, market conditions and the shape of the
yield curve. In general, a flattening yield curve would result in reduced net
interest income compared to the current flat rate scenario and proportionate
rate shift assumptions. Actual results may also differ due to the Company’s
actions, if any, in response to the changing rates.





Management
also monitors interest rate risk by utilizing a market value of equity model.
The model assesses the impact of a change in interest rates on the market value
of all the Company's assets and liabilities, as well as any off balance sheet
items. The model calculates the market value of the Company's assets and
liabilities in excess of book value in the current rate scenario, and then
compares the excess of market value over book value given an immediate plus 200
and minus 100 basis point change in rates. The Company's ALCO policy indicates
that the level of interest rate risk is unacceptable if the immediate plus 200
and minus 100 basis point change would result in the loss of 45% or more of the
excess of market value over book value in the current rate scenario. At March
31, 2005, the market value of equity model indicates an acceptable level of
interest rate risk.








11





The
market value of equity model reflects certain estimates and assumptions
regarding the impact on the market value of the Company’s assets and liabilities
given an immediate plus 200 or minus 100 basis point change in interest rates.
One of the key assumptions is the market value assigned to the Company’s core
deposits, or the core deposit premium. Utilizing an independent consultant, the
Company has completed and updated comprehensive core deposit studies in order to
assign its own core deposit premiums. The studies have consistently confirmed
management’s assertion that the Company’s core deposits have stable balances
over long periods of time, are generally insensitive to changes in interest
rates and have significantly longer average lives and durations than the
Company’s loans and investment securities. Thus, these core deposit balances
provide an internal hedge to market value fluctuations in the Company’s fixed
rate assets. At March 31, 2005, the average life of the Company’s core deposit
transaction accounts was 15.0 years.





The
market value of equity model analyzes both sides of the balance sheet and, as
indicated below, demonstrates the inherent value of the Company’s core deposits
in a rising rate environment. As rates rise, the value of the Company’s core
deposits increases which helps offset the decrease in value of the Company’s
fixed rate assets. The following table summarizes the market value of equity at
March 31, 2005 (in millions, except for per share amounts):





**Market
      Value****Of
      Equity**
    
    **Per
      Share**Plus
      200 basis point
    
    $
    6,878
    
    $
    42.34Current
      Rate
    
    $
    6,648
    
    $
    40.93Minus
      100 basis point
    
    $
    5,715
    
    $
    35.19





Liquidity
involves the Company's ability to raise funds to support asset growth or reduce
assets to meet deposit withdrawals and other borrowing needs, to maintain
reserve requirements and to otherwise operate the Company on an ongoing basis.
The Company's liquidity needs are primarily met by growth in core deposits, its
cash position and cash flow from its amortizing investment and loan portfolios.
If necessary, the Company has the ability to raise liquidity through
collateralized borrowings, FHLB advances, or the sale of its available for sale
investment portfolio. As of March 31, 2005 the Company had in excess of $13.7
billion in immediately available liquidity which includes unpledged securities
that could be used for collateralized borrowings, cash on hand, and borrowing
capacities under existing lines of credit. During the first three months of
2005, deposit growth, short-term borrowings and maturing investment securities
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. During the first three months of 2005, the Company
reduced its short-term borrowings, primarily through increased deposits. At
March 31, 2005, short-term borrowings aggregated $136.3 million and had an
average rate of 2.48%, as compared to $661.2 million at an average rate of 2.30%
at December 31, 2004.





**Interest
Earning Assets**





The
Company’s cash flow from deposit growth and repayments from its investment
portfolio totaled approximately $3.1 billion for the first three months of 2005.
This significant cash flow provides the Company with ongoing reinvestment
opportunities as interest rates change. For the three month period ended March
31, 2005, interest earning assets increased $1.3 billion from $28.2 billion to
$29.5 billion. This increase was primarily in investment securities and the loan
portfolio as described below.








12





**Loans**





During
the first three months of 2005, loans increased $521.3 million from $9.5 billion
to $10.0 billion. All segments of the loan portfolio experienced growth in the
first three months of 2005.





The
following table summarizes the loan portfolio of the Company by type of loan as
of the dates shown.





**March
      31,**
    
    **December
      31,****2005**
    
    **2004**(in
      thousands)Commercial:Term
    
    $
    1,376,663
    
    $
    1,283,476Line
      of credit
    
    
    1,221,096
    
    
    1,168,5422,597,759
    
    
    2,452,018Owner-occupied
    
    
    2,100,289
    
    
    1,998,2034,698,048
    
    
    4,450,221Consumer:Mortgages
      (1-4 family residential)
    
    
    1,447,365
    
    
    1,340,009Installment
    
    
    134,965
    
    
    132,646Home
      equity
    
    
    1,845,963
    
    
    1,799,841Credit
      lines
    
    
    70,405
    
    
    69,0793,498,698
    
    
    3,341,575Commercial
      real estate:Investor
      developer
    
    
    1,553,908
    
    
    1,455,891Construction
    
    
    225,239
    
    
    206,9241,779,147
    
    
    1,662,815Total
      loans
    
    $
    9,975,893
    
    $
    9,454,611





Investments





In
total, for the first three months of 2005, securities increased $772.8 million
from $18.7 billion to $19.4 billion. The available for sale portfolio remained
at $8.0 billion during the first three months of 2005 and the held to maturity
portfolio increased $829.3 million to $11.3 billion at March 31, 2005 from $10.5
billion at year-end 2004. The portfolio of trading securities increased $37.0
million from year-end 2004 to $206.1 million at March 31, 2005.







13








Detailed
below is information regarding the composition and characteristics of the
Company’s investment portfolio, excluding trading securities, as of March 31,
2005.





**Available**
    
    **Held
      to****Product
      Description**
    
    **For
      Sale**
    
    **Maturity**
    
    **Total**(in
      millions)Mortgage-backed
      Securities:Federal
      Agencies Pass ThroughCertificates
      (AAA Rated)
    
    $
    1,666
    
    $
    2,491
    
    $
    4,157Collateralized
      MortgageObligations
      (AAA Rated)
    
    
    5,887
    
    
    7,811
    
    
    13,698U.S.
      Government agencies/Other
    
    
    398
    
    
    991
    
    
    1,389Total
    
    $
    7,951
    
    $
    11,293
    
    $
    19,244Duration
      (in years)
    
    
    3.02
    
    
    4.17
    
    
    3.69Average
      Life (in years)
    
    
    3.62
    
    
    5.16
    
    
    4.52Quarterly
      Average Yield
    
    
    4.90
    %
    
    4.92
    %
    
    4.91
    %





At
March 31, 2005, the after tax depreciation of the Company’s available for sale
portfolio was $35.9 million.





The
Company’s mortgage-backed securities (MBS) portfolio comprises 92% 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.





A
summary of the amortized cost and market value of securities available for sale
and securities held to maturity (in thousands) at March 31, 2005 and December
31, 2004 follows:





**At
      March 31, 2005****Amortized**
      **Cost**
    
    **Gross**
      **Unrealized**
      **Gains**
    
    **Gross**
      **Unrealized
      Losses**
    
    **Market**
      **Value**U.S.
      Government agency and mortgage-backed obligations
    
    $
    7,956,392
    
    $
    12,742
    
    $
    (81,539
    )
    $
    7,887,595Obligations
      of state and political subdivisions
    
    
    9,555
    
    
    103
    
    
    
    
    
    9,658Equity
      securities
    
    
    9,679
    
    
    11,859
    
    
    
    
    
    21,538Other
    
    
    31,251
    
    
    601
    
    
    
    
    
    31,852Securities
      available for sale
    
    $
    8,006,877
    
    $
    25,305
    
    $
    (81,539
    )
    $
    7,950,643U.S.
      Government agency and mortgage-backed obligations
    
    $
    10,768,421
    
    $
    11,441
    
    $
    (191,641
    )
    $
    10,588,221Obligations
      of state and political subdivisions
    
    
    431,850
    
    
    1,856
    
    
    (141
    )
    
    433,565Other
    
    
    92,724
    
    
    
    
    
    
    
    
    92,724Securities
      held tomaturity
    
    $
    11,292,995
    
    $
    13,297
    
    $
    (191,782
    )
    $
    11,114,510











14








**At
      December 31, 2004****Amortized**
      **Cost**
    
    **Gross**
      **Unrealized**
      **Gains**
    
    **Gross**
      **Unrealized
      Losses**
    
    **Market**
      **Value**U.S.
      Government agency and mortgage-backed obligations
    
    $
    7,884,113
    
    $
    40,141
    
    $
    (21,438
    )
    $
    7,902,816Obligations
      of state and political subdivisions
    
    
    87,605
    
    
    305
    
    
    
    
    
    87,910Equity
      securities
    
    
    10,129
    
    
    13,174
    
    
    
    
    
    23,303Other
    
    
    29,312
    
    
    809
    
    
    
    
    
    30,121Securities
      available for sale
    
    $
    8,011,159
    
    $
    54,429
    
    $
    (21,438
    )
    $
    8,044,150U.S.
      Government agency and mortgage-backed obligations
    
    $
    9,967,041
    
    $
    43,982
    
    $
    (81,028
    )
    $
    9,929,995Obligations
      of state and political subdivisions
    
    
    398,963
    
    
    3,867
    
    
    (28
    )
    
    402,802Other
    
    
    97,654
    
    
    
    
    
    
    
    
    97,654Securities
      held tomaturity
    
    $
    10,463,658
    
    $
    47,849
    
    $
    (81,056
    )
    $
    10,430,451





Gross
gains and losses on securities sold during the first quarter of 2005 were $1.1
million and $23 thousand, respectively.





During
the first quarter of 2005, $69.4 million of securities were sold which had
unrealized losses at December 31, 2004. Gross gains and losses on these
securities sold were $172 thousand and $23 thousand, respectively.





**Net
Income**





Net
income for the first quarter of 2005 was $77.1 million, an increase of $15.1
million or 24% over the $62.0 million recorded for the first quarter of 2004. On
a per share basis, diluted net income for the first quarter of 2005 was $0.45
per common share compared to $0.37 per common share for the first quarter of
2004.





Return
on average assets (ROA) and return on average equity (ROE) for the first quarter
of 2005 were 0.99% and 17.98%, respectively, compared to 1.06% and 17.91%,
respectively, for the same 2004 period. The decrease in ROA was primarily due to
average asset growth of 32% exceeding net income growth, which was impacted by
net interest margin compression due to the flattening yield curve.








15





**Net
Interest Income**





Net
interest income totaled $278.9 million for the first quarter of 2005, an
increase of $48.7 million or 21% from $230.2 million in the first quarter of
2004. The increase in net interest income was due to the Company’s continued
ability to grow deposits as well as its loan and investment portfolios, offset
by rate changes due to the existing interest rate environment.





On
a tax equivalent basis, the Company recorded $283.0 million in net interest
income in the first quarter of 2005, an increase of $48.6 million or 21% over
the first quarter of 2004. As shown below, the increase in net interest income
on a tax equivalent basis was due to volume increases in the Company’s earning
assets, which were fueled by the Company’s continued growth of low-cost core
deposits (in millions).





**Quarter
      Ended**
    
    **Volume**
    
    **Rate**
    
    **Total**
    
    %**March
      31**
    
    **Increase**
    
    **Change**
    
    **Increase**
    
    **Increase****2005
      vs. 2004**
    
    $
    70.6
    
    
    ($22.0)
    
    $
    48.6
    
    
    21%






The
net interest margin for the first quarter of 2005 was 4.04%, down 35 basis
points from the margin for the first quarter of 2004 and down 12 basis points
from the margin for the fourth quarter of 2004. The decrease in the net interest
margin was primarily due to the flattening yield curve.





The
following table sets forth balance sheet items on a daily average basis for the
three months ended March 31, 2005, December 31, 2004 and March 31, 2004 and
presents the daily average interest earned on assets and paid on liabilities for
such periods.
















16










**Average
Balances and Net Interest Income**





March
      2005
    
    December
      2004
    
    March
      2004Average
    
    
    
    Average
    
    Average
    
    
    
    Average
    
    Average
    
    
    
    Average*(dollars
      in thousands)*
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate**Earning
      Assets**Investment
      securitiesTaxable
    
    $
    18,192,721
    
    $
    221,886
    
    
    4.95
    %
    $
    17,294,817
    
    $
    211,263
    
    
    4.86
    %
    $
    13,295,903
    
    $
    159,648
    
    
    4.83
    %Tax-exempt
    
    
    405,771
    
    
    3,313
    
    
    3.31
    
    
    457,654
    
    
    5,628
    
    
    4.89
    
    
    256,628
    
    
    3,860
    
    
    6.05Trading
    
    
    111,732
    
    
    1,395
    
    
    5.06
    
    
    180,711
    
    
    2,898
    
    
    6.38
    
    
    161,701
    
    
    2,065
    
    
    5.14Total
      investment securities
    
    
    18,710,224
    
    
    226,594
    
    
    4.91
    
    
    17,933,182
    
    
    219,789
    
    
    4.88
    
    
    13,714,232
    
    
    165,573
    
    
    4.86Federal
      funds sold
    
    
    50,311
    
    
    316
    
    
    2.55
    
    
    54,620
    
    
    261
    
    
    1.90
    
    
    144,297
    
    
    340
    
    
    0.95LoansCommercial
      mortgages
    
    
    3,527,626
    
    
    55,095
    
    
    6.33
    
    
    3,357,348
    
    
    52,747
    
    
    6.25
    
    
    2,793,159
    
    
    42,782
    
    
    6.16Commercial
    
    
    2,327,438
    
    
    35,581
    
    
    6.20
    
    
    2,186,627
    
    
    31,852
    
    
    5.80
    
    
    1,878,353
    
    
    24,535
    
    
    5.25Consumer
    
    
    3,423,574
    
    
    49,974
    
    
    5.92
    
    
    3,233,755
    
    
    47,550
    
    
    5.85
    
    
    2,603,037
    
    
    36,936
    
    
    5.71Tax-exempt
    
    
    391,510
    
    
    7,028
    
    
    7.28
    
    
    350,414
    
    
    6,429
    
    
    7.30
    
    
    337,313
    
    
    6,092
    
    
    7.26Total
      loans
    
    
    9,670,148
    
    
    147,678
    
    
    6.19
    
    
    9,128,144
    
    
    138,578
    
    
    6.04
    
    
    7,611,862
    
    
    110,345
    
    
    5.83Total
      earning assets
    
    $
    28,430,683
    
    $
    374,588
    
    
    5.35
    %
    $
    27,115,946
    
    $
    358,628
    
    
    5.26
    %
    $
    21,470,391
    
    $
    276,258
    
    
    5.17
    %**Sources
      of Funds**Interest-bearing
      liabilitiesSavings
    
    $
    6,558,587
    
    $
    19,080
    
    
    1.18
    %
    $
    6,289,379
    
    $
    16,270
    
    
    1.03
    %
    $
    4,492,847
    
    $
    7,786
    
    
    0.70
    %Interest-bearing
      demand
    
    
    11,924,947
    
    
    46,671
    
    
    1.59
    
    
    11,348,516
    
    
    36,042
    
    
    1.26
    
    
    8,986,070
    
    
    15,943
    
    
    0.71Time
      deposits
    
    
    2,566,074
    
    
    13,740
    
    
    2.17
    
    
    2,472,670
    
    
    12,436
    
    
    2.00
    
    
    2,430,589
    
    
    11,323
    
    
    1.87Public
      funds
    
    
    781,282
    
    
    4,658
    
    
    2.42
    
    
    888,209
    
    
    4,255
    
    
    1.91
    
    
    968,513
    
    
    3,320
    
    
    1.38Total
      deposits
    
    
    21,830,890
    
    
    84,149
    
    
    1.56
    
    
    20,998,774
    
    
    69,003
    
    
    1.31
    
    
    16,878,019
    
    
    38,372
    
    
    0.91Other
      borrowed money
    
    
    703,223
    
    
    4,410
    
    
    2.54
    
    
    545,073
    
    
    2,930
    
    
    2.14
    
    
    174,746
    
    
    448
    
    
    1.03Long-term
      debt
    
    
    200,000
    
    
    3,020
    
    
    6.12
    
    
    200,000
    
    
    3,020
    
    
    6.01
    
    
    200,000
    
    
    3,020
    
    
    6.07Total
      deposits and interest-bearingliabilities
    
    
    22,734,113
    
    
    91,579
    
    
    1.63
    
    
    21,743,847
    
    
    74,953
    
    
    1.37
    
    
    17,252,765
    
    
    41,840
    
    
    0.98Noninterest-bearing
      funds (net)
    
    
    5,696,570
    
    
    
    
    
    
    
    
    5,372,099
    
    
    
    
    
    
    
    
    4,217,626Total
      sources to fund earning assets
    
    $
    28,430,683
    
    
    91,579
    
    
    1.31
    
    $
    27,115,946
    
    
    74,953
    
    
    1.10
    
    $
    21,470,391
    
    
    41,840
    
    
    0.78Net
      interest income andmargin
      tax-equivalent basis
    
    
    
    
    $
    283,009
    
    
    4.04
    %
    
    
    
    $
    283,675
    
    
    4.16
    %
    
    
    
    $
    234,418
    
    
    4.39
    %**Other
      Balances**Cash
      and due from banks
    
    $
    1,180,375
    
    
    
    
    
    
    
    $
    1,223,722
    
    
    
    
    
    
    
    $
    1,007,182Other
      assets
    
    
    1,625,412
    
    
    
    
    
    
    
    
    1,522,258
    
    
    
    
    
    
    
    
    1,129,880Total
      assets
    
    
    31,096,724
    
    
    
    
    
    
    
    
    29,725,307
    
    
    
    
    
    
    
    
    23,491,544Total
      deposits
    
    
    28,220,513
    
    
    
    
    
    
    
    
    27,105,818
    
    
    
    
    
    
    
    
    21,478,730Demand
      deposits (noninterest-
      bearing)
    
    
    6,389,623
    
    
    
    
    
    
    
    
    6,107,044
    
    
    
    
    
    
    
    
    4,600,711Other
      liabilities
    
    
    256,677
    
    
    
    
    
    
    
    
    248,762
    
    
    
    
    
    
    
    
    253,890Stockholders'
      equity
    
    
    1,716,311
    
    
    
    
    
    
    
    
    1,625,654
    
    
    
    
    
    
    
    
    1,384,178





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.










17





**Noninterest
Income**





Noninterest
income totaled $103.7 million for the first quarter of 2005, an increase of
$17.5 million or 20% from $86.2 million in the first quarter of 2004. Deposit
charges and service fees increased $14.5 million, or 32%, during the first
quarter of 2005 as compared to the same period in 2004, primarily due to the
Company’s growth in deposits. Other operating income, which includes the
Company’s insurance and capital markets divisions, increased by $2.3 million, or
6%. The increase in other operating income in more fully depicted in the
following chart (in thousands).




**Three
      Months Ended****March
      31,****2005**
    
    **2004**Other
      operating income:Insurance
    
    $
    19,789
    
    $
    18,336Capital
      Markets
    
    
    6,441
    
    
    9,727Loan
      brokerage fees
    
    
    2,759
    
    
    3,053Other
    
    
    13,628
    
    
    9,211Total
      other
    
    $
    42,617
    
    $
    40,327






Commerce
Capital Markets, Inc. (CCMI) revenues decreased $3.3 million, or 34%, during the
first quarter of 2005 as compared to the same period in 2004, which was related
in part to the Company’s decision to exit the negotiated government public
finance business during the third quarter of 2004 as well as decreased municipal
trading results. All other operating income increased $4.4 million, or 48%,
primarily due to increased gains on sale of SBA loans, letter of credit fees,
revenues generated by the Company’s leasing division and income from
other investments.





**Noninterest
Expense**





For
the first quarter of 2005, noninterest expense totaled $258.4 million, an
increase of $46.2 million, or 22%, over the same period in 2004. Contributing to
this increase was new store activity over the past twelve months, with the
number of stores increasing from 278 at March 31, 2004 to 319 at March 31, 2005.
With the addition of these new offices, staff, facilities, and related expenses
rose accordingly.





Other
noninterest expense increased $10.7 million, or 25%, over the first quarter of
2004. The increase in other noninterest expense is depicted in the following
chart (in thousands).




**Three
      Months Ended****March
      31,****2005**
    
    **2004**Other
      noninterest expense:Business
      development costs
    
    $
    7,115
    
    $
    5,996Bank-card
      related service charges
    
    
    10,914
    
    
    7,523Professional
      services/Insurance
    
    
    9,786
    
    
    7,357Provisions
      for non-credit-related losses
    
    
    7,672
    
    
    5,403Other
    
    
    18,221
    
    
    16,726Total
      other
    
    $
    53,708
    
    $
    43,005




The
growth in business development costs, bank-card related service charges and
non-credit-related losses, which includes fraud and forgery losses on deposit
and other non-credit related items, was due to the Company’s growth in new
stores and customer accounts. The growth in professional services and insurance
expense was primarily attributable to increased consulting and insurance costs
related to the Company’s overall growth.





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 67.70% for the first three months of 2005 as compared
to 67.12% for the same 2004 period. The Company's efficiency ratio remains above
its peer group primarily due to its aggressive growth expansion activities.











18





**Loan
and Asset Quality**





Total
non-performing assets (non-performing loans and other real estate, excluding
loans past due 90 days or more and still accruing interest) at March 31, 2005
were $32.8 million, or 0.10% of total assets compared to $33.5 million or 0.11%
of total assets at December 31, 2004 and $32.4 million or 0.13% of total assets
at March 31, 2004.





Total
non-performing loans (non-accrual loans and restructured loans, excluding loans
past due 90 days or more and still accruing interest) at March 31, 2005 were
$32.0 million or 0.32% of total loans compared to $32.8 million or 0.35% of
total loans at December 31, 2004 and $30.5 million or 0.39% of total loans at
March 31, 2004. At March 31, 2005, loans past due 90 days or more and still
accruing interest amounted to $233 thousand compared to $602 thousand at
December 31, 2004 and $696 thousand at March 31, 2004. Additional loans
considered as potential problem loans by the Company's internal loan review
department ($34.7 million at March 31, 2005, compared to $37.7 million at
December 31, 2004 and $35.8 million at March 31, 2004) have been evaluated as to
risk exposure in determining the adequacy of the allowance for loan losses.





During
the first quarter of 2005, consumer non-accrual loans decreased by $1.4 million,
which primarily related to a partial charge-off on one loan for $550 thousand
and two smaller loans for approximately $600 thousand that were paid off during
the quarter. The decrease in consumer non-accrual loans led to the overall
decrease in non-performing assets during the first three months of 2005. The
overall asset quality of the Company, as measured in terms of non-performing
assets to total assets, coverage ratios and non-performing assets to
stockholders’ equity, remained strong.








19





The
following summary presents information regarding non-performing loans and assets
as of March 31, 2005 and the preceding four quarters (dollar amounts in
thousands).





**March
      31,**
      **2005**
    
    **December
      31,**
      **2004**
    
    **September
      30,**
      **2004**
    
    **June
      30,**
      **2004**
    
    **March
      31,**
      **2004**Non-accrual
      loans:Commercial
    
    $
    18,376
    
    $
    17,874
    
    $
    22,647
    
    $
    17,382
    
    $
    19,701Consumer
    
    
    8,723
    
    
    10,138
    
    
    9,784
    
    
    11,675
    
    
    9,984Real
      estate:Construction
    
    
    178Mortgage
    
    
    1,290
    
    
    1,317
    
    
    1,251
    
    
    675
    
    
    810Total
      non-accrual loans
    
    
    28,567
    
    
    29,329
    
    
    33,682
    
    
    29,732
    
    
    30,495Restructured
      loans:Commercial
    
    
    3,422
    
    
    3,518
    
    
    3,614
    
    
    1
    
    
    1Total
      restructured loans
    
    
    3,422
    
    
    3,518
    
    
    3,614
    
    
    1
    
    
    1Total
      non-performing loans
    
    
    31,989
    
    
    32,847
    
    
    37,296
    
    
    29,733
    
    
    30,496Other
      real estate
    
    
    777
    
    
    626
    
    
    972
    
    
    653
    
    
    1,890Total
      non-performing assets
    
    
    32,766
    
    
    33,473
    
    
    38,268
    
    
    30,386
    
    
    32,386Loans
      past due 90 days or moreand
      still accruing
    
    
    233
    
    
    602
    
    
    614
    
    
    318
    
    
    696Total
      non-performing assets andloans
      past due 90 days or more
    
    $
    32,999
    
    $
    34,075
    
    $
    38,882
    
    $
    30,704
    
    $
    33,082Total
      non-performing loans as apercentage
      of total period-end loans
    
    
    0.32
    %
    
    0.35
    %
    
    0.42
    %
    
    0.36
    %
    
    0.39
    %Total
      non-performing assets as apercentage
      of total period-end assets
    
    
    0.10
    %
    
    0.11
    %
    
    0.13
    %
    
    0.11
    %
    
    0.13
    %Total
      non-performing assets and loanspast
      due 90 days or more as apercentage
      of total period-end assets
    
    
    0.10
    %
    
    0.11
    %
    
    0.14
    %
    
    0.11
    %
    
    0.13
    %Allowance
      for loan losses as a percentageof
      total non-performing loans
    
    
    435
    %
    
    413
    %
    
    353
    %
    
    419
    %
    
    385
    %Allowance
      for loan losses as a percentageof
      total period-end loans
    
    
    1.40
    %
    
    1.43
    %
    
    1.48
    %
    
    1.50
    %
    
    1.51
    %Total
      non-performing assets and loanspast
      due 90 days or more as apercentage
      of stockholders' equity andallowance
      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 (in thousands):





**Three
      Months Ended**
    
    **Year
      Ended****March
      31,**
    
    **December
      31,****2005**
    
    **2004**
    
    **2004**Balance
      at beginning of period
    
    $
    135,620
    
    $
    112,057
    
    $
    112,057Provisions
      charged to operating expenses
    
    
    6,250
    
    
    9,500
    
    
    39,238141,870
    
    
    121,557
    
    
    151,295Recoveries
      of loans previously charged-off:Commercial
    
    
    651
    
    
    156
    
    
    1,000Consumer
    
    
    833
    
    
    270
    
    
    1,123Commercial
      real estate
    
    
    50
    
    
    47
    
    
    52Total
      recoveries
    
    
    1,534
    
    
    473
    
    
    2,175Loans
      charged-off:Commercial
    
    
    (2,602
    )
    
    (2,293
    )
    
    (9,416
    )Consumer
    
    
    (1,487
    )
    
    (772
    )
    
    (6,733
    )Commercial
      real estate
    
    
    (26
    )
    
    (1,636
    )
    
    (1,701
    )Total
      charge-offs
    
    
    (4,115
    )
    
    (4,701
    )
    
    (17,850
    )Net
      charge-offs
    
    
    (2,581
    )
    
    (4,228
    )
    
    (15,675
    )Balance
      at end of period
    
    $
    139,289
    
    $
    117,329
    
    $
    135,620Net
      charge-offs as a percentage of average loans outstanding
    
    
    0.11
    %
    
    0.22
    %
    
    0.19
    %Net
      Reserve Additions
    
    $
    3,669
    
    $
    5,272
    
    $
    23,563





Net
charge-offs as a percentage of average loans outstanding during the first three
months of 2005 decreased to 0.11% as compared to 0.22% for the same period in
2004. This decrease was primarily attributable to an increase in total
recoveries of loans previously charged-off of $1.1 million. Also contributing to
the decrease in net charge-offs as a percentage of average loans oustanding was
a slight decrease in total charge-offs. Commercial and consumer loan charge-offs
increased by $1.0 million during the first three months of 2005 which were
offset by a decrease in commercial real estate charge-offs of $1.6 million.
Commercial real estate charge-offs during the first three months of 2004
reflected one large credit for $1.6 million. The net reserve additions for the
first three months of 2005 were reflective of the overall credit quality of the
Company’s loan portfolio.





The
Company considers the allowance for loan losses of $139.3 million adequate to
cover probable losses inherent in the loan portfolio at March 31, 2005. The
allowance for loan losses is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. The level of the allowance is
based on an evaluation of individual large classified loans and nonaccrual
loans, the Company’s historical loss experience and the risk characteristics
included in the loan portfolio. While the allowance for loan losses is
maintained at a level considered to be adequate by management for estimated
losses in the loan portfolio, determination of the allowance is inherently
subjective, as it requires estimates that 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; the ability to
maintain the growth and further development of the Company’s community-based
retail branching network; unanticipated regulatory or judicial proceedings;
changes in consumer spending and saving habits; and the 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 cautions that any such forward-looking statements are not guarantees
of future performance and involve known and unknown risks, uncertainties and
other factors which may cause the Company’s actual results, performance or
achievements to differ materially from the future results, performance or
achievements the Company has anticipated in such forward-looking statements. You
should note that many factors, some of which are discussed in this Form 10-Q
could affect the Company’s future financial results and could cause those
results to differ materially from those expressed or implied in the Company’s
forward-looking statements contained or incorporated by reference in this
document. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.








**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.








22





**Item
4.** **Controls and Procedures**





**Quarterly
evaluation of the Company's Disclosure Controls and Internal
Controls** .
As of the end of the period covered by this quarterly report, the Company has
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO").





**Limitations
on the Effectiveness of Controls** .
The Company's management, including the CEO and CFO, does not expect that its
Disclosure Controls or its "internal controls and procedures for financial
reporting" ("Internal Controls") will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. The
Company conducts periodic evaluations of its internal controls to enhance, where
necessary, its procedures and controls.





**Conclusions.** Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject
to the limitations noted above, the Disclosure Controls are effective in
reaching a reasonable level of assurance that management is timely alerted to
material information relating to the Company during the period when its periodic
reports are being prepared.





During
the quarter ended March 31, 2005, there has not occurred any 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**





During
July and August 2004, six 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. All class action complaints have been
consolidated in the United States District Court for the District of New Jersey,
Camden Division. As a result of the consolidation, a single consolidated
complaint has been filed. It alleges that the defendants violated federal
securities laws, specifically Sections 10(b) and 20(a) of the Securities 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 these class
action complaints are without merit. No accrual for a loss contingency has been
recorded, as the risk of loss is considered remote.





Other
than routine litigation arising in the normal course of business, the Company
and its subsidiaries are not parties to any other material
litigation.








23





**Item 2.**  **Purchases
of Certain Equity Securities by the Issuer and Affiliated
Purchasers**





(a)
    
    (b)
    
    (c)
    
    (d)Period
    
    Total
      Number of Shares Purchased (1)
    
    Average
      Price Paid per Share
    
    Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
    
    Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or
      ProgramsJanuary
      1 to January 31, 2005
    
    
    43,298
    
    $
    32.23February
      1 to February 28, 2005March
      1 to March 31, 2005Total
    
    
    43,298
    
    $
    32.23





(1)
Purchases were made by the Company for the payment of income taxes on the
exercise of stock options by an executive officer.





**Item
6.**  **Exhibits**





ExhibitsExhibit
      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.








24





**SIGNATURES**





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.










COMMERCE
      BANCORP, INC.(Registrant)








May
      9, 2005
    /s/
      DOUGLAS J. PAULS(Date)
    DOUGLAS
      J. PAULSSENIOR
      VICE PRESIDENT ANDCHIEF
      FINANCIAL OFFICER(PRINCIPAL
      FINANCIAL AND ACCOUNTING OFFICER)