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 March 31, 2003
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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
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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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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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:
2,134,439 Common shares outstanding at 04/30/03
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Transitional Small Business Disclosure Format (check one): Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited).........................................................3
March 31, 2003, and December 31, 2002
Consolidated Statements of Income (Unaudited)...................................................4
Three months ended March 31, 2003 and March 31, 2002
Consolidated Statements of Stockholders' Equity (Unaudited)....................................5
Three months ended March 31, 2003 and March 31, 2002
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Three months ended March 31, 2003, and March 31, 2002
Notes to Consolidated Financial Statements (Unaudited)..........................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................20
Item 4. Controls and Procedures........................................................................21
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.......................................................................................21
Item 6b. Reports on Form 8-K............................................................................22
Signatures.....................................................................................23
Certifications.................................................................................24
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
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March 31, December 31,
( in thousands, except share amounts) 2003 2002
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Assets Cash and due from banks $ 34,381 $ 30,950
Federal funds sold 11,000 44,500
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Cash and cash equivalents 45,381 75,450
Securities, available for sale at fair value 247,900 205,436
Securities, held to maturity at cost
(fair value 2003: $123,289; 2002: $101,036 ) 119,235 97,625
Loans, held for sale 6,961 10,514
Loans receivable :
Real estate:
Commercial mortgage 150,311 144,959
Construction and land development 29,387 31,034
Residential mortgage 66,017 66,190
Tax-exempt 6,481 5,629
Commercial business 51,052 49,226
Consumer 40,437 34,598
Lines of credit 39,380 37,245
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383,065 368,881
Less: Allowance for loan losses 5,434 5,146
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Net loans receivable 377,631 363,735
Restricted investments in bank stock 2,367 2,045
Premises and equipment, net 29,575 26,409
Accrued interest receivable 3,889 3,675
Other assets 2,160 1,709
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Total assets $ 835,099 $ 786,598
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Liabilities Deposits :
Noninterest-bearing $ 144,418 $ 127,199
Interest-bearing 629,941 599,756
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Total deposits 774,359 726,955
Accrued interest payable 922 832
Other liabilities 2,339 2,999
Long term debt 13,000 13,000
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Total liabilities 790,620 743,786
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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 - 2003: 2,133,768; 2002: 2,117,089 2,134 2,117
Surplus 32,311 31,909
Retained earnings 8,476 6,866
Accumulated other comprehensive income (loss) 1,158 1,520
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Total stockholders' equity 44,479 42,812
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Total liabilities and stockholders' equity $ 835,099 $ 786,598
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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
Ended March 31,
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(in thousands, except per share amounts) 2003 2002
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Interest Loans receivable, including fees :
Income Taxable $ 6,478 $ 6,600
Tax - exempt 57 22
Securities :
Taxable 4,068 3,145
Tax - exempt 91 27
Federal funds sold 84 79
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Total interest income 10,778 9,873
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Interest Deposits 2,835 3,236
Long-term debt 339 339
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Total interest expense 3,174 3,575
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Net interest income 7,604 6,298
Provision for loan losses 325 435
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Net interest income after provision for loan losses 7,279 5,863
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Noninterest Service charges and other fees 1,804 1,564
Income Other operating income 98 127
Gain on sale of loans 289 132
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Total noninterest income 2,191 1,823
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Noninterest Salaries and employee benefits 3,532 2,666
Expenses Occupancy 797 527
Furniture and equipment 398 347
Advertising and marketing 444 587
Data processing 515 426
Postage and supplies 238 209
Audits , regulatory fees and assessments 99 109
Other 1,005 876
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Total noninterest expenses 7,028 5,747
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Income before income taxes 2,442 1,939
Provision for federal income taxes 794 649
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Net income $ 1,648 $ 1,290
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Net income per common share : Basic $ 0.77 $ 0.64
Diluted 0.71 0.57
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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, 2001 $ 400 $ 1,882 $ 25,263 $ 5,159 $ (111) $ 32,593
Comprehensive income:
Net income - - - 1,290 - 1,290
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (335) (335)
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Total comprehensive income 955
Dividends declared on preferred stock - - - (20) - (20)
Common stock of 13,661 shares issued under stock
option plans - 14 184 - - 198
Income tax benefit of stock options exercised - - 106 - - 106
Common stock of 60 shares issued under employee
stock purchase plan - - 2 - - 2
Proceeds from issuance of 10,688 shares of common
stock in connection with dividend reinvestment and
stock purchase plan - 11 421 - - 432
Other - - 17 (17) - -
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March 31, 2002 $ 400 $ 1,907 $ 25,993 $ 6,412 $ (446) $ 34,266
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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, 2002 $ 400 $ 2,117 $ 31,909 $ 6,866 $ 1,520 $ 42,812
Comprehensive income:
Net income - - - 1,648 - 1,648
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (362) (362)
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Total comprehensive income 1,286
Dividends declared on preferred stock - - - (20) - (20)
Common stock of 12,163 shares issued under
stock option plans - 12 146 - - 158
Income tax benefit of stock options exercised - - 92 - - 92
Common stock of 40 shares issued under employee
stock purchase plan - - 1 - - 1
Proceeds from issuance of 4,023 shares of
common stock in connection with dividend
reinvestment and stock purchase plan - 4 146 - - 150
Other - 1 17 (18) - -
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March 31, 2003 $ 400 $ 2,134 $ 32,311 $ 8,476 $ 1,158 $ 44,479
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See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Three Months Ended March 31,
( in thousands ) 2003 2002
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Operating
Activities Net income $ 1,648 $ 1,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 325 435
Provision for depreciation and amortization 401 348
Deferred income taxes 16 (87)
Amortization of securities premiums and accretion of discounts, net 676 143
Proceeds from sale of loans 23,756 11,147
Loans originated for sale (19,914) (6,604)
Gain on sales of loans (289) (132)
Stock granted under stock purchase plan 1 2
Increase in accrued interest receivable and other assets (392) (2,866)
Increase (decrease) in accrued interest payable and other liabilities (570) 893
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Net cash provided by operating activities 5,658 4,569
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 11,079 5,720
Purchases (32,722) (7,011)
Securities available for sale :
Proceeds from principal repayments and maturities 38,781 10,500
Purchases (82,437) (11,919)
Net increase in loans receivable (14,221) (7,876)
Purchases of restricted investments in bank stock (322) 0
Purchases of premises and equipment (3,567) (759)
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Net cash (used by) investing activities (83,409) (11,345)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 19,115 32,469
Net increase (decrease) in time deposits 28,289 (5,836)
Proceeds from common stock options exercised 158 198
Proceeds from common stock purchase and dividend reinvestment plans 150 432
Cash dividends on preferred stock and cash in lieu of fractional shares (30) (30)
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Net cash provided by financing activities 47,682 27,233
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Increase (decrease) in cash and cash equivalents (30,069) 20,457
Cash and cash equivalents at beginning of year 75,450 25,855
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Cash and cash equivalents at end of period $ 45,381 $ 46,312
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See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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 three-month period ended March 31,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
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 on 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, 2002.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 24, 2003, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 24, 2003, to stockholders of record
on February 7, 2003. Payment of the stock dividend resulted in the issuance of
101,030 additional common shares and cash of $9,550 in lieu of fractional
shares. The effect of the 5% common stock dividend has been recorded as of
December 31, 2002.
New Accounting Statements
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of
8
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities". This statement clarifies the definition of a derivative and
incorporates certain decisions made by the Board as part of the Derivatives
Implementation Group process. This statement is effective for contracts entered
into or modified, and for hedging relationships designated after June 30, 2003
and should be applied prospectively. The provisions of the Statement that relate
to implementation issues addressed by the Derivatives Implementation Group that
have been effective should continue to be applied in accordance with their
respective effective dates.
Adoption of this statement does not have or is not expected to have a material
impact on the Company's financial condition or results of operations.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies." In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party, which would include standby letters of
credit. Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this Interpretation, including, among others,
guarantees related to commercial letters of credit and loan commitments. The
disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
accounting recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did
not have a significant impact on the Company's financial condition or results of
operations.
Outstanding letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. The Company had $7.5 million of
standby letters of credit as of March 31, 2003. The Bank uses the same credit
policies in making conditional obligations as it does for on-balance sheet
instruments.
The majority of these standby letters of credit expire within the next twelve
months. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending other loan commitments. The Company requires
collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation
of such collateral and the enforcement of personal guarantees would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The current amount of the liability as of
March 31, 2003 for guarantees under standby letters of credit issued after
December 31, 2002 is not material.
9
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 has entered into an agreement to purchase the land at 3951 Union
Deposit Road, Harrisburg, Dauphin County, Pennsylvania. The Company plans to
construct a full-service branch on this property to be opened in "early Summer"
2003.
The Company has entered into an agreement to purchase the land at 15 Lorane Road
in conjunction with the purchase of 5140 Perkiomen Avenue, Reading, Berks
County, Pennsylvania. The Company plans to construct a full-service branch on
these properties to be opened in Summer 2003.
Note 4. COMPREHENSIVE INCOME
Comprehensive income for the Company consists of net income and unrealized gains
or losses on available for sale 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
------------------
March 31,
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(in thousands)
2003 2002
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Unrealized holding gains on
available for sale securities
occurring during the period ($548) ($508)
Reclassification adjustment for
gains included in net income 0 0
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Net Unrealized Gains (548) (508)
Tax effect 186 173
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Other comprehensive
Income (loss) ($362) ($335)
============== ===============
Note 5. STOCK OPTION PLAN
The Company accounts for the stock option plan under the recognition and
measurements principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
10
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement 123, "Accounting for Stock-Based
Compensation," to stock-based compensation for quarters ended March 31, 2003 and
2002:
Three Months Ended
March 31,
---------
(in thousands) 2003 2002
---- ----
Net income:
As reported $1,648 $1,290
Total stock-based compensation
cost, net of tax, that would have
been included in the determination
of net income if the fair value
based method had been applied
to all awards (155) (359)
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Pro-forma 1,493 931
Reported earnings per share:
Basic $0.77 $0.64
Diluted 0.71 0.57
Pro-forma earnings per share:
Basic $0.69 $0.46
Diluted 0.64 0.41
11
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 28% to $1.6 million as compared to $1.3
million for the first quarter of 2002 and total revenues (net interest income
plus other income) increased by 21% to $9.8 million for the quarter. Diluted net
income per common share increased 25% to $0.71 from $0.57 per share in the first
quarter a year ago (after adjusting for a 5% common stock dividend paid in
February 2003). At March 31, 2003, the Company had total assets of $835.1
million, total loans (including loans held for sale) of $390.0 million, and
total deposits of $774.4 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $737.5 million for the first quarter of 2003 as
compared to $579.3 million for the same period in 2002. Approximately $29.3
million, or 19%, of this increase was in average loans outstanding and $128.9
million, or 81%, was in average investment securities and federal funds sold.
The yield on earning assets for the first quarter of 2003 was 5.91%, a decrease
of 97 basis points (bps) from the comparable period in 2002. This decrease was
resulted primarily from decreased yields in the loan and investment portfolios
due to the overall level and timing of changes in general market interest rates
during the first quarter of 2003 versus the same period one year ago.
The growth in interest earning assets was funded primarily by an increase in the
average balance of deposits of $171.1 million. Interest-bearing liabilities
increased from $482.5 million during the first quarter of 2002 to $633.4 million
during the first quarter of 2003. Average savings deposits increased $50.3
million over first quarter a year ago, average public funds deposits increased
$72.2 million and average non-interest bearing demand deposits increased by
$20.1 million. Average time deposits increased $12.5 million during the quarter
as compared to the first quarter one year ago.
The average rate paid on these liabilities for the first quarter of 2003 was
2.03%, a decrease of 97 basis points from the comparable period in 2002. The
Company's aggregate cost of funding sources was 1.75% for the first quarter of
2003, a decrease of 75 basis points from the prior year. This is primarily the
result of a decrease in the average rates paid on all interest bearing deposits.
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, interest bearing liabilities, related yields and
associated funding costs.
Interest income increased by $905,000, or 9%, over the first quarter of 2002.
Interest expense for the
12
first quarter of 2003 decreased by $401,000, or 11%, compared to the first
quarter of 2002.
Net interest income for the first quarter of 2003 increased by $1.3 million, or
21%, over the same period in 2002. 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 3.88% during the
first quarter of 2003 and 2002. The net interest margin decreased by 22 basis
points from 4.38% for the first quarter 2002 to 4.16% during the first quarter
of 2003.
Noninterest Income
Noninterest income for the first quarter of 2003 increased by $368,000, or 20%,
over the same period in 2002. The increase is attributable to service charges
and fees associated with servicing a higher volume of deposit accounts and
transactions in addition to the increase of the gain on the sale of loans.
Included in noninterest income for the first three months of 2003 is
nonrecurring income of $167,000, as a result of a gain on the sale of student
loans. Included in noninterest income for the first three months of 2002 is
nonrecurring income of $95,000 as a result of a gain on the sale of student
loans. Excluding these transactions, recurring core noninterest income for the
first three months of 2003 totaled $2.0 million as compared to $1.7 million for
the first three months of 2002, an increase of 17%. 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 first quarter of 2003, noninterest expenses increased by $1.3 million,
or 22%, over the same period in 2002. 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 three additional branch offices, one each in
June 2002, August 2002 and December 2002, respectively. A comparison of
noninterest expense for certain categories for the three months ended March 31,
2003, and March 31, 2002, is presented in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $866,000, or 32%, for the first quarter of
2003 over the first quarter of 2002. This increase is consistent with increases
in staff levels necessary to handle Company growth from first quarter 2002 to
first quarter 2003, including the additional staff of the branch offices opened
in June 2002, August 2002, and December 2002.
Occupancy expenses of $797,000 were $270,000 higher for the first quarter of
2003 than for the three months ended March 31, 2002. Increased occupancy
expenses primarily are a result of the branch offices opened in June 2002,
August 2002 and December 2002.
Furniture and equipment expenses of $398,000 were $51,000, or 15% higher for the
first quarter of 2003 then the three months ended March 31, 2002. This increase
was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of three new branches
13
opened during the last 12 months.
Advertising and marketing expenses totaled $444,000 for the three months ended
March 31, 2003, a decrease of $143,000, or 24%, from the first quarter of 2002.
This decrease was primarily the result of no grand openings scheduled in the
first quarter of 2003 offset by increased advertising efforts in each of the
Company's markets. The Company's markets will continue to expand as the branch
network grows.
Data processing expenses of $515,000 were $89,000, or 21%, higher in the first
quarter of 2003 than the three months ended March 31, 2002. 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, at the end of the first quarter 2002, Commerce
outsourced the proof, check clearing, and customer statement and processing
functions in 2002. As a result, the Company experienced greater costs in the
data processing area but achieved offsetting savings in postage, stationary and
supplies, and correspondent bank charges.
Postage and supplies expenses of $238,000 were $29,000 higher for the first
quarter of 2003 than for the three months ended March 31, 2002. This was due to
a combination of increased usage of supplies with the addition of three new
branches and growth in the volume of customers and customer transaction
statements, offset by savings from the above-mentioned outsourcing.
Other noninterest expenses increased by $129,000, or 15%, for the three-month
period ended March 31, 2003, as compared to the same period in 2002. Components
of the increase include higher volume and service costs of coin and currency
delivery, higher loan related expenses due to an increase in loan volume, and an
increase in payroll processing expense.
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 2.51% for the three months ended March 31, 2003, less than
the 2.61% reported for the three months ended March 31, 2002. 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 March 31, 2003, the operating efficiency ratio was 72.7%,
compared to 71.5% for the similar period in 2002.
Provision for Federal Income Taxes
The provision for federal income taxes was $794,000 for the first quarter of
2003 as compared to $649,000 for the same period in 2002. The effective tax
rate, which is the ratio of income tax expense to income before income taxes,
was 32.5% for the first three months of 2003 and 33.5% for the same period in
2002.
Net Income and Net Income Per Share
Net income for the first quarter of 2003 was $1.6 million, an increase of
$358,000, or 28%, over the $1.3 million recorded in the first quarter of 2002.
The increase was due to an increase in net interest income of $1.3 million, an
increase in noninterest income of $368,000, a decrease of $110,000 in the
provision for loan losses, offset partially by an increase
14
in noninterest expenses of $1.3 million and an increase of $145,000 in the
provision for income taxes. Basic earnings per common share, after adjusting for
a 5% common stock dividend paid in February 2003, increased 20% to $0.77 per
common share for the first three months of 2003 compared to $0.64 for the same
period in 2002. Diluted earnings per common share were $0.71 for the first three
months of 2003 and $0.57 for the same period in 2002, an increase of 25%.
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 first quarter of
2003 was 0.83% as compared to 0.84% for the first quarter of 2002. 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 first quarter of 2003 was 15.20%,
as compared to 15.50% for the first quarter of 2002.
FINANCIAL CONDITION
Securities
During the first three months of 2003, securities available for sale increased
by $42.5 million from $205.4 million at December 31, 2002 to $247.9 million at
March 31, 2003. This resulted from the purchase of $82.4 million in securities,
partially offset by $38.8 million in principal repayments. The securities
available for sale portfolio is comprised of U.S. Government agency securities,
mortgage-backed securities, AAA CMO securities, and corporate debt. The weighted
average life of the securities available for sale portfolio was 2.9 years at
March 31, 2003 with a weighted average yield of 5.12%.
During the first three months of 2003, securities held to maturity increased
from $97.6 million to $119.2 million primarily as a result of the purchase of
$32.7 million in securities, offset by principal repayments of $11.1 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 4.7 years at March 31, 2003 with a weighted average yield
of 6.12%.
Federal funds sold decreased by $33.5 million during the first three months of
2003. Total securities and federal funds sold aggregated $378.1 million at March
31, 2003, and represented 45% of total assets.
The average yield on the combined securities portfolio for the first three
months of 2003 was 5.44%, as compared to 6.29% for the similar period of 2002.
The average yield earned on federal funds sold during the first three months of
2003 was 1.14%, down 50 basis points from 1.64% earned during the
15
first three months of 2002. The decrease in the yield on federal funds sold is a
result of a 50 basis point Fed rate cut in the fourth quarter of 2002. The
decrease in yield in the investment portfolio is partially due to the overall
level and timing of changes in general market interest rates.
Loans Held for Sale
Loans held for sale are comprised of student loans and residential mortgage
loans, which the Company originates with the intention of selling in the future.
During the first three months of 2003, total loans held for sale decreased by
$3.5 million, from $10.5 million at December 31, 2002 to $7.0 million at March
31, 2003. The change was the result of the sale of $6.8 million of student loans
and the sale of $17.0 million of residential loans, offset by originations of
$20.3 million in new loans held for sale. Loans held for sale represented 1.3%
of total assets at December 31, 2002 and 0.8% of total assets at March 31, 2003.
Loans Receivable
During the first three months of 2003, total loans receivable increased by $14.2
million from $368.9 million at December 31, 2002, to $383.1 million at March 31,
2003. Loans receivable represented 49% of total deposits and 46% of total assets
at March 31, 2003, as compared to 51% and 47%, respectively, at December 31,
2002.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans, foreclosed real estate, and
loans past due 90 days or more and still accruing interest) at March 31, 2003,
were $1.2 million, or 0.14%, of total assets as compared to $1.8 million, or
0.23%, of total assets at December 31, 2002. Foreclosed real estate totaled
$281,000 at March 31, 2003, and $118,000 as of December 31, 2002.
The summary table below presents information regarding nonperforming loans and
assets as of March 31, 2003, March 31, 2002 and December 31, 2002.
Nonperforming Loans and Assets
- ------------------------------------------------------------------------------------------------
(dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
- ------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 197 $ 958 $ 444
Consumer 91 42 15
Real estate:
Construction 0 0 0
Mortgage 421 599 835
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 709 1,599 1,294
Loans past due 90 days or more and still 175 55 0
accruing
Restructured loans 0 0 0
Total nonperforming loans 884 1,654 1,294
- ------------------------------------------------------------------------------------------------
Foreclosed real estate 281 118 107
- ------------------------------------------------------------------------------------------------
Total nonperforming assets 1,165 $1,772 1,401
- ------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.23% 0.45% 0.37%
Nonperforming assets to total assets 0.14% 0.23% 0.22%
- ------------------------------------------------------------------------------------------------
Nonaccrual commercial loans are comprised of eight loans at March 31, 2003.
Management's Allowance for Loan Loss Committee has reviewed the composition of
the nonaccrual loans and believes adequate
16
collateralization exists.
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
- ------------------------------------------------------------------------------------------------
(dollars in thousands) 3 Months Year Ending
Ending December 31,
March 31, 2002
2003
- ------------------------------------------------------------------------------------------------
Balance at beginning of period $ 5,146 $ 4,544
Provisions charged to operating expenses 325 1,435
- ------------------------------------------------------------------------------------------------
5,471 5,979
Recoveries of loans previously charged-off:
Commercial 0 93
Consumer 2 2
Real estate 8 21
- ------------------------------------------------------------------------------------------------
Total recoveries 10 116
Loans charged-off:
Commercial (0) (561)
Consumer (7) (70)
Real estate (40) (318)
- ------------------------------------------------------------------------------------------------
Total charged-off (47) (949)
- ------------------------------------------------------------------------------------------------
Net charge-offs (37) (833)
- ------------------------------------------------------------------------------------------------
Balance at end of period $ 5,434 $ 5,146
- ------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of 0.01% 0.23%
Average loans outstanding
Allowance for loan losses as a percentage of 1.42% 1.40%
Period-end loans
- ------------------------------------------------------------------------------------------------
Deposits
Total deposits at March 31, 2003 were $774.4 million, up $47.4 million, or 6%,
over total deposits of $727.0 million at December 31, 2002. The average balances
and weighted average rates paid on deposits for the first three months of 2003
and 2002 are presented in the following table.
- ------------------------------------------------------------------------------------------------
Three months Ended March 31,
2003 2002
- ------------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 124,009 $ 103,911
Interest-bearing (money market
and checking) 203,617 0.98% 129,423 1.38%
Savings 225,011 1.23 172,780 2.13
Time deposits 191,778 3.51 167,220 4.58
- ------------------------------------------------------------------------------------------------
Total deposits $ 744,415 $ 573,334
- ------------------------------------------------------------------------------------------------
17
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 Company's Board of Directors reviews the guidelines established by
ALCO.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one-year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
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 March 31, 2003, the Company projected its interest rate risk
using a plus 200 and minus 100 basis point scenario. During 2002 and 2001, the
Federal Reserve lowered short-term interest rates by 525 basis points, pushing
the Federal Funds rate down to 1.25% from 6.5% at year-end 2001, the lowest
level in over 50 years. The Company's ALCO believed it was a better measure of
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 March 31, 2003, the Company's income simulation
model indicates net income would
18
increase by 0.04% in the first year and decrease by 5.4% over a two-year time
frame, if rates decreased 100 basis points as compared to an increase of 0.2%
and decrease of 1.6%, respectively, at March 31, 2002. The model projects that
net income would increase by 4.2% and 17.1% in the first year and over a
two-year time frame, respectively, if rates increased 200 basis points as
compared to a decrease of 0.8% and an increase of 0.1%, respectively, at March
31, 2002. 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
Company has completed and updated comprehensive core deposit studies in order to
assign its own core deposit premiums as permitted by regulation. 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 December 31, 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
the excess of market value over book value in the current rate scenario. At
March 31, 2003, 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.
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 March 31, 2003,
the total potential liquidity for the Company through these secondary sources
was $271 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 March 31, 2003, stockholders' equity totaled $44.5 million, up 4% over
stockholders' equity of
19
$42.8 million at December 31, 2002. Stockholders' equity at March 31, 2003
included $1.2 million of gross unrealized gains, net of income taxes, on
securities available for sale. Excluding these unrealized gains, gross
stockholders' equity increased by $2.0 million from $41.3 million at December
31, 2002, to $43.3 million at March 31, 2003 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. Proceeds of this offering were downstreamed to the Bank 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. Proceeds of this offering were downstreamed to the Bank to be used for
additional capitalization purposes. All $8.0 million of the Trust Capital
Securities qualify as Tier 1 capital for regulatory capital purposes.
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.
The following table provides a comparison of the Bank's risk-based capital
ratios and leverage ratios to the minimum regulatory requirements for the
periods indicated:
- -----------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
Under Prompt
March 31, December 31, For Capital Corrective Action
2003 2002 Adequacy Purposes Provisions
- -----------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier 1 10.88% 11.11% 4.00% 6.00%
Total 11.94 12.17 8.00 10.00
Leverage ratio 6.97 6.97 4.00 5.00
(to average assets)
- -----------------------------------------------------------------------------------------------------------------------------
At March 31, 2003, the consolidated capital levels of the Company and of the
Bank 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 the National Prime Rate fell 525 basis points
between January 1, 2001 and March 31, 2003, the Company's net interest margin
has remained fairly stable. Commerce's net interest margin for the first three
months of 2003 was 4.16%, a difference of 22 basis points from 4.38% for the
first three months of 2002.
20
Currently, Commerce has 75% 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.
Item 4. Controls and Procedures
Within the 90 days prior to the filing of this report, the Chief Financial
Officer, under the supervision of the Chief Executive Officer, has evaluated the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the Company's periodic reports is
accumulated and communicated to management as appropriate to allow timely
decisions by management regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date that the Company completed its evaluation.
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 March 31, 2003.
Item 3. Defaults Upon Senior Securities
No items to report for the quarter ending March 31, 2003.
Item 4. Submission of Matters to a Vote of Securities Holders
No items to report for the quarter ending March 31, 2003.
Item 5. Other Information
No items to report for the quarter ending March 31, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share...................................Exhibit 11
21
(b.) Reports on Form 8-K
On January 17, 2003, the Company filed a form 8-K announcing the following
information:
On December 20, 2002, the Board of Directors of Pennsylvania Commerce Bancorp,
Inc. (the "Company") accepted the resignation of Vernon W. Hill, II as a
director and appointed Mr. Hill to the position of "director emeritus". The
Company anticipates that as a "director emeritus," Mr. Hill will continue to
attend certain Board meetings and to participate in certain marketing and
promotional activities of the registrant's bank subsidiary.
22
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.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
05/15/03 /s/ Gary L. Nalbandian
- ------------------------- -------------------------------------
(Date) Gary L. Nalbandian
President/CEO
05/15/03 /s/ Mark A. Zody
- ------------------------- -------------------------------------
(Date) Mark A. Zody
Chief Financial Officer
23