Selected Financial Data
Year Ended December 31,
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
BALANCE SHEET DATA:
Total assets $ 378,913 $ 319,323 $ 239,829 $ 198,282 $ 159,769
Loans held for sale 5,301 5,641 6,816 12,953 0
Loans receivable (gross) 216,105 167,121 134,459 103,739 100,361
Securities available for sale 84,652 96,993 48,512 43,088 22,249
Securities held to maturity 29,039 11,493 12,239 13,524 11,037
Federal funds sold 0 11,900 14,325 3,850 12,875
Deposits 348,546 297,737 220,224 182,572 145,957
Long-term debt and other borrowed money 8,300 0 0 1,000 1,000
Stockholders' equity 20,378 20,445 18,318 13,275 11,806
INCOME STATEMENT:
Net interest income $ 14,676 $ 11,276 $ 9,308 $ 7,851 $ 7,226
Provision for loan losses 762 542 150 90 170
Noninterest income 4,531 4,055 2,740 1,700 1,258
Noninterest operating expenses 13,729 11,465 9,078 7,079 6,126
Income before income taxes 4,716 3,324 2,820 2,382 2,188
Net income 3,103 2,218 1,892 1,602 1,473
PER COMMON SHARE DATA:
Net income: Basic $1.85 $1.31 $1.20 $1.12 $1.25
Diluted 1.72 1.21 1.09 1.05 1.19
Book value 11.76 11.87 10.63 8.96 7.95
SELECTED PERFORMANCE RATIOS:
Return on average assets 0.89% 0.80% 0.91% 0.94% 1.05%
Return on average stockholders' equity 15.18 11.50 11.86 12.77 16.88
Net interest margin 4.59 4.49 4.92 5.05 5.57
SELECTED LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits 60.24% 60.26% 63.83% 69.29% 68.87%
Stockholders' equity to total year-end assets 5.38 6.40 7.64 6.70 7.39
Risk based capital: Tier 1 9.91 10.83 12.20 11.44 11.57
Total 11.12 12.02 13.36 13.29 13.62
Leverage ratio 6.28 6.50 7.85 7.10 7.79
ASSET QUALITY:
Net charge-offs to average loans outstanding 0.08% 0.01% 0.11% (0.05)% 0.08%
Nonperforming loans to total year-end loans 0.32 0.16 0.43 0.37 0.16
Nonperforming assets to total year-end assets 0.18 0.09 0.35 0.19 0.10
Allowance for loan losses to total year-end loans 1.31 1.34 1.26 1.62 1.54
Allowance for loan losses to nonperforming loans 415.35 808.70 290.92 436.27 941.46
1
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 consolidated balance
sheets and statements of income. This section should be read in conjunction with
the Company's financial statements and accompanying notes.
1999 OVERVIEW
1999 was highlighted by another year of continued strong financial performance
for Commerce Bank and by the formation of Pennsylvania Commerce Bancorp, Inc., a
Pennsylvania business corporation which reorganized Commerce into a one-bank
holding company. Total assets grew by $60 million, or 19%, to $379 million and
total deposits increased $51 million, or 17%, to $349 million. Total loans also
experienced strong growth of $49 million, or 28%, in 1999 from $172 million to
$221 million.
Net income was up a record 40% in 1999 to $3.1 million from $2.2 million for
1998 and total revenues increased by 25% to a record level of $19.2 million.
Diluted net income per common share increased 42% to $1.72 from $1.21 per share
in 1998 (after adjusting for a 5% common stock dividend declared in January
2000).
The formation of Pennsylvania Commerce Bancorp, Inc., a one-bank holding company
became effective July 1, 1999. The holding company structure will provide
Commerce with the flexibility necessary to continue expanding, opening new
branches and to pursue other future opportunities for growth. The holding
company exchanged one (1) share of its common stock for each share of Commerce
Bank common stock in a tax-free exchange. The Reorganization was accounted for
as a pooling of interests and received regulatory and shareholder approvals.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Table 1 on the following page sets forth balance sheet items on a daily average
basis for the years ended December 31, 1999, 1998 and 1997 and presents the
daily average interest rates earned on assets and the daily average interest
rates paid on liabilities for such periods. During 1999, average interest
earning assets were $319.7 million, an increase of $68.3 million, or 27%, over
1998. This was the result of an increase in the average balance of securities of
$30.7 million and an increase in the average balance of loans receivable of
$40.8 million. The growth was funded by an increase in the average balance of
deposits of $67.4 million.
The yield on total interest earning assets decreased by 26 basis points in 1999
to 7.70%. The decrease resulted primarily from decreased yields in the loan and
investment portfolios due to the overall level and timing of changes in general
market interest rates during 1999 as compared to 1998.
The aggregate cost of interest-bearing liabilities decreased 41 basis points in
1999 to 3.81% from 4.22% in 1998. The average rate paid on savings deposits
decreased by 50 basis points, from 3.40% in 1998 to 2.90% in 1999 and the
average rate paid on time deposits was 5.04%, down 42 basis points from 1998.
Conversely, the average rate paid on interest checking accounts, increased from
2.69% in 1998 to 3.76% in 1999. The average rate paid on public funds time
deposits decreased by 38 basis points in 1999. The majority of the Company's
public funds are deposits of the Commonwealth of Pennsylvania and local school
districts and municipalities. These deposits are repriced at maturity based upon
an average of rates paid for comparable time deposits by several financial
institutions in the Central Pennsylvania market.
The Company's aggregate cost of funding sources decreased 37 basis points in
1999 to 3.11% from 3.48%. This is primarily the result of the decrease in the
average rate paid on total interest bearing deposits combined with a 29%
increase in average noninterest-bearing deposits.
2
TABLE 1
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Earning Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
Securities:
Taxable $ 114,992 $ 7,405 6.44% $ 84,056 $ 5,593 6.65% $ 56,820 $ 3,995 7.03%
Tax-exempt 0 0 0.00 150 7 4.61 747 35 4.68
- -------------------------------------------------------------------------------------------------------------------------------
Total securities 114,992 7,405 6.44 84,206 5,600 6.65 57,567 4,030 7.00
Federal funds sold 9,129 447 4.83 12,420 658 5.23 9,778 540 5.52
Loans receivable:
Mortgage
and construction 136,325 11,685 8.57 110,033 9,836 8.94 86,539 8,028 9.28
Commercial loans
and lines of credit 36,267 3,254 8.97 23,539 2,193 9.32 17,278 1,651 9.55
Consumer 22,629 1,806 7.98 20,755 1,709 8.23 17,188 1,435 8.35
Tax-exempt 365 20 5.52 415 23 5.52 832 62 7.51
- -------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 195,586 16,765 8.57 154,742 13,761 8.89 121,837 11,176 9.17
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 319,707 $ 24,617 7.70% $ 251,368 $ 20,019 7.96% $ 189,182 $ 15,746 8.32%
- -------------------------------------------------------------------------------------------------------------------------------
Sources of Funds
Interest-bearing deposits:
Regular savings $ 78,465 $ 2,272 2.90% $ 69,959 $ 2,378 3.40% $ 63,100 $ 2,429 3.85%
Interest checking 9,779 368 3.76 27,842 750 2.69 25,850 668 2.59
Money market 49,855 1,111 2.23 11,081 249 2.25 3,036 80 2.63
Time deposits 107,928 5,444 5.04 89,452 4,880 5.46 57,449 3,144 5.47
Public funds time 14,105 721 5.11 8,835 486 5.49 1,489 80 5.40
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 260,132 9,916 3.81 207,169 8,743 4.22 150,924 6,401 4.24
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 460 25 5.35 0 0 0.00 197 11 5.58
Long-term debt 0 0 0.00 0 0 0.00 159 26 16.35
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 260,592 9,941 3.81 207,169 8,743 4.22 151,280 6,438 4.26
Noninterest-bearing
funds (net) 59,115 44,199 37,902
- -------------------------------------------------------------------------------------------------------------------------------
Total sources to fund
earning assets $ 319,707 9,941 3.11 $ 251,368 8,743 3.48 $ 189,182 6,438 3.40
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income
and margin $ 14,676 4.59% $ 11,276 4.49% $ 9,308 4.92%
- -------------------------------------------------------------------------------------------------------------------------------
Other Balances
Cash & due from banks $ 12,740 $ 11,787 $ 8,748
Other assets 16,122 14,746 10,966
Total assets 348,569 277,901 208,896
Noninterest-bearing
demand deposits 64,082 49,636 39,951
Other liabilities 3,459 1,816 1,709
Stockholders' equity 20,436 19,280 15,956
- -------------------------------------------------------------------------------------------------------------------------------
Notes: Nonaccrual loans have been included in the average loan balances.
Securities include securities available for sale and securities held to
maturity. Securities available for sale are carried at amortized cost for
purposes of calculating the average rate received on taxable securities above.
Yields on tax-exempt securities are not computed on a taxable equivalent basis.
4
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities. Liabilities used to fund
such assets include deposits and borrowed funds. Changes in net interest income
and margin result from the interaction between the volume and composition of
earning assets, related yields and associated funding costs.
Net interest income for 1999 increased $3.4 million, or 30%, over 1998 to $14.7
million. Interest income on earning assets totaled $24.6 million, an increase of
$4.6 million, or 23%, over 1998. The majority of this increase was related to
volume increases in the securities and loans receivable portfolios. Interest
expense for 1999 increased by $1.2 million, or 14%, to $9.9 million from $8.7
million.
Changes in net interest income are frequently measured by two statistics: net
interest rate spread and net interest margin. Net interest rate spread is the
difference between the average rate earned on earning assets and the average
rate incurred on interest-bearing liabilities. Net interest margin represents
the difference between interest income, including net loan fees earned, and
interest expense, reflected as a percentage of average earning assets. The
Company's net interest rate spread increased to 3.89% in 1999 from 3.74% in 1998
and the net interest margin increased 10 basis points from 4.49% to 4.59%.
Table 2 demonstrates the relative impact on net interest income of changes in
the volume of earning assets and interest-bearing liabilities and changes in
rates earned and paid by the Company on such assets and liabilities. For
purposes of this table, nonaccrual loans have been included in the average loan
balances.
TABLE 2
- -------------------------------------------------------------------------------------------------------------------------------
1999 v. 1998 1998 v. 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in (1) Due to Changes in (1)
(in thousands) Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------------------
Interest on securities:
Taxable $1,988 $(176) $1,812 $1,813 $(215) $1,598
Tax-exempt (7) 0 (7) (28) 0 (28)
Federal funds sold (161) (50) (211) 139 (21) 118
Interest on loans receivable:
Mortgage and construction 2,256 (407) 1,849 2,100 (292) 1,808
Commercial 1,143 (82) 1,061 583 (41) 542
Consumer 149 (52) 97 293 (19) 274
Tax-exempt (3) 0 (3) (22) (17) (39)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 5,365 (767) 4,598 4,878 (605) 4,273
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Regular savings 244 (350) (106) 232 (283) (51)
Interest checking (680) 298 (382) 56 26 82
Money market plus 864 (2) 862 181 (12) 169
Time deposits 940 (376) 564 1,742 (6) 1,736
Public funds 269 (34) 235 405 1 406
Short-term borrowings 25 0 25 (11) 0 (11)
Long-term debt 0 0 0 (26) 0 (26)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,662 (464) 1,198 2,579 (274) 2,305
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) $3,703 $(303) $3,400 $2,299 $(331) $1,968
- -------------------------------------------------------------------------------------------------------------------------------
(1)Changes due to both volume and rate have been allocated to volume changes.
5
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Noninterest Income
Noninterest income for 1999 increased by $476,000, or 12%, over 1998 to $4.5
million. The increase was due primarily to increased "core" other operating
income, which rose $728,000, or 23%, from 1998. This increase was attributable
to service charges and fees associated with servicing a higher volume of deposit
and loan accounts. Included in total noninterest income were gains of $654,000
in 1999 and $500,000 in 1998 on the sale of residential, student, and Small
Business Administration loans. Also included in noninterest income were net
securities gains of $1,000 for 1999 and $386,000 for 1998. The Company recorded
losses of $27,000 and $6,000 in 1999 and 1998 respectively on the sale of Other
Real Estate Owned (OREO), net of expenses.
Noninterest Expenses
Noninterest expenses totaled $13.7 million for 1999, an increase of $2.3
million, or 20%, over 1998. Staffing levels, occupancy, furniture and equipment,
and related expenses increased as a result of opening two Loan Production
Offices in December 1998. Also contributing to the increase was the full-year
impact of the two branch offices that opened in April and August 1998. A
comparison of noninterest expense for certain categories for 1999 and 1998 is
presented below.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $1.1 million, or 22%, in 1999 over 1998. This
increase was consistent with an increase in the level of full-time equivalent
employees from 206 at December 31, 1998 to 231 at year-end 1999. The increased
level of expenses includes the full-year impact of salary and benefit costs
associated with the additional staff for the two new branch offices opened in
April and August 1998.
Occupancy expenses totaled $1.7 million in 1999, an increase of $203,000, or
14%, over 1998 while furniture and equipment expenses increased by $90,000, or
11%, to $937,000. The full-year impact of the two branch offices opened in 1998
along with the two Loan Production Offices opened in December 1998, contributed
to the increases in occupancy and furniture and equipment expenses in 1999 over
1998.
Advertising and marketing expenses were $1.3 million for 1999, an increase of
$214,000, or 20%, over 1998. The increase was primarily the result of increased
advertising efforts in each of the Company's markets. Going forward, the Company
will continue to have multiple markets in which to advertise its products.
Data processing expenses increased by $164,000, or 21%, in 1999 over 1998. The
increase was due to costs associated with processing additional transactions as
a result of growth in the number of accounts serviced combined with the costs
associated with the increased volume of users of our Home Banking product. The
Home Banking product is offered to our customers at no charge. Also included in
the increase were expenses of $60,000 incurred with development and
implementation of the Company's new website, www.commercepc.com.
Postage and supplies expenses of $529,000 were $58,000, or 12%, higher than the
prior year. The increase in postage expenses resulted from the growth in the
number of account statements mailed to customers. The increase in supplies
expense was a result of increased usage of such items related to additional
staff levels as well as an increase in the number of accounts serviced.
Audits, regulatory fees, and assessments for 1999 increased by $60,000, or 30%,
from 1998. The primary reason was the increase in the yearly assessment by the
Office of the Comptroller of the Currency for examinations. The assessment
calculation, which is based on deposit size, continues to increase as the
Company's deposit balances grow.
Other noninterest expenses totaled $2.0 million for 1999, compared to $1.6
million for 1998. The majority of this increase was due to the following:
o increased provisions for non-credit related losses
o increased correspondent bank charges due to an increase in the volume of
items processed, and
o one time nonrecurring expenses associated with the formation of the new
Holding Company, Pennsylvania Commerce Bancorp, Inc.
The Company's current strategic plan calls for the construction of two
additional new branches in 2000. The costs associated with these planned offices
will continue to result in higher levels of staff, facilities, and related
expenses in 2000 and in future periods.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding other
6
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
real estate expenses) less noninterest income (exclusive of non-recurring
gains). This ratio equaled 2.75% for 1999, compared to 2.80% for 1998. Another
productivity measure is the operating efficiency ratio. This ratio expresses the
relationship of noninterest expenses (excluding other real estate expenses) to
net interest income plus noninterest income (excluding non-recurring gains). For
1999, the operating efficiency ratio was 73.0%, compared to 76.7% for 1998.
Provision for Federal Income Taxes
The provision for federal income taxes was $1.6 million for 1999, compared to
$1.1 million for 1998. The effective tax rate, which is the ratio of income tax
expense to income before taxes, was 34% in 1999 and 33% in 1998. The tax rate
for 1998 was less than the federal statutory rate of 34%, primarily because of
tax-exempt securities and loan income. Reference should be made to Note 10 of
the Notes to Financial Statements for an additional analysis of the provision
for income taxes for 1999 and 1998.
In accordance with Statement of Financial Accounting Standard No. 109 (SFAS No.
109), "Accounting for Income Taxes", income taxes are accounted for under the
liability method. Under the liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to temporary
differences between the financial statement and tax bases of existing assets and
liabilities.
At December 31, 1999, deferred tax assets amounted to $2.5 million and deferred
tax liabilities amounted to $277,000. Deferred tax assets are realizable
primarily through carryback of existing deductible temporary differences to
recover taxes paid in prior years, and through future reversal of existing
taxable temporary differences.
Net Income and Net Income Per Share
Net income for 1999 rose to a record $3.1 million, an increase of $885,000, or
40%, over the $2.2 million recorded in 1998. This increase was due to an
increase in net interest income of $3.4 million and an increase in noninterest
income of $476,000, offset by an increase in the provision for loan losses of
$220,000, an increase in noninterest expenses of $2.3 million, and an increase
of $507,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
declared in January 2000, increased by 41% to $1.85 per share, compared to $1.31
in 1998. Diluted earnings per common share were $1.72 for 1999 and $1.21 for
1998 after adjusting for the 5% common stock dividend declared in January 2000.
Reference should be made to Note 12 in the Notes to Financial Statements for an
analysis of earnings per share.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's ROA for 1999 was 0.89%, compared to
0.80% in 1998.
For purposes of calculating ROA, average assets have been adjusted to exclude
the effect of net unrealized gains (losses) on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized gains (losses), net of income taxes, on securities available for
sale. Reference should be made to Note 3 in the Notes to Financial Statements
for an analysis of securities available for sale. The Company's ROE for 1999 was
15.18%, a 32% increase over the 11.50% for 1998.
RESULTS OF OPERATIONS 1998 VERSUS 1997
Net income for 1998 was $2.2 million, an increase of $326,000, or 17%, over the
$1.9 million recorded in 1997.
Basic earnings per common share, after adjusting for a 5% common stock dividend
declared in January 2000 and 1999, increased by 9% to $1.31 per share, compared
to $1.20 per common share for 1997. Diluted earnings per common share were $1.21
for 1998 and $1.09 for 1997 after adjusting for the 5% common stock dividends
declared in January 2000 and 1999.
Net interest income for 1998 was $11.3 million, up $2.0 million, or 21%, over
1997. Interest income on earning assets totaled $20.0 million, an increase of
$4.3 million, or 27%, over 1997. Interest expense for 1998 increased by $2.3
million, or 36%, to $8.7 million from $6.4 million.
The Company's net interest rate spread decreased to 3.74% in 1998 from 4.06% in
1997 and the net interest margin
7
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
decreased by 43 basis points from 4.92% to 4.49%.
Noninterest income for 1998 increased by $1.3 million, or 48%, over 1997 to $4.1
million. Included in noninterest income for 1998 were gains of $500,000 compared
to $501,000 in 1997. Also included in noninterest income were securities gains
of $386,000 for 1998 and $39,000 for 1997. The Company recorded a loss of $6,000
in 1998 and a gain of $46,000 on the sale of OREO, net of expenses, in 1997.
Excluding the above mentioned items, recurring noninterest income increased by
$1.0 million, or 47%, in 1998 over 1997. The increase was attributable to
service charges and fees associated with servicing a higher volume of deposit
and loan accounts. Noninterest expenses totaled $11.5 million for 1998, an
increase of $2.4 million, or 26%, over 1997. The addition of two new branch
offices in 1998 and the full-year impact of the two branch offices opened in
1997 contributed to the increases in noninterest expenses in 1998 over 1997.
Salary expenses and employee benefits increased by $1.2 million, or 33%, in 1998
over 1997. This increase was consistent with the increase in the level of
full-time equivalent employees from 169 at December 31, 1997 to 206 at year-end
1998. Occupancy expenses totaled $1.4 million in 1998, an increase of $234,000,
or 19%, over 1997, while furniture and equipment expenses increased by $173,000,
or 26%, to $847,000.
Advertising and marketing expenses were $1.0 million for 1998, an increase of
$105,000, or 11%, over 1997. Data processing expenses increased by $140,000, or
22%, in 1998 over 1997. Postage and supplies expenses of $471,000 were $106,000,
or 29%, higher than the prior year.
Audits, regulatory fees, and assessments for 1998 increased by $15,000, or 8%,
from 1997. Other noninterest expenses totaled $1.6 million for 1998, compared to
$1.3 million for 1997. The increase was attributable to increased telephone
expenses and loan expenses.
FINANCIAL CONDITION
Securities
Securities are purchased and sold as part of the overall asset and liability
management function at Pennsylvania Commerce Bancorp, Inc. The classification of
all securities is determined at the time of purchase. Securities expected to be
held for an indefinite period of time are classified as securities available for
sale and are carried at fair value. Decisions by management to purchase or sell
these securities are based on an assessment of financial and economic
conditions, including changes in prepayment risks and interest rates, liquidity
needs, capital adequacy, collateral requirements for pledging, alternative asset
and liability management strategies, tax considerations, and regulatory
requirements.
Securities are classified as held to maturity if, at the time of purchase,
management has both the intent and ability to hold the securities until
maturity. Securities held to maturity are carried at amortized cost. Sales of
securities in this portfolio should only occur in unusual and rare situations
where significant unforeseeable changes in circumstances may cause a change in
intent. Examples of such instances would include deterioration in the issuer's
creditworthiness that is evidently supportable and significant or a change in
tax law that eliminates or reduces the tax-exempt status of interest (but not
the revision of marginal tax rates applicable to interest income). Held to
maturity securities cannot be sold based upon any of the decisions used to sell
securities available for sale as listed above. Reference should be made to Note
3 in the Notes to Financial Statements for further analysis of the Company's
securities portfolio.
The Company's securities portfolio, which includes both the available for sale
and held to maturity securities, consists primarily of U.S. Government agency
and mortgage-backed obligations. These securities have very little, if any,
credit risk because they are either backed by the full faith and credit of the
U.S. Government or their principal and interest payments are guaranteed by an
agency of the U.S. Government. These investment securities carry fixed rate
coupons that do not change over the life of the securities. Since most
securities are purchased at premiums or discounts, their yield and average life
will change depending on any change in the estimated rate of prepayments. The
Company amortizes premiums and accretes discounts over the estimated average
life of the securities. Changes in the estimated average life of the securities
8
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
portfolio will lengthen or shorten the period in which the premium or discount
must be amortized or accreted, thus affecting the Company's securities yields.
At December 31, 1999, the weighted average life of the Company's securities
portfolio was 5.4 years compared to 4.0 years at December 31, 1998. The weighted
average life of the portfolio is calculated by estimating the average rate of
repayment of the underlying collateral of the security. U.S. Government
mortgage-backed obligations historically experience repayment rates in excess of
the scheduled repayments, causing a shorter weighted average life of the
security. The Company's securities portfolio contained no "high-risk" securities
or derivatives as of December 31, 1999 or 1998.
Securities available for sale decreased by $7.5 million in 1999 (excluding the
effect of unrealized gains or losses) primarily as a result of purchases of
$12.6 million offset by principal repayments and maturities of $14.5 million and
proceeds from sales of $5.4 million. The securities available for sale portfolio
is comprised of U.S. Treasury securities, U.S. Government Agency securities,
mortgage-backed securities, corporate debt securities, and equity securities. At
December 31, 1999, the unrealized depreciation in securities available for sale
included in stockholders' equity totaled $3.0 million, net of tax, compared to
unrealized appreciation of $214,000, net of tax, at December 31, 1998. The
weighted average maturity of the securities available for sale portfolio was 5.1
years at December 31, 1999, with a weighted average yield of 6.63%.
During 1999, securities held to maturity increased by $17.5 million as a result
of purchases of $20.0 million of mortgage-backed securities offset by principal
repayments of $2.5 million. The securities held in this portfolio include U.S.
Government Agency securities, and mortgage-backed securities. The weighted
average maturity of the securities held to maturity portfolio was 6.4 years at
December 31, 1999, with a weighted average yield of 6.50%.
In concert with the Company's liquidity and asset/liability management
strategies, $5.4 million of mortgage-backed securities were sold in 1999 at a
net pre-tax gain of $1,000. The proceeds of the sale were used to purchase
shorter term mortgage-backed securities in order to reduce the Company's
interest rate. The contractual maturity distribution and weighted average yield
of the Company's available for sale and held to maturity portfolios at December
31, 1999 are summarized in Table 3. Weighted average yield is calculated by
dividing income within each maturity range by the outstanding amount of the
related investment and has not been tax effected on tax-exempt obligations.
9
TABLE 3
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 Due Under 1 Year Due 1-5 Years Due 5-10 Years Due Over 10 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands) Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government:
Treasury securities $ 1,004 5.63% $ 1,001 5.82% $ 2,005 5.72%
Agency obligations 2,000 6.10 $ 7,999 6.61% $ 14,000 6.74% 23,999 6.64
Agency mortgage-
backed obligations 347 6.17 2,126 6.34 55,435 6.63 57,908 6.62
Corporate debt securities 3,154 7.72 3,154 7.72
Equity securities 2,130 6.28 2,130 6.28
- --------------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 1,004 5.63% $ 3,348 6.02% $ 10,125 6.55% $ 74,719 6.69% $ 89,196 6.63%
- --------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government:
Agency obligations $ 1,998 6.23% $ 3,000 6.14% $ 1,000 7.00% $ 5,998 6.31%
Agency mortgage-
backed obligations 6,338 6.20 16,703 6.67 23,041 6.54
- --------------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 0 0.00% $ 1,998 6.23% $ 9,338 6.19% $ 17,703 6.69% $ 29,039 6.50%
- --------------------------------------------------------------------------------------------------------------------------------
Note: Securities available for sale are carried at amortized cost in the table
above for purposes of calculating the weighted average yield received on such
securities.
Loan Portfolio
The following table summarizes the composition of the loan portfolio of the
Company by type as of December 31, for each of the years 1995 through 1999.
TABLE 4
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Commercial real estate, construction and
land development loans $ 120,008 $ 81,949 $ 76,339 $ 63,872 $ 60,829
Residential real estate mortgage loans 34,681 31,694 21,414 13,060 11,651
Tax-exempt loans 342 395 442 784 822
Commercial, industrial and other business loans 21,228 19,614 9,231 7,642 7,821
Consumer loans 22,764 20,868 17,839 9,768 13,043
Lines of credit 17,082 12,601 9,194 8,613 6,195
- -------------------------------------------------------------------------------------------------------------------------------
Total loans $ 216,105 $ 167,121 $ 134,459 $ 103,739 $ 100,361
- -------------------------------------------------------------------------------------------------------------------------------
The Company manages risk associated with its loan portfolio through
diversification, underwriting policies and procedures that are reviewed and
updated on at least an annual basis, and ongoing loan monitoring efforts. The
commercial real estate portfolio includes owner-occupied (owner occupies greater
than 50% of the property), other commercial real estate and construction loans.
Owner-occupied and other commercial real estate loans generally have five-year
call provisions. Construction loans are primarily used for residential single
family properties. Financing is provided against firm agreements of sale, with
speculative construction normally limited to one or two samples per project.
The commercial loan portfolio is comprised primarily of amortizing loans to
small businesses in the Southern Central Pennsylvania market area. Business
assets, personal guarantees, and/or personal assets of the borrower generally
secure these loans. The consumer loan portfolio is comprised primarily of
student loans and loans secured by first and second mortgage liens on
residential real estate. The Company's loan portfolio is generally
nonhomogeneous in that the loans have different interest rates, repayment
options, maturities, collateral requirements, etc.
During 1999, total loans increased by $48.6 million from $172.8 million at
December 31, 1998, to $221.4
10
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
million at December 31, 1999, including $5.3 million of loans held for sale on
December 31, 1999 and $5.6 million at December 31, 1998. The loans held for sale
represent student loans that Company's management intends to sell and reinvest
in higher yielding loans and securities. The increase in loans receivable in
1999 was primarily in commercial real estate, lines of credit and real estate
construction and land development. Loans receivable represented 62% of total
deposits and 57% of total assets at December 31, 1999, excluding the loans held
for sale, compared to 56% and 52%, respectively, at December 31, 1998.
The maturity ranges of the loan portfolio and the amounts of loans with
predetermined interest rates and floating interest rates in each maturity range,
as of December 31, 1999, are presented in the following table.
TABLE 5
- ------------------------------------------------------------------------------------------
December 31, 1999
Due Under Due 1-5 Due Over
(in thousands) One Year Years Five Years Total
- ------------------------------------------------------------------------------------------
Real estate:
Commercial mortgage $ 22,988 $ 25,211 $ 53,351 $101,550
Construction and
land development 11,803 831 5,824 18,458
Residential mortgage 1,069 6,912 26,700 34,681
Tax-exempt 30 206 106 342
- ------------------------------------------------------------------------------------------
35,890 33,160 85,981 155,031
Commercial 7,984 9,893 3,351 21,228
Consumer 10,368 9,938 2,458 22,764
Lines of credit 17,010 58 14 17,082
- ------------------------------------------------------------------------------------------
Total loans $ 71,252 $ 53,049 $ 91,804 $216,105
- ------------------------------------------------------------------------------------------
Interest rates:
Predetermined $ 22,159 $ 53,049 $ 91,804 $167,012
Floating 49,093 0 0 49,093
- ------------------------------------------------------------------------------------------
Total loans $ 71,252 $ 53,049 $ 91,804 $216,105
- ------------------------------------------------------------------------------------------
Concentrations of Credit Risk
The largest portion of loans, 55%, on the Company's balance sheet is for
commercial real estate related loans. The Company's commercial real estate loan
portfolio is principally to borrowers throughout Cumberland, Dauphin and York
counties of Pennsylvania where it has full-service branch locations. Commercial
real estate, construction, and land development loans aggregated $120.0 million
at December 31, 1999, compared to $81.9 million at December 31, 1998. Commercial
real estate loans are collateralized by the related project (principally office
building, multi-family residential, land development, and other properties) and
the Company generally requires loan-to-value ratios of no greater than 80%.
Collateral requirements on such loans are determined on a case-by-case basis
based on managements' credit evaluations of the respective borrowers.
Loan and Asset Quality
Total nonperforming assets (nonperforming loans and other real estate) at
December 31, 1999, were $716,000, or 0.18%, of total assets as compared to
$287,000, or 0.09%, of total assets at December 31, 1998. Other real estate
owned totaled $12,000 as of December 31, 1999, and $11,000 as of December 31,
1998. The Company's loan portfolio has continued to perform extremely well over
the past few years. Total delinquent loans (those loans 30 days or more
delinquent) as a percentage of total loans were 0.38% at December 31, 1999,
compared to 0.50% at December 31, 1998. The Company generally places a loan on
nonaccrual status and ceases accruing interest when loan payment performance is
deemed unsatisfactory and the loan is past due 90 days or more, unless the loan
is both well-secured and in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
an allowance for loan losses that they believe is adequate for estimated losses
in the current loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the
Board of Directors, indicating any changes in the allowance since the last
review and any recommendations as to adjustments in the allowance. In making the
evaluation, management considers the results of recent regulatory examinations,
the effects on the loan portfolio of current economic indicators and their
probable impact on borrowers, the amount of loans charged-off for the period,
the amount of nonperforming loans and related collateral security, and the
evaluation of the loan portfolio by external loan review. These factors led to
decisions in all periods presented to provide amounts greater than net
charge-offs. Charge-offs occur when loans are deemed to be uncollectible.
The Company recorded provisions of $762,000 to the allowance for loan losses for
1999 compared to $542,000 for 1998. During 1999, net charge-offs amounted to
$153,000, or 0.08%, of average loans outstanding for the year, compared to
$9,000, or 0.01%, of average loans outstanding for 1998. The allowance for loan
losses decreased as a percentage of loans receivable from 1.34% of total loans
outstanding at December 31, 1998, to 1.31% of total loans
11
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
outstanding. With the exclusion of the governmental guaranteed portion of the
Small Business Administration loans, the allowance for loan losses as a
percentage of total loans is 1.36% of total loans outstanding at December 31,
1999. The following table summarizes information regarding nonperforming loans
and nonperforming assets as of December 31, 1995 through 1999.
TABLE 6
- ---------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $119 $227 $ 53 $ 78 $ 55
Consumer 244 23 3 59 5
Real estate: Construction 0 0 0 0 0
Mortgage 321 25 528 249 104
- ---------------------------------------------------------------------------------
Total nonaccrual loans 684 275 584 386 164
Loans past due 90 days or more 20 1 0 0 0
Restructured loans 0 0 0 0 0
- ---------------------------------------------------------------------------------
Total nonperforming loans 704 276 584 386 164
Other real estate 12 11 264 0 0
- ---------------------------------------------------------------------------------
Total nonperforming assets $716 $287 $848 $386 $164
- ---------------------------------------------------------------------------------
Nonperforming loans
to total loans 0.32% 0.16% 0.43% 0.37% 0.16%
Nonperforming assets
to total assets 0.18% 0.09% 0.35% 0.19% 0.10%
- ---------------------------------------------------------------------------------
Interest income received on
nonaccrual loans $ 38 $ 5 $ 37 $ 29 $ 1
- ---------------------------------------------------------------------------------
Interest income that would have
been recorded under the
original terms of the loans $ 66 $ 22 $ 53 $ 41 $ 23
- ---------------------------------------------------------------------------------
The table below sets forth information regarding the Company's provision and
allowance for loan losses.
TABLE 7
- ------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Balance at beginning of year $ 2,232 $ 1,699 $ 1,684 $ 1,544 $ 1,448
Provisions charged to
operating expenses 762 542 150 90 170
- ------------------------------------------------------------------------------------------------
2,994 2,241 1,834 1,634 1,618
- ------------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Commercial 8 4 5 62 13
Consumer 4 3 1 3 5
Real estate 1 0 1 0 0
- ------------------------------------------------------------------------------------------------
Total recoveries 13 7 7 65 18
- ------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial 150 2 51 2 20
Consumer 10 14 84 13 6
Real estate 6 0 7 0 66
- ------------------------------------------------------------------------------------------------
Total charged-off 166 16 142 15 92
- ------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 153 9 135 (50) 74
- ------------------------------------------------------------------------------------------------
Balance at end of year $ 2,841 $ 2,232 $ 1,699 $ 1,684 $ 1,544
- ------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) to
average loans outstanding 0.08% 0.01% 0.11% (0.05)% 0.08%
Allowance for loan losses to
year-end loans 1.31% 1.34% 1.26% 1.62% 1.54%
- ------------------------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future credit losses may
occur. The total allowance is available to absorb losses from any segment of
loans.
TABLE 8
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses at December 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
% Gross % Gross % Gross % Gross % Gross
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -------------------------------------------------------------------------------------------------------------------------------
Commercial loans
and lines of credit $ 155 17.73% $ 400 19.28% $ 233 13.70% $ 274 15.67% $ 220 13.96%
Consumer 224 10.53 150 12.49 225 13.27 180 9.42 185 13.00
Real estate, construction
and land development:
Commercial 2,335 55.69 1,582 49.27 970 57.10 1,105 62.32 936 61.43
Residential 127 16.05 100 18.96 271 15.93 125 12.59 203 11.61
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 2,841 100.00% $2,232 100.00% $ 1,699 100.00% $ 1,684 100.00% $ 1,544 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
12
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Deposits
Total deposits averaged $324.2 million for 1999, an increase of $67.4 million,
or 26%, over the 1998 average of $256.8 million. The average balance on
noninterest-bearing demand deposits increased in 1999 by $14.4 million, or 29%,
compared to the prior year. The average total balance of all savings account
products was $78.5 million, a $8.5 million, or 12%, increase over the average
balance for 1998. The average balance of interest-bearing demand accounts (money
market and interest checking accounts) for 1999 increased by $20.7 million, or
53%, over the average balance for the prior year. The average balance of all
time deposits in 1999 was $122.0 million, an increase of $23.7 million, or 24%,
over the average balance for 1998.
The Company believes that its record of sustaining core deposit growth is
reflective of the Company's retail approach to banking which emphasizes a
combination of free checking accounts, convenient branch locations, extended
hours of operation, quality service, and active marketing. Core deposits, which
consist of all deposits other than certificates of deposit in excess of
$100,000, increased $42.4 million, or 17%, in 1999 over 1998.
The remaining maturity for certificates of deposit of $100,000 or more as of
December 31, 1999 is presented in Table 9.
TABLE 9
- -------------------------------------------------------------
(in thousands) 1999
- -------------------------------------------------------------
3 months or less $ 35,491
3 to 6 months 5,089
6 to 12 months 3,158
Over 12 months 7,781
- -------------------------------------------------------------
Total $ 51,519
- -------------------------------------------------------------
Total deposits at December 31, 1999, were $348.5 million, up $50.8 million, or
17%, over total deposits of $297.7 million at December 31, 1998. The average
balances and weighted average rates paid on deposits for 1999, 1998 and 1997 are
presented in Table 10.
TABLE 10
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1999 Average 1998 Average 1997 Average
(dollars in thousands) Balance/Rate Balance/Rate Balance/Rate
- -----------------------------------------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 64,082 $ 49,636 $ 39,951
Interest-bearing (money market and checking) 59,634 2.48% 38,923 2.57% 28,886 2.59%
Savings 78,465 2.90 69,959 3.40 63,100 3.85
Time 122,033 5.05 98,287 5.46 58,938 5.47
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 324,214 $ 256,805 $ 190,875
- -----------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The guidelines established by ALCO are reviewed by the Company's Board
of Directors.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the
13
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
amount of its interest-earning assets within the one year horizon. However,
assets and liabilities with similar repricing characteristics may not reprice at
the same time or to the same degree. As a result, the Company's GAP does not
necessarily predict the impact of changes in general levels of interest rates on
net interest income. Table 11 shows the GAP position for the Company as of
December 31, 1999.
TABLE 11
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
1 - 90 91 - 180 181 - 365 1 - 5 Beyond 5
(in thousands) Days Days Days Years Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans receivable $ 55,319 $ 5,004 $ 7,286 $ 53,436 $ 96,617 $ 217,662
Securities 3,063 3,064 7,127 47,652 54,233 115,139
Federal funds sold 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 58,382 8,068 14,413 101,088 150,850 332,801
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Transaction accounts 36,235 10,374 20,747 62,974 28,186 158,516
Other money borrowed 8,300 0 0 0 0 8,300
Time deposits 54,283 12,910 21,489 31,857 0 120,539
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 98,818 23,284 42,236 94,831 28,186 287,355
- -------------------------------------------------------------------------------------------------------------------------------
Period GAP (40,436) (15,216) (27,823) 6,257 122,664 $ 45,446
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ (40,436) $ (55,652) $ (83,475) $ (77,218) $ 45,446
- -------------------------------------------------------------------------------------------------------------------------------
14
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net income in alternative interest rate scenarios. Management continually
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a
proportionate 200 basis point change during the next year, with rates remaining
constant in the second year.
The Company's Asset/Liability Committee (ALCO) policy has established that
income sensitivity will be considered acceptable if overall net income
volatility in a plus or minus 200 basis point scenario is within 15% of net
income in a flat rate scenario in the first year and 30% using a two year
planning window. At December 31, 1999, the Company's income simulation model
indicates net income would increase 3.9% and 3.7% in the first year and over a
two year time frame, respectively, if rates decreased as described above, as
compared to a decrease of 3.8% and 8.9%, respectively, at December 31, 1998. The
model projects that net income would decrease by 8.6% and 9.5% in the first year
and over a two year time frame, respectively, if rates increased as described
above, as compared to a decrease of 3.0% and 1.3%, respectively, at December 31,
1998. All of these forecasts are within an acceptable level of interest rate
risk per the policies established by ALCO.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point change in rates. The Company's ALCO policy indicates that the level
of interest rate risk is unacceptable if the immediate 200 basis point change
would result in the loss of 60% or more of the excess of market value over book
value in the current rate scenario. At December 31, 1999, the market value of
equity indicates an acceptable level of interest rate risk.
Liquidity
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth and reduce
assets to meet deposit withdrawals, to maintain reserve requirements, and to
otherwise operate the Company on an ongoing basis. Liquidity sources from asset
categories are provided primarily by cash, federal funds sold, and the cash flow
from the amortizing securities and loan portfolios. The primary source of
liquidity from liability categories is the generation of additional core deposit
balances. As previously mentioned, total core deposits increased by $42.4
million, or 17%, in 1999.
Additionally, the Company has established secondary sources of liquidity
consisting of federal funds lines of credit, repurchase agreements, and
borrowing capacity at the Federal Home Loan Bank which can be drawn upon if
needed. As of December 31, 1999, the total potential liquidity for the Company
through these secondary sources was $145 million. In view of the primary and
secondary sources as previously mentioned, management believes the Company is
capable of meeting its anticipated liquidity needs.
Short-Term Borrowings
Short-term borrowings, or other borrowed money, which consists of securities
sold under agreement to repurchase and federal funds purchased, were used
occasionally in 1999 to meet short-term liquidity needs. For 1999, other
borrowed money average $460,000 as compared to $0 in 1998. The average rate paid
on the Company's short-term borrowings was 5.35% during 1999. At December 31,
1999, short-term borrowings totaled $8.3 million. These funds were used to
purchase additional cash to have on hand throughout the branch network as
preparation for possible customer demands for large sums of cash close to
year-end related to Year 2000 (Y2K) fears. Subsequent to year-end, cash on hand
was reduced to normal levels and the borrowed funds were repaid.
Stockholders' Equity and Capital Adequacy
At December 31, 1999, stockholders' equity totaled $20.4 million, the same as
stockholders' equity at December 31, 1998. SFAS No. 115, "Accounting for
15
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
Certain Investments in Debt and Equity Securities", requires that unrealized
gains or losses, net of the tax effect, on securities classified available for
sale be reflected as a separate component of stockholders' equity. As a result,
stockholders' equity at December 31, 1999 included $3.0 million unrealized loss,
net of income taxes, on securities available for sale. Excluding these
unrealized losses, gross stockholders' equity increased by $3.2 million, or 16%,
from $20.2 million at December 31, 1998, to $23.4 million at December 31, 1999,
principally as a result of retained net income.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
Table 12 provides a comparison of the Company's risk-based capital ratios and
leverage ratios to the minimum regulatory requirements for the periods
indicated.
At December 31, 1999, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%.
TABLE 12
- -------------------------------------------------------------------------------------------------------------------------------
To Be Well-
Capitalized Under
Actual December 31, For Capital Prompt Corrective
1999 1998 Adequacy Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------------------
Total Capital 11.12% 12.02% 8.00% 10.00%
Tier 1 Capital 9.91 10.83 4.00 6.00
Leverage ratio (to average assets) 6.28 6.50 4.00 5.00
- -------------------------------------------------------------------------------------------------------------------------------
The Company's common stock is listed for trading on the NASDAQ Stock Exchange
under the symbol COBH. As of February 29, 2000, there was approximately 400
holders of record of the Company's common stock. The Company offers a Dividend
Reinvestment and Stock Purchase Plan by which dividends on the Company's Common
Stock and optional cash payments of up to $5,000 per quarter (subject to change)
may be invested in Common Stock at a 3% discount (subject to change) to the
market price and without payment of brokerage commissions.
Year 2000
Over the past two years, the Company has described and reported on the progress
of its plans to be ready for the Year 2000 date change. In 1999, the company
completed all necessary remediation and testing of systems. As a result of the
detailed planning and implementation efforts, we are pleased to report the
Company experienced no disruptions in mission critical or non-mission critical
information and technology systems, and believe those systems successfully
responded to the Year 2000 date change. The Company is not aware of any problems
resulting from Year 2000 issues, either with its internal systems or the
products and services of third parties (including loan and deposit customers).
The total cost of the entire Year 2000 compliance process, including internal
and external personnel and any required hardware or software modifications was
approximately $100,000.
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 this Annual Report and Form 10-K
and the exhibits hereto and 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.
16
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such forward-looking statements: the strength
of the United States economy in general and the strength of the local economies
in which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "FRB"); 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); technological
changes; future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Impact of Inflation and Changing Prices
Interest rates have a more significant impact on the Company's performance than
do the effects of general levels of inflation, since most of the Company's
assets and liabilities are monetary in nature. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services as measured by the Consumer Price Index. The liquidity and maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
17
Consolidated Balance Sheets
December 31,
(in thousands, except share amounts) 1999 1998
ASSETS
Cash and due from banks $ 27,490 $ 11,975
Federal funds sold 0 11,900
--------- ---------
Cash and cash equivalents 27,490 23,875
Securities, available for sale at fair value 84,652 96,993
Securities, held to maturity at cost
(fair value 1999: $27,877; 1998: $11,524 ) 29,039 11,493
Loans, held for sale (fair value 1999: $5,380; 1998: $5,726) 5,301 5,641
Loans receivable:
Real estate:
Commercial mortgage 101,550 68,663
Construction and land development 18,458 13,286
Residential mortgage 34,681 31,694
Tax-exempt 342 395
Commercial business 21,228 19,614
Consumer 22,764 20,868
Lines of credit 17,082 12,601
--------- ---------
216,105 167,121
Less: Allowance for loan losses 2,841 2,232
--------- ---------
Net loans receivable 213,264 164,889
Premises and equipment, net 14,408 13,420
Accrued interest receivable 2,105 1,824
Other assets 2,654 1,188
--------- ---------
Total assets $ 378,913 $ 319,323
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 69,495 $ 60,699
Interest-bearing 279,051 237,038
--------- ---------
Total deposits 348,546 297,737
Accrued interest payable 567 518
Other liabilities 1,122 623
Other borrowed money 8,300 0
--------- ---------
Total liabilities 358,535 298,878
Stockholders' Equity:
Preferred stock - Series A noncumulative; $10.00 par value;
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 1999: 1,644,523; 1998: 1,557,375) 1,644 1,557
Surplus 18,196 16,728
Retained earnings 3,137 1,546
Accumulated other comprehensive income (loss) (2,999) 214
--------- ---------
Total stockholders' equity 20,378 20,445
--------- ---------
Total liabilities and stockholders' equity $ 378,913 $ 319,323
========= =========
See accompanying notes.
18
Consolidated Statements of Income
Year Ended December 31,
(in thousands, except per share amounts) 1999 1998 1997
INTEREST INCOME Loans receivable, including fees:
Taxable $ 16,745 $ 13,738 $ 11,114
Tax-exempt 20 23 62
Securities:
Taxable 7,405 5,593 3,995
Tax-exempt 0 7 35
Federal funds sold 447 658 540
-------- -------- --------
Total interest income 24,617 20,019 15,746
INTEREST EXPENSE
Deposits 9,916 8,743 6,401
Long-term debt 0 0 26
Other 25 0 11
-------- -------- --------
Total interest expense 9,941 8,743 6,438
-------- -------- --------
Net interest income 14,676 11,276 9,308
Provision for loan losses 762 542 150
-------- -------- --------
Net interest income after provision for loan losses 13,914 10,734 9,158
NONINTEREST INCOME
Service charges and other fees 3,538 2,897 1,937
Other 365 278 217
Gain on sale of securities available for sale 1 386 39
Other real estate (net) (27) (6) 46
Gain on sale of loans 654 500 501
-------- -------- --------
Total noninterest income 4,531 4,055 2,740
NONINTEREST EXPENSES
Salaries and employee benefits 6,180 5,048 3,808
Occupancy 1,651 1,448 1,214
Furniture and equipment 937 847 674
Advertising and marketing 1,259 1,045 940
Data processing 936 772 632
Postage and supplies 529 471 365
Audits, regulatory fees and assessments 260 200 185
Other 1,977 1,634 1,260
-------- -------- --------
Total noninterest expenses 13,729 11,465 9,078
-------- -------- --------
Income before income taxes 4,716 3,324 2,820
Provision for federal income taxes 1,613 1,106 928
-------- -------- --------
Net income $ 3,103 $ 2,218 $ 1,892
======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 1.85 $ 1.31 $ 1.20
Diluted 1.72 1.21 1.09
See accompanying notes.
19
Consolidated Statements of Stockholders' Equity
Accumulated Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
January 1, 1997 $ 400 $ 1,180 $ 9,949 $ 1,864 $ (118) $ 13,275
-----------
Comprehensive income:
Net income - - - 1,892 - 1,892
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 446 446
-----------
Total comprehensive income 2,338
Dividends declared on preferred stock - - - (80) - (80)
Proceeds from exercise of common
stock warrants - 201 2,531 - - 2,732
Common stock issued under stock
option plans - 24 15 - - 39
Income tax benefit of stock options
exercised - - 19 - - 19
5% common stock dividend and cash
paid in lieu of fractional shares - 70 1,893 (1,968) - (5)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1997 400 1,475 14,407 1,708 328 18,318
Comprehensive income:
Net income - - - 2,218 - 2,218
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (114) (114)
------------
Total comprehensive income 2,104
Dividends declared on preferred stock - - - (80) - (80)
Common stock issued under stock
option plans - 8 38 - - 46
Income tax benefit of stock options
exercised - - 64 - - 64
5% common stock dividend and cash
paid in lieu of fractional shares - 74 2,219 (2,300) - (7)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1998 400 1,557 16,728 1,546 214 20,445
Comprehensive income:
Net income - - - 3,103 - 3,103
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (3,213) (3,213)
------------
Total comprehensive income (loss) (110)
Dividends declared on preferred stock - - - (80) - (80)
Common stock issued under
stock option plans - 6 61 - - 67
Income tax benefit of
stock options exercised - - 8 - - 8
Common stock issued under employee
stock purchase plan - 1 19 - - 20
Proceeds from issuance of common
stock in connection with
dividend reinvestment and stock
purchase plan - 2 29 - - 31
5% common stock dividend and cash
paid in lieu of fractional shares - 78 1,351 (1,432) - (3)
----------- ----------- ----------- ------------ ----------- ------------
Balance: December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
=========== =========== =========== =========== ============ ===========
See accompanying notes.
20
Statements of Cash Flows
Year Ended December 31,
( in thousands ) 1999 1998 1997
OPERATING ACTIVITIES
Net income $ 3,103 $ 2,218 $ 1,892
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 762 542 150
Provision for depreciation and amortization 1,119 1,040 827
Deferred income taxes (185) (183) 29
Amortization of securities premiums and accretion of discounts, net 311 225 103
Net (gain) loss on sale of securities available for sale (1) (386) (39)
Proceeds from sales of loans 38,913 59,425 29,770
Loans originated for sale (38,339) (57,750) (23,132)
Gains on sales of loans and other real estate owned (654) (522) (532)
Stock granted under stock purchase plan 20 0 0
Increase in accrued interest receivable and other assets 106 (362) (203)
(Decrease) increase in accrued interest payable and other liabilities 548 (83) (136)
-------- -------- --------
Net cash provided by operating activities 5,703 4,164 8,729
INVESTING ACTIVITIES
Securities held to maturity:
Proceeds from principal repayments and maturities 2,517 4,703 1,244
Purchases (20,105) (3,998) 0
Securities available for sale:
Proceeds from principal repayments and maturities 14,484 19,306 7,194
Proceeds from sales 5,357 22,141 8,057
Purchases (12,638) (89,900) (20,022)
Proceeds from sale of loans receivable 9,847 0 0
Net increase in loans receivable (58,563) (32,648) (30,809)
Purchases of premises and equipment (2,107) (3,151) (3,806)
-------- -------- --------
Net cash used by investing activities (61,208) (83,547) (38,142)
FINANCING ACTIVITIES
Net increase in demand, interest checking,
money market, and savings deposits 41,681 39,213 19,874
Net increase in time deposits 9,128 38,300 17,778
Net increase in borrowed money 8,300 0 0
Repayment of long-term debt 0 0 (1,000)
Proceeds from common stock warrants exercised 0 0 2,732
Proceeds from common stock options exercised 67 46 39
Proceeds from common stock purchase and dividend reinvestment plan 31 0 0
Cash dividends on preferred stock and cash in lieu of fractional shares (87) (85) (80)
-------- -------- --------
Net cash provided by financing activities 59,120 77,474 39,343
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,615 (1,909) 9,930
Cash and cash equivalents at beginning of year 23,875 25,784 15,854
-------- -------- --------
Cash and cash equivalents at year-end $ 27,490 $ 23,875 $ 25,784
======== ======== ========
See accompanying notes.
21
Notes to Financial Statements
December 31, 1999
1. Significant Accounting Policies
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. (the company) and its wholly-owned subsidiary Commerce
Bank/Harrisburg, N.A. (Commerce). All material intercompany transactions have
been eliminated. The Holding Company was formed July 1, 1999 and is subject to
regulation of the Federal Reserve Bank.
The company is a one-bank holding company headquartered in Camp Hill,
Pennsylvania and provides full banking services through its subsidiary Commerce
Bank. Commerce operates under a national bank charter and provides full banking
services. As a national bank, the Bank is subject to regulation of the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The area served by the Bank is principally South Central Pennsylvania.
Estimates
The financial statements are prepared in conformity with generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect reported amounts of assets and liabilities and require
disclosure of contingent assets and liabilities. In the opinion of management,
all adjustments considered necessary for fair presentation have been included
and are of a normal, recurring nature. Actual results could differ from those
estimates.
Securities
Securities classified as held to maturity are those debt securities that the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs, or general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over the estimated
average life of the securities.
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported in other comprehensive income, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest income using the interest method over the estimated average life of
the securities. Equity securities are comprised of stock in the Federal Reserve
Bank and the Federal Home Loan Bank.
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date.
Loans Receivable
Loans generally are stated at their outstanding unpaid principal balances net of
an allowance for loan losses and any deferred fees or costs. Interest income is
accrued on the unpaid principal balance. Loan origination fees net of certain
direct origination costs are deferred and recognized as an adjustment of the
yield (interest income) of the related loans. The Company is generally
amortizing these amounts over the contractual life of the loan.
A loan is generally considered impaired when it is probable the Company will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest is
discontinued when the contractual payment of principal or interest has become 90
days past due or management has serious doubts about further collectability of
principal or interest, even though the loan is currently performing. A loan may
remain on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgment as
to the collectability of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time, and the ultimate
collectability of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income.
22
Notes to Financial Statements
Loans deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
certain collateral dependent loans. By the time a loan becomes probable of
foreclosure, it has been charged down to fair value, less estimated costs to
sell.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant change,
including the amounts and timing of future cash flows expected to be received on
impaired loans.
Loans Held for Sale
Loans held for sale are largely comprised of student loans that the Company
originates with the intention of selling in the future. These loans are carried
at the lower of cost or estimated fair value.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance, when in the opinion of management, it is more likely than not that
some portion or all the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted through the provision for income taxes for
the effects of changes in tax laws and rates on the date of enactment.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is charged to operations over the estimated
useful lives of the respective assets. Leasehold improvements are amortized over
the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Depreciation and amortization are determined
on the straight-line method.
Per Share Data
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued as
well as any adjustments to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
Per share amounts have been adjusted to give retroactive effect to stock
dividends declared through January 21, 2000.
Off Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded on the balance sheet when they become payable by the
borrower to the Company.
Cash Flow Information
For purposes of the statements of cash flows, the Company considers cash and due
from banks and federal funds sold as cash and cash equivalents. Generally,
federal funds are purchased and sold for one-day periods. Cash paid during the
years ended December 31, 1999, 1998, and 1997 for interest was $9.9 million,
$8.7 million, and $6.3 million respectively.
Recently Issued FASB Statement
In July 1999, the Financial Accounting Standards Board issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133." Statement No. 137 delays the effective date required for adoption of
Statement No. 133 by one year. Therefore, the Company is required to adopt the
statement on January 1, 2001. The adoption of the statement is not expected to
have a significant impact on the financial condition or results of operations of
the Company.
23
Notes to Financial Statements
Segment Reporting
Commerce acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branches, the Company offers a
full array of commercial and retail financial services.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial and retail operations of the Company. As
such, discrete financial information is not available and segment reporting
would not be meaningful.
2. Restrictions on Cash and Due From Bank Accounts
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances maintained for 1999
and 1998 was approximately $1.2 million and $2.3 million, respectively.
3. Securities
The amortized cost and fair value of securities are summarized in the following
tables.
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury securities $ 2,005 $ 0 $ (10) $ 1,995
U.S. Government Agency securities 23,999 0 (1,575) 22,424
Mortgage-backed securities 57,908 1 (2,697) 55,212
Corporate debt securities 3,154 0 (263) 2,891
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 87,066 1 (4,545) 82,522
Equity securities 2,130 0 0 2,130
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 89,196 $ 1 $ (4,545) $ 84,652
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government Agency securities $ 5,998 $ 0 $ (159) $ 5,839
Mortgage-backed securities 23,041 0 (1,003) 22,038
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 29,039 $ 0 $ (1,162) $ 27,877
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury securities $ 2,008 $ 24 $ 0 $ 2,032
U.S. Government Agency securities 19,998 55 (18) 20,035
Mortgage-backed securities 69,924 238 (65) 70,097
Corporate debt securities 3,184 91 0 3,275
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 95,114 408 (83) 95,439
Equity securities 1,554 0 0 1,554
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 96,668 $ 408 $ (83) $ 96,993
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Government Agency securities $ 2,000 $ 0 $ 0 $ 2,000
Mortgage-backed securities 9,493 53 (22) 9,524
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 11,493 $ 53 $ (22) $ 11,524
- -------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at December 31, 1999 by
contractual maturity are shown in the following table. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
24
Notes to Financial Statements
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 0 $ 0 $ 1,004 $ 1,000
Due after one year through five years 1,998 1,961 3,001 2,915
Due after five years through ten years 3,000 2,910 7,999 7,694
Due after ten years 1,000 968 17,154 15,701
- -------------------------------------------------------------------------------------------------------------------------------
5,998 5,839 29,158 27,310
Mortgage-backed securities 23,041 22,038 57,908 55,212
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 29,039 $ 27,877 $ 87,066 $ 82,522
- -------------------------------------------------------------------------------------------------------------------------------
Gross gains of $8,000 and gross losses of $7,000 were realized on sales of
securities available for sale in 1999. Gross gains of $395,000 and gross losses
of $9,000 were realized on sales of securities available for sale in 1998. Gross
gains of $39,000 were realized on sales of securities available for sale in
1997.
At December 31, 1999 and 1998, securities with a carrying value of $43.1 million
and $25.6 million respectively were pledged to secure public deposits and for
other purposes as required or permitted by law.
4. Loans Receivable and Allowance for Loan Losses
Certain directors and executive officers of the Company, including their
associates and companies, have loans with Commerce Bank. Such loans were made in
the ordinary course of business at the Bank's normal credit terms including
interest rate and collateralization, and do not represent more than a normal
risk of collection. Total loans to these persons and companies amounted to
approximately $4.9 million and $5.2 million at December 31, 1999 and 1998,
respectively. During 1999, $2.2 million of new loans were made and repayments
totaled $2.5 million.
The following is a summary of the transactions in the allowance for loan losses.
- ---------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Balance at beginning of year $ 2,232 $ 1,699 $ 1,684
Provision charged to expense 762 542 150
Recoveries 13 7 7
Loans charged off (166) (16) (142)
- ---------------------------------------------------------------
Balance at end of year $ 2,841 $ 2,232 $ 1,699
- ---------------------------------------------------------------
Information with respect to impaired loans as of and for the year ended December
31 is as follows:
- -----------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------
Recorded investment:
Requiring an allowance
for loan losses $ 0 $ 0 $ 0
Not requiring an allowance
for loan losses 684 275 585
- -----------------------------------------------------------------
Total $ 684 $ 275 $ 585
- -----------------------------------------------------------------
Average recorded investment $ 686 $ 234 $ 576
Interest income recognized 38 7 37
- -----------------------------------------------------------------
25
Notes to Financial Statements
5. Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Commerce's
customers. Standby letters of credit commit the Bank to make payments on behalf
of customers when certain specified future events occur. They primarily are
issued to facilitate the customers' normal course of business transactions.
Historically, almost all of the Bank's standby letters of credit expire
unfunded.
Both types of lending arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the Bank's normal
credit policies. Collateral (e.g., securities, receivables, inventory, and
equipment) is obtained based on management's credit assessment of the customer.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.
The Bank's maximum exposure to credit loss for loan commitments (unfunded loans
and unused lines of credit, including home equity lines of credit) and standby
letters of credit outstanding were as follows:
- ---------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------
Commitments to grant loans $ 4,330 $ 2,854
Unfunded commitments
of existing loans 46,376 30,568
Standby letters of credit 2,863 4,126
- ---------------------------------------------------------------
Total $ 53,569 $ 37,548
- ---------------------------------------------------------------
6. Concentrations of Credit Risk
The Company's loan portfolio is principally to borrowers throughout Cumberland,
Dauphin, and York counties of Pennsylvania where it has full-service branch
locations. Commercial real estate loans and loan commitments for commercial real
estate projects aggregated $143 million at December 31, 1999.
Commercial real estate loans are collateralized by the related project
(principally office buildings, multifamily residential, land development, and
other properties) and the Company generally requires loan-to-value ratios of no
greater than 80%. Collateral requirements on such loans are determined on a
case-by-case basis based on management's credit evaluations of the respective
borrowers.
7. Premises and Equipment
A summary of premises and equipment is as follows:
- ---------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
Land $ 3,842 $ 2,516
Buildings 9,290 9,033
Leasehold improvements 1,576 1,450
Furniture, fixtures, and equipment 4,793 4,566
- ---------------------------------------------------------------------------------------------------------
19,501 17,565
Less accumulated depreciation and amortization 5,093 4,145
- ---------------------------------------------------------------------------------------------------------
$ 14,408 $ 13,420
- ---------------------------------------------------------------------------------------------------------
26
Notes to Financial Statements
8. Deposits
The composition of deposits is as follows:
- ----------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------
Demand $69,495 $60,699
Interest checking and money market 70,546 52,964
Savings 87,967 72,664
Time certificates $100,000 or more 51,519 43,148
Other time certificates 69,019 68,262
- ----------------------------------------------------------------
$348,546 $297,737
- ----------------------------------------------------------------
At December 31, 1999, the scheduled maturities of time deposits are as follows:
- ----------------------------------------------
(in thousands)
- ----------------------------------------------
2000 $ 88,681
2001 13,075
2002 4,584
2003 8,348
2004 5,850
- ----------------------------------------------
$ 120,538
- ----------------------------------------------
9. Other Borrowed Money
Other borrowed money consisted of securities sold under agreements to
repurchase, which were overnight in maturity and federal funds purchased. The
following table represents information for other borrowed money as of December
31, 1999:
- --------------------------------------------------------------------------------------
Average
(in thousands) Amount Rate
- --------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 3,000 6.25%
Federal funds purchased 5,300 4.50
- --------------------------------------------------------------------------------------
$ 8,300
- --------------------------------------------------------------------------------------
Average amount outstanding $ 460 5.35%
Maximum month-end balance 8,300
- --------------------------------------------------------------------------------------
Securities with a fair value of $3.1 million were pledged as collateral for the
securities sold under agreements to repurchase. The securities underlying the
agreement were under the Bank's control. The Bank has a line of credit
commitment from the Federal Home Loan Bank (FHLB) for borrowings up to $120
million. No amounts were outstanding on this line as of December 31, 1999 and
1998. Certain qualifying assets of Commerce Bank collateralize the line.
10. Income Taxes
A reconciliation of the provision for income taxes and the amount that would
have been provided at statutory rates is as follows:
- -------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------
Provision at statutory
rate on pre-tax income $ 1,603 $ 1,130 $ 959
Tax-exempt income on
loans and investments (6) (9) (30)
Other 16 (15) (1)
- -------------------------------------------------------------------
$ 1,613 $ 1,106 $ 928
- -------------------------------------------------------------------
The components of income tax expense are as follows:
- ---------------------------------------------------------------
Year Ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Current $ 1,798 $ 1,289 $ 899
Deferred (185) (183) 29
- ---------------------------------------------------------------
$ 1,613 $ 1,106 $ 928
- ---------------------------------------------------------------
27
Notes to Financial Statements
The components of the net deferred tax assets were as follows:
- -------------------------------------------------------------------------------
December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 934 $ 727
Unrealized losses on securities 1,545 0
Other 3 13
- -------------------------------------------------------------------------------
Total deferred tax assets 2,482 740
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment (226) (218)
Prepaid expenses (51) (47)
Unrealized gains on securities 0 (111)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (277) (376)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 2,205 $ 364
- -------------------------------------------------------------------------------
Income taxes paid totaled $1,703,000, $1,153,000, and $861,000 in 1999, 1998,
and 1997, respectively. Income taxes of $0, $131,000, and $13,000 were
recognized on net securities gains in 1999, 1998, and 1997 respectively.
11. Stockholders' Equity
At December 31, 1999, Commerce Bancorp, Inc., owned 40,000 shares of the
Company's Series A $10 par value noncumulative nonvoting preferred stock and
warrants that entitle the holder to purchase 118,195 shares (adjusted for common
stock dividends) of the Company's common stock, exercisable at $8.45 per share
(adjusted for common stock dividends), in the event of a "change in control" (as
defined in the Warrant Agreement). Such warrants are fully transferable and
expire on October 7, 2008. None of these warrants were exercised during 1999 or
1998. The preferred stock is redeemable at the option of the Company at the
price of $25 per share plus any unpaid dividends. Dividends on the preferred
stock are payable quarterly at a rate of $2 per share per annum (see Note 14).
During the 4th quarter of 1999, the Company implemented a dividend reinvestment
and stock purchase plan. Holders of common stock may participate in the plan in
which reinvested dividends and voluntary cash payments of up to $5,000 per
quarter (subject to change) may be reinvested in additional common shares at a
3% discount (subject to change) from the current market price. Employees who
have been continuously employed for at least one year are also eligible to
participate in the plan under the same terms as listed above for shareholders. A
total of 1,527 common shares were purchased pursuant to this plan in 1999. At
December 31, 1999, the Company had reserved approximately 498,000 common shares
to be issued in connection with the plan.
On January 15, 1999, the Board of Directors declared a 5% common stock dividend
payable on February 19, 1999, to stockholders of record on January 29, 1999.
Payment of the stock dividend resulted in the issuance of 73,952 additional
common shares.
On January 21, 2000, the Board of Directors declared a 5% common stock dividend
payable on February 18, 2000, to stockholders of record on February 4, 2000.
Payment of the stock dividend will result in the issuance of 78,342 additional
common shares.
All common stock and per share data included in these financial statements have
been restated for these stock dividends.
28
Notes to Financial Statements
12. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
- -------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income $ 3,103 $2,218 $1,892
Preferred stock dividends (80) (80) (80)
- -------------------------------------------------------------------------------------------------------------------------------
Income available to
common stockholders 3,023 1,638 $1.85 2,138 1,632 $1.31 1,812 1,504 $1.20
Effect of dilutive securities:
Warrants 0 0 44
Stock options 118 133 118
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income available to
common stockholders
plus assumed conversions $ 3,023 1,756 $1.72 $ 2,138 1,765 $1.21 $ 1,812 1,666 $1.09
- -------------------------------------------------------------------------------------------------------------------------------
Options to purchase 46,570 shares of common stock at $26.08, options to purchase
39,100 shares at $25.92 and options to purchase 8,864 shares of common stock at
$28.12 were outstanding during 1999. They were not included in the computation
of diluted EPS for the year ended December 31, 1999, because the options'
exercise price was greater than the average market price of the common shares.
No options were excluded from the computation of diluted EPS for the year ended
December 31, 1998.
Options to purchase 45,643 shares of common stock at $25.92 were outstanding
during 1997. They were not included in the computation of diluted EPS for the
year ended December 31, 1997 because the options' exercise price was greater
than the average market price of the common shares.
13. Stock Option Plans
In 1996, the Company's shareholders approved the adoption of the 1996 Employee
Stock Option Plan. The Plan covers 243,390 authorized shares of common stock
reserved for issuance upon exercise of options granted or available for grant to
officers and key employees and will expire on December 31, 2005. The Plan
provides that the option price of qualified incentive stock options will be
fixed by the Board of Directors, but will not be less than 100% of the fair
market value of the stock at the date of grant. In addition, the Plan provides
that the option price of nonqualified stock options (NQSO's) also will be fixed
by the Board of Directors, however for NQSO's the option price may be less than
100% of the fair market value of the stock at the date of grant. Options granted
are exercisable one year after the date of grant, subject to certain vesting
provisions, and expire ten years after the date of grant.
Under the Company's Directors' Stock Option Plan, each Director of the Company
who is not regularly employed on a salaried basis by the Company shall be
entitled to an option to acquire 1,477 shares of the Company's common stock
during each year in which the Director serves on the Board. The Plan covers
147,744 authorized shares of common stock and will expire on December 31, 2000.
The Plan provides that the option price will be fixed by the Board of Directors,
but will not be less than 100% of the fair market value of the stock on the date
of the grant. Options granted are exercisable from the earlier of (1) one year
after the date of the option grant, or (2) the date of a change in control of
the Bank.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee and director stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee and
29
Notes to Financial Statements
director stock options. Under APB 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro-forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998,
and 1997 respectively: risk-free interest rates of 6.0%, 4.5% and 5.8%;
volatility factors of the expected market price of the Company's common stock of
.24, .25, and .34; weighted-average expected life of the option of 10 years; and
no cash dividends.
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's
pro-forma information is presented in the following table.
- ----------------------------------------------------------------
Year ended December 31,
1999 1998 1997
- ----------------------------------------------------------------
Net income (in thousands):
As reported $3,103 $2,218 $1,892
Pro-forma 2,570 1,694 1,635
- ----------------------------------------------------------------
Reported earnings per share:
Basic $1.85 $1.31 $1.20
Diluted 1.72 1.21 1.09
- ----------------------------------------------------------------
Pro-forma earnings per share:
Basic $1.57 $0.99 $1.03
Diluted 1.46 0.91 0.93
- ----------------------------------------------------------------
Stock options transactions under the Plans were as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 315,839 $ 14.39 267,255 $11.58 253,643 $ 8.27
Granted 63,786 22.97 60,837 25.80 54,509 23.32
Exercised (6,614) 10.20 (9,569) 6.20 (35,260) 5.90
Forfeited (6,591) 25.28 (2,684) 11.83 (5,637) 11.89
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 366,420 $ 15.77 315,839 $ 14.39 267,255 $ 11.58
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 286,032 $ 13.63 243,623 $ 11.22 203,078 $ 8.31
Options available for grant at December 31 121,560
Weighted-average fair value
of options granted during the year $ 10.36 $ 10.94 $ 12.69
- ---------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1999 are presented in
the following table.
- -------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Options Weighted Avg. Weighted Avg. Options Weighted Avg.
Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Options with exercise prices
ranging from $5.08 to $10.00 166,464 $ 7.04 4.3 Years 166,464 $ 7.04
Options with exercise prices
ranging from $10.01 to $20.00 41,635 16.70 7.2 Years 39,873 16.71
Options with exercise prices
ranging from $20.01 to $28.12 158,320 24.70 9.1 Years 79,695 25.85
- -------------------------------------------------------------------------------------------------------------------------------
Total options outstanding with exercise
prices ranging from $5.08 to $28.12 366,420 $ 15.77 6.7 Years 286,032 $ 13.63
- -------------------------------------------------------------------------------------------------------------------------------
30
Notes to Financial Statements
14. Regulatory Matters
Regulatory authorities restrict the amount of cash dividends the Bank can
declare without prior regulatory approval. Presently, the Bank cannot declare a
cash dividend in excess of its accumulated retained earnings.
The Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1999, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the following
table. The consolidated capital ratios are identical to the Bank's capital
ratios.
- -----------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Total capital greater than greater than greater than greater than
(to risk-weighted assets) $26,218 11.12% or equal to $18,864 or equal to 8.0% or equal to $23,580 or equal to 10.0%
Tier 1 capital greater than greater than greater than greater than
(to risk-weighted assets) 23,377 9.91 or equal to 9,432 or equal to 4.0 or equal to 14,148 or equal to 6.0
Tier 1 capital greater than greater than greater than greater than
(to average assets) 23,377 6.28 or equal to 14,894 or equal to 4.0 or equal to 18,618 or equal to 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total capital greater than greater than greater than greater than
(to risk-weighted assets) $22,463 12.02% or equal to $14,946 or equal to 8.0% or equal to $18,683 or equal to 10.0%
Tier 1 capital greater than greater than greater than greater than
(to risk-weighted assets) 20,231 10.83 or equal to 7,473 or equal to 4.0 or equal to 11,210 or equal to 6.0
Tier 1 capital greater than greater than greater than greater than
(to average assets) 20,231 6.50 or equal to 12,447 or equal to 4.0 or equal to 15,559 or equal to 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
15. Employee Benefit Plan
The Company has established a 401(k) Retirement Savings Plan for all of its
employees who meet eligibility requirements. Employees may contribute up to 15%
of their salary to the Plan. The Company will provide a discretionary matching
contribution for up to 6% of each employee's salary. For 1999, 1998, and 1997,
the Company's matching contribution was established at 25% of the employees'
salary deferral. The amount charged to expense was $31,000, $62,000, and $28,000
in 1999, 1998, and 1997, respectively.
16. Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income are components of comprehensive
income.
31
Notes to Financial Statements
The only comprehensive income item that the Company presently has is unrealized
gains (losses) on securities available for sale. The federal income taxes
allocated to the unrealized gains (losses) are presented in the table below. The
reclassification adjustments included in comprehensive income are also
presented.
- -----------------------------------------------------------------------------------------------------------
Year ended December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the year $(4,868) $ 214 $ 715
Less reclassification adjustment for gains (losses)
included in net income 1 386 39
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (4,869) (172) 676
Tax (expense) benefit 1,656 58 (230)
- -----------------------------------------------------------------------------------------------------------
Net of tax amount $(3,213) $ (114) $ 446
- -----------------------------------------------------------------------------------------------------------
17. LEASES
Land, buildings, and equipment are leased under noncancelable operating lease
agreements that expire at various dates through 2019. Total rental expense for
operating leases in 1999, 1998, and 1997 was $673,000, $602,000, and $527,000,
respectively. At December 31, 1999, future minimum lease payments for
noncancelable operating leases are payable as follows:
- --------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------
2000 $ 635
2001 656
2002 581
2003 574
2004 358
Thereafter 3,483
- --------------------------------------------------------------
Total minimum lease payments $ 6,287
- --------------------------------------------------------------
18. Contingencies
The Company has purchased the parcel of land at 1120 Carlisle Road, Camp Hill,
Pennsylvania, and intends to construct a full-service branch office on this land
in the year 2000. The Company has entered into a contract to build the branch
office in the amount of $600,000.
The Company has entered into a land lease for the premises located on lot #2, in
Palmyra Shopping Center, on Route #422 in Palmyra, Pennsylvania. The Company
intends to construct a full-service branch office on this land in the year 2000.
The land lease commenced September 13, 1999 and has an initial term of 20 years.
In addition, the Company has an option to renew the land lease for four
additional 5-year terms. Initial annual rent payments equal $60,000 and will
commence on the opening of the branch for business. Rent is subject to change on
terms set forth in the lease agreement.
In addition, the Company is also 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.
19. Related Party Transactions
Commerce Bancorp, Inc. (a 9.17% shareholder of common stock and 100% shareholder
of Series A preferred stock of the Company), through a subsidiary (Commerce
Bank, N.A., a national bank located in Cherry Hill, New Jersey), provides
various services to the Company. These services include maintenance to the
branch LAN network, loan review services, MAC/VISA card processing, data
processing, and advertising support. Insurance premiums and commissions are also
included in these services which are paid to a subsidiary of Commerce Bancorp,
Inc. The Company paid approximately $344,000, $325,000, and $210,000 for
services provided buy Commerce Bancorp, Inc. during 1999, 1998, and 1997,
respectively. The Company routinely sells loan participations to Commerce Bank,
N.A. and at December 31, 1999, approximately $8.6 million of these
participations were outstanding.
32
Notes to Financial Statements
A director of the Company is Chairman of the Board of Commerce Bank, N.A. The
Company obtained interior design services for $16,000, $17,000, and $27,000 in
1999, 1998, and 1997, respectively, from a business owned by the spouse of the
director. Additionally, the business received commissions of approximately
$21,000, $66,000, and $109,000 in 1999, 1998, and 1997, respectively, on
furniture and facility purchases made directly by the Company. The Company
leases land for one of its branches from a limited partnership in which the
director is a 20% limited partner. Total payments on the land lease for 1999,
1998 and 1997 were $50,000. The Company engaged a company owned by the director
to prepare the building sites for the branches constructed in 1998 and 1997.
Total payments made in 1998 and 1997 were $20,000 respectively. During 1997, the
Board of Directors approved the purchase of land for one of its branches from a
company in which the director is a 50% owner. The contract price of the land was
$664,000.
A law firm in which a director of the Company is a partner received professional
fees totaling $149,000, $104,000, and $115,000 during 1999, 1998, and 1997,
respectively.
The Company leases land for a billboard owned by the Company from a director.
Annual lease payments are $24,000, and lease payments made during 1999, 1998,
and 1997 totaled $24,000, $24,000, and $16,000, respectively.
The Company paid commissions for real estate services to a company owned by the
Chairman of the Board of the Company of $65,000, $0, and $25,000 in 1999, 1998,
and 1997 respectively.
20. Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been re-evaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair value
disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents:
The carrying amounts reported approximate those assets' fair value.
Securities:
Fair values of securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans receivable were estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable approximate their
fair values.
33
Notes to Financial Statements
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest-bearing and
noninterest-bearing checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates of deposit
to a schedule of aggregated expected monthly maturities on time deposits.
Other Borrowed Money
The carrying amount of this debt approximates its fair value.
Off-balance Sheet Instruments
Off-balance sheet instruments of the Company consist of letters of credit, loan
commitments, and unfunded lines of credit. Fair values for the Company's
off-balance sheet instruments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts and fair values of
the Company's financial instruments as of December 31 are presented in the
following table.
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 27,490 $ 27,490 $ 23,875 $ 23,875
Securities 113,691 112,529 108,486 108,517
Loans, net (including loans held for sale) 218,565 216,984 170,530 173,241
Accrued interest receivable 2,105 2,105 1,824 1,824
- -------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $ 348,546 $ 348,891 $ 297,737 $ 298,489
Other borrowed money 8,300 8,300 0 0
Accrued interest payable 567 567 518 518
- -------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letters of credit $ 0 $ 0 $ 0 $ 0
Commitments to extend credit 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------
34
21. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the
Company which in the opinion of management, reflects adjustments (comprising
only normal recurring accruals) necessary for fair presentaton (in thousands,
except per share amounts):
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------
1999
Interest income $6,689 $6,424 $5,923 $5,581
Interest expense 2,769 2,528 2,360 2,284
Net interest income 3,920 3,896 3,563 3,297
Provision for loan losses 160 232 190 180
Net investment securities gains 0 0 0 1
Provision for federal income taxes 487 480 330 316
Net income 935 923 636 609
Net income per share:
Basic $ 0.57 $ 0.55 $ 0.37 $ 0.36
Diluted 0.53 0.51 0.35 0.33
1998
Interest income $5,509 $5,262 $4,837 $4,411
Interest expense 2,384 2,397 2,079 1,883
Net interest income 3,125 2,865 2,758 2,528
Provision for loan losses 165 150 120 107
Net investment securities gains 0 128 0 258
Provision for federal income taxes 326 248 232 300
Net income 653 492 469 604
Net income per share:
Basic $ 0.38 $ 0.29 $ 0.28 $ 0.36
Diluted 0.35 0.27 0.26 0.33
35
Notes to Financial Statements
22. Condensed Financial Statements of the Parent Company
Balance Sheet
----------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1999
----------------------------------------------------------------------------------
Assets
Investment in Bank subsidiary $ 20,378
----------------------------------------------------------------------------------
$ 20,378
----------------------------------------------------------------------------------
Stockholders' equity $ 20,378
----------------------------------------------------------------------------------
$ 20,378
----------------------------------------------------------------------------------
Statement of Income
----------------------------------------------------------------------------------
For the Period
July 1, 1999 to
(dollars in thousands) December 31, 1999
----------------------------------------------------------------------------------
Dividends from bank subsidiary $ 40
Equity in undistributed net income of bank subsidiary 1,818
----------------------------------------------------------------------------------
Net Income $1,858
----------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------
For the Period
July 1, 1999 to
(dollars in thousands) December 31, 1999
----------------------------------------------------------------------------------
Operating activities:
Net Income $ 1,858
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of bank subsidiary (1,818)
----------------------------------------------------------------------------------
Net cash provided by operating activities 40
Investing Activities:
Investment in bank subsidiary (57)
----------------------------------------------------------------------------------
Net cash used in investing activities (57)
Financing Activities:
Proceeds from common stock options exercised 26
Proceeds from stock purchase and dividend reinvestment plans 31
Cash dividends on preferred stock (40)
----------------------------------------------------------------------------------
Net cash provided by financing activities 17
----------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents 0
Cash and cash equivalents at July 1, 1999 0
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0
----------------------------------------------------------------------------------
36
Notes to Financial Statements
Independent Auditor's Report
To the Board of Directors
Pennsylvania Commerce Bancorp, Inc.
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Pennsylvania
Commerce Bancorp, Inc. and its subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennsylvania
Commerce Bancorp, Inc. and its subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Beard & Company, Inc.
Harrisburg, Pennsylvania
February 4, 2000
37
Notes to Financial Statements
Headquarters
Pennsylvania Commerce Bancorp, Inc.
100 Senate Avenue
Camp Hill, PA 17011
Annual Shareholders' Meeting
Pennsylvania Commerce Bancorp, Inc.'s annual shareholders meeting will be held
on Friday May 19, 2000 at 9:00 am at the following location:
Hilton Harrisburg and Towers
One North Second Street
Harrisburg, PA 17102
Contacts
Analysts, portfolio managers, and others seeking financial information about
Pennsylvania Commerce Bancorp, Inc. should contact:
Mark A. Zody,
Chief Financial Officer
at (717) 975-5630
News media representatives and others seeking general corporate information
should contact:
James T. Gibson, President/CEO, or
Gary L. Nalbandian, Chairman
at (717) 975-5630
Shareholders seeking assistance with stock records should contact:
Deborah Miller
Shareholder Relations
at (717) 972-2870
Dividend Reinvestment and Stock Purchase Plan
Pennsylvania Commerce Bancorp, Inc. offers its shareholders a convenient plan to
increase their investment in the Company. Through the Dividend Reinvestment and
Stock Purchase Plan, holders of common stock may have their dividends and
voluntary cash payments of up to $5,000 per quarter (subject to change)
reinvested in additional common shares at a 3% discount (subject to change) from
the market price and without brokerage fees, commissions, or service charges.
Shareholders not enrolled in this plan, as well as brokers and custodians who
hold stock for clients, may receive a plan prospectus and enrollment card by
contacting Deborah Miller at (717) 972-2870.
Annual Report and Form 10-K
Additional copies of Pennsylvania Commerce Bancorp, Inc.'s Annual Report and
Form 10-K are available without charge by writing:
Pennsylvania Commerce Bancorp, Inc.
Shareholder Relations
100 Senate Avenue
Camp Hill, PA 17011
NASDAQ Symbol
Shares of Pennsylvania Commerce Bancorp, Inc. common stock are traded nationally
under the symbol COBH in the Over-The-Counter Small Cap Market and are listed in
NASDAQ Quotations.
Common Stock Prices
The following table sets forth the prices for which common stock has traded
during the last two (2) fiscal years on the NASDAQ Small Cap Market. The prices
per share have been adjusted to reflect common stock dividends of 5% with record
dates of February 4, 2000 and January 29, 1999. As of December 31, 1999, there
were approximately 400 holders of record of the Company's common stock.
Quarter Ended: High Low
- ----------------------------------------------------------
March 31, 1999 $ 28.81 $ 25.62
June 30, 1999 27.38 25.24
September 30, 1999 25.60 21.43
December 31, 1999 23.81 20.00
- ----------------------------------------------------------
March 31, 1998 $ 27.21 $ 23.76
June 30, 1998 31.29 26.08
September 30, 1998 34.47 27.21
December 31, 1998 28.12 25.40
- ----------------------------------------------------------
Transfer and Dividend Paying Agent/Registrar
Pennsylvania Commerce Bancorp, Inc.
100 Senate Avenue
Camp Hill, PA 17011