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, 2003
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
2,150,165 Common shares outstanding at 07/31/03
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Transitional Small Business Disclosure Format (check one): Yes No X
PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.......................................3
June 30, 2003 (unaudited), and December 31, 2002
Consolidated Statements of Income (Unaudited).....................4
Three months ended June 30, 2003 and June 30, 2002
Six months ended June 30, 2003 and June 30, 2002
Consolidated Statements of Stockholders' Equity (Unaudited)......5
Six months ended June 30, 2003 and June 30, 2002
Consolidated Statements of Cash Flows (Unaudited).................6
Six months ended June 30, 2003, and June 30, 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.......22
Item 4. Controls and Procedures..........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................23
Item 2. Changes in Securities and Use of Proceeds........................23
Item 3. Defaults Upon Senior Securities..................................23
Item 4. Submission of Matters to a Vote of Securities Holders............23
Item 5. Other Information................................................23
Item 6a. Exhibits.........................................................23
Item 6b. Reports on Form 8-K..............................................23
Signatures.......................................................24
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
( in thousands, except share amounts) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 38,778 $ 30,950
Federal funds sold 12,000 44,500
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 50,778 75,450
Securities, available for sale at fair value 213,468 205,436
Securities, held to maturity at cost
(fair value 2003: $123,289; 2002: $101,036 ) 127,089 97,625
Loans, held for sale 12,812 10,514
Loans receivable, net of allowance for loan losses
(allowance 2003: $5,667; 2002: $5,146) 401,073 363,735
Restricted investments in bank stock 2,450 2,045
Premises and equipment, net 31,472 26,409
Accrued interest receivable 3,870 3,675
Other assets 2,285 1,709
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Total assets $ 845,297 $ 786,598
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 155,968 $ 127,199
Interest-bearing 626,765 599,756
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Total deposits 782,733 726,955
Accrued interest payable 489 832
Other liabilities 2,313 2,999
Long term debt 13,000 13,000
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Total liabilities 798,535 743,786
- -----------------------------------------------------------------------------------------------------------------------------
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: 2,149,490; 2002: 2,117,089 2,150 2,117
Surplus 32,730 31,909
Retained earnings 10,114 6,866
Accumulated other comprehensive income 1,368 1,520
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Total stockholders' equity 46,762 42,812
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Total liabilities and stockholders' equity $ 845,297 $ 786,598
=============================================================================================================================
See accompanying notes .
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unadutied)
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Interest Loans receivable, including fees :
Income Taxable $ 6,883 $ 6,599 $ 13,361 $13,199
Tax - exempt 54 19 111 41
Securities :
Taxable 4,013 3,614 8,081 6,759
Tax - exempt 121 27 212 54
Federal funds sold 56 83 140 162
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Total interest income 11,127 10,342 21,905 20,215
- --------------------------------------------------------------------------------------------------------------------------------
Interest Deposits 2,593 3,262 5,428 6,498
Long-term debt 339 337 678 676
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Total interest expense 2,932 3,599 6,106 7,174
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Net interest income 8,195 6,743 15,799 13,041
Provision for loan losses 525 280 850 715
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Net interest income after provision
for loan losses 7,670 6,463 14,949 12,326
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Service charges and other fees 1,928 1,564 3,732 3,128
Income Other operating income 88 127 186 254
Gain on sale of loans 200 57 489 189
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Total noninterest income 2,216 1,748 4,407 3,571
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and employee benefits 3,751 2,916 7,283 5,582
Expenses Occupancy 772 559 1,569 1,086
Furniture and equipment 446 359 844 706
Advertising and marketing 474 586 918 1,173
Data processing 587 523 1,102 949
Postage and supplies 216 203 454 412
Audits , regulatory fees and assessments 127 109 226 218
Other 1,054 927 2,059 1,803
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Total noninterest expenses 7,427 6,182 14,455 11,929
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Income before income taxes 2,459 2,029 4,901 3,968
Provision for federal income taxes 801 682 1,595 1,331
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Net income $ 1,658 $ 1,347 $ 3,306 $ 2,637
===================================================================================================================
Net income per common share : Basic $ 0.77 $ 0.65 $ 1.53 $ 1.28
Diluted 0.71 0.58 1.42 1.16
===================================================================================================================
See accompanying notes.
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
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
--------
Total comprehensive income 3,949
Dividends declared on preferred stock -- -- -- (40) -- (40)
Common stock of 95,016 shares issued under stock
option plans -- 96 1,409 -- -- 1,505
Income tax benefit of stock options exercised -- -- 292 -- -- 292
Common stock of 330 shares issued under employee
stock purchase plan -- -- 15 -- -- 15
Proceeds from issuance of 14,304 shares of common
stock in connection with dividend reinvestment and
stock purchase plan -- 14 589 -- -- 603
Other -- -- 17 (17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 $ 400 $ 1,992 $ 27,585 $ 7,739 $ 1,201 $ 38,917
====================================================================================================================================
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 2002 $ 400 $ 2,117 $ 31,909 $ 6,866 $ 1,520 $ 42,812
Comprehensive income:
Net income -- -- -- 3,306 -- 3,306
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment -- -- -- -- (152) (152)
--------
Total comprehensive income 3,154
Dividends declared on preferred stock -- -- -- (40) -- (40)
Common stock of 22,571 shares issued under stock
option plans -- 23 358 -- -- 381
Income tax benefit of stock options exercised -- -- 107 -- -- 107
Common stock of 70 shares issued under employee
stock purchase plan -- -- 2 -- -- 2
Proceeds from issuance of 9,307 shares of common
stock in connection with dividend reinvestment and
stock purchase plan -- 9 337 -- -- 346
Other -- 1 17 (18) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2003 $ 400 $ 2,150 $ 32,730 $ 10,114 $ 1,368 $ 46,762
====================================================================================================================================
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
( in thousands ) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Operating
Activities Net income $ 3,306 $ 2,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 850 715
Provision for depreciation and amortization 832 709
Deferred income taxes (103) (110)
Amortization of securities premiums and accretion of discounts, net 1,405 300
Proceeds from sale of loans 54,633 22,746
Loans originated for sale (56,442) (17,861)
Gain on sales of loans (489) (189)
Stock granted under stock purchase plan 2 15
Increase in accrued interest receivable and other assets (488) (344)
Increase (decrease) in accrued interest payable and other liabilities (1,029) 1,128
-------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,477 9,746
- --------------------------------------------------------------------------------------------------------------------------
Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 23,312 12,039
Purchases (52,812) (29,124)
Securities available for sale :
Proceeds from principal repayments and maturities 93,113 21,119
Purchases (102,729) (43,330)
Net increase in loans receivable (38,188) (17,693)
Purchases of restricted investments in bank stock (405) (776)
Purchases of premises and equipment (5,895) (2,681)
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Net cash used by investing activities (83,604) (60,446)
- --------------------------------------------------------------------------------------------------------------------------
Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 66,851 57,666
Net increase (decrease) in time deposits (11,073) (926)
Proceeds from common stock options exercised 381 1,505
Proceeds from common stock purchase and dividend reinvestment plans 346 603
Cash dividends on preferred stock and cash in lieu of fractional shares (50) (50)
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Net cash provided by financing activities 56,455 58,798
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Increase (decrease) in cash and cash equivalents (24,672) 8,098
Cash and cash equivalents at beginning of year 75,450 25,855
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Cash and cash equivalents at end of period $ 50,778 $ 33,953
=======================================================================================================
See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six-month period ended June 30,
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.
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 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 three months ended and six months ended June 30,
2003 and 2002:
Three Months Six Months
Ended June 30, Ended June 30,
- ----------------------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported $ 1,658 $ 1,347 $ 3,306 $ 2,637
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 (276) (359) (431) (718)
---- ---- ---- ----
Pro-forma 1,382 988 2,875 1,919
Reported earnings per share:
Basic $ 0.77 $ 0.65 $ 1.53 $ 1.28
Diluted 0.71 0.58 $ 1.42 $ 1.16
Pro-forma earnings per share:
Basic $ 0.64 $ 0.47 $ 1.34 $ 0.94
Diluted 0.59 0.42 1.24 $ 0.85
8
New Accounting Standards
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of 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.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003.
Adoption of these statements 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 June 30, 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
9
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 June 30,
2003 for guarantees under standby letters of credit issued after December 31,
2002 is not material.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". This interpretation provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The disclosure requirements apply to all financial statements issued after
January 31, 2003. The consolidation requirements apply immediately to VIEs
created after January 31, 2003 and are effective for the first fiscal year or
interim period beginning after June 15, 2003 for VIEs acquired before February
1, 2003. The adoption of this interpretation did not have an 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 purchased the parcel of land at 15 Lorane Road in conjunction with
the purchase of 5140 Perkiomen Avenue, Reading, in Berks County, Pennsylvania.
The Company constructed a full-service branch on this land and held Grand
Opening Ceremonies for this branch on July 19, 2003.
The Company has entered into a land lease for the premises located in the Penn
Plaza Shopping Center in Muhlenberg Township, in Berks County, Pennsylvania. The
Company is currently constructing a full-service branch office on this land and
plans Grand Opening Ceremonies for this branch in September 2003.
The Company has entered into a lease for office space at 1803 Mt. Rose Avenue,
Suites A9 and A10, in York, Pennsylvania. The lease commenced March 1, 2003.
Rent payments will commence August 2003. The Company moved its York Loan
Production Office to this building.
The Company has purchased the parcel of land at 115 Bowman Street, City of
Lebanon, in Lebanon County, Pennsylvania. The Company plans to construct a
full-service branch on this property to be opened in 2004.
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.
10
Unrealized securities gains or losses and the related tax impact included in
comprehensive income are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands)
2003 2002 2003 2002
----------------------------- -----------------------
Unrealized holding gains (losses)
on available for sale securities
occurring during the period $ 318 $ 2,495 $ (230) $ 1,988
Reclassification adjustment for
gains included in net income
0 0 0 0
------- ------- ------- -------
Net unrealized gains (losses)
318 2,495 (230) 1,988
Tax effect
(108) (848) 78 (676)
------- ------- ------- -------
Other comprehensive
income (loss) $ 210 $ 1,647 $ (152) $ 1,312
======= ======= ======= =======
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 23% to $1.7 million as compared to $1.3
million for the second quarter of 2002 and total revenues (net interest income
plus other income) increased by 23% to $10.4 million for the quarter. Diluted
net income per common share increased 22% to $0.71 from $0.58 per share in the
second quarter a year ago (after adjusting for a 5% common stock dividend paid
in February 2003). At June 30, 2003, the Company had total assets of $845.3
million, total net loans (including loans held for sale) of $413.9 million, and
total deposits of $782.7 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $765.1 million for the second quarter of 2003
as compared to $617.2 million for the same period in 2002. Approximately $44.4
million, or 30%, of this increase was in average loans outstanding and $103.5
million, or 70%, was in average investment securities. The yield on earning
assets for the second quarter of 2003 was 5.83%, a decrease of 89 basis points
(bps) from the comparable period in 2002. This decrease 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 present during the second
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 $139.0 million over the second quarter 2002.
Average interest-bearing liabilities increased from $511.1 million during the
second quarter of 2002 to $648.6 million during the second quarter of 2003.
Average savings deposits increased $35.1 million over second quarter a year ago,
average public funds deposits increased $60.3 million, average non-interest
bearing demand deposits increased by $28.6 million, and average time deposits
increased $15.0 million during the quarter as compared to the second quarter one
year ago.
The average rate paid on interest-bearing liabilities for the second quarter of
2003 was 1.81%, a decrease of 101 basis points from the comparable period in
2002. The Company's aggregate cost of funding sources was 1.54% for the second
quarter of 2003, a decrease of 80 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.
12
Interest income increased by $785,000, or 8%, over the second quarter of 2002.
Interest expense for the second quarter of 2003 decreased by $667,000, or 19%,
compared to the second quarter of 2002.
Net interest income for the second quarter of 2003 increased by $1.5 million, or
22%, 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 4.02% during the
second quarter of 2003 compared to 3.90% during the same period of the previous
year. The net interest margin decreased by 9 basis points from 4.38% for the
second quarter 2002 to 4.29% during the second quarter of 2003.
For the first six months ended June 30, 2003, interest income increased by $1.7
million, or 8%, over the same period in 2002. Interest expense for the first six
months of 2003 totaled $6.1 million, a decrease of $1.1 million, or 15%, from
the first six months of 2002.
Net interest income for the first six months of 2002 increased by $2.8 million,
or 21%, over the same period in 2002. The Company's net interest margin
decreased 15 basis points from 4.37% for the first six months of 2002 to 4.22%
for the first half of 2003.
Provision for Loan Losses
The provision for loan losses was $525,000 for the second quarter of 2003 as
compared to $280,000 for the same period in 2002. For the six months ended June
30, the provision was $850,000 and $715,000 for 2003 and 2002, respectively. The
increase in the provision is primarily related to the growth in loan
receivables. The allowance for loan losses as a percentage of period-end loans
was 1.39% at June 30, 2003 as compared to 1.40% and 1.38% at December 31, 2002
and June 30, 2002, respectively.
Noninterest Income
Noninterest income for the second quarter of 2003 increased by $468,000, or 27%,
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 six 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 six 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 six months of 2003
totaled $4.2 million as compared to $3.5 million for the first six months of
2002, an increase of 20%. 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 2003, noninterest expenses increased by $1.2 million,
or 20%, 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
13
expenses also increased as a result of opening four additional branch offices,
one each in June 2002, August 2002, December 2002, and June 2003, respectively.
A comparison of noninterest expenses for certain categories for the three months
ended June 30, 2003, and June 30, 2002, is presented in the following
paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $835,000, or 29%, for the second quarter of
2003 over the second quarter of 2002. This increase is consistent with increases
in staff levels necessary to handle Company growth from second quarter 2002 to
second quarter 2003, including the additional staff of the branch offices opened
in June 2002, August 2002, December 2002, and June 2003. In addition, staffing
expenses increased in preparation for the July 2003 opening of the first Berks
County branch.
Occupancy expenses of $772,000 were $213,000 higher for the second quarter of
2003 than for the three months ended June 30, 2002. Increased occupancy expenses
primarily are a result of the branch offices opened in June 2002, August 2002,
December 2002, and June 2003.
Furniture and equipment expenses of $446,000 were $87,000, or 24%, higher for
the second quarter of 2003 than the three months ended June 30, 2002. This
increase was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of four new branches opened during the last
13 months.
Advertising and marketing expenses totaled $474,000 for the three months ended
June 30, 2003, a decrease of $112,000, or 19%, from the second quarter of 2002.
This decrease was primarily the result of overall lower marketing expenses in
the second quarter of the year versus the same period in 2002. The Company plans
to have a higher level of marketing expenses in the second half of 2003 in
conjunction with four planned Grand Opening Celebrations versus two Grand
Opening Celebrations in the second half of 2002. The Company's markets will
continue to expand as the branch network grows.
Data processing expenses of $587,000 were $64,000, or 12%, higher in the second
quarter of 2003 than the three months ended June 30, 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 second quarter 2002, Commerce
outsourced the proof, check clearing, and customer statement and processing
function. As a result, the Company experienced greater costs in the data
processing area but achieved offsetting savings in postage, stationery and
supplies, and correspondent bank charges.
Postage and supplies expenses of $216,000 were $13,000 higher for the second
quarter of 2003 than for the three months ended June 30, 2002. This was due to a
combination of increased usage of supplies with the addition of four new
branches and growth in the volume of customers and customer transaction
statements, offset by savings from the above-mentioned outsourcing.
Audit and regulatory fees increased by $18,000, or 17%, from $109,000 for the
second quarter of 2002 to $127,000 for the second quarter of 2003. 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 on deposit size, continue to increase as the Company's deposit
balances grow.
Other noninterest expenses increased by $127,000, or 14%, for the three-month
period ended June 30, 2003, as compared to the same period in 2002. Components
of the increase include higher
14
volume and service costs of coin and currency delivery, higher loan related
expenses due to an increase in loan volume, greater checkbook printing expenses
due to an increase in new accounts and an increase in payroll processing
expense.
For the first six months of 2003, total noninterest expenses increased by $2.5
million, or 21% over the comparable period in 2002. A comparison of noninterest
expenses for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $1.7 million, or 30%, over the
first six months of 2002. The increase was due to normal increases and
additional salary and benefits costs due to an increase in the level of
full-time equivalent employees from 350 at June 30, 2002 to 418 at June 30, 2003
as well as the addition of new staff to operate the new branches opened in June
2002, August 2002, December 2002 and June 2003.
Occupancy and furniture & equipment expenses for the first six months of 2003
were $621,000, or 35%, higher for the first six months of 2003 over the similar
period in 2002. The majority of the increase is the result of costs associated
with the opening of four new branch facilities during the last 13 months.
Additionally, Commerce increased the office space at the Lemoyne Loan Production
Office during the first quarter of 2003.
Advertising and marketing expenses totaled $918,000 for the six months ended
June 30, 2003, a decrease of $255,000, or 22%, from the first six month of 2002.
This decrease was primarily the result of overall lower marketing expenses in
the second half of the year versus the same period in 2002. The Company plans to
have a higher level of marketing expenses in the second half of 2003 in
conjunction with four planned Grand Opening Celebrations versus two Grand
Opening Celebrations in the second half of 2002.
Data processing expenses increased $153,000 or 16%, for the first six months of
2003 as compared to the first six months of 2002. The increase is the result of
the previously mentioned higher data processing support costs and processing
higher volumes of customer transactions.
Other noninterest expenses for the first six months of 2003 were $2.1 million
compared to $1.8 million for the similar period in 2002. Components of the
increase include increased in volume and service costs of coin and currency
delivery, higher loan expenses due to an increase in loan volume, and increased
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 2.50% for the three months ended June 30, 2003, less than the
2.66% reported for the three months ended June 30, 2002, and 2.50% for the first
six months of 2003 compared to 2.64% for the first half of 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 June 30, 2003, the operating efficiency ratio was 71.3%,
compared to 72.4% for the similar period in 2002. For the six months ended June
30, 2003, this ratio was 71.9%, the same as for the six months ended June 30,
2002.
15
Provision for Federal Income Taxes
The provision for federal income taxes was $801,000 for the second quarter of
2003 as compared to $682,000 for the same period in 2002. For the six months
ended June 30, the provision was $1.6 million and $1.3 million for 2003 and
2002, respectively. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 32.5% for the first six months of
2003 and 33.5% for the same period in 2002.
Net Income and Net Income Per Share
Net income for the second quarter of 2003 was $1.7 million, an increase of
$311,000, or 23%, over the $1.3 million recorded in the second quarter of 2002.
The increase was due to an increase in net interest income of $1.5 million, an
increase in noninterest income of $468,000, offset partially by an increase in
noninterest expenses of $1.2 million, an increase of $245,000 in the provision
for loan losses, and an increase of $119,000 in the provision for income taxes.
Net income for the first six months of 2003 was $3.3 million compared to $2.6
million recorded in the first six months of 2002. The increase was due to an
increase in net interest income of $2.8 million, an increase in noninterest
income of $836,000, offset partially by an increase in noninterest expenses of
$2.5 million, an increase of $135,000 in the provision for loan losses, and an
increase of $264,000 in the provision for income taxes.
Diluted earnings per common share, after adjusting for a 5% common stock
dividend paid in February 2003, increased 22% to $0.71 per common share for the
second quarter of 2003 compared to $0.58 for the same period in 2002. Diluted
earnings per common share were $1.42 for the first six months of 2003 and $1.16
for the same period in 2002, an increase of 22%.
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
2003 was 0.80% as compared to 0.82% for the second quarter of 2002. The ROA for
the first six months of 2003 was 0.81% compared to 0.83% for the first half 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 second quarter of 2003 was
14.48%, as compared to 14.57% for the second quarter of 2002. The annualized ROE
for the first six months of 2003 was 14.83%, as compared to 15.01% for the first
six months of 2002.
FINANCIAL CONDITION
Securities
During the first six months of 2003, securities available for sale increased by
$8.1 million from $205.4 million at December 31, 2002 to $213.5 million at June
30, 2003. This resulted from the
16
purchase of $102.8 million in securities, partially offset by $93.1 million in
principal repayments.
The securities available for sale portfolio are comprised of U.S. Government
agency securities, mortgage-backed securities, collateralized mortgage
obligations, and corporate debt. The weighted average life of the securities
available for sale portfolio was 2.2 years at June 30, 2003 with a weighted
average yield of 4.40%.
During the first six months of 2003, securities held to maturity increased from
$97.6 million to $127.1 million primarily as a result of the purchase of $52.8
million in securities, offset by principal repayments of $23.3 million. The
securities held in this portfolio include U.S. Government agency securities,
tax-exempt municipal bonds, collateralized mortgage obligations, corporate debt
securities, and mortgage-backed securities. The weighted average life of the
securities held to maturity portfolio was 4.3 years at June 30, 2003 with a
weighted average yield of 6.12%.
Federal funds sold decreased by $32.5 million during the first six months of
2003. Total securities and federal funds sold aggregated $352.6 million at June
30, 2003, and represented 42% of total assets.
The average yield on the combined securities portfolio for the first six months
of 2003 was 4.98%, as compared to 6.14% for the similar period of 2002. The
average yield earned on federal funds sold during the first six months of 2003
was 1.15%, down 51 basis points from 1.66% earned during the first six months of
2002. The decrease in the yield on federal funds sold is a result of a 50 basis
point decrease by the Federal Reserve Board in the fourth quarter of 2002. The
decrease in the 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 six months of 2003, total loans held for sale increased by $2.3
million, from $10.5 million at December 31, 2002 to $12.8 million at June 30,
2003. The change was the result of the sale of $6.8 million of student loans and
the sale of $47.3 million of residential loans, offset by originations of $56.4
million in new loans held for sale. Loans held for sale represented 1.3% of
total assets at December 31, 2002 and 1.5% of total assets at June 30, 2003.
Loans Receivable
During the first six months of 2003, total gross loans receivable increased by
$37.8 million from $368.9 million at December 31, 2002, to $406.7 million at
June 30, 2003. Loans receivable represented 52% of total deposits and 48% of
total assets at June 30, 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 June 30, 2003,
were $2.0 million, or 0.24%, of total assets as compared to $1.8 million, or
0.23%, of total assets at December 31, 2002. Foreclosed real estate totaled
$256,000 at June 30, 2003, and $118,000 as of December 31, 2002.
17
The summary table below presents information regarding nonperforming loans and
assets as of June 30, 2003 and 2002 and December 31, 2002.
Nonperforming Loans and Assets
==================================================================================
(dollars in thousands) June 30, December 31, June 30,
2003 2002 2002
- -------------------------------------------------------- ---------------- ---------
Nonaccrual loans:
Commercial $ 398 $ 958 $ 376
Consumer 188 42 74
Real estate:
Construction 0 0 0
Mortgage 196 599 757
- ------------------------------------------- ------ ------ ------
Total nonaccrual loans 782 1,599 1,207
Loans past due 90 days or more and still
accruing 960 55 0
Restructured loans 0 0 0
- ------------------------------------------- ------ ------ ------
Total nonperforming loans 1,742 1,654 1,207
Foreclosed real estate 256 118 125
- ------------------------------------------- ------ ------ ------
Total nonperforming assets 1,998 $1,772 1,332
- ------------------------------------------- ------ ------ ------
Nonperforming loans to total loans 0.43% 0.45% 0.34%
Nonperforming assets to total assets 0.24% 0.23% 0.20%
==================================================================================
Management's Allowance for Loan Loss Committee has reviewed the composition of
the nonaccrual loans and believes adequate 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) Six Months Year Ending Six Months
Ending December 31, Ending
June 30, 2003 2002 June 30, 2002
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 5,146 $ 4,544 $ 4,544
Provisions charged to operating expenses 850 1,435 715
- ----------------------------------------------------------- ------- ------- -------
5,996 5,979 5,259
Recoveries of loans previously charged-off:
Commercial 17 93 40
Consumer 57 2 1
Real estate 48 21 19
- ----------------------------------------------------------- ------- ------- -------
Total recoveries 122 116 60
Loans charged-off:
Commercial (174) (561) (129)
Consumer (46) (70) (61)
Real estate (231) (318) (164)
- ----------------------------------------------------------- ------- ------- -------
Total charged-off (451) (949) (354)
- ----------------------------------------------------------- ------- ------- -------
Net charge-offs (329) (833) (294)
- ----------------------------------------------------------- ------- ------- -------
Balance at end of period $ 5,667 $ 5,146 $ 4,965
- ----------------------------------------------------------- ------- ------- -------
Net charge-offs as a percentage of 0.08% 0.23% 0.08%
Average loans outstanding
- ----------------------------------------------------------- ------- ------- -------
Allowance for loan losses as a percentage of 1.39% 1.40% 1.38%
Period-end loans
============================================================================================================
18
Premises and Equipment
During the first six months of 2003, premises and equipment increased by $5.1
million, or 19%, from $26.4 million at December 31, 2002 to $31.5 million at
June 30, 2003. The majority of the increase was a result from the purchase of
land for new branch sites, furniture and equipment for the additional space at
the Lemoyne Loan Processing Office, furniture and equipment for the new branch
that opened in June 2003, and preliminary costs for the future branch sites,
offset by the provision for depreciation and amortization.
Deposits
Total deposits at June 30, 2003 were $782.7 million, up $55.8 million, or 8%,
over total deposits of $727.0 million at December 31, 2002. The average balances
and weighted average rates paid on deposits for the first six months of 2003 and
2002 are presented in the following table.
- ----------------------------------------------------------------------------------------------
Six months Ended June 30,
- ----------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 132,290 $ 107,896
Interest-bearing (money 214,130 0.93% 129,986 1.36%
market and checking)
Savings 228,550 1.15 183,081 2.13
Time deposits 185,347 3.41 170,788 4.36
- ----------------------------------------------------------------------------------------------
Total deposits $ 760,317 $ 591,751
==============================================================================================
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
19
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, 2003, the Company projected its interest rate risk
using a plus 200 and minus 100 basis point scenario. For the period January 2001
to June 2003, the Federal Reserve lowered short-term interest rates thirteen
times for a total of 550 basis points, pushing the Federal Funds rate down to
1.00% from 6.5% at year-end 2000, 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 June
30, 2003, the Company's income simulation model indicates net income would
increase by 0.5% in the first year and decrease by 4.7% over a two-year time
frame, if rates decreased 100 basis points as compared to a decrease of 0.1% and
decrease of 3.6%, respectively, at June 30, 2002. The model projects that net
income would increase by 3.0% and 16.0% in the first year and over a two-year
time frame, respectively, if rates increased 200 basis points, as compared to a
increase of 0.3% and an increase of 4.7%, respectively, at June 30, 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 June 30,
2003 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
20
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 June 30, 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 June 30, 2003,
the total potential liquidity for the Company through these secondary sources
was $314 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, 2003, stockholders' equity totaled $46.8 million, up 9% over
stockholders' equity of $42.8 million at December 31, 2002. Stockholders' equity
at June 30, 2003 included $1.4 million of gross unrealized gains, net of income
taxes, on securities available for sale. Excluding these unrealized gains, gross
stockholders' equity increased by $4.1 million from $41.3 million at December
31, 2002, to $45.4 million at June 30, 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.
21
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 Corrective
June 30, December 31, For Capital Action Provisions
2003 2002 Adequacy Purposes
- ------------------------------------ ---------------- ----------------- -------------------------- --------------------------
Risk-Based Capital Ratios:
Tier 1 10.72% 11.11% 4.00% 6.00%
Total 11.76 12.17 8.00 10.00
Leverage ratio 6.95 6.97 4.00 5.00
(to average assets)
- ------------------------------------ ---------------- ----------------- -------------------------- --------------------------
The consolidated capital ratios at June 30, 2003 are not materially different to
the Bank's capital ratios. At June 30, 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 550 basis points
between January 1, 2001 and June 30, 2003, the Company's net interest margin has
remained fairly stable. Commerce's net interest margin for the first six months
of 2003 was 4.22%, a difference of 15 basis points from 4.37% for the first six
months of 2002.
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
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (pursuant to Rule 13a-15(b)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. There has been no change in the
Company's internal control over financial reporting during the quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
22
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, 2003.
Item 3. Defaults Upon Senior Securities
No items to report for the quarter ending June 30, 2003.
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Company's Shareholders was held on May 16, 2003. The
items of business approved by the shareholders at the annual meeting were (i)
the election of seven directors for a one-year term and (ii) the amendment to
the 2001 Directors Stock Option Plan. No proposals were submitted for the
election of other directors.
Item 5. Other Information
No items to report for the quarter ending June 30, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share.........................................Exhibit 11
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer...........Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer...........Exhibit 31.2
Section 1350 Certification of Chief Executive Officer.......................Exhibit 32.1
Section 1350 Certification of Chief Financial Officer.......................Exhibit 32.2
(b.) Reports on Form 8-K
On April 17, 2003, the Company filed a form 8-K announcing the following
information:
On April 17, 2003, Pennsylvania Commerce Bancorp, Inc. issued a press release
reporting financial results for its first quarter of 2003.
23
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)
08/14/03 /s/ Gary L. Nalbandian
- ------------------------- -------------------------------
(Date) Gary L. Nalbandian
President/CEO
08/14/03 /s/ Mark A. Zody
- ------------------------- -------------------------------
(Date) Mark A. Zody
Chief Financial Officer
24