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UNITED STATES 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 quarterly period ended September 30, 2004
--------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File 000-50961
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PENNSYLVANIA COMMERCE BANCORP, INC.
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(Exact name of registrant 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) (zip code)
(717) 975-5630
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(Registrant's telephone number, including area code)
________________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 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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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
2,908,336 Common shares outstanding at 11/2/04
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1
PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.....................................................................3
September 30, 2004 (Unaudited), and December 31, 2003
Consolidated Statements of Income (Unaudited)...................................................4
Three months ended September 30, 2004 and September 30, 2003
Nine months ended September 30, 2004 and September 30, 2003
Consolidated Statements of Stockholders' Equity (Unaudited)....................................5
Nine months ended September 30, 2004 and September 30, 2003
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Nine months ended September 30, 2004, and September 30, 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.....................................27
Item 4. Controls and Procedures........................................................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....................................28
Item 3. Defaults Upon Senior Securities................................................................29
Item 4. Submission of Matters to a Vote of Securities Holders..........................................29
Item 5. Other Information..............................................................................29
Item 6. Exhibits ......................................................................................29
Signatures
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2004 2003
( dollars in thousands, except share amounts) (unaudited)
- -----------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 33,620 $ 37,715
Federal funds sold 7,300 0
------------------------------------------------------------------------------------------------
Cash and cash equivalents 40,920 37,715
Securities, available for sale at fair value 293,565 275,400
Securities, held to maturity at cost
(fair value 2004: $194,269; 2003: $201,568 ) 193,484 199,863
Loans, held for sale 10,596 9,164
Loans receivable, net of allowance for loan losses
(allowance 2004: $7,175; 2003: $6,007) 611,088 469,937
Restricted investments in bank stock 4,191 5,227
Premises and equipment, net 41,690 38,178
Other assets 9,647 16,505
------------------------------------------------------------------------------------------------
Total assets $ 1,205,181 $ 1,051,989
- -----------------------------------------------------------------------------------------------------------------
Liabilities Deposits :
Noninterest-bearing $ 189,636 $ 170,414
Interest-bearing 935,270 736,113
------------------------------------------------------------------------------------------------
Total deposits 1,124,906 906,527
Short-term borrowings and repurchase agreements 0 79,000
Junior subordinated debt 13,600 0
Trust capital securities 0 13,000
Other liabilities 4,814 3,738
------------------------------------------------------------------------------------------------
Total liabilities 1,143,320 1,002,265
- -----------------------------------------------------------------------------------------------------------------
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: 2,445,325 ; 2003: 2,291,805 2,445 2,292
Surplus 44,993 38,725
Retained earnings 13,766 7,758
Accumulated other comprehensive income 257 549
------------------------------------------------------------------------------------------------
Total stockholders' equity 61,861 49,724
------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,205,181 $ 1,051,989
- -----------------------------------------------------------------------------------------------------------------
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,
----------------------------------------------------
(dollars in thousands, except per share amounts) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Interest Loans receivable, including fees :
Income Taxable $ 9,367 $ 6,953 $ 25,398 $20,314
Tax - exempt 74 47 217 158
Securities :
Taxable 6,096 3,650 18,433 11,731
Tax - exempt 100 120 301 332
Federal funds sold 1 69 1 209
-------------------------------------------------------------------------------------------------------------
Total interest income 15,638 10,839 44,350 32,744
- -----------------------------------------------------------------------------------------------------------------------------
Interest Deposits 3,047 2,349 7,760 7,777
Expense Short-term borrowings 354 1 1,035 1
Long-term debt 354 339 1,063 1,017
-------------------------------------------------------------------------------------------------------------
Total interest expense 3,755 2,689 9,858 8,795
-------------------------------------------------------------------------------------------------------------
Net interest income 11,883 8,150 34,492 23,949
Provision for loan losses 675 350 1,925 1,200
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,208 7,800 32,567 22,749
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest Service charges and other fees 2,707 2,077 7,465 5,809
Income Other operating income 130 99 314 285
Gain on sale of securities available for sale 0 288 0 288
Gain on sales of loans 112 185 472 674
-------------------------------------------------------------------------------------------------------------
Total noninterest income 2,949 2,649 8,251 7,056
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and employee benefits 5,364 4,120 16,110 11,403
Expenses Occupancy 1,087 856 3,301 2,425
Furniture and equipment 720 517 1,870 1,361
Advertising and marketing 713 662 2,148 1,580
Data processing 744 485 2,191 1,587
Postage and supplies 279 264 852 718
Other 1,983 1,309 4,984 3,594
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 10,890 8,213 31,456 22,668
-------------------------------------------------------------------------------------------------------------
Income before income taxes 3,267 2,236 9,362 7,137
Provision for federal income taxes 1,069 710 3,055 2,305
-------------------------------------------------------------------------------------------------------------
Net income $ 2,198 $ 1,526 $ 6,307 $ 4,832
- -----------------------------------------------------------------------------------------------------------------------------
Net income per common share : Basic $ 0.93 $ 0.67 $ 2.70 $ 2.13
Diluted 0.86 0.62 2.49 1.97
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes .
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Preferred Common Retained Comprehensive
( dollars 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 purcahse plan - 14 508 - - 522
5 % common stock dividend and cash paid in lieu of
fractional shares (453 shares issued) - 1 17 (18) - -
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2003 $ 400 $ 2,156 $ 32,967 $ 11,620 $ 546 $ 47,689
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Preferred Common Retained Comprehensive
( dollars 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 - - - 6,307 - 6,307
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (292) (292)
-----------
Total comprehensive income 6,015
Dividends declared on preferred stock - - - (60) - (60)
Common stock of 42,557 shares issued under stock
option plans - 43 809 - - 852
Income tax benefit of stock options exercised - - 275 - - 275
Common stock of 510 shares issued under employee
stock purchase plan - - 23 - - 23
Proceeds from issuance of 10,091 shares of common
stock in connection with dividend reinvestment and
stock purchase plan - 10 463 - - 473
Proceeds from issuance of 100,000 shares of common
stock in connection with private placement - 100 4,467 4,567
5 % common stock dividend and cash paid in lieu of
fractional shares (362 shares issued) - - 231 (239) - (8)
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2004 $ 400 $ 2,445 $ 44,993 $ 13,766 $ 257 $ 61,861
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
( in thousands ) 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Operating
Activities Net income $ 6,307 $ 4,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,925 1,200
Provision for depreciation and amortization 1,750 1,313
Deferred income taxes (402) 292
Amortization of securities premiums and accretion of discounts, net 981 2,290
Net gain on sale of securities available for sale 0 (288)
Proceeds from sale of loans 58,672 90,945
Loans originated for sale (59,632) (88,366)
Gain on sales of loans (472) (674)
Stock granted under stock purchase plan 23 3
(Increase) decrease in other assets 8,295 (1,397)
Increase (decrease) in other liabilities 1,076 (1,158)
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,523 8,992
- ----------------------------------------------------------------------------------------------------------------------
Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 31,314 35,530
Purchases (25,008) (113,251)
Securities available for sale :
Proceeds from principal repayments and maturities 85,543 159,182
Purchases (105,059) (172,984)
Net increase in loans receivable (143,076) (66,405)
Purchases of restricted investments in bank stock 1,036 (868)
Purchases of premises and equipment (5,262) (10,044)
-----------------------------------------------------------------------------------------------------
Net cash used by investing activities (160,512) (168,840)
- ----------------------------------------------------------------------------------------------------------------------
Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 192,706 168,605
Net increase (decrease) in time deposits 25,673 (952)
Net increase (decrease) in short-term borrowings (79,000) 0
Proceeds from common stock options exercised 852 403
Proceeds from dividend reinvestment and common stock purchase plans 473 522
Proceeds from issuance of 100,000 shares of common stock in connection
with private placement 4,567 0
Cash dividends on preferred stock and cash in lieu of fractional shares (77) (70)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 145,194 168,508
-----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents 3,205 8,660
Cash and cash equivalents at beginning of year 37,715 75,450
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 40,920 $ 84,110
-----------------------------------------------------------------------------------------------------
See accompanying notes .
6
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Note 1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements were prepared in accordance
with the accounting policies set forth in note 1 (Significant Accounting
Policies) of the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003. The
accompanying consolidated financial statements reflect all adjustments that are,
in the opinion of management, necessary to reflect a fair statement of the
results for the interim periods presented. Such adjustments are of a normal
recurring nature.
These consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003. the results for
the three and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. and its consolidated subsidiaries. All material
intercompany transactions have been eliminated.
Note 2. 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.
Note 3. STOCK-BASED COMPENSATION
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, 2004 and 2003:
7
Three Months Nine Months
Ended September 30, Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Net income:
As reported $2,198 $1,526 $6,307 $4,832
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 (312) (276) (809) (708)
---- ---- ---- ----
Pro-forma $1,886 $1,250 $5,498 $4,124
====== ====== ====== ======
Reported earnings per share:
Basic $0.93 $0.67 $2.70 $2.13
Diluted 0.86 0.62 2.49 1.97
Pro-forma earnings per share:
Basic $0.80 $0.54 $2.35 $1.81
Diluted 0.74 0.50 2.16 1.68
Subsequent to quarter-end September 30, 2004, the Company completed an offering
of 460,000 shares of its common stock at $49 per share.
Note 4. NEW ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." EITF No. 03-1 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB deferred the implementation dates of the
provisions that relate to measurement and recognition of other-than-temporary
impairments. The Company is continuing to evaluate the impact of the measurement
and recognition provisions of EITF 03-1 but does not believe the adoption will
have a material effect on the financial position or results of operations of the
Company.
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. 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 September 30, 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
8
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 did not have a material impact on the Company's
financial condition or results of operations.
Note 5. 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 purchased 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.
The Company has entered into an agreement to purchase the parcel of land at
Linglestown and Patton Roads, Harrisburg, Dauphin County, Pennsylvania. The
Company plans to construct a full-service branch on this property to be opened
in 2005. Subsequent to September 30, 2004 the purchase was completed.
Note 6. COMPREHENSIVE INCOME (LOSS)
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
statements 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)
2004 2003 2004 2003
------------- ------------------ -------------- ----------------
Unrealized holding gains (losses)
on available for sale securities
occurring during the period $ 5,248 $ (959) $ (442) $ (1,188)
Reclassification adjustment for
gains included in net income - 288 - 288
------------- ------------------ -------------- ----------------
Net unrealized gains (losses) 5,248 (1,247) (442) (1,476)
Tax effect (1,784) 424 150 502
------------- ------------------ -------------- ----------------
Other comprehensive
income (loss) $ 3,464 $ (823) $ (292) $ (974)
============= ================== ============== ================
9
Note 7. 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 $9.6 million of standby letters of credit as of September 30, 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 September 30, 2004 for guarantees
under standby letters of credit issued is not material.
Note 8. EQUITY
Subsequent to September 30, 2004, the Company completed its offering of 460,000
shares of its common stock at $49.00 per share. The 60,000 share underwriters'
option to cover over-allotments was fully exercised, which is included in the
460,000-share total. This offering was completed on November 2, 2004.
10
Item 2. 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.
EXECUTIVE SUMMARY
Our competitive strategy utilizes a retail model, which is built on the
gathering and retention of low cost deposits. Management believes deposit growth
continues to be the primary driver of our success and that service and a
superior retail experience, not interest rates, drives deposit growth. The
consistent growth of low cost, long-term deposit relationships allows us to
focus our investments on less risky loans and securities. In addition, our
significant cash flow allows us ongoing reinvestment opportunities as interest
rates change.
Total deposits increased $218.4 million from $906.5 million at December 31, 2003
to $1.12 billion at September 30, 2004. The growth in total deposits was due to
a combination of growth from five new stores opened in the second half of 2003
and also from same store deposit growth. We measure same store deposit growth as
the annual percentage increase in core deposits for store offices open two years
or more. Same store deposit growth as of September 30, 2004 was 25%. As of
September 30, 2004, 16 of our 23 stores had been open for two years or more. Our
core deposits include all deposits except for public fund time deposits.
We expect that we will continue our pattern of expanding our footprint by
branching into contiguous areas of our existing market, and by filling gaps
between existing store locations. We are targeting to open approximately three
to six new stores in each of the next five years. We opened an additional store
in October 2004 bringing the total to 24 by year-end. In addition, to
accommodate our growth we plan to construct a new headquarters, operations and
training center in Harrisburg, which we expect to open in 2005. The anticipated
cost to construct and furnish our new headquarters, operations and training
center in Harrisburg will be between $15.0 million and $18.0 million. As a
result of our targeted growth, we expect that expenses related to salaries,
employee benefits, occupancy, furniture and equipment, and advertising will
increase in subsequent periods. Our long-range plan targets a total of 35 store
offices by the end of 2006. We believe that the demographics of the south
central Pennsylvania market should provide significant opportunities for us to
continue to grow both deposit and lending relationships.
During the first nine months of 2004 our total net loans (including loans held
for sale) increased by $142.6 million from $479.1 million as of December 31,
2003 to $621.7 million at September 30, 2004. This growth was represented across
all loan categories, reflecting a continuing commitment to the credit needs of
our market areas. We have taken great strides over the past 24 months to
strengthen the structure and depth of our lending function and we believe that
the growth in total loans is a result of these efforts. In recent years, there
has been significant consolidation in financial institutions in our market
areas. We believe this consolidation has caused dislocation, and therefore has
provided us with the opportunity to gain customers and hire experienced local
banking professionals. Our loan to deposit ratio at September 30, 2004 was
55.9%, as compared to 53.5% as of December 31, 2003.
11
During the first nine months of 2004 our total assets grew by $153.2 million
from $1.05 billion at December 31, 2003 to $1.21 billion as of September 30,
2004. During this same nine-month time period, interest earning assets (loans
and investments) increased by $153.3 million from $959.6 million to $1.11
billion. The growth in earning assets was funded by the previously mentioned
deposit growth of $218.4 million.
Net interest income grew by $10.5 million, or 44%, compared to the first nine
months of 2003 almost entirely due to the increased volume in interest earning
assets. Total revenues (net interest income plus noninterest income) increased
by $11.7 million, or 38%, in the first nine months of 2004 compared to the first
nine months of 2003 and net income increased by 31% from $4.8 million to $6.3
million. Diluted net income per share increased by 26%, from $1.97 to $2.49.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our accounting policies are fundamental to understanding Management's Discussion
and Analysis of Financial Condition and Results of Operation. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make assumptions about future events that affect the
amounts reported in our consolidated financial statements and accompanying
notes. Since future events and their effects cannot be determined with absolute
certainty, actual results may differ from those estimates. Management makes
adjustments to its assumptions and judgments when facts and circumstances
dictate. The amounts currently estimated by us are subject to change if
different assumptions as to the outcome of future events were made. We evaluate
our estimates and judgments on an ongoing basis and predicate those estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Management believes the
following critical accounting policies encompass the more significant judgments
and estimates used in preparation of our consolidated financial statements.
12
Allowance for Loan Losses. The allowance for loan losses represents the amount
available for estimated probable losses existing in our lending portfolio. While
the allowance for loan losses is maintained at a level believed to be adequate
by management for estimated losses in the loan portfolio, the determination of
the allowance is inherently subjective, as it involves significant estimates by
management, all of which may be susceptible to significant change.
While management uses available information to make such evaluations, future
adjustments to the allowance and the provision for loan losses may be necessary
if economic conditions or loan credit quality differ substantially from the
estimates and assumptions used in making the evaluations. The use of different
assumptions could materially impact the level of the allowance for loan losses
and, therefore, the provision for loan losses to be charged against earnings.
Such changes could impact future results.
We perform periodic, systematic reviews of our loan portfolios to identify
inherent losses and assess the overall probability of collection. These reviews
include an analysis of historical default and loss experience, which results in
the identification and quantification of loss factors. These loss factors are
used in determining the appropriate level of allowance to cover the estimated
probable losses existing in each lending category. Management judgment involving
the estimates of loss factors can be impacted by many variables, such as the
number of years of actual default and loss history included in the evaluation
and the volatility of forecasted net credit losses.
The methodology used to determine the appropriate level of the allowance for
loan losses and related provisions differs for commercial versus consumer loans,
and involves other overall evaluations. In addition, significant estimates are
involved in the determination of the appropriate level of allowance related to
impaired loans. The portion of the allowance related to impaired loans is based
on discounted cash flows using the loan's effective interest rate, or the fair
value of the collateral for collateral-dependent loans, or the observable market
price of the impaired loan. Each of these variables involves judgment and the
use of estimates. For instance, discounted cash flows are based on estimates of
the amount and timing of expected future cash flows.
In addition to periodic estimation and testing of loss factors, we periodically
evaluate changes in levels and trends of charge-offs, delinquencies and
nonaccrual loans, trends in volume and term loans, changes in underwriting
standards and practices, portfolio mix, tenure of the loan officers and
management, changes in credit concentrations, and national and local economic
trends and conditions. Management judgment is involved at many levels of these
evaluations.
An integral aspect of our risk management process is allocating the allowance
for loan losses to various components of the lending portfolio based upon an
analysis of risk characteristics, demonstrated losses, industry and other
segmentations, and other more judgmental factors, such as recent loss
experience, industry concentrations, and the impact of current economic
conditions on historical or forecasted net credit losses.
Stock-Based Compensation. As permitted by SFAS No. 123, we account for
stock-based compensation in accordance with Accounting Principles Board Opinion
(APB) No. 25. Under
13
APB No. 25, no compensation expense is recognized in the income statement
related to any options granted under our stock option plans. The pro-forma
impact to net income and earnings per share that would occur if compensation
expense was recognized, based on the estimated fair value of the options on the
date of grant, is disclosed in the notes to the consolidated financial
statements. The calculations used in preparing the pro-forma disclosures include
significant estimates and assumptions by management, some of which could be
susceptible to significant change. These estimates and assumptions include:
weighted average risk-free interest rates, volatility factors of the expected
market price of our common stock, the weighted average expected life of the
stock options and the payment or nonpayment of future cash dividends. Changes in
these assumptions could affect the pro-forma impact to net income and earnings
per share that would occur if compensation expense was recognized.
We intend to continue to account for stock-based compensation in this manner
unless there is more specific guidance issued by the Financial Accounting
Standards Board or unless a clear consensus develops in the financial services
industry on the application of accounting methods.
On March 31, 2004, the Financial Accounting Standards Board issued an Exposure
Draft, Share-Based Payment, which is a proposed amendment to SFAS No. 123. The
Exposure Draft would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, and generally would require
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement at their grant-date fair
values.
THREE MONTHS ENDED SEPTEMBER 30, 2004 OVERVIEW
Total revenues (net interest income plus noninterest income) increased by 37% to
$14.8 million for the quarter as compared to the third quarter of 2003 and net
income for the quarter increased 44% to $2.2 million as compared to $1.5 million
for the third quarter of 2003. Diluted net income per common share increased 39%
to $0.86 from $0.62 per share in the third quarter a year ago (after adjusting
for a 5% common stock dividend paid in February 2004). At September 30, 2004, we
had total assets of $1.21 billion, total net loans (including loans held for
sale) of $621.7 million, and total deposits of $1.12 billion.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $1.12 billion for the third quarter of 2004 as
compared to $794.6 million for the same period in 2003. Approximately $187.8
million, or 58%, of this increase was in average loans outstanding and $135.8
million, or 42%, was in average investment securities and federal funds sold.
The yield on earning assets for the third quarter of 2004 was 5.56%, an increase
of 15 basis points (bps) from the comparable period in 2003. This increase
resulted primarily from increased yields on securities offset by a decrease in
loan yields.
The growth in interest earning assets was funded primarily by an increase in the
average balance of interest-bearing deposits of $186.2 million, an increase in
average noninterest-bearing demand deposits of $37.0 million, and an increase in
average short-term borrowings of $90.7 million over the third quarter of 2003.
Average interest-bearing liabilities increased from $676.1 million during the
third quarter of 2003 to $953.6 million during the third quarter of 2004.
Average savings deposits increased $43.8 million over third quarter of 2003,
average public funds
14
deposits increased $53.2 million, average interest-bearing demand deposits and
money market accounts increased by $51.2 million, and average time deposits
increased $38.0 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
2004 was 1.57%, compared to 1.58% for the third quarter of 2003. Our aggregate
cost of funding sources was 1.33% for the third quarter of 2004, similar to
1.34% as reported for 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 investment 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 $4.8 million, or 44%, over the third quarter of
2003. Interest income on loans outstanding increased by 35% over the third
quarter of 2003 and interest income on investment securities increased by 64%
over the same period. Total interest expense for the third quarter of 2004
increased by $1.1 million, or 40%, from the third quarter of 2003. Interest
expense on deposits increased by $698,000, or 30%, during the third quarter of
2004 over the third quarter of 2003 and interest expense on short-term
borrowings increased by $353,000.
Net interest income for the third quarter of 2004 increased by $3.7 million, or
46%, 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. Our net interest rate spread was 3.99% during the third quarter
of 2004 compared to 3.83% during the same period of the previous year. The net
interest margin increased by 16 basis points from 4.07% for the third quarter
2003 to 4.23% during the third quarter of 2004 as a result of the increased
yield on interest earning assets.
For the nine months ended September 30, 2004, interest income increased by $11.6
million, or 35%, over the same period in 2003. Interest income on loans
outstanding increased by 25% over the first nine months of 2003 and interest
income on investment securities increased by 55% over the same period. Interest
expense for the first nine months of 2004 totaled $9.9 million, up $1.1 million,
or 12%, over total interest expense for the first nine months of 2003. This
increase consisted primarily of an increase of $1.0 million of interest expense
on other borrowed money.
Net interest income for the first nine months of 2004 increased by $10.5
million, or 44%, over the same period in 2003. The Company's net interest margin
increased 15 basis points from 4.18% for the first nine months of 2003 to 4.33%
for the same period of 2004. This is a result of the decrease in the cost of
deposits of .97% during the first nine months of 2004 as compared to 1.36% for
the same period of 2003.
Provision for Loan Losses
We recorded provisions of $675,000 to the allowance for loan losses for the
third quarter of 2004 as
15
compared to $350,000 for the third quarter of 2003. The total provisions for
loan losses were $1.9 million and $1.2 million for the first nine months of 2004
and 2003, respectively. The allowance for loan losses as a percentage of
period-end loans was 1.16% at September 30, 2004 as compared to 1.26% and 1.33%
at December 31, 2003 and September 30, 2003, respectively. The provisions we
have made for loan losses in the first nine months of 2004 are based upon a
combination of loan growth of 30% during the first nine months of 2004, the
increase in the level of non-performing loans as well as managements' internal
analysis of the inherent losses in the current portfolio.
From December 31, 2003 to September 30, 2004, total non-performing loans
increased from $1.2 million to $1.6 million and non-performing loans as a
percentage of total loans increased from 0.25% to 0.27%.
Noninterest Income
Noninterest income for the third quarter of 2004 increased by $300,000, or 11%,
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 $288,000 decrease in the gains on the sale of
securities available for sale and a $73,000 decrease in the gains on the sale of
loans.
Included in noninterest income for the first nine months of 2004 is income of
$119,000, as a result of the gain on the sale of student loans. The Bank sells
its student loans during the first quarter of each year. Included in noninterest
income for the first nine months of 2003 is income of $167,000 as a result of a
gain on the sale of student loans and income of $288,000 as a result of a gain
on the sale of securities. Excluding these transactions, noninterest income for
the first nine months of 2004 totaled $8.1 million as compared to $6.6 million
for the first nine months of 2003, an increase of 23%. 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 2004, noninterest expenses increased by $2.7 million,
or 33%, 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. Noninterest expenses also increased
in 2004 over 2003 as a result of opening five additional stores, 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 September 30, 2004, and September 30, 2003, is presented in the
following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $1.2 million, or 30%, for the third quarter
of 2004 over the third quarter of 2003. This increase primarily reflects
increases in staff levels necessary to handle Company growth from third quarter
2003 to third quarter 2004, including the additional staff of the stores opened
in the period June 2003 through December 2003.
Occupancy expenses of $1.1 million were $231,000 higher for the third quarter of
2004 than for the three months ended September 30, 2003. Increased occupancy
expenses primarily are a result of the five stores opened between June 2003 and
December 2003.
Furniture and equipment expenses of $720,000 were $203,000, or 39%, higher for
the third quarter
16
of 2004 then the three months ended September 30, 2003. This increase was the
result of higher levels of depreciation costs for furniture and equipment
incurred with the addition of five new stores opened between June 2003 and
December 2003.
Advertising and marketing expenses totaled $713,000 for the three months ended
September 30, 2004, an increase of $51,000, or 8%, from the third quarter of
2003. Advertising and marketing expenses increased due to additional marketing
initiatives in all of our markets.
Data processing expenses of $744,000 were $259,000, or 53%, higher in the third
quarter of 2004 than the three months ended September 30, 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 $279,000 were $15,000, or 6%, higher for the
third quarter of 2004 than for the three months ended September 30, 2003. This
was due to a combination of increased usage of supplies with the addition of
five new stores and growth in the volume of customers and customer transaction
statements offset by increased efficiencies gained by the use of an online
ordering and monitoring system.
Other noninterest expenses increased by $674,000, or 51%, for the three-month
period ended September 30, 2004, as compared to the same period in 2003.
Components of the increase include telecommunication and data line expenses,
loan related expenses, checkbook printing expenses, insurance expense,
Pennsylvania shares tax expense, and an increase in the provision for other
losses and differences.
For the first nine months of 2004, total noninterest expenses increased by $8.8
million, or 39%, over the comparable period in 2003. A comparison of noninterest
expenses for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $4.7 million, or 41%, over the
first nine months of 2003. The increase was due to the increase in benefit costs
and claims, and additional salary and benefits costs due to a change in the
level of full-time equivalent employees from 508 at September 30, 2003 to 565 at
September 30, 2004 including the addition of new staff to operate the new stores
opened in June 2003, July 2003, September 2003and December 2003.
Occupancy, furniture and equipment expenses for the first nine months of 2004
were $1.4 million, or 37%, higher for the first nine months of 2004 over the
similar period in 2003. The
17
majority of the increase is the result of costs associated with the opening of
five new stores between June 2003 and December 2003 and the expanded regional
administrative office in York during the summer of 2003.
Advertising and marketing expenses totaled $2.2 million for the nine months
ended September 30, 2004, an increase of $568,000, or 36%, from the first nine
months of 2003. This increase was primarily due to additional marketing
initiatives in all of our markets along with supporting additional stores opened
between June 2003 and December 2003. Our marketing expenses will continue to
expand as the branch network grows.
Data processing expenses increased $604,000, or 38%, for the first nine months
of 2004 as compared to the first nine months of 2003. The increase is the result
of processing higher volumes of customer transactions.
Postage and supplies expenses of $852,000 were $134,000, or 19%, higher for the
first nine months of 2004 than for the nine months ended September 30, 2003.
This was due to a combination of increased usage of supplies with the addition
of five new stores and growth in the volume of customers and customer
transaction statements.
Other noninterest expenses for the first nine months of 2004 were $5.0 million
compared to $3.6 million for the similar period in 2003. Components of the
increase include telecommunication and data line expenses, loan related
expenses, audit and regulatory fees, checkbook printing expenses, director and
committee fees, Pennsylvania shares tax expense, the provision for other losses
and differences, and shareholder expenses.
Operating efficiency ratio expresses the relationship of noninterest expenses to
net interest income plus noninterest income (excluding gain on sales of
investment securities). For the quarter ended September 30, 2004, the operating
efficiency ratio was 73.5%, compared to 78.1% for the similar period in 2003,
and for the nine months ended September 30, 2004, this ratio was 73.6%, compared
to 73.8% for the same period in 2003. Our efficiency ratio remains above our
peer group primarily due to our aggressive growth expansion activities.
Provision for Federal Income Taxes
18
The provision for federal income taxes was $1.1 million for the third quarter of
2004 as compared to $710,000 for the same period in 2003. For the nine months
ended September 30, the provision was $3.1 million and $2.3 million for 2004 and
2003, respectively. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 32.6% for the nine months of 2004 and
32.3% for the same period in 2003.
Net Income and Net Income Per Share
Net income for the third quarter of 2004 was $2.2 million, an increase of
$672,000, or 44%, over the $1.5 million recorded in the third quarter of 2003.
The increase was due to an increase in net interest income of $3.7 million, an
increase in noninterest income of $300,000, offset partially by an increase in
noninterest expenses of $2.7 million, a $325,000 increase in the provision for
loan losses, and an increase of $359,000 in the provision for income taxes.
Net income for the first nine months of 2004 was $6.3 million, up 31% over the
$4.8 million recorded in the first nine months of 2003. This was due to an
increase in net interest income of $10.5 million, an increase in noninterest
income of $1.2 million, offset partially by an increase in noninterest expenses
of $8.8 million, an increase of $725,000 in the provision for loan losses, and
an increase of $750,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2004, increased 27% to $2.70 per common share for the first
nine months of 2004 compared to $2.13 for the same period in 2003. Diluted
earnings per common share were $2.49 for the first nine months of 2004 and $1.97
for the same period in 2003, an increase of 26%.
Return on Average Assets and Average Equity
Return on average assets, referred to as "ROA," measures our net income in
relation to our total average assets. Our annualized ROA for the third quarter
of 2004 was 0.73% as compared to 0.69% for the third quarter of 2003. The ROA
for the first nine months of 2004 was 0.74% compared to 0.77% for the same
period in 2003.
Return on average equity, referred to as "ROE," indicates how effectively we can
generate net income on the capital invested by our shareholders. ROE is
calculated by dividing net income by average stockholders' equity. The
annualized ROE for the third quarter of 2004 was 15.75%, as compared to 13.28%
for the third quarter of 2003. The annualized ROE for the first nine months of
2004 was 15.91%, as compared to 14.30% for the first nine months of 2003.
FINANCIAL CONDITION
Securities
During the first nine months of 2004, securities available for sale increased by
$18.2 million from $275.4 million at December 31, 2003 to $293.6 million at
September 30, 2004. This resulted from the purchase of $105.1 million in
securities, partially offset by $85.5 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 3.5 years at September 30, 2004 and 3.9
19
years at December 31, 2003 with a weighted average yield of 4.87% at September
30, 2004 and 4.55% at December 31, 2003.
During the first nine months of 2004, securities held to maturity decreased by
$6.4 million. During this period, we purchased $25.0 million in securities,
offset by principal repayments of $31.3 million. The securities held in this
portfolio include U.S. Government agency securities, tax-exempt municipal bonds,
collateralized mortgage obligations, corporate debt securities, and
mortgage-backed securities. The duration of the securities held to maturity
portfolio was 5.8 years at September 30, 2004 and 5.9 years at December 31, 2003
with a weighted average yield of 5.54% at September 30, 2004 and 5.43% at
December 31, 2003.
Total securities aggregated $487.0 million at September 30, 2004, and
represented 40% of total assets.
The average yield on the combined securities portfolio for the first nine months
of 2004 was 4.96% as compared to 4.80% for the similar period of 2003.
Loans Held for Sale
Loans held for sale are comprised of student loans and residential mortgage
loans, which we intend to sell and reinvest in higher yielding loans and
securities. The Bank sells its student loans during the first quarter of each
year. At the present time, the Bank's residential loans are originated with the
intent to sell to the secondary market unless the loan is nonconforming to the
secondary market standards or, due to a customer request, we agree not to sell
the loan. The residential mortgage loans that are designated as held for sale
are sold to other financial institutions in correspondent relationships. The
sale of these loans takes place typically within 30 days of funding. At December
31, 2003 and September 30, 2004, none of the residential mortgage loans held for
sale were past due or impaired. During the first nine months of 2004, total
loans held for sale increased approximately $1.4 million, from $9.2 million at
December 31, 2003 to $10.6 million at September 30, 2004. At December 31, 2003,
loans held for sale were comprised of $6.3 million of student loans and $2.9
million of residential mortgages compared to $6.6 million of student loans and
$4.0 million of residential loans at September 30, 2004. The change was the
result of the sale of $7.0 million of student loans and the sale of $51.2
million of residential loans, offset by originations of $59.6 million in new
loans held for sale. Loans held for sale represented 1% of total assets at
December 31, 2003 and September 30, 2004.
Loans Receivable
During the first nine months of 2004, total gross loans receivable increased by
$142.3 million from $475.9 million at December 31, 2003, to $618.3 million at
September 30, 2004. The majority of the growth was in commercial real estate
loans, commercial business loans, lines of credit, and installment loans. Loans
receivable represented 55% of total deposits and 51% of total assets at
September 30, 2004, as compared to 53% and 45%, respectively, at December 31,
2003.
Loan and Asset Quality and Allowance for Loan Losses
Total non-performing assets (non-performing loans, foreclosed real estate, and
loans past due 90 days or more and still accruing interest) at September 30,
2004, were $2.5 million, or 0.20%, of total assets as compared to $1.4 million,
or 0.13%, of total assets at December 31, 2003. Foreclosed real estate totaled
$805,000 at September 30, 2004 and $236,000 at December 31, 2003. The commercial
nonaccrual loan category showed the largest increase from December 31, 2003 to
September 30, 2004. At December 31, 2003, Commercial nonaccrual loans were
comprised of four loans ranging from $25,000 to $42,000 per loan. At September
30, 2004, five loans were in the nonaccrual commercial category, which include
two loans over $300,000. Despite these increases, our overall asset quality, as
measured in terms of non-performing assets total assets, coverage ratios and
non-performing assets to stockholders' equity, remains strong. Loans past due 90
days or more and still accruing as of September 30, 2004 consisted of a consumer
loan
20
and a residential mortgage. This amount was $385,000 at December 31, 2003
(consisting of four commercial loans and four consumer loans) and $707,000 at
September 30, 2003 (consisting of one real estate loan, one commercial loan and
six consumer loans.)
The summary table below presents information regarding non-performing loans and
assets as of September 30, 2004 and 2003 and December 31, 2003.
Non-performing Loans and Assets
- ----------------------------------------------------- ------------------ -------------- -----------------
(dollars in thousands) September 30, December 31, September 30,
2004 2003 2003
- ----------------------------------------------------- ------------------ -------------- -----------------
Nonaccrual loans:
Commercial $ 693 $ 143 $ 214
Consumer 36 68 108
Real estate:
Construction 159 159 0
Mortgage 476 417 195
- ----------------------------------------------------- ------------------ -------------- -----------------
Total nonaccrual loans 1,364 787 517
Loans past due 90 days or more and still accruing 52 385 707
Renegotiated loans 228 0 0
...................................................... .................. .............. .................
Total non-performing loans 1,644 1,172 1,224
Foreclosed real estate 805 236 238
- ----------------------------------------------------- ------------------ -------------- -----------------
Total non-performing assets $ 2,449 $ 1,408 $ 1,462
===================================================== ================== ============== =================
Non-performing loans to total loans 0.27% 0.25% 0.28%
Non-performing assets to total assets 0.20% 0.13% 0.15%
Interest income received on nonaccrual loans $45 $37 $31
Interest income that would have been recorded
under the original terms of the loans $47 $45 $28
Non-performing loan coverage 436% 513% 472%
Non-performing assets/capital reserves 4% 2% 3%
- ----------------------------------------------------- ------------------ -------------- -----------------
Nonaccrual commercial loans were comprised of five loans at September 30, 2004.
Management's Allowance for Loan Loss Committee reviewed the composition of the
nonaccrual loans and believes adequate collateralization exists.
Additional loans of $6.0 million, considered by our internal loan review
department as potential problem loans at September 30, 2004, have been evaluated
as to risk exposure in determining the adequacy for the allowance for loan
losses. Potential problem loans were $10.1 million at December 31, 2003.
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
21
Allowance for Loan Losses
- ----------------------------------------------------------- ----------------- ---------------- ----------------
(dollars in thousands) Nine Months Nine Months
Ending Year Ending Ending
September 30, December 31, September 30,
2004 2003 2003
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Balance at beginning of period $ 6,007 $ 5,146 $ 5,146
Provisions charged to operating expenses 1,925 1,695 1,200
- ----------------------------------------------------------- ----------------- ---------------- ----------------
7,932 6,841 6,346
............................................................ ................. ................ ................
Recoveries of loans previously charged-off:
Commercial 41 66 28
Consumer 102 85 82
Real estate 4 115 115
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Total recoveries 147 266 225
............................................................ ................. ................ ................
Loans charged-off:
Commercial (502) (483) (323)
Consumer (281) (331) (184)
Real estate (121) (286) (287)
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Total charged-off (904) (1,100) (794)
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Net charge-offs (757) (834) (569)
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Balance at end of period $ 7,175 $ 6,007 $ 5,777
=========================================================== ================= ================ ================
Net charge-offs as a percentage of
Average loans outstanding 0.13% 0.20% 0.14%
Allowance for loan losses as a percentage of
Period-end loans 1.16% 1.26% 1.33%
- ----------------------------------------------------------- ----------------- ---------------- ----------------
Premises and Equipment
During the first nine months of 2004, premises and equipment increased by $3.5
million, or 9%, from $38.2 million at December 31, 2003 to $41.7 million at
September 30, 2004. The increase was a result of leasehold improvements and
furniture and equipment purchases necessary for additions to staff and replacing
certain fixed assets partially offset by the provision for depreciation and
amortization.
Other Assets
During the first nine months of 2004, other assets decreased by $6.9 million
from $16.5 million at December 31, 2003, to $9.6 million at September 30, 2004.
The change was 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 September 30, 2004 were $1.12 billion, up $218.4 million, or
24%, over total deposits of $906.5 million at December 31, 2003. Core deposits
(total deposits less public fund time deposits) averaged $919.8 million at
September 30, 2004 up $190.0 million, or 26%, over average core deposits at
September 30, 2003. The average balances and weighted average rates paid on
deposits for the first nine months of 2004 and 2003 are presented in the
following table.
22
Nine months Ended September 30,
2004 2003
- ----------------------------------------- ------------------------- --------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------- ------------ ------------ ------------- ------------
Demand deposits:
Noninterest-bearing $ 176,788 $ 138,548
Interest-bearing (money 314,445 1.00% 227,754 0.91%
market and checking)
Savings 267,187 0.94 232,059 1.06
Time deposits 209,212 2.24 179,864 3.26
- ----------------------------------------- ------------ ------------ ------------- ------------
Total deposits $ 967,632 $ 778,255
- ----------------------------------------- ------------ ------------ ------------- ------------
Short-Term Borrowings
Short-term borrowings totaled $0 as of September 30, 2004 compared to $79.0
million at December 31, 2003. The average rate paid on the short-term
borrowings, which consist of securities sold under agreements to repurchase and
federal funds purchased, was 1.34% during the first nine months of 2004,
compared to an average rate of 1.17% during the first nine months of 2003.
Beginning in the fourth quarter of 2003, we undertook an earnings strategy to
utilize short-term borrowings in an effort to increase the level of interest
earning assets and thus generate a higher level of net interest income. The
additional net interest income earned was used to offset the expenses associated
with opening five new stores between June 2003 and December 2003. The borrowed
funds were reinvested into short and medium term investment securities, mainly
mortgage-backed securities.
We continued to utilize short-term borrowings during the first nine months of
2004 due to our strong loan growth from December 31, 2003 to September 30, 2004.
During the third quarter of 2004, we used a portion of our deposit growth as
well as cash flows from the loan and investment portfolios to reduce the level
of short-term borrowings to $0.
Long-Term Debt
As a result of the adoption of FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," we deconsolidated
our wholly-owned subsidiaries, Commerce Capital Harrisburg Trust I and Commerce
Capital Harrisburg Trust II, referred to as the "Trusts", from our consolidated
financial statements as of March 31, 2004. We have not restated prior periods.
The impact of this deconsolidation was to increase our junior subordinated
debentures by $13.6 million and reduce our trust capital securities line item by
$13.0 million that had represented the trust preferred securities of the Trusts.
Our equity interest in the trust subsidiaries of $600,000, which had previously
been eliminated in consolidation, is now reported in "Other assets" as of
September 30, 2004. For regulatory reporting purposes, the FRB has indicated
that the preferred securities will continue to qualify as Tier 1 Capital subject
to previously specified limitations, until further notice. The adoption of FIN
46 did not have an impact on our results of operations or liquidity.
23
Stockholders' Equity and Capital Adequacy
At September 30, 2004, stockholders' equity totaled $61.9 million, up 24% over
stockholders' equity of $49.7 million at December 31, 2003. Stockholders' equity
at September 30, 2004 included $257,000 of gross unrealized gains, net of income
taxes, on securities available for sale. Excluding these unrealized gains, gross
stockholders' equity increased by $12.4 million from $49.2 million at December
31, 2003, to $61.6 million at September 30, 2004 due to retained net income and
the proceeds from the sale of stock in conjunction with the private placement of
$4.6 million and sales under our stock option and stock purchase plans.
On June 15, 2000, we issued $5.0 million of 11.00% Trust Capital Securities to
Commerce Bancorp, Inc. ("Commerce of New Jersey") through Commerce Harrisburg
Capital Trust I. Proceeds of this offering were down streamed to the Bank to be
used for additional capitalization purposes. All $5.0 million of the Trust
Capital Securities currently qualify as Tier 1 capital for regulatory capital
purposes.
On September 28, 2001, we issued $8.0 million of 10.00% Trust Capital Securities
to Commerce of New Jersey through Commerce Harrisburg Capital Trust II. Proceeds
of this offering were down streamed to the Bank to be used for additional
capitalization purposes. All $8.0 million of the Trust Capital Securities
currently qualify as Tier 1 capital for regulatory capital purposes.
Banks are evaluated for capital adequacy based on the ratio of capital to
risk-weighted assets and total assets. 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-weighted assets. Tier 1 capital includes
common stockholders' equity and qualifying perpetual preferred stock together
with related surpluses and retained earnings. Total capital includes total Tier
1 capital, limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses. The capital standard based on total assets, also
known as the "leverage ratio," requires all, but the most highly-rated, banks to
have Tier 1 capital of at least 4% of total assets.
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:
- ------------------------------------ ---------------- ----------------- ----------------------------- -----------------------
For Minimum For Well
September 30, December 31, Adequately Capitalized Capitalized
2004 2003 Requirements Requirements
- ------------------------------------ ---------------- ----------------- ----------------------------- -----------------------
Risk-Based Capital Ratios:
Tier 1 9.34% 9.49% 4.00% 6.00%
Total 10.24 10.42 8.00 10.00
Leverage ratio 6.19 6.14 3.00 - 4.00 5.00
(to average assets)
- ------------------------------------ ---------------- ----------------- ----------------------------- -----------------------
The consolidated capital ratios of Pennsylvania Commerce at September 30, 2004
are as follows: our leverage ratio was 6.21%, our ratio of Tier 1 capital to
risk-weighted assets was 9.36%, and
24
our ratio of total capital to risk-weighted assets was 10.26%. At September 30,
2004, the Bank met the definition of a "well capitalized" institution.
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.
Our 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 our asset/liability management activities is to maximize
net interest income while maintaining acceptable levels of interest rate risk.
Our Asset/Liability Committee, referred to as "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. Our 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.
Our 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, our 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.
Our ALCO policy has established that income sensitivity will be considered
acceptable if overall net income volatility in a plus 200 or minus 100 basis
point scenario is within 12% of net income in a flat rate scenario in the first
year and 18% using a two year planning window. Net income in the flat rate
scenario is projected to increase by approximately 25% per year. At September
30, 2004, our income simulation model indicates net income would be lower by 0.8
% 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 2.5% and lower by 2.2%,
respectively, at September 30, 2003. The model projects that net income would be
lower by 3.3% and higher by 1.1% in the first year and over a two-year time
frame, respectively, if rates increased 200 basis points, as compared to lower
by 1.3% and higher by 10.1%, respectively, at September 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 of our assets and liabilities, as well as any off balance
sheet items. The model calculates the market value of our 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. Our ALCO policy
indicates that the level of interest rate risk is unacceptable if the immediate
change would result in the loss of 50% or more of the excess of market value
over
25
book value in the current rate scenario. At September 30, 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 our assets and liabilities given an
immediate plus 200 basis point or minus 100 basis point change in interest
rates. One of the key assumptions is the market value assigned to our core
deposits, or the core deposit premium. Using an independent consultant, we have
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 our 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 our
loans and investment securities. Thus, these core deposit balances provide an
internal hedge to market fluctuations in our fixed rate assets. Management
believes the core deposit premiums produced by its market value of equity model
September 30, 2004 provide an accurate assessment of our interest rate risk.
Liquidity
The objective of liquidity management is to ensure our ability to meet our
financial obligations. These obligations include the payment of deposits on
demand at their contractual maturity; the repayment of borrowings as they
mature; the payment of lease obligations as they become due; the ability to fund
new and existing loans and other funding commitments; and the ability to take
advantage of new business opportunities. Our ALCO is responsible for
implementing the policies and guidelines of our board governing liquidity.
Liquidity sources are found on both sides of the balance sheet. Liquidity is
provided on a continuous basis through scheduled and unscheduled principal
reductions and interest payments on outstanding loans and investments. Liquidity
is also provided through the availability and maintenance of a strong base of
core customer deposits; maturing short-term assets; the ability to sell
marketable securities; short-term borrowings and access to capital markets.
Liquidity is measured and monitored daily, allowing management to better
understand and react to balance sheet trends. On a monthly basis, a
comprehensive liquidity analysis is reviewed by our board of directors. The
analysis provides a summary of the current liquidity measurements, projections
and future liquidity positions given various levels of liquidity stress.
Management also maintains a detailed liquidity contingency plan designed to
respond to an overall decline in the condition of the banking industry or a
problem specific to the Company.
The Consolidated Statements of Cash Flows provide additional information on our
sources and uses of funds. From a funding standpoint, we have been able to rely
over the years on a stable base of strong "core" deposit growth. We generated
$18.5 million in cash from operating activities during the first nine months of
2004 versus $9.0 million for the first nine of 2003, mainly due to a combination
of higher net income and an increase in other assets. Investing activities
resulted in a net cash outflow of $160.5 million for the first nine months of
2004 compared to $168.8 million for the same period in 2003. Financing
activities resulted in a net inflow of $145.2 million in 2004 compared to $168.5
million in the first nine
26
months of 2003. Funds from net deposit growth of $218.4 million, offset by a
$79.0 million reduction of short-term borrowings, resulted in a net inflow of
139.4 million in 2004 as compared to the net deposit growth of $167.7 million in
2003. Proceeds from the issuance of 100,000 shares of common stock in connection
with the private placement totaled $4.6 million in additional sources of funds
in 2004.
At September 30, 2004, liquid assets (defined as cash and cash due from banks,
short-term investments, mortgages available for sale, securities available for
sale, and non-mortgage-backed securities held to maturity due in one year or
less) totaled $338.5 million, or 28% of total assets. This compares to $320.8
million, or 31% of total assets, at December 31, 2003.
The Company's investment portfolio consists mainly of mortgage-backed
securities, which do not have stated maturities. Cash flows from such
investments are dependent upon the performance of the underlying mortgage loans,
and are generally influenced by the level of interest rates. As rates increase,
cash flows generally decrease as prepayments on the underlying mortgage loans
slow. As rates decrease, cash flows generally increase as prepayments increase.
The Company and the Bank's liquidity are managed separately. On an
unconsolidated basis, the principal source of our revenue is dividends paid to
the company by the Bank. The Bank is subject to regulatory restrictions on its
ability to pay dividends to the Company. The Company's net cash outflows consist
principally of interest on the trust-preferred securities, dividends on the
preferred stock and unallocated corporate expenses.
We also maintain 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, 2004, our
total potential liquidity through these secondary sources was $481 million of
which all was currently available, as compared to $270 million at December 31,
2003 of which $191 million was available.
Subject to regulatory approvals, we are targeting to open approximately three to
six new stores in each of the next five years. The cost to construct and furnish
a new store will be approximately $1.7 million, excluding the cost to lease or
purchase the land on which the store is located. To accommodate our growth and
perpetuate our culture we plan to construct a new headquarters, operations and
training center in Harrisburg, which we expect to open in 2005. The anticipated
cost to construct and furnish our new headquarters, operations and training
center in Harrisburg will be between $15.0 and $18.0 million.
Forward-Looking Statements
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
27
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 policies, including interest rate policies of the Board of
Governors 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 for the Company's products and services and vice versa; the impact of
changes in financial services' laws and regulations (including laws concerning
taxes, banking, securities and insurance); the impact of the rapid growth of the
Company; the Company's dependence on Commerce Bancorp, Inc. to provide various
services to the Company; changes in the Company's allowance for loan losses;
effect of terrorists attacks and threats of actual war; 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 Company's filings
with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk principally includes interest rate risk, which is
discussed above. The information presented in the Interest Rate Sensitivity
subsection of Part I, Item 2 of this Report, Management's Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated by
reference into this Item 3. Our net interest margin has remained fairly stable.
Our net interest margin for the first nine months of 2004 was 4.33%, an increase
of 15 basis points over 4.18% for the first nine months of 2003.
At September 30, 2004, we had 97% of our deposits in accounts which we consider
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
Quarterly evaluation of the Company's Disclosure and Internal Controls. As of
the end of the period covered by this quarterly report, the Company has
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, with the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. The Company conducts periodic
evaluations of its internal controls to enhance, where necessary, its procedures
and controls.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective in reaching a reasonable level of assurance that management is timely
alerted to material information relating to the Company during the period when
the Company's periodic reports are being prepared.
During the quarter ended September 30, 2004, there has not occurred any change
in Internal Controls that has materially affected or is reasonably likely to
materially affect Internal Controls.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not party to any material pending legal proceeding, other than the
ordinary routine litigation incidental to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On September 29, 2004, the Company entered into and consummated a Stock Purchase
Agreement with Commerce Bancorp, Inc., ("Commerce of New Jersey"). Pursuant to
the Stock Purchase Agreement, Commerce of New Jersey purchased 100,000 shares of
unregistered common stock of the Company (the "Stock") for a per share price of
$45.666 and an aggregate price of $4,566,600. Pursuant to the Stock Purchase
Agreement, the per share price was equal to the average of the closing sale
prices of the Company's common stock on the NASDAQ SmallCap Market for the five
trading day period (i.e. dates in which trades occurred) ending on September 28,
2004.
In connection with the Stock Purchase Agreement, the Company entered into a
Registration Rights Agreement with Commerce of New Jersey whereby the Company
granted Commerce of New Jersey "demand" and "piggy-back" registration rights
with respect to the Stock. Commerce of New Jersey may exercise its "demand"
right at any time from and after March 29, 2005 by providing the Company with a
written request that the Company file a registration statement covering the
Stock. Commerce of New Jersey may only exercise this "demand" right once and
this right is subject to certain exceptions. In connection with Commerce of New
Jersey's "piggy-back" rights, the Company must notify Commerce of New Jersey in
writing at least 15 days prior to the filing of any registration statement for
purposes of a public offering of any of the Company's securities (including, but
not limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding the Company's registration statement on
Form S-1 filed with the SEC on August 13, 2004 (File No. 333-118236) and any
amendments thereto and registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and the Company must afford Commerce of New
Jersey an opportunity to include in such registration statement all or part of
the Stock.
Issuance of the Stock to Commerce of New Jersey pursuant to the Stock Purchase
Agreement was a private placement transaction exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
No items to report for the quarter ending September 30, 2004.
Item 4. Submission of Matters to a Vote of Securities Holders.
No items to report for the quarter ending September 30, 2004.
Item 5. Other Information.
No items to report for the quarter ending September 30, 2004.
29
Item 6. Exhibits.
4 Registration Rights Agreement dated as of September 29, 2004 between
Pennsylvania Commerce Bancorp, Inc. and Commerce Bancorp, Inc.
(incorporated by reference to Exhibit 4.1 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
10.1 Amendment No. 2 to Network Agreement by and among Commerce Bancorp,
Inc., Pennsylvania Commerce Bancorp, Inc. and
Commerce Bank/Harrisburg, N.A. dated as of September 29, 2004
(incorporated by reference to Exhibit 10.1 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
10.2 Stock Purchase Agreement dated as of September 29, 2004, between
Pennsylvania Commerce Bancorp, Inc and Commerce Bancorp, Inc.
(incorporated by reference to Exhibit 10.2 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
Computation of Net Income Per Share.................................Exhibit 11
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act")....................................................Exhibit 31.1
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Exchange Act........................Exhibit 31.2
Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002...................................Exhibit 32
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
11/15/04 /s/ Gary L. Nalbandian
- ------------------------- -------------------------------------------------
(Date) Gary L. Nalbandian
President/CEO
11/15/04 /s/ Mark A. Zody
- ------------------------- -------------------------------------------------
(Date) Mark A. Zody Chief
Financial Officer
31
Exhibit Index
4 Registration Rights Agreement dated as of September 29, 2004 between
Pennsylvania Commerce Bancorp, Inc. and Commerce Bancorp, Inc.
(incorporated by reference to Exhibit 4.1 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
10.1 Amendment No. 2 to Network Agreement by and among Commerce Bancorp,
Inc., Pennsylvania Commerce Bancorp, Inc. and
Commerce Bank/Harrisburg, N.A. dated as of September 29, 2004
(incorporated by reference to Exhibit 10.1 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
10.2 Stock Purchase Agreement dated as of September 29, 2004, between
Pennsylvania Commerce Bancorp, Inc and Commerce Bancorp, Inc.
(incorporated by reference to Exhibit 10.2 to Form 8-K filed by
Pennsylvania Commerce Bancorp, Inc. on October 1, 2004).
Computation of Net Income Per Share.................................Exhibit 11
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act")....................................................Exhibit 31.1
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Exchange Act........................Exhibit 31.2
Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002...................................Exhibit 32
32