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 quarter ended June 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File 333-78445
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PENNSYLVANIA COMMERCE BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1834776
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599
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(Address of principal executive offices)
(717) 975-5630
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
1,992,037 Common shares outstanding at 07/31/02
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Transitional Small Business Disclosure Format (check one): Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)..............................3
June 30, 2002, and December 31, 2001
Consolidated Statements of Income (Unaudited)........................4
Three months ended June 30, 2002 and June 30, 2001
Six months ended June 30, 2002 and June 30, 2001
Consolidated Statements of Stockholders' Equity (Unaudited)........5
Six months ended June 30, 2002 and June 30, 2001
Consolidated Statements of Cash Flows (Unaudited)....................6
Six months ended June 30, 2002, and June 30, 2001
Notes to Consolidated Financial Statements (Unaudited)...............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 2. Changes in Securities and Use of Proceeds...........................21
Item 3. Defaults Upon Senior Securities.....................................21
Item 4. Submission of Matters to a Vote of Securities Holders...............21
Item 5. Other Information...................................................21
Item 6a. Exhibits
Exhibit 11 & 99.....................................................21
Item 6b. Reports on Form 8-K.................................................21
Signatures..........................................................24
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
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June 30, December 31,
( in thousands, except share amounts) 2002 2001
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Assets Cash and due from banks $ 21,078 $ 21,555
Federal funds sold 12,875 4,300
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Cash and cash equivalents 33,953 25,855
Securities, available for sale at fair value 132,065 107,315
Securities, held to maturity at cost
(fair value 2002: $121,609; 2001: $102,427 ) 120,358 103,349
Loans, held for sale
(fair value 2002: $2,986; 2001: $7,733 ) 2,968 7,661
Loans receivable :
Real estate:
Commercial mortgage 148,551 142,969
Construction and land development 31,644 32,863
Residential mortgage 60,836 48,415
Tax-exempt 3,372 2,676
Commercial business 48,435 42,399
Consumer 32,335 36,551
Lines of credit 34,900 36,801
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360,073 342,674
Less: Allowance for loan losses 4,965 4,544
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Net loans receivable 355,108 338,130
Premises and equipment, net 23,559 21,587
Accrued interest receivable 3,869 3,542
Other assets 2,202 2,451
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Total assets $ 674,082 $ 609,890
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Liabilities Deposits :
Noninterest-bearing $ 121,595 $ 105,171
Interest-bearing 496,883 456,567
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Total deposits 618,478 561,738
Accrued interest payable 716 837
Other liabilities 2,971 1,722
Long term debt 13,000 13,000
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Total liabilities 635,165 577,297
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Stockholders' Preferred stock - Series A noncumulative; $10.00 par value
Equity 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
issued and outstanding - 2002: 1,992,037; 2001: 1,881,960 1,992 1,882
Surplus 27,585 25,263
Retained earnings 7,739 5,159
Accumulated other comprehensive income (loss) 1,201 (111)
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Total stockholders' equity 38,917 32,593
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Total liabilities and stockholders' equity $ 674,082 $ 609,890
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See accompanying notes.
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unadutied)
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Three Months Six Months
Ended June 30, Ended June 30,
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(in thousands, except per share amounts) 2002 2001 2002 2001
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Interest Loans receivable, including fees:
Income Taxable $ 6,599 $ 6,627 $ 13,199 $ 13,110
Tax - exempt 19 33 41 70
Securities :
Taxable 3,614 2,702 6,759 5,009
Tax - exempt 27 26 54 40
Federal funds sold 83 101 162 403
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Total interest income 10,342 9,489 20,215 18,632
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Interest Deposits 3,262 3,899 6,498 8,068
Expense Other borrowed money 0 11 0 11
Long-term debt 337 139 676 277
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Total interest expense 3,599 4,049 7,174 8,356
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Net interest income 6,743 5,440 13,041 10,276
Provision for loan losses 280 315 715 600
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Net interest income after
provision for loan losses 6,463 5,125 12,326 9,676
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Noninterest Service charges and other fees 1,564 1,417 3,128 2,762
Income Other operating income 127 119 254 245
Gain on sale of securities available for sale 0 0 0 52
Gain on sale of loans 57 58 189 262
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Total noninterest income 1,748 1,594 3,571 3,321
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Noninterest Salaries and employee benefits 2,916 2,434 5,582 4,732
Expenses Occupancy 559 551 1,086 1,066
Furniture and equipment 359 369 706 708
Advertising and marketing 586 390 1,173 780
Data processing 523 311 949 622
Postage and supplies 203 198 412 410
Audits , regulatory fees and assessments 109 98 218 197
Other 927 767 1,803 1,497
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Total noninterest expenses 6,182 5,118 11,929 10,012
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Income before income taxes 2,029 1,601 3,968 2,985
Provision for federal income taxes 682 533 1,331 994
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Net income $ 1,347 $ 1,068 $ 2,637 $ 1,991
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Net income per common share : Basic $ 0.68 $ 0.56 $ 1.35 $ 1.05
Diluted 0.61 0.51 1.21 0.96
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See accompanying notes.
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
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Balance : December 31, 2000 $ 400 $ 1,749 $ 20,861 $ 4,334 $ (676) $ 26,668
Comprehensive income:
Net income - - - 1,991 - 1,991
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 528 528
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Total comprehensive income 2,519
Dividends declared on preferred stock - - - (40) - (40)
Common stock issued under stock option plans - 12 93 - - 105
Income tax benefit of stock options exercised - - 69 - - 69
Common stock issued under employee stock purchase plan - - 6 - - 6
Proceeds from issuance of common stock in connection
with dividend reinvestment and stock purchase plan - 5 166 - - 171
Other - - 12 (12) - -
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June 30, 2001 $ 400 $ 1,766 $ 21,207 $ 6,273 $ (148) $ 29,498
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
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Balance : December 31, 2001 $ 400 $ 1,882 $ 25,263 $ 5,159 $ (111) $ 32,593
Comprehensive income:
Net income - - - 2,637 - 2,637
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 1,312 1,312
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Total comprehensive income 3,949
Dividends declared on preferred stock - - - (40) - (40)
Common stock issued under stock option plans - 96 1,409 - - 1,505
Income tax benefit of stock options exercised - - 292 - - 292
Common stock issued under employee stock purchase plan - - 15 - - 15
Proceeds from issuance of common stock in connection
with dividend reinvestment and stock purchase plan - 14 589 - - 603
Other - - 17 (17) - -
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June 30, 2002 $ 400 $ 1,992 $ 27,585 $ 7,739 $ 1,201 $ 38,917
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See accompanying notes.
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended
June 30,
( in thousands ) 2002 2001
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Operating
Activities Net income $ 2,637 $ 1,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 715 600
Provision for depreciation and amortization 709 707
Deferred income taxes (110) (181)
Amortization of securities premiums and accretion of discounts, net 300 107
Net gain on sale of securities available for sale 0 (52)
Proceeds from sale of loans 22,746 29,772
Loans originated for sale (17,861) (32,124)
Gain on sales of loans (189) (262)
Stock granted under stock purchase plan 15 6
(Increase) decrease in accrued interest receivable and other assets (344) (380)
Increase in accrued interest payable and other liabilities 1,128 328
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Net cash provided by operating activities 9,746 512
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 12,039 5,823
Purchases (29,124) (49,138)
Securities available for sale :
Proceeds from principal repayments and maturities 21,119 15,859
Proceeds from sales 0 7,497
Purchases (44,106) (21,326)
Proceeds from sale of loans receivable 0 3,255
Net increase in loans receivable (17,693) (21,828)
Purchases of premises and equipment (2,681) (2,236)
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Net cash (used) by investing activities (60,446) (62,094)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 57,666 42,084
Net increase (decrease) in time deposits (926) 2,701
Proceeds from common stock options exercised 1,505 105
Proceeds from common stock purchase and dividend reinvestment plans 603 171
Cash dividends on preferred stock and cash in lieu of fractional shares (50) (40)
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Net cash provided by financing activities 58,798 45,021
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Increase (decrease) in cash and cash equivalents 8,098 (16,561)
Cash and cash equivalents at beginning of year 25,855 39,649
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Cash and cash equivalents at end of period $ 33,953 $23,088
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See accompanying notes.
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries
Commerce Bank/Harrisburg, N.A. ("the Bank"), Commerce Capital Harrisburg Trust
I, and Commerce Capital Harrisburg Trust II. All material intercompany accounts
and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the six-month period ended June 30,
2002, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
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 the annual report and Form 10-K
and the exhibits thereto), 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
policy, including interest rate policies of the Board of the Federal Reserve
System; inflation; interest rate, 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 and vice versa; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities, and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
7
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company. For further information, refer to the financial
statements and footnotes thereto included in the Pennsylvania Commerce Bancorp,
Inc., Annual Report for the year ended December 31, 2001.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 30, 2002, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 25, 2002, to stockholders of record
on February 11, 2002. Payment of the stock dividend resulted in the issuance of
89,805 additional common shares and cash of $9,870 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
2001.
Recently Issued FASB Statements
In July of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations", which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the Company on January 1, 2003.
Adoption of this statement will not have a material impact on the Company's
financial condition or results of operations.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Future Branch Facilities
The Company entered into a land lease for the premises located in front of the
Camp Hill Mall at 32nd Street and Trindle Road in the Borough of Camp Hill,
Cumberland County, Pennsylvania. The land lease commenced in April 2002 with a
term of 20 years and annual rent payments began in August 2002. Rent is subject
to change on terms set forth in the lease agreement. Commerce subsequently
opened this branch for business on August 3, 2002.
8
The Bank leases office space at 4 Lemoyne Drive, Suite 100, Lemoyne,
Pennsylvania. The lease for 1,885 square feet commenced October 1, 1998, with an
initial term of 2 years and year-to year renewal options. In June 2002, the Bank
exercised its option to renew for a third 1-year renewal period beginning
October 1, 2002 and ending on September 30, 2003.
Note 4. COMPREHENSIVE INCOME
Comprehensive income for the Company consists of net income and unrealized gains
or losses on available for sale and securities and is presented in the
consolidated statement of stockholders' equity. Unrealized securities gains or
losses and the related tax impact included in comprehensive income are as
follows:
Three Months Ended June30, Six Months Ended June 30,
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2002 2001 2002 2001
-------------- --------------- ------------- --------------
Unrealized holding gains
(losses) on available for
sale securities occurring
during the period $2,495 ($33) $1,988 $852
Reclassification adjustment for
gains included in net
income 0 0 0 (52)
-------------- --------------- ------------- --------------
Net Unrealized Gains (Losses) 2,495 (33) 1,988 800
Tax effect (848) 11 (676) (272)
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Net of Tax Other Comprehensive
Income (Loss) $1,647 ($22) $1,312 $528
============== =============== ============= ==============
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of income. This section should be read in conjunction with the
Company's financial statements and accompanying notes.
OVERVIEW
Net income for the quarter increased 26% to $1.3 million as compared to $1.1
million for the second quarter of 2001 and total revenues (net interest income
plus noninterest income) increased by 21% to $8.5 million for the quarter.
Diluted net income per common share increased 20% to $0.61 from $0.51 per share
in the second quarter a year ago (after adjusting for a 5% common stock dividend
paid in February 2002). At June 30, 2002, the Company had total assets of $674.1
million, total loans (including loans held for sale) of $363.0 million, and
total deposits of $618.5 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $617.2 million for the second quarter of 2002
as compared to $484.8 million for the same period in 2001. Approximately $48.8
million, or 37%, of this increase was in average loans outstanding and $83.6
million, or 63%, was in average investment securities and federal funds sold.
The yield on earning assets for the second quarter of 2002 was 6.72%, a decrease
of 113 basis points (bps) from the comparable period in 2001. This decrease was
mainly the result of eleven decreases in short-term interest rates totaling 475
bps by the Federal Reserve Board during 2001.
The growth in interest earning assets was funded primarily by an increase in the
average balance of deposits of $104.6 million. Interest-bearing liabilities
increased from $399.6 million during the second quarter of 2001 to $511.1
million during the second quarter of 2002. Average savings deposits increased
$56.5 million over second quarter a year ago, average public funds deposits
increased $48.2 million and average non-interest bearing demand deposits
increased by $20.3 million. Average time deposits decreased $13.6 million during
the quarter as compared to the second quarter one year ago.
The average rate paid on these liabilities for the second quarter of 2002 was
2.82%, a decrease of 124 basis points from the comparable period in 2001. The
Company's aggregate cost of funding sources was 2.34% for the second quarter of
2002, a decrease of 101 basis points from the prior year. This is the result of
10
a decrease in the average rates paid on all interest bearing deposits partially
offset by the issuance of $8.0 million of long-term debt in September 2001,
which bears interest at a higher rate than the Company's deposits.
Interest earning assets for the first six months averaged $598.4 versus $472.4
million for the comparable period in 2001. The yield on earning assets decreased
to 6.79% during the first half of 2002, from 7.95% for the first half of 2001.
The level of average interest-bearing liabilities increased from $393.3 million
for the first half of 2001 to $496.9 million for the first six months of 2002.
The Company's cost of funds for the first half of 2002 was 2.42%, down 115 basis
points from 3.57% for the comparable period in the prior year.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities. Liabilities used to fund
such assets include deposits, borrowed funds, and long-term debt. Changes in net
interest income and margin result from the interaction between the volume and
composition of earning assets, related yields and associated funding costs.
Interest income increased by $853,000, or 9%, over the second quarter of 2001.
Interest expense for the second quarter of 2002 decreased by $450,000, or 11%,
compared to the second quarter of 2001.
Net interest income for the second quarter of 2002 increased by $1.3 million, or
24%, over the same period in 2001. Changes in net interest income are frequently
measured by two statistics: net interest rate spread and net interest margin.
Net interest rate spread is the difference between the average rate earned on
earning assets and the average rate incurred on interest-bearing liabilities.
Net interest margin represents the difference between interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. The Company's net interest rate spread was 3.90% during the
second quarter of 2002 compared to 3.79% during the same period of the previous
year. The net interest margin decreased by 12 basis points from 4.50% for the
second quarter 2001 to 4.38% during the second quarter of 2002.
For the first six months ended June 30, 2002, interest income increased by $1.6
million, or 9%, over the same period in 2001. Interest expense for the first six
months of 2002 totaled $7.2 million, a decrease of $1.2 million, or 14%, from
the first six months of 2001.
Net interest income for the first six months of 2002 increased by $2.8 million,
or 27%, over the same period in 2001. The Company's net interest margin
increased from 4.36% for the first six months of 2001 to 4.37% for the first
half of 2002.
Noninterest Income
Noninterest income for the second quarter of 2002 increased by $154,000, or 10%,
over the same period in 2001. The increase is attributable to service charges
11
and fees associated with servicing a higher volume of deposit accounts and
transactions.
Included in noninterest income for the first six months of 2002 is nonrecurring
income of $95,000, as a result of a gain on the sale of student loans. Included
in noninterest income for the first six months of 2001 is nonrecurring income of
$233,000, comprised of a $102,000 gain on the sale of student loans, a $79,000
gain from the sale of Small Business Administration loans, and a $52,000 gain on
sale of securities available for sale. Excluding these transactions, recurring
core noninterest income for the first six months of 2002 totaled $3.5 million as
compared to $3.1 million for the first half of 2001, an increase of 13%. The
increase is mainly attributable to additional service charges and fees
associated with servicing a higher volume of deposit accounts and transactions.
Noninterest Expenses
For the second quarter of 2002, noninterest expenses increased by $1.1 million,
or 21%, over the same period in 2001. Staffing levels and related expenses
increased as a result of servicing more deposit and loan customers and
processing a higher volume of transactions. Staffing and occupancy expenses also
increased as a result of opening two additional branch offices, one each in
October 2001 and June 2002, respectively. In addition, staffing and occupancy
expenses increased in preparation for the August opening of the Trindle Road
branch in Camp Hill, Pennsylvania. A comparison of noninterest expense for
certain categories for the three months ended June 30, 2002, and June 30, 2001,
is presented in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $482,000, or 20%, for the second quarter of
2002 over the second quarter of 2001. This increase is consistent with increases
in staff levels necessary to handle Company growth from second quarter 2001 to
second quarter 2002, including the additional staff of the branch offices opened
in October 2001 and June 2002.
Occupancy expenses of $559,000 were $8,000 higher for the second quarter of 2002
than for the three months ended June 30, 2001. Increased occupancy expenses
primarily are a result of the two branch offices opened in October 2001 and June
2002 offset by rental income earned at the downtown Harrisburg location.
Advertising and marketing expenses totaled $586,000 for the three months ended
June 30, 2002, an increase of $196,000, or 50% from the second quarter of 2001.
This increase was primarily the result of increased advertising efforts in each
of the Company's markets along with grand opening celebrations at the newly
opened branches in Red Lion, PA and downtown Harrisburg. The Company's markets
will continue to expand as the branch network grows.
Data processing expenses of $523,000 were $212,000, or 68%, higher in the second
quarter of 2002 than the three months ended June 30, 2001. The increase was due
to a combination of increased costs associated with processing additional
transactions (due to growth in number of accounts) and an increase in data
processing support costs. Also, during the second quarter 2002, Commerce
converted its check statement processing function to an image system as an added
convenience for customers. The increased data processing costs to implement this
system are expected to result in lower supplies expense and postage expense in
the future that would have been incurred with continued paper checking statement
processing.
Audits and regulatory fees increased by $11,000, or 11%, from $98,000 for the
second quarter of 2001 to $109,000 for the second quarter of 2002. This increase
is a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of
the Comptroller of the Currency (OCC) assessments. Both assessment calculations,
which are based upon deposit size, continue to increase as the Company's deposit
balances grow.
12
Other noninterest expenses increased by $160,000, or 21%, for the three-month
period ended June 30, 2002, as compared to the same period in 2001. Components
of the increase include telephone services for new branch locations, increase in
volume and service costs of coin and currency delivery, higher loan expenses due
to an increase in loan volume, higher provisions for non-credit related losses,
an increase in Pennsylvania Shares Tax which is based on the Bank's equity, and
increased insurance costs offset by a decrease in checkbook printing costs.
For the first six months of 2001, total noninterest expenses increased by $1.9
million, or 19% over the comparable period in 2001. A comparison of noninterest
expense for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $850,000, or 18%, over the
first six months of 2001. The increase was due to normal increases and
additional salary and benefits costs due to and increase in the level of
full-time equivalent employees from 316 at June 30, 2001 to 350 at June 30, 2002
as well as the addition of new staff to operate the new branches opened in
October 2001 and June 2002.
Data processing expenses increased $327,000 or 53%, for the first six months of
2002 as compared to the first six months of 2001. The increase is the result of
higher data processing support costs and processing higher volumes of customer
transactions.
Audit and regulatory fees increased by $21,000, or 11%, for the first six months
of 2002 over the same period in 2001. This increase is a result of higher
Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller
of the Currency (OCC) assessments, both of which are calculated on levels of
deposits.
Other noninterest expenses for the first six months of 2002 were $1.8 million
compared to $1.5 million for the similar period in 2001. Components of the
increase include telephone services for new branch locations, increase in volume
and service costs of coin and currency delivery, higher loan expenses due to an
increase in loan volume, higher provisions for non-credit related losses, an
increase in Pennsylvania Shares Tax which is based on the Bank's equity, and
increased insurance costs offset by a decrease in checkbook printing costs.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding foreclosed real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio equaled 2.66% for the three months ended June 30, 2002, less than the
2.70% reported for the three months ended June 30, 2001, and 2.64% for the six
months of 2002 compared to 2.74% for the first half of 2001. Another
productivity measure is the operating efficiency ratio. This ratio expresses the
relationship of noninterest expenses (excluding foreclosed real estate expenses)
to net interest income plus noninterest income (excluding nonrecurring gains).
For the quarter ended June 30, 2002, the operating efficiency ratio was 72.4%,
compared to 72.7% for the similar period in 2001. For the six months ended June
30, 2002, this ratio was 71.9% compared to 74.9% for the six months ended June
30, 2001.
Provision for Federal Income Taxes
The provision for federal income taxes was $682,000 for the second quarter of
13
2002 as compared to $533,000 for the same period in 2001. For the six months
ended June 30, the provision was $1.3 million and $1.0 million for 2002 and
2001, respectively. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 33.5% for the first six months of
2002 and 33.3% for the same period in 2001.
Net Income and Net Income Per Share
Net income for the second quarter of 2002 was $1.3 million, an increase of
$279,000, or 26%, over the $1.1 million recorded in the second quarter of 2001.
The increase was due to an increase in net interest income of $1.3 million, an
increase in noninterest income of $154,000, offset partially by an increase in
noninterest expenses of $1.1 million, a decrease of $35,000 in the provision for
loan losses, and an increase of $149,000 in the provision for income taxes.
Net income for the first six months of 2002 was $2.6 million as compared to $2.0
million recorded in the first six months of 2001.The increase was due to an
increase in net interest income of $2.8 million, an increase in noninterest
income of $250,000, offset partially by an increase in noninterest expenses of
$1.9 million, an increase of $115,000 in the provision for loan losses, and an
increase of $337,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2002, increased 29% to $1.35 per common share for the first six
months of 2002 compared to $1.05 for the same period in 2001. Diluted earnings
per common share were $1.21 for the first six months of 2002 and $0.96 for the
same period in 2001, an increase of 26%.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the second quarter of
2002 and second quarter of 2001 was 0.82%. The ROA for the first six months of
2002 and 2001 was 0.83% and 0.79%, respectively. For purposes of calculating
ROA, average assets have been adjusted to exclude gross unrealized appreciation
or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the second quarter of 2002 was
14.57%, as compared to 14.85% for the second quarter of 2001. The annualized ROE
for the first six months of 2002 was 15.01%, as compared to 14.24% for the first
six months of 2001.
FINANCIAL CONDITION
Securities
During the first six months of 2002, securities available for sale increased by
$24.8 million (net of unrealized appreciation) from $107.3 million at December
31, 2001 to $132.1 million at June 30, 2002. This resulted from the purchase of
$44.1 million in securities, partially offset by $21.1 million in principal
repayments.
14
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, AAA CMO
securities, corporate debt, and equity securities. The weighted average life of
the securities available for sale portfolio was 5.0 years at June 30, 2002 with
a weighted average yield of 6.22%.
During the first six months of 2002, securities held to maturity increased from
$103.3 million to $120.4 million primarily as a result of the purchase of $29.1
million in securities, offset by principal repayments of $12.0 million. The
securities held in this portfolio include U.S. Government agency securities,
tax-exempt municipal bonds, AAA CMO securities, corporate debt securities, and
mortgage-backed securities. The weighted average life of the securities held to
maturity portfolio was 7.8 years at June 30, 2002 with a weighted average yield
of 6.32%.
Federal funds sold increased by $8.6 million during the first six months of
2002. Total securities and federal funds sold aggregated $265.3 million at June
30, 2002, and represented 39% of total assets.
The average yield on the combined securities portfolio for the first six months
of 2002 was 6.14%, as compared to 6.73% for the similar period of 2001. The
average yield earned on federal funds sold during the first six months of 2002
was 1.66%, down 353 basis points from 5.19% earned during the first six months
of 2001. The decrease in the yield in the investment securities portfolio and on
federal funds sold is a result of eleven decreases in short-term interest rates
by the Federal Reserve Bank for a total of 475 bps between January 1, 2001 and
December 31, 2001.
Loans Held for Sale
Loans held for sale are comprised of student loans, Small Business
Administration loans, and residential mortgage loans, which the Company
originates with the intention of selling in the future. During the first six
months of 2002, total loans held for sale decreased by $4.7 million, from $7.7
million at December 31, 2001 to $3.0 million at June 30, 2002. The change was
the result of the sale of $6.3 million of student loans and the sale of $16.3
million of residential loans, offset by originations of $17.9 million in new
loans held for sale. Loans held for sale represented 1% of total assets at
December 31, 2001 and 0.4% of total assets at June 30, 2002.
Loans Receivable
During the first six months of 2002, total loans receivable increased by $17.4
million from $342.7 million at December 31, 2001, to $360.1 million at June 30,
2002. Loans receivable represented 58% of total deposits and 53% of total assets
at June 30, 2002, as compared to 61% and 56%, respectively, at December 31,
2001.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans and foreclosed real estate,
excluding loans past due 90 days or more and still accruing interest) at June
30, 2002, were $1.3 million, or 0.20%, of total assets as compared to $888,000,
or 0.15%, of total assets at December 31, 2001. Foreclosed real estate totaled
$125,000 at June 30, 2002, and $12,000 as of December 31, 2001.
15
The summary table below presents information regarding nonperforming loans and
assets as of June 30, 2002 and 2001 and December 31, 2001.
Nonperforming Loans and Assets
- ------------------------------------------------------------------------------------------------
(dollars in thousands) June 30, December 31, June 30,
2002 2001 2001
- ------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 376 $ 127 $ 508
Consumer 74 116 126
Real estate:
Construction 0 0 0
Mortgage 757 633 805
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,207 876 1,439
Restructured loans 0 0 0
- ------------------------------------------------------------------------------------------------
Total nonperforming loans 1,207 876 1,439
Foreclosed real estate 125 12 12
- ------------------------------------------------------------------------------------------------
Total nonperforming assets 1,332 888 1,451
- ------------------------------------------------------------------------------------------------
Loans past due 90 days or more 0 0 0
- ------------------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $ 1,332 $ 888 $ 1,451
- ------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.34% 0.26% 0.47%
Nonperforming assets to total assets 0.20% 0.15% 0.27%
- ------------------------------------------------------------------------------------------------
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
- ----------------------------------------------------------------------------------------------
(dollars in thousands) 6 Months Year Ending
Ending December 31,
June 30, 2001
2002
- ----------------------------------------------------------------------------------------------
Balance at beginning of period $ 4,544 $ 3,732
Provisions charged to operating expenses 715 1,469
- ----------------------------------------------------------------------------------------------
5,259 5,201
Recoveries of loans previously charged-off:
Commercial 40 3
Consumer 1 21
Real estate 19 0
- ----------------------------------------------------------------------------------------------
Total recoveries 60 24
Loans charged-off:
Commercial 129 475
Consumer 61 85
Real estate 164 121
- ----------------------------------------------------------------------------------------------
Total charged-off 354 681
- ----------------------------------------------------------------------------------------------
Net charge-offs 294 657
- ----------------------------------------------------------------------------------------------
Balance at end of period $ 4,965 $ 4,544
- ----------------------------------------------------------------------------------------------
Net charge-offs as a percentage of
Average loans outstanding 0.08% 0.21%
- ----------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
Period-end loans 1.38% 1.33%
- ----------------------------------------------------------------------------------------------
16
Deposits
Total deposits at June 30, 2002 were $618.5 million, up $56.7 million, or 10%,
over total deposits of $561.7 million at December 31, 2001. The average balances
and weighted average rates paid on deposits for the first six months of 2002 and
2001 are presented in the following table.
- ----------------------------------------------------------------------------------------------
Six Months Ended June 30,
2002 2001
- ----------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 107,896 $ 85,493
Interest-bearing (money market 129,986 1.36% 94,635 2.64%
and checking)
Savings 183,081 2.13 130,204 3.39
Time deposits 170,788 4.36 162,865 5.75
- ----------------------------------------------------------------------------------------------
Total deposits $ 591,751 $ 473,197
- ----------------------------------------------------------------------------------------------
Interest Rate Sensitivity
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
An interest rate sensitive asset or liability is one that, within a defined
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time (GAP), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
17
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a 200 basis
point increase and a 100 basis point decrease during the next year, with rates
remaining constant in the second year.
Historically, the Company's Asset/Liability Committee (ALCO) policy has
established that income sensitivity will be considered acceptable if overall net
income volatility in a plus 200 or minus 200 basis point scenario is within 15%
of net income in a flat rate scenario in the first year and 30% using a two year
planning window. At June 30, 2002, the Company projected its interest rate risk
using a plus 200 and minus 100 basis point scenario. During 2001, the Federal
Reserve lowered short-term interest rates by 475 basis points, pushing the
Federal Funds rate down to 1.75% from 6.5% at year-end 2000, the lowest level in
over 40 years. The Company's ALCO believed it was more realistic to measure
current risk assuming a minus 100 point scenario, as a minus 200 basis point
reduction would be unlikely given that current short-term market interest rates
are already below 2.00%. At June 30, 2002, the Company's income simulation model
indicates net income would decrease 0.13% in the first year and decrease 3.62%
over a two-year time frame, respectively, if rates decreased 100 basis points.
The model projects that net income would increase by 0.25% and increase 4.67% in
the first year and over a two-year time frame, respectively, if rates increased
by 200 basis points. All of these forecasts are within an acceptable level of
interest rate risk per the policies established by ALCO. 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 200
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. The
studies have consistently confirmed management's assertion that the Company's
core deposits have stable balances over long periods of time, and are generally
insensitive to changes in interest rates. Thus, these core deposit balances
provide an internal hedge to market fluctuations in the Company's fixed rate
assets. Management believes the core deposit premiums produced by its market
value of equity model at June 30, 2002 provide an accurate assessment of the
Company's interest rate risk.
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 200
basis point increase in rates and a 100 basis point decrease in rates. The
Company's ALCO policy indicates that the level of interest rate risk is
unacceptable if the immediate change would result in the loss of 60% or more of
18
the excess of market value over book value in the current rate scenario. At June
30, 2002, the market value of equity indicates an acceptable level of interest
rate risk.
Liquidity
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Company on an ongoing basis. Liquidity needs are generally met by converting
assets into cash or obtaining sources of additional funding, mainly deposits.
Liquidity sources from asset categories are provided primarily by cash and
federal funds sold, and the cash flow from the amortizing securities and loan
portfolios. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
Additionally, the Company has established secondary sources of liquidity
consisting of federal funds lines of credit, repurchase agreements, and
borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if
needed. As of June 30, 2002, the total potential liquidity for the Company
through these secondary sources was $194 million. In view of the primary and
secondary sources as previously mentioned, management believes that the Company
is capable of meeting its anticipated liquidity needs.
Capital Adequacy
At June 30, 2002, stockholders' equity totaled $38.9 million, up 19% over
stockholders' equity of $32.6 million at December 31, 2001. Stockholders' equity
at June 30, 2002 included $1.2 million gross unrealized gains, net of income
taxes, on securities available for sale. Excluding this unrealized gains, gross
stockholders' equity increased by $5.0 million from $32.7 million at December
31, 2001, to $37.7 million at June 30, 2002 due to retained net income and the
proceeds from the stock option and stock purchase plans.
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
I, a newly formed Delaware business trust subsidiary of the Company. Proceeds of
this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the Company's
wholly owned banking subsidiary, to be used for additional capitalization
purposes. All $5.0 million of the Trust Capital Securities qualify as Tier 1
capital for regulatory capital purposes.
On September 28, 2001, the Company issued $8.0 million of 10.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
II, a newly formed Delaware business trust subsidiary of the Company. Proceeds
of this offering were downstreamed to Commerce Bank/Harrisburg, N.A., the
Company's wholly owned banking subsidiary, to be used for additional
capitalization purposes. At June 30, 2002, $7.57 million of the Trust Capital
Securities qualify as Tier 1 capital for regulatory capital purposes and the
remaining $428,000 qualifies as Tier 2 capital.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
19
The following table provides a comparison of the Company's risk-based capital
ratios and leverage ratios to the minimum regulatory requirements for the
periods indicated:
- -----------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
Under Prompt Corrective
June 30, December 31, For Capital Action Provisions
2002 2001 Adequacy Purposes
- -----------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Total 12.11% 11.78% 8.00% 10.00%
Tier 1 10.94 10.22 4.00 6.00
Leverage ratio 7.59 7.33 4.00 5.00
(to average assets)
- -----------------------------------------------------------------------------------------------------------------------------
At June 30, 2002, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis section above.
While the federal funds rate and National Prime Rate fell 475 basis points
between January 1, 2001 and December 31, 2001, the Company's net interest margin
has remained fairly stable. Commerce's net interest margin for the first half of
2002 was 4.37%, a difference of 1 basis point over 4.36% for the first half of
2001.
Currently, Commerce has 74% of its deposits in non-interest bearing, interest
checking, and saving accounts, which it considers core deposits. Because of
this, these accounts have historically contributed significantly to the net
interest margin.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Item 2. Changes in Securities and Use of Proceeds
No items to report for the quarter ending June 30, 2002.
Item 3. Defaults Upon Senior Securities
No items to report for the quarter ending June 30, 2002.
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Company's Shareholders was held on May 17, 2002. The
item of business approved by the shareholders at the annual meeting was the
election of eight directors for a one-year term. No proposals were submitted for
the election of other directors.
Item 5. Other Information
In the second quarter, Pennsylvania Commerce Bancorp, Inc. and Commerce
Bank/Harrisburg, N.A. entered into an amendment of a 1997 Network Agreement
between the Bank and Commerce Bancorp, Inc. Commerce Bancorp, Inc. is a New
Jersey bank holding company that has developed valuable trademarks and banking
operations systems. Through the Network Agreement, Pennsylvania Commerce
Bancorp, Inc. is able to use the trademarks and systems developed by Commerce
Bancorp, Inc., and its ability to do so enables it to be competitive in
Pennsylvania with larger financial institutions while maintaining its
independence as a community bank.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share...................................Exhibit 11
Certification of Chief Executive Officer and Chief Financial Officer..Exhibit 99
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
08/14/02 /s/ Gary L Nalbandian
- ------------------------- -----------------------------------------
(Date) Gary L. Nalbandian
President/CEO
08/14/02 /s/ Mark A. Zody
- ------------------------- -----------------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
22