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 September 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 ________
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
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: 2,158,406 Common shares
outstanding at 10/31/03
Transitional Small Business Disclosure Format (check one): Yes ___ No X
PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.....................................................................3
September 30, 2003 (Unaudited), and December 31, 2002
Consolidated Statements of Income (Unaudited)...................................................4
Three months ended September 30, 2003 and September 30, 2002
Nine months ended September 30, 2003 and September 30, 2002
Consolidated Statements of Stockholders' Equity (Unaudited)....................................5
Nine months ended September 30, 2003 and September 30, 2002
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Nine months ended September 30, 2003, and September 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.....................................23
Item 4. Controls and Procedures........................................................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................24
Item 2. Changes in Securities and Use of Proceeds......................................................24
Item 3. Defaults Upon Senior Securities................................................................24
Item 4. Submission of Matters to a Vote of Securities Holders..........................................24
Item 5. Other Information..............................................................................24
Item 6a. Exhibits.......................................................................................24
Item 6b. Reports on Form 8-K............................................................................25
Signatures.....................................................................................26
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
=============================================================================================================================
September 30, December 31,
2003 2002
( in thousands, except share amounts) (unaudited)
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Assets Cash and due from banks $ 30,110 $ 30,950
Federal funds sold 54,000 44,500
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Cash and cash equivalents 84,110 75,450
Securities, available for sale at fair value 215,844 205,436
Securities, held to maturity at cost
(fair value 2003: $175,336; 2002: $101,036 ) 175,278 97,625
Loans, held for sale 8,609 10,514
Loans receivable, net of allowance for loan losses
(allowance 2003: $5,777; 2002: $5,146) 428,940 363,735
Restricted investments in bank stock 2,913 2,045
Premises and equipment, net 35,140 26,409
Other assets 7,136 5,384
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Total assets $ 957,970 $ 786,598
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 169,996 $ 127,199
Interest-bearing 724,612 599,756
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Total deposits 894,608 726,955
Other liabilities 2,673 3,831
Long term debt 13,000 13,000
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Total liabilities 910,281 743,786
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: 2,155,612; 2002: 2,117,089 2,156 2,117
Surplus 32,967 31,909
Retained earnings 11,620 6,866
Accumulated other comprehensive income 546 1,520
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Total stockholders' equity 47,689 42,812
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Total liabilities and stockholders' equity $ 957,970 $ 786,598
=============================================================================================================================
See accompanying notes.
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
============================================================================================================================
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
Interest Loans receivable, including fees :
Income Taxable $ 6,953 $ 6,769 $ 20,314 $19,968
Tax - exempt 47 31 158 72
Securities :
Taxable 3,650 3,776 11,731 10,535
Tax - exempt 120 26 332 80
Federal funds sold 69 186 209 348
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Total interest income 10,839 10,788 32,744 31,003
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Interest Deposits 2,349 3,276 7,777 9,774
Expense Other borrowed money 1 0 1 0
Long-term debt 339 339 1,017 1,015
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Total interest expense 2,689 3,615 8,795 10,789
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Net interest income 8,150 7,173 23,949 20,214
Provision for loan losses 350 375 1,200 1,090
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Net interest income after provision
for loan losses 7,800 6,798 22,749 19,124
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Noninterest Service charges and other fees 2,077 1,747 5,809 4,875
Income Other operating income 99 105 285 359
Gain on sale of securities available for sale 288 0 288 0
Gain on sale of loans 185 142 674 331
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Total noninterest income 2,649 1,994 7,056 5,565
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and employee benefits 4,120 3,336 11,403 8,918
Expenses Occupancy 856 653 2,425 1,739
Furniture and equipment 517 417 1,361 1,123
Advertising and marketing 662 560 1,580 1,733
Data processing 485 462 1,587 1,411
Postage and supplies 264 202 718 614
Other 1,309 954 3,594 2,975
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Total noninterest expenses 8,213 6,584 22,668 18,513
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Income before income taxes 2,236 2,208 7,137 6,176
Provision for federal income taxes 710 741 2,305 2,072
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Net income $ 1,526 $ 1,467 $ 4,832 $ 4,104
============================================================================================================================
Net income per common share : Basic $ 0.70 $ 0.69 $ 2.23 $ 1.97
Diluted 0.65 0.63 2.07 1.80
============================================================================================================================
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
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Balance : December 31, 2001 $ 400 $ 1,882 $ 25,263 $ 5,159 $ (111) $ 32,593
Comprehensive income:
Net income - - - 4,104 - 4,104
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 1,732 1,732
Total comprehensive income 5,836
Dividends declared on preferred stock - - - (60) - (60)
Common stock of 99,408 shares issued under
stock option plans - 100 1,475 - - 1,575
Income tax benefit of stock options exercised - - 332 - - 332
Common stock of 360 shares issued under
employee stock purchase plan - - 16 - - 16
Proceeds from issuance of 17,957 shares of
common stock in connection with dividend
reinvestment and stock purchase plan - 18 723 - - 741
Other - - 17 (17) - -
- --------------------------------------------------------------------------------------------------------------------------------
September 30, 2002 $ 400 $ 2,000 $ 27,826 $ 9,186 $ 1,621 $ 41,033
================================================================================================================================
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 - - - 4,832 - 4,832
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (974) (974)
Total comprehensive income 3,858
Dividends declared on preferred stock - - - (60) - (60)
Common stock of 24,274 shares issued under
stock option plans - 24 379 - - 403
Income tax benefit of stock options exercised - - 151 - - 151
Common stock of 100 shares issued under
employee stock purchase plan - - 3 - - 3
Proceeds from issuance of 13,696 shares of
common stock in connection with dividend
reinvestment and stock purchase plan - 14 508 - - 522
Other (issuance of 453 shares of common stock) - 1 17 (18) - -
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September 30, 2003 $ 400 $ 2,156 $ 32,967 $ 11,620 $ 546 $ 47,689
================================================================================================================================
See accompanying notes.
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
===================================================================================================================================
Nine Months Ended September 30,
( in thousands ) 2003 2002
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Operating
Activities Net income $ 4,832 $ 4,104
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200 1,090
Provision for depreciation and amortization 1,313 1,106
Deferred income taxes 292 (146)
Amortization of securities premiums and accretion of discounts, net 2,290 478
Net gain on sale of securities available for sale (288) 0
Proceeds from sale of loans 90,945 39,563
Loans originated for sale (88,366) (41,039)
Gain on sales of loans (674) (331)
Stock granted under stock purchase plan 3 16
Increase in accrued interest receivable and other assets (1,397) (3,627)
Increase (decrease) in accrued interest payable and other liabilities (1,158) 1,716
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,992 2,930
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 35,530 21,797
Purchases (113,251) (29,121)
Securities available for sale :
Proceeds from principal repayments and maturities 159,182 45,146
Purchases (172,984) (109,121)
Net increase in loans receivable (66,405) (24,438)
Purchases of restricted investments in bank stock (868) 0
Purchases of premises and equipment (10,044) (4,649)
----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (168,840) (100,386)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 168,605 160,082
Net increase (decrease) in time deposits (952) 9,683
Proceeds from common stock options exercised 403 1,575
Proceeds from common stock purchase and dividend reinvestment plans 522 741
Cash dividends on preferred stock and cash in lieu of fractional shares (70) (70)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 168,508 172,011
----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 8,660 74,555
Cash and cash equivalents at beginning of year 75,450 25,855
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 84,110 $100,410
================================================================================================================
See accompanying notes.
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month period ended September
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 nine months ended September
30, 2003 and 2002:
Three Months Nine months
Ended September 30, Ended September 30,
- --------------------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
----- ----- ----- -----
Net income:
As reported $1,526 $1,467 $4,832 $4,104
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) (708) (1,077)
----- ----- ----- -------
Pro-forma 1,250 1,108 4,124 3,027
Reported earnings per share:
Basic $0.70 $0.69 $2.23 $1.97
Diluted 0.65 0.63 $2.07 $1.80
Pro-forma earnings per share:
Basic $0.57 $0.52 $1.90 $1.45
Diluted 0.53 0.47 1.76 $1.32
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 September 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 $7.6 million of
standby letters of credit as of September 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
9
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
September 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 fiscal years ending after
December 15, 2003 or for the first interim period ending after December 15, 2003
for VIEs acquired before February 1, 2003. The adoption of this interpretation
did not have a significant 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 has entered into a land lease for a premises located at Kohn Road
and Progress Avenue in Susquehanna Township, in Dauphin County, Pennsylvania.
The Company is currently constructing a full-service branch office on this land
and plans Grand Opening Ceremonies for this branch in December 2003.
The Company has entered into a land lease for a premises located on Derry Street
in Swatara Township, in Dauphin County, Pennsylvania. The Company is currently
constructing a full-service branch office on this land and plans Grand Opening
Ceremonies for this branch in December 2003.
10
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 Nine Months Ended
September 30, September 30,
(in thousands)
2003 2002 2003 2002
------------------------------ -------------------------------
Unrealized holding gains (losses)
on available for sale securities
occurring during the period $(1,535) $ 636 $(1,764) $ 2,624
Reclassification adjustment for
gains included in net income 288 0 288 0
------- ------- ------- -------
Net unrealized gains (losses) (1,247) 636 (1,476) 2,624
Tax effect 424 (216) 502 (892)
------- ------- ------- -------
Other comprehensive
income (loss) $ (823) $ 420 $ (974) $ 1,732
======= ======= ======= =======
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
Total revenues (net interest income plus other income) increased by 18% to $10.8
million for the quarter as compared to third quarter of 2002 and net income for
the quarter increased 4% to $1.53 million as compared to $1.47 million for the
third quarter of 2002. Diluted net income per common share increased 3% to $0.65
from $0.63 per share in the third quarter a year ago (after adjusting for a 5%
common stock dividend paid in February 2003). At September 30, 2003, the Company
had total assets of $958 million, total net loans (including loans held for
sale) of $438 million, and total deposits of $895 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $794.6 million for the third quarter of 2003 as
compared to $665.3 million for the same period in 2002. Approximately $59.5
million, or 46%, of this increase was in average loans outstanding and $69.8
million, or 54%, was in average investment securities and federal funds sold.
The yield on earning assets for the third quarter of 2003 was 5.41%, a decrease
of 102 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 third 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 interest-bearing deposits of $121.5 million over the third
quarter 2002. Average interest-bearing liabilities increased from $554.1 million
during the third quarter of 2002 to $676.1 million during the third quarter of
2003. Average savings deposits increased $39.2 million over third quarter a year
ago, average public funds deposits increased $44.2 million, average interest
bearing demand deposits increased by $22.0 million, average non-interest bearing
demand deposits increased by $31.0 million, and average time deposits increased
$16.1 million during the quarter as compared to the third quarter one year ago.
The average rate paid on interest-bearing liabilities for the third quarter of
2003 was 1.58%, a decrease of 101 basis points from the comparable period in
2002, similar to the decreased yield on earning assets. The Company's aggregate
cost of funding sources was 1.34% for the third quarter of 2003, a decrease of
81 basis points from the prior year. This is primarily the result of a decrease
in the average rates paid on all interest bearing deposits.
Interest earning assets for the first nine months averaged $765.9 million versus
$620.9 million for the comparable period in 2002. The yield on earning assets
decreased to 5.72% during the first nine months of 2003, from 6.67% for the
first nine months of 2002.
The level of average interest-bearing liabilities increased from $516.1 million
12
for the first nine months of 2002 to $652.8 million for the first nine months of
2003. The Company's cost of funds for the first nine months of 2003 was 1.54%,
down 78 basis points from 2.32% for the comparable period in the prior year.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities. Liabilities used to fund
such assets include deposits, borrowed funds, and long-term debt. Changes in net
interest income and margin result from the interaction between the volume and
composition of earning assets, interest bearing liabilities, related yields and
associated funding costs.
Interest income increased by $51,000 over the third quarter of 2002. Interest
expense for the third quarter of 2003 decreased by $926,000, or 26%, from the
third quarter of 2002.
Net interest income for the third quarter of 2003 increased by $977,000, or 14%,
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 3.83% during the
third quarter of 2003 compared to 3.84% during the same period of the previous
year. The net interest margin decreased by 21 basis points from 4.28% for the
third quarter 2002 to 4.07% during the third quarter of 2003.
For the first nine months ended September 30, 2003, interest income increased by
$1.7 million, or 6%, over the same period in 2002. Interest expense for the
first nine months of 2003 totaled $8.8 million, a decrease of $2.0 million, or
18%, from the first nine months of 2002.
Net interest income for the first nine months of 2003 increased by $3.7 million,
or 18%, over the same period in 2002. The Company's net interest margin
decreased 17 basis points from 4.35% for the first nine months of 2002 to 4.18%
for the first nine months of 2003.
Provision for Loan Losses
The provision for loan losses was $350,000 for the third quarter of 2003 as
compared to $375,000 for the same period in 2002. The provision was $1.2 million
and $1.1 million for the nine months ended September 30, 2003 and 2002,
respectively. The increase in the provision for the nine month period is
primarily related to the growth in loan receivables. The allowance for loan
losses as a percentage of period-end loans was 1.33% at September 30, 2003 as
compared to 1.40% and 1.44% at December 31, 2002 and September 30, 2002,
respectively.
Noninterest Income
Noninterest income for the third quarter of 2003 increased by $655,000, or 33%,
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, an increase of the gain on the sale of loans and a gain on the
sale of securities available for sale.
Noninterest income for the first nine months of 2003 increased by $1.5 million,
13
or 27% over the same period in 2003. The increase is attributable to similar
reasons as previously stated.
Included in noninterest income for the first nine months of 2003 is nonrecurring
income of $455,000, comprised of $167,000 gain on the sale of student loans and
$288,000 gain on sale of securities available for sale. Included in noninterest
income for the first nine 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 nine months of 2003 totaled $6.6
million as compared to $5.5 million for the first nine months of 2002, an
increase of 21%. 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 third quarter of 2003, noninterest expenses increased by $1.6 million,
or 25%, 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 five additional branch offices, one each in
August 2002, December 2002, June 2003, July 2003, and September 2003,
respectively. A comparison of noninterest expenses for certain categories for
the three months ended September 30, 2003, and September 30, 2002, is presented
in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $784,000, or 24%, for the third quarter of
2003 over the third quarter of 2002. This increase is consistent with increases
in staff levels necessary to handle Company growth from third quarter 2002 to
third quarter 2003, including the additional staff of the branch offices opened
in the period August 2002 through September 2003. In addition, staffing expenses
increased in preparation for two branch openings scheduled for December 2003.
Occupancy expenses of $856,000 were $203,000 higher for the third quarter of
2003 than for the three months ended September 30, 2002. Increased occupancy
expenses primarily are a result of the five branch offices opened between August
2002 and September 2003, along with expanding the Loan Production Office (LPO)
in the Harrisburg Region in the Spring of 2003 and with opening a bigger LPO in
the York region during the summer of 2003.
Furniture and equipment expenses of $517,000 were $100,000, or 24%, higher for
the third quarter of 2003 than the three months ended September 30, 2002. This
increase was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of five new branches opened during the last
14 months and the expansion/addition of the new LPO offices.
Advertising and marketing expenses totaled $662,000 for the three months ended
September 30, 2003, an increase of $102,000, or 18%, from the third quarter of
2002. This increase was primarily the result of having two grand opening
celebrations of new branches during the third quarter of 2003 versus one grand
opening celebration during the third quarter of 2002. Also, both of the new
offices opened in the third quarter marked the Company's initial entry into the
Berk's County market and thus additional expense was incurred to market this new
Region.
Data processing expenses of $485,000 were $23,000, or 5%, higher in the third
quarter of 2003 than the three months ended September 30, 2002. The increase was
due to increased costs associated with processing additional transactions due to
growth in number of accounts.
14
Postage and supplies expenses of $264,000 were $62,000 higher for the third
quarter of 2003 than for the three months ended September 30, 2002. This was due
to a combination of increased usage of supplies with the addition of five new
branches and growth in the volume of customers and customer transaction
statements.
Other noninterest expenses increased by $355,000, or 37%, for the three-month
period ended September 30, 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, greater checkbook printing expenses due to an increase in new accounts,
higher audit and regulatory fees due to additional requirements imposed by
enactment of legislation by Regulatory Agencies to address corporate governance,
and an increase in travel and entertainment expense.
For the first nine months of 2003, total noninterest expenses increased by $4.2
million, or 22%, 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 $2.5 million, or 28%, over the
first nine 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 404 at September 30, 2002 to 508 at
September 30, 2003 as well as the addition of new staff to operate the new
branches opened in August 2002, December 2002, June 2003, July 2003, and
September 2003.
Occupancy and furniture & equipment expenses for the first nine months of 2003
were $924,000, or 32%, higher for the first nine months of 2003 over the similar
period in 2002. The majority of the increase is the result of costs associated
with the opening of five new branch facilities during the last 14 months.
Additionally, Commerce increased the office space at the Lemoyne Loan Production
Office during the first quarter of 2003 and the York Loan Production Office
during the summer of 2003.
Advertising and marketing expenses totaled $1.6 million for the nine months
ended September 30, 2003, a decrease of $153,000, or 9%, from the first nine
months of 2002. This decrease was primarily the result of redirecting marketing
initiatives to the latter part of 2003 in conjunction with the planned grand
opening celebrations. The Company's markets will continue to expand as the
branch network grows. Data processing expenses increased $176,000, or 12%, for
the first nine months of 2003 as compared to the first nine months of 2002. The
increase is the result of processing higher volumes of customer transactions.
Other noninterest expenses for the first nine months of 2003 were $3.6 million
compared to $3.0 million for the similar period in 2002. Components of the
increase include increase in volume and service costs of coin and currency
delivery, higher loan expenses due to an increase in loan volume, higher audit
and regulatory fees due to additional requirements imposed by enactment of
legislation by Regulatory Agencies to address corporate governance, increased
checkbook printing costs due to an increase in new accounts, and an increase in
travel and entertainment expense.
One key measure used to monitor progress in controlling overhead expenses is the
15
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 2.64% for the three months ended September 30, 2003, up
slightly over the 2.55% reported for the three months ended September 30, 2002,
and 2.55% for the first nine months of 2003 compared to 2.60% for the first nine
months 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 September 30, 2003, the
operating efficiency ratio was 77.9%, compared to 71.9% for the similar period
in 2002. For the nine months ended September 30, 2003, this ratio was 74.0%,
compared to 71.9% for the nine months ended September 30, 2002.
Provision for Federal Income Taxes
The provision for federal income taxes was $710,000 for the third quarter of
2003 as compared to $741,000 for the same period in 2002. For the nine months
ended September 30, the provision was $2.3 million and $2.1 million for 2003 and
2002, respectively. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 32.3% for the first nine months of
2003 and 33.5% for the same period in 2002.
Net Income and Net Income Per Share
Net income for the third quarter of 2003 was $1.53 million, an increase of
$59,000, or 4%, over the $1.47 million recorded in the third quarter of 2002.
The increase was due to an increase in net interest income of $977,000, an
increase in noninterest income of $655,000, a decrease of $25,000 in the
provision for loan losses, a decrease of $31,000 in the provision for income
taxes, offset partially by an increase in noninterest expenses of $1.63 million.
Net income for the first nine months of 2003 was $4.8 million compared to $4.1
million recorded in the first nine months of 2002. The increase was due to an
increase in net interest income of $3.7 million, an increase in noninterest
income of $1.5 million, offset partially by an increase in noninterest expenses
of $4.2 million, an increase of $110,000 in the provision for loan losses, and
an increase of $233,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2003, increased 13% to $2.23 per common share for the first
nine months of 2003 compared to $1.97 for the same period in 2002. Diluted
earnings per common share were $2.07 for the first nine months of 2003 and $1.80
for the same period in 2002, an increase of 15%.
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 third quarter of
2003 was 0.69% as compared to 0.81% for the third quarter of 2002. The ROA for
the first nine months of 2003 was 0.77% compared to 0.82% for the first nine
months 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
16
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 third quarter of 2003 was 13.28%,
as compared to 14.49% for the third quarter of 2002. The annualized ROE for the
first nine months of 2003 was 14.30%, as compared to 14.82% for the first nine
months of 2002.
FINANCIAL CONDITION
Securities
During the first nine months of 2003, securities available for sale increased by
$10.4 million from $205.4 million at December 31, 2002 to $215.8 million at
September 30, 2003. This resulted from the purchase of $173.0 million in
securities, partially offset by $158.9 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 duration of the securities available for
sale portfolio was 3.4 years at September 30, 2003 with a weighted average yield
of 3.80%.
During the first nine months of 2003, securities held to maturity increased from
$97.6 million to $175.3 million primarily as a result of the purchase of $113.2
million in securities, offset by principal repayments of $35.5 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 duration of the securities held
to maturity portfolio was 5.9 years at September 30, 2003 with a weighted
average yield of 5.54%.
Federal funds sold increased $9.5 million during the first nine months of 2003.
Total securities and federal funds sold aggregated $445.1 million at September
30, 2003, and represented 46% of total assets.
The average yield on the combined securities portfolio for the first nine months
of 2003 was 4.58%, as compared to 6.08% for the similar period of 2002. The
average yield earned on federal funds sold during the first nine months of 2003
was 1.06%, down 59 basis points from 1.65% earned during the first nine 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 nine months of 2003, total loans held for sale decreased $1.9
million, from $10.5 million at December 31, 2002 to $8.6 million at September
30, 2003. The change was the result of the sale of $6.8 million of student loans
and the sale of $83.5 million of residential loans, offset by originations of
$88.4 million in new loans held for sale. Loans held for sale represented 1.3%
of total assets at December 31, 2002 and 0.9% of total assets at September 30,
2003.
Loans Receivable
During the first nine months of 2003, total gross loans receivable increased by
17
$65.8 million from $368.9 million at December 31, 2002, to $434.7 million at
September 30, 2003. Loans receivable represented 49% of total deposits and 45%
of total assets at September 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 September 30,
2003, were $1.5 million, or 0.15%, of total assets as compared to $1.8 million,
or 0.23%, of total assets at December 31, 2002. Foreclosed real estate totaled
$238,000 at September 30, 2003, and $118,000 as of December 31, 2002.
The summary table below presents information regarding nonperforming loans and
assets as of September 30, 2003 and 2002 and December 31, 2002.
Nonperforming Loans and Assets
================================================================================================
(dollars in thousands) September 30, December 31, September 30,
2003 2002 2002
- ------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 214 $ 958 $ 1,261
Consumer 108 42 43
Real estate:
Construction 0 0 0
Mortgage 195 599 716
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 517 1,599 2,020
Loans past due 90 days or more and still
accruing 707 55 23
Restructured loans 0 0 0
- ------------------------------------------------------------------------------------------------
Total nonperforming loans 1,224 1,654 2,043
Foreclosed real estate 238 118 138
- ------------------------------------------------------------------------------------------------
Total nonperforming assets 1,462 $1,772 2,181
- ------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.28% 0.45% 0.55%
Nonperforming assets to total assets 0.15% 0.23% 0.27%
================================================================================================
Nonaccrual commercial loans are comprised of six loans at September 30, 2003.
Management's Allowance for Loan Loss Committee has reviewed the composition of
the nonaccrual loans and believes adequate collateralization exists.
18
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
===============================================================================================================
(dollars in thousands) Nine months Year Ending Nine months
Ending December 31, Ending
September 30, 2002 September 30,
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 5,146 $ 4,544 $ 4,544
Provisions charged to operating expenses 1,200 1,435 1,090
- ---------------------------------------------------------------------------------------------------------------
6,346 5,979 5,634
Recoveries of loans previously charged-off:
Commercial 28 93 89
Consumer 82 2 2
Real estate 115 21 20
- ---------------------------------------------------------------------------------------------------------------
Total recoveries 225 116 111
Loans charged-off:
Commercial (323) (561) (205)
Consumer (184) (70) (66)
Real estate (287) (318) (204)
- ---------------------------------------------------------------------------------------------------------------
Total charged-off (794) (949) (475)
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs (569) (833) (364)
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $ 5,777 $ 5,146 $ 5,270
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of 0.14% 0.23% 0.10%
Average loans outstanding
Allowance for loan losses as a percentage of
Period-end loans 1.33% 1.40% 1.44%
===============================================================================================================
Premises and Equipment
During the first nine months of 2003, premises and equipment increased by $8.7
million, or 33%, from $26.4 million at December 31, 2002 to $35.1 million at
September 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 and York Loan Processing Offices, furniture and equipment for the
new branches that opened in June 2003, July 2003 and September 2003, and
preliminary costs for the future branch sites, offset by the provision for
depreciation and amortization.
19
Deposits
Total deposits at September 30, 2003 were $894.6 million, up $167.7 million, or
23%, over total deposits of $727.0 million at December 31, 2002. The average
balances and weighted average rates paid on deposits for the first nine months
of 2003 and 2002 are presented in the following table.
==============================================================================================
Nine months Ended September 30,
2003 2002
- ----------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 138,548 $ 111,921
Interest-bearing (money market
and checking) 227,754 0.91% 138,287 1.36%
Savings 232,059 1.06 190,300 2.09
Time deposits 179,894 3.26 174,557 4.13
- ----------------------------------------------------------------------------------------------
Total deposits $ 778,255 $ 615,065
==============================================================================================
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.
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 September 30, 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
20
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 September 30, 2003, the Company's
income simulation model indicates net income would increase by 2.5% in the first
year and decrease by 2.2% over a two-year time frame, if rates decreased 100
basis points as compared to an increase of 0.4% and decrease of 4.2%,
respectively, at September 30, 2002. The model projects that net income would
decrease by 1.3% and increase by 10.1% in the first year and over a two-year
time frame, respectively, if rates increased 200 basis points, as compared to a
increase of 3.9% and an increase of 13.4%, respectively, at September 30, 2002.
All of these forecasts are within an acceptable level of interest rate risk per
the policies established by ALCO.
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
September 30, 2003, the market value of equity indicates an acceptable level of
interest rate risk.
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. Using an independent consultant, 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, are relatively insensitive to changes in
interest rates and have significant longer average lives and durations than the
Company's loans and investment securities. 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 September 30, 2003 provide an accurate assessment of
the Company's 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 September 30,
21
2003, the total potential liquidity for the Company through these secondary
sources was $251 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 September 30, 2003, stockholders' equity totaled $47.7 million, up 11% over
stockholders' equity of $42.8 million at December 31, 2002. Stockholders' equity
at September 30, 2003 included $546,000 of gross unrealized gains, net of income
taxes, on securities available for sale. Excluding these unrealized gains, gross
stockholders' equity increased by $5.9 million from $41.3 million at December
31, 2002, to $47.2 million at September 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.
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
September 30, December 31, For Capital Under Prompt Corrective
2003 2002 Adequacy Purposes Action Provisions
- ------------------------------------ ---------------- ----------------- -------------------------- --------------------------
Risk-Based Capital Ratios:
Tier 1 10.12% 11.11% 4.00% 6.00%
Total 11.10 12.17 8.00 10.00
Leverage ratio
(to average assets) 6.81 6.97 4.00 5.00
==============================================================================================================================
The consolidated capital ratios at September 30, 2003 are not materially
different to the Bank's capital ratios. At September 30, 2003, the consolidated
capital levels of the Company and of the Bank met the definition of a "well
capitalized" institution.
22
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 September 30, 2003, the Company's net interest
margin has remained fairly stable. Commerce's net interest margin for the first
nine months of 2003 was 4.18%, a difference of 17 basis points from 4.35% for
the first nine months of 2002.
Currently, Commerce has 73% 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
September 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
23
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 September 30, 2003.
Item 3. Defaults Upon Senior Securities
No items to report for the quarter ending September 30, 2003.
Item 4. Submission of Matters to a Vote of Securities Holders
No items to report for the quarter ending September 30, 2003.
Item 5. Other Information
No items to report for the quarter ending September 30, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Articles of Incorporation (incorporated by
reference to Form 10-K filed March 31, 2003)..........................................................Exhibit 3 (i)
Bylaws (incorporated by
reference to Form 10-K filed March 31, 2003)..........................................................Exhibit 3(ii)
Amendment to Network Agreement,
including original Network Agreement, by and among
Commerce Bancorp, Inc., Pennsylvania Commerce Bancorp, Inc.
and Commerce Bank/Harrisburg, ...........................................................................Exhibit 10
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
24
(b.) Reports on Form 8-K
On July 23, 2003, the Company filed a form 8-K announcing the following
information:
On July 23, 2003, Pennsylvania Commerce Bancorp, Inc. issued a press release
reporting financial results for its second quarter of 2003.
25
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)
11/14/03 /s/ Gary L. Nalbandian
- ------------------------- -----------------------------------------
(Date) Gary L. Nalbandian
President/CEO
11/14/03 /s/ Mark A. Zody
- ------------------------- -----------------------------------------
(Date) Mark A. Zody
Chief Financial Officer
26