SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004
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.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1834776
- ------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599
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(Address of principal executive offices)
(717) 975-5630
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
2,309,209 Common shares outstanding at 3/31/04
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Transitional Small Business Disclosure Format (check one): Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.....................................................................3
March 31, 2004 (Unaudited), and December 31, 2003
Consolidated Statements of Income (Unaudited)...................................................4
Three months ended March 31, 2004 and March 31, 2003
Consolidated Statements of Stockholders' Equity (Unaudited)....................................5
Three months ended March 31, 2004 and March 31, 2003
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Three months ended March 31, 2004, and March 31, 2003
Notes to Consolidated Financial Statements (Unaudited)..........................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................20
Item 4. Controls and Procedures........................................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................20
Item 2. Changes in Securities and Use of Proceeds......................................................21
Item 3. Defaults Upon Senior Securities................................................................21
Item 4. Submission of Matters to a Vote of Securities Holders..........................................21
Item 5. Other Information..............................................................................21
Item 6a. Exhibits.......................................................................................21
Item 6b. Reports on Form 8-K............................................................................21
Signatures
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
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March 31, December 31,
2004 2003
( dollars in thousands, except share amounts) (unaudited)
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Assets Cash and due from banks $ 27,271 $ 37,715
Federal funds sold 0 0
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Cash and cash equivalents 27,271 37,715
Securities, available for sale at fair value 293,348 275,400
Securities, held to maturity at cost
(fair value 2004: $214,128; 2003: $201,568 ) 210,209 199,863
Loans, held for sale 7,552 9,164
Loans receivable, net of allowance for loan losses
(allowance 2004: $6,519; 2003: $6,007) 507,156 469,937
Restricted investments in bank stock 5,542 5,227
Premises and equipment, net 38,687 38,178
Other assets 7,461 16,505
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Total assets $ 1,097,226 $ 1,051,989
=================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 177,960 $ 170,414
Interest-bearing 759,257 736,113
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Total deposits 937,217 906,527
Other borrowed money 88,500 79,000
Junior subordinated debt 13,600 0
Trust capital securities 0 13,000
Other liabilities 4,054 3,738
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Total liabilities 1,043,371 1,002,265
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Stockholders' Preferred stock - Series A noncumulative; $10.00 par value
Equity 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
issued and outstanding - 2004: 2,309,209 ; 2003: 2,291,805 2,309 2,292
Surplus 39,438 38,725
Retained earnings 9,427 7,758
Accumulated other comprehensive income 2,281 549
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Total stockholders' equity 53,855 49,724
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Total liabilities and stockholders' equity $ 1,097,226 $ 1,051,989
=================================================================================================================
See accompanying notes .
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
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Three Months
Ended March 31,
----------------------------
(dollars in thousands, except per share amounts) 2004 2003
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Interest Loans receivable, including fees :
Income Taxable $ 7,618 $ 6,478
Tax - exempt 70 57
Securities :
Taxable 6,089 4,068
Tax - exempt 101 91
Federal funds sold 0 84
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Total interest income 13,878 10,778
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Interest Deposits 2,267 2,835
Expense Other borrowed money 289 0
Long-term debt 354 339
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Total interest expense 2,910 3,174
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Net interest income 10,968 7,604
Provision for loan losses 575 325
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Net interest income after provision for loan losses 10,393 7,279
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Noninterest Service charges and other fees 2,241 1,804
Income Other operating income 90 98
Gain on sale of loans 255 289
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Total noninterest income 2,586 2,191
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Noninterest Salaries and employee benefits 5,369 3,532
Expenses Occupancy 1,124 797
Furniture and equipment 548 398
Advertising and marketing 711 444
Data processing 611 515
Postage and supplies 288 238
Other 1,466 1,104
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Total noninterest expenses 10,117 7,028
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Income before income taxes 2,862 2,442
Provision for federal income taxes 934 794
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Net income $ 1,928 $ 1,648
=======================================================================================
Net income per common share : Basic $ 0.83 $ 0.73
Diluted 0.76 0.68
==========================================================================================================
See accompanying notes .
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
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Balance : December 31, 2002 $ 400 $2,117 $ 31,909 $ 6,866 $ 1,520 $ 42,812
Comprehensive income:
Net income - - - 1,648 - 1,648
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (362) (362)
-------------
Total comprehensive income 1,286
Dividends declared on preferred stock - - - (20) - (20)
Common stock of 12,163 shares issued under
stock option plans - 12 146 - - 158
Income tax benefit of stock options exercised - - 92 - - 92
Common stock of 40 shares issued under employee
stock purchase plan - - 1 - - 1
Proceeds from issuance of 4,023 shares of common
stock in connection with dividend-reinvestment and
stock purchase plan - 4 146 - - 150
5 % common stock dividend and cash paid in lieu
of fractional shares - 1 17 (18) - -
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March 31, 2003 $ 400 $2,134 $ 32,311 $ 8,476 $ 1,158 $ 44,479
==================================================================================================================================
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 2003 $ 400 $2,292 $ 38,725 $ 7,758 $ 549 $ 49,724
Comprehensive income:
Net income - - - 1,928 - 1,928
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 1,732 1,732
-------------
Total comprehensive income 3,660
Dividends declared on preferred stock - - - (20) - (20)
Common stock of 13,071 shares issued under
stock option plans - 13 161 - - 174
Income tax benefit of stock options exercised - - 135 - - 135
Common stock of 90 shares issued under employee
stock purchase plan - - 4 - - 4
Proceeds from issuance of 3,881 shares of common
stock in connection with
dividend reinvestment and stock purchase plan - 4 182 - - 186
5 % common stock dividend and cash paid in lieu of
fractional shares (362 shares issued) - - 231 (239) - (8)
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March 31, 2004 $ 400 $2,309 $ 39,438 $ 9,427 $ 2,281 $ 53,855
==================================================================================================================================
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Three Months Ended March 31,
( in thousands ) 2004 2003
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Operating
Activities Net income $ 1,928 $ 1,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 575 325
Provision for depreciation and amortization 577 401
Deferred income taxes 67 16
Amortization of securities premiums and accretion of discounts, net 287 676
Proceeds from sale of loans 20,662 23,756
Loans originated for sale (18,795) (19,914)
Gain on sales of loans (255) (289)
Stock granted under stock purchase plan 4 1
(Increase) decrease in other assets 8,354 (392)
Increase (decrease) in other liabilities 316 (570)
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Net cash provided by operating activities 13,720 5,658
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 4,714 11,079
Purchases (15,007) (32,722)
Securities available for sale :
Proceeds from principal repayments and maturities 24,954 38,781
Purchases (40,143) (82,437)
Net increase in loans receivable (37,794) (14,221)
Purchases of restricted investments in bank stock (315) (322)
Purchases of premises and equipment (1,086) (3,567)
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Net cash used by investing activities (64,677) (83,409)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 7,280 19,115
Net increase in time deposits 23,410 28,289
Net increase in short-term borrowings 9,500 0
Proceeds from common stock options exercised 174 158
Proceeds from dividend reinvestment and common stock purchase plans 186 150
Cash dividends on preferred stock and cash in lieu of fractional shares (37) (30)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,513 47,682
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Decrease in cash and cash equivalents (10,444) (30,069)
Cash and cash equivalents at beginning of year 37,715 75,450
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Cash and cash equivalents at end of period $ 27,271 $ 45,381
----------------------------------------------------------------------------------------------------------------
See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiary Commerce
Bank/Harrisburg, N.A. ("the Bank"). All material intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the three-month period ended March 31,
2004, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2004.
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.
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
7
statements and footnotes thereto included in the Pennsylvania Commerce Bancorp,
Inc., Annual Report for the year ended December 31, 2003.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 23, 2004 the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 24, 2004, to stockholders of record
on February 6, 2004. Payment of the stock dividend resulted in the issuance of
approximately 109,000 additional common shares and cash of $16,592 in lieu of
fractional shares. The effect of the 5% common stock dividend has been recorded
as of December 31, 2003.
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 March 31, 2004 and 2003:
Three Months
Ended March 31,
- --------------------------------------------------------------------------------
(in thousands) 2004 2003
---- ----
Net income:
As reported $ 1,928 $ 1,648
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 (187) (155)
--------- ---------
Pro-forma 1,741 1,493
Reported earnings per share:
Basic $ 0.83 $ 0.73
Diluted 0.76 0.68
Pro-forma earnings per share:
Basic $ 0.75 $ 0.66
Diluted 0.68 0.61
New Accounting Standards
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003.
8
This Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). The Company's wholly owned subsidiaries, Commerce Capital
Harrisburg Trust I and Commerce Capital Harrisburg Trust II, (the "Trusts")
qualify as variable interest entities under FIN 46. The Trusts issued mandatory
redeemable preferred securities (Trust Preferred Securities) to third-party
investors and loaned the proceeds to the Company. The Trusts hold, as their sole
asset, subordinated debentures issued by the Company.
FIN 46 required the Company to deconsolidate the Trusts from the consolidated
financial statements as of March 31, 2004. There has been no restatement of
prior periods. The impact of this deconsolidation was to increase junior
subordinated debentures by $13.6 million and reduce the trust capital securities
line item by $13.0 million that had represented the trust preferred securities
of the Trusts. The Company's equity interest in the trust subsidiaries of
$600,000, which had previously been eliminated in consolidation, is now reported
in "Other assets" as of March 31, 2004. For regulatory reporting purposes, the
Federal Reserve Board has indicated that the preferred securities will continue
to qualify as Tier 1 Capital subject to previously specified limitations, until
further notice. If regulators make a determination that Trust Preferred
Securities can no longer be considered in regulatory capital, the securities
become callable and the Company may redeem them. The adoption of FIN 46 did not
have an impact on the Company's results of operations or liquidity.
Adoption of this statement does not have or is not expected to have a material
impact on the Company's financial condition or results of operations.
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 Facilities
The Company has entered into an agreement to purchase the land located at the
corner of Friendship Road and TecPort Drive in Swatara Township, Dauphin County,
Pennsylvania. The Company plans to construct a Headquarters/Operations Facility
on this property to be opened in 2005.
9
Note 4. COMPREHENSIVE INCOME
Comprehensive income for the Company consists of net income and unrealized gains
or losses on available for sale securities and is presented in the consolidated
statement of stockholders' equity. Unrealized securities gains or losses and the
related tax impact included in comprehensive income are as follows:
Three Months Ended
------------------
March 31,
---------
(in thousands)
2004 2003
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Unrealized holding gains (losses)
on available for sale securities
occurring during the period $ 2,624 $ (548)
Reclassification adjustment for
gains included in net income 0 0
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Net unrealized gains (losses) 2,624 (548)
Tax effect (892) 186
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Other comprehensive
income (loss) $ 1,732 $ (362)
======= =======
Note 5. GUARANTEES
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Generally, all letters of
credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are
involved in extending loan facilities to customers. The Company, generally,
holds collateral and/or personal guarantees supporting these commitments. The
Company had $8.6 million of standby letters of credit as of March 31, 2004.
Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to cover the
potential amount of future payment required under the corresponding guarantees.
The current amount of the liability as of March 31, 2004 for guarantees under
standby letters of credit issued is not material.
10
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 38% to $13.6
million for the quarter as compared to first quarter of 2003 and net income for
the quarter increased 17% to $1.9 million as compared to $1.6 million for the
first quarter of 2003. Diluted net income per common share increased 12% to
$0.76 from $0.68 per share in the first quarter a year ago (after adjusting for
a 5% common stock dividend paid in February 2004). At March 31, 2004, the
Company had total assets of $1.1 billion, total net loans (including loans held
for sale) of $515 million, and total deposits of $937 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $993.4 million for the first quarter of 2004 as
compared to $737.4 million for the same period in 2003. Approximately $118
million, or 46%, of this increase was in average loans outstanding and $138
million, or 54%, was in average investment securities. The yield on earning
assets for the first quarter of 2004 was 5.60%, a decrease of 31 basis points
(bps) from the comparable period in 2003. 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 first
quarter of 2004 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 million over the first
quarter 2003. Average interest-bearing liabilities increased from $633 million
during the first quarter of 2003 to $849 million during the first quarter of
2004. Average savings deposits increased $27 million over first quarter a year
ago, average public funds deposits increased $36 million, average interest
bearing demand deposits increased by $43 million, average non-interest bearing
demand deposits increased by $39 million, and average time deposits increased
$15 million during the quarter as compared to the first quarter one year ago.
The average rate paid on interest-bearing liabilities for the first quarter of
2004 was 1.38%, a decrease of 65 basis points from the comparable period in
2003. The Company's aggregate cost of funding sources was 1.18% for the first
quarter of 2004, a decrease of 57 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 investment securities. Liabilities
used to fund such assets include deposits, borrowed funds, and long-term
11
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 $3.1 million, or 29%, over the first quarter of
2003. Interest income on loans outstanding increased by 18% over the first
quarter of 2003 and interest income on investment securities increased by 49%
over the same period. Total interest expense for the first quarter of 2004
decreased by $264,000, or 8%, from the first quarter of 2003. Interest expense
on deposits decreased by $568,000, or 20%, during the first quarter of 2004 from
the first three months of 2003. This was offset by an increase of interest
expense on other borrowed money of $289,000.
Net interest income for the first quarter of 2004 increased by $3.4 million, or
44%, over the same period in 2003. 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 4.22% during the
first quarter of 2004 compared to 3.88% during the same period of the previous
year. The net interest margin increased by 26 basis points from 4.16% for the
first quarter 2003 to 4.42% during the first quarter of 2004.
Provision for Loan Losses
The provision for loan losses was $575,000 for the first quarter of 2004 as
compared to $325,000 for the same period in 2003. The increase in the provision
for the three-month period is primarily related to the growth in loan
receivables. The allowance for loan losses as a percentage of period-end loans
was 1.27% at March 31, 2004 as compared to 1.26% and 1.42% at December 31, 2003
and March 31, 2003, respectively.
Noninterest Income
Noninterest income for the first quarter of 2004 increased by $395,000, or 18%,
over the same period in 2003. The increase is attributable to service charges
and fees associated with servicing a higher volume of deposit accounts and
transactions, offset by a decrease in the gain on the sale of loans and other
miscellaneous operating income.
Included in noninterest income for the first three months of 2004 is
nonrecurring income of $119,000, as a result of the gain on the sale of student
loans. Included in noninterest income for the first three months of 2003 is
nonrecurring income of $167,000 as a result of a gain on the sale of student
loans. Excluding these transactions, recurring core noninterest income for the
first three months of 2004 totaled $2.5 million as compared to $2.0 million for
the first three months of 2003, an increase of 22%. The increase is mainly
attributable to additional service charges and fees associated with servicing a
higher volume of deposit accounts and transactions.
Noninterest Expenses
For the first quarter of 2004, noninterest expenses increased by $3.1 million,
or 44%, over the same period in 2003. 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
12
also increased as a result of opening five additional branch offices, one each
in June 2003, July 2003, and September 2003, respectively and two in December
2003. A comparison of noninterest expenses for certain categories for the three
months ended March 31, 2004, and March 31, 2003, is presented in the following
paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $1.8 million, or 52%, for the first quarter
of 2004 over the first quarter of 2003. This increase is consistent with
increases in staff levels necessary to handle Company growth from first quarter
2003 to first quarter 2004, including the additional staff of the branch offices
opened in the period June 2003 through December 2003.
Occupancy expenses of $1.1 million were $327,000 higher for the first quarter of
2004 than for the three months ended March 31, 2003. Increased occupancy
expenses primarily are a result of the five branch offices opened between June
2003 and December 2003, along with expanding the Loan Production Office (LPO) in
the Harrisburg Region in the Spring of 2003 and opening a new and larger LPO in
the York region during the summer of 2003.
Furniture and equipment expenses of $548,000 were $150,000, or 38%, higher for
the first quarter of 2004 then the three months ended March 31, 2003. 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
12 months and the expansion/addition of the new LPO offices.
Advertising and marketing expenses totaled $711,000 for the three months ended
March 31, 2004, an increase of $267,000, or 60%, from the first quarter of 2003.
Advertising and marketing expenses increased due to additional marketing
initiatives in all of our markets and the addition of the Berks County market,
which occurred in the summer of 2003 when we opened two branches in this market.
Data processing expenses of $611,000 were $96,000, or 19%, higher in the first
quarter of 2004 than the three months ended March 31, 2003. The increase was due
to increased costs associated with processing additional transactions due to
growth in number of accounts serviced.
Postage and supplies expenses of $288,000 were $50,000, or 21%, higher for the
first quarter of 2004 than for the three months ended March 31, 2003. 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 $362,000, or 33%, for the three-month
period ended March 31, 2004, as compared to the same period in 2003. Components
of the increase include:
o higher telecommunication and data line expenses due to the addition of five
new branches;
o higher loan related expenses due to a 34% increase in loan volume over the
past 12 months;
o greater checkbook printing expenses due to an increase in the number of new
accounts opened;
o an increase in the provision for other losses and differences; and
o an increase in audit, exams and shareholder expenses.
13
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 2.88% for the three months ended March 31, 2004, up over the
2.51% reported for the three months ended March 31, 2003. Another productivity
measure is the operating efficiency ratio. This ratio expresses the relationship
of noninterest expenses (excluding foreclosed real estate expenses) to net
interest income plus noninterest income (excluding nonrecurring gains). For the
quarter ended March 31, 2004, the operating efficiency ratio was 75.1%, compared
to 72.7% for the similar period in 2003.
Provision for Federal Income Taxes
The provision for federal income taxes was $934,000 for the first quarter of
2004 as compared to $794,000 for the same period in 2003. The effective tax
rate, which is the ratio of income tax expense to income before income taxes,
was 32.6% for the first three months of 2004 and 32.5% for the same period in
2003.
Net Income and Net Income Per Share
Net income for the first quarter of 2004 was $1.9 million, an increase of
$280,000, or 17%, over the $1.6 million recorded in the first quarter of 2003.
The increase was due to an increase in net interest income of $3.4 million, an
increase in noninterest income of $395,000, offset partially by an increase in
noninterest expenses of $3.1 million, a $250,000 increase in the provision for
loan losses, and an increase of $140,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2004, increased 14% to $0.83 per common share for the first
three months of 2004 compared to $0.73 for the same period in 2003. Diluted
earnings per common share were $0.76 for the first three months of 2004 and
$0.68 for the same period in 2003, an increase of 12%.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the first quarter of
2004 was 0.73% as compared to 0.83% for the first quarter of 2003. For purposes
of calculating ROA, average assets have been adjusted to exclude gross
unrealized appreciation or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the first quarter of 2004 was 14.87%,
as compared to 15.20% for the first quarter of 2003.
14
FINANCIAL CONDITION
Securities
During the first three months of 2004, securities available for sale increased
by $17.9 million from $275.4 million at December 31, 2003 to $293.3 million at
March 31, 2004. This resulted from the purchase of $40.1 million in securities,
partially offset by $25.0 million in principal repayments. The securities
available for sale portfolio is comprised of U.S. Government agency securities,
mortgage-backed securities, collateralized mortgage obligations, and corporate
debt securities. The duration of the securities available for sale portfolio was
3.0 years at March 31, 2004 with a weighted average yield of 4.87%.
During the first three months of 2004, securities held to maturity increased
from $199.9 million to $210.2 million primarily as a result of the purchase of
$15.0 million in securities, offset by principal repayments of $4.7 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 5.2 years at March 31, 2004 with a weighted average
yield of 5.58%.
Total securities aggregated $503.6 million at March 31, 2004, and represented
46% of total assets.
The average yield on the combined securities portfolio for the first three
months of 2004 was 5.08%, as compared to 5.44% for the similar period of 2003.
Loans Held for Sale
Loans held for sale are comprised of student loans and residential mortgage
loans, which the Company originates with the intention of selling in the future.
During the first three months of 2004, total loans held for sale decreased $1.6
million, from $9.2 million at December 31, 2003 to $7.6 million at March 31,
2004. The change was the result of the sale of $7.0 million of student loans and
the sale of $13.5 million of residential loans, offset by originations of $18.9
million in new loans held for sale. Loans held for sale represented 0.9% of
total assets at December 31, 2003 and 0.7% of total assets at March 31, 2004.
Loans Receivable
During the first three months of 2004, total gross loans receivable increased by
$37.7 million from $475.9 million at December 31, 2003, to $513.7 million at
March 31, 2004. The majority of the growth was in commercial real estate and
commercial business loans. Loans receivable represented 55% of total deposits
and 47% of total assets at March 31, 2004, as compared to 53% and 45%,
respectively, at December 31, 2003.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans, foreclosed real estate, and
loans past due 90 days or more and still accruing interest) at March 31, 2004,
were $1.7 million, or 0.15%, of total assets as compared to $1.4 million, or
0.13%, of total assets at December 31, 2003. Foreclosed real estate totaled
$236,000 at March 31, 2004 and December 31, 2003.
15
The summary table below presents information regarding nonperforming loans and
assets as of March 31, 2004 and 2003 and December 31, 2003.
Nonperforming Loans and Assets
- ----------------------------------------------------------------------------------------------
(dollars in thousands) March 31, December 31, March 31,
2004 2003 2003
- ----------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 104 $ 143 $ 197
Consumer 24 68 91
Real estate:
Construction 159 159 0
Mortgage 1,056 417 421
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans 1,343 787 709
Loans past due 90 days or more and still accruing 112 385 175
Restructured loans 0 0 0
- ----------------------------------------------------------------------------------------------
Total nonperforming loans 1,455 1,172 884
Foreclosed real estate 236 236 281
- ----------------------------------------------------------------------------------------------
Total nonperforming assets 1,691 $1,408 1,165
- ----------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.28% 0.25% 0.23%
Nonperforming assets to total assets 0.15% 0.13% 0.14%
==============================================================================================
Nonaccrual commercial loans are comprised of nine loans at March 31, 2004.
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) Three months Year Ending Three months
Ending December 31, Ending
March 31, 2004 2003 March 31, 2003
- -----------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 6,007 $ 5,146 $ 5,146
Provisions charged to operating expenses 575 1,695 325
- ----------------------------------------------------------------------------------------------------------
6,582 6,841 5,471
Recoveries of loans previously charged-off:
Commercial 27 66 0
Consumer 34 85 2
Real estate 0 115 8
- ----------------------------------------------------------------------------------------------------------
Total recoveries 61 266 10
Loans charged-off:
Commercial 0 (483) (0)
Consumer (121) (331) (7)
Real estate (3) (286) (40)
- ----------------------------------------------------------------------------------------------------------
Total charged-off (124) (1,100) (47)
- ----------------------------------------------------------------------------------------------------------
Net charge-offs (63) (834) (37)
- ----------------------------------------------------------------------------------------------------------
Balance at end of period $ 6,519 $ 6,007 $ 5,434
- ----------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of 0.01% 0.20% 0.01%
Average loans outstanding
Allowance for loan losses as a percentage of
Period-end loans 1.27% 1.26% 1.42%
==========================================================================================================
16
Premises and Equipment
During the first three months of 2004, premises and equipment increased by
$509,000, or 1%, from $38.2 million at December 31, 2003 to $38.7 million at
March 31, 2004. The increase was a result of leasehold improvements and
furniture and equipment purchases necessary for additions to staff and replacing
certain fixed assets offset by the provision for depreciation and amortization.
Other Assets
During the first three months of 2004, other assets decreased by $9.0 million
from $16.5 million at December 31, 2003, to $7.5 million at March 31, 2004. The
change was primarily the result of the sale of committed securities included as
other assets at December 31, 2003, with a fair market value of $9.2 million. The
proceeds from the sale were received in the first quarter of 2004.
Deposits
Total deposits at March 31, 2004 were $937.2 million, up $30.7 million, or 3%,
over total deposits of $906.5 million at December 31, 2003. The average balances
and weighted average rates paid on deposits for the first three months of 2004
and 2003 are presented in the following table.
Three months Ended March 31,
2004 2003
- ----------------------------------------- ------------------------- --------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------- ------------ ------------ ------------- ------------
Demand deposits:
Noninterest-bearing $ 162,541 $ 124,009
Interest-bearing (money
market and checking) 294,609 0.84% 203,617 0.98%
Savings 249,939 0.89 225,011 1.23
Time deposits 197,096 2.24 191,778 3.51
- ----------------------------------------- ------------ ------------ ------------- ------------
Total deposits $ 904,185 $ 744,415
========================================= ============ ============ ============= ============
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.
17
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.
The Company's Asset/Liability Committee (ALCO) policy has established that
income sensitivity will be considered acceptable if overall net income
volatility in a plus 200 or minus 200 basis point scenario is within 15% of net
income in a flat rate scenario in the first year and 30% using a two year
planning window. At March 31, 2004, the Company's income simulation model
indicates net income would be higher by 0.1% in the first year and lower by 5.9%
over a two-year time frame, if rates decreased 100 basis points as compared to
higher by 0.04% and lower by 5.4%, respectively, at March 31, 2003. The model
projects that net income would by lower by 4.1% and higher by 1.8% in the first
year and over a two-year time frame, respectively, if rates increased 200 basis
points, as compared to higher by 4.2% and 17.1%, respectively, at March 31,
2003. 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
March 31, 2004, 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 March 31, 2004 provide an accurate assessment of the
Company's interest rate risk.
18
Liquidity
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Company on an ongoing basis. Liquidity needs are generally met by converting
assets into cash or obtaining sources of additional funding, mainly deposits.
Liquidity sources from asset categories are provided primarily by cash and
federal funds sold, and the cash flow from the amortizing securities and loan
portfolios. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
The Company has established secondary sources of liquidity consisting of federal
funds lines of credit, repurchase agreements, and borrowing capacity at the
Federal Home Loan Bank, which can be drawn upon if needed. As of March 31, 2004,
the total potential liquidity for the Company through these secondary sources
was $362 million. In view of the primary and secondary sources as previously
mentioned, management believes that the Company is capable of meeting its
anticipated liquidity needs.
Capital Adequacy
At March 31, 2004, stockholders' equity totaled $53.9 million, up 8% over
stockholders' equity of $49.7 million at December 31, 2003. Stockholders' equity
at March 31, 2004 included $2.3 million of gross unrealized gains, net of income
taxes, on securities available for sale. Excluding these unrealized gains, gross
stockholders' equity increased by $2.4 million from $49.2 million at December
31, 2003, to $51.6 million at March 31, 2004 due to retained net income and the
proceeds from the sale of stock under the Company's 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.
19
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
March 31, December 31, For Capital Action Provisions
2004 2003 Adequacy Purposes
- ------------------------------ ---------------- ----------------- -------------------------- --------------------------
Risk-Based Capital Ratios:
Tier 1 9.37% 9.49% 4.00% 6.00%
Total 10.33 10.42 8.00 10.00
Leverage ratio 6.01 6.14 4.00 5.00
(to average assets)
- ------------------------------ ---------------- ----------------- -------------------------- --------------------------
The consolidated capital ratios at March 31, 2004 are not materially different
to the Bank's capital ratios. At March 31, 2004, 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.
The Company's net interest margin has remained fairly stable. Commerce's net
interest margin for the first three months of 2004 was 4.42%, a difference of 26
basis points over 4.16% for the first three months of 2003.
Currently, Commerce has 78% of its deposits in non-interest bearing, interest
checking, and saving accounts, which it considers core deposits. These accounts,
which have a relatively low cost of deposits, 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
March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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.
20
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
No items to report for the quarter ending March 31, 2004.
Item 3. Defaults Upon Senior Securities
No items to report for the quarter ending March 31, 2004.
Item 4. Submission of Matters to a Vote of Securities Holders
No items to report for the quarter ending March 31, 2004.
Item 5. Other Information
No items to report for the quarter ending March 31, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share...........................Exhibit 11
(b.) Reports on Form 8-K
On January 23, 2004, the Company filed a form 8-K announcing the following
information:
On January 23, 2004, Pennsylvania Commerce Bancorp, Inc. declared a 5% stock
dividend on the Company's common stock outstanding. The dividend was paid on
Feb. 24, 2004 to shareholders of record Feb. 6, 2004.
On January 27, 2004, the Company filed a form 8-K announcing the following
information:
On January 27, 2004, Pennsylvania Commerce Bancorp, Inc. issued a press release
reporting financial results for its fourth quarter of 2003.
On January 29, 2004, the Company filed a form 8-K announcing the following
information:
On January 28, 2004, Pennsylvania Commerce Bancorp, Inc. announced the
appointment of John J. Cardello, CPA, to the Board of Directors of the Company
and its subsidiary bank, Commerce Bank/Harrisburg, N.A., expanding the board to
eight members.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
5/14/04 /s/ Gary L. Nalbandian
- ------------------------- -----------------------------------------
(Date) Gary L. Nalbandian
President/CEO
5/14/04 /s/ Mark A. Zody
- ------------------------- -----------------------------------------
(Date) Mark A. Zody Chief Financial
Officer
22
Exhibit 11.
Pennsylvania Commerce Bancorp, Inc.
Computation of Net Income Per Share
====================================================================================================
For the Quarter Ended March 31, 2004
- ---------------------------------------------------------------------------------------------------
Income Shares Per Share
Amount
- ---------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net income $1,928,000
Preferred stock dividends (20,000)
--------
Income available to common stockholders 1,908,000 2,301,558 $0.83
- ---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock Options 216,635
-------
Diluted Earnings Per Share:
Income available to common stockholders plus
assumed conversions $1,908,000 2,518,193 $0.76
====================================================================================================
For the Quarter Ended March 31, 2003
- ---------------------------------------------------------------------------------------------------
Income Shares Per Share
Amount
- ---------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net income $1,648,000
Preferred stock dividends (20,000)
--------
Income available to common stockholders 1,628,000 2,230,844 $0.73
- ---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock Options 171,533
-------
Diluted Earnings Per Share:
Income available to common stockholders plus
assumed conversions $1,628,000 2,402,377 $0.68
====================================================================================================
23