SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 333-78445
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PENNSYLVANIA COMMERCE BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1834776
- ------------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599
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(Address of principal executive offices)
(717) 975-5630
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,652,608 Common shares
outstanding at 7/31/00
Transitional Small Business Disclosure Format (check one):
Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)...............................3
June 30, 2000, and December 31, 1999
Consolidated Statements of Income (Unaudited).........................4
Three months ended June 30, 2000 and June 30, 1999
Six months ended June 30, 2000 and June 30, 1999
Consolidated Statement of Stockholders' Equity (Unaudited)...........5
Six months ended June 30, 2000 and June 30, 1999
Consolidated Statements of Cash Flows (Unaudited).....................6
Six months ended June 30, 2000, and June 30, 1999
Notes to Consolidated Financial Statements (Unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 4. Submission of Matters to a Vote of Securities Holders................20
Item 6a. Exhibits
Exhibit 11...........................................................20
Exhibit 27...........................................................20
Item 6b. Reports on Form 8-K..................................................20
Signatures...........................................................22
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
=============================================================================================================================
June 30, December 31,
( in thousands, except share amounts) 2000 1999
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Assets Cash and due from banks $ 15,093 $ 27,490
Federal funds sold 14,050 0
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Cash and cash equivalents 29,143 27,490
Securities, available for sale at fair value 81,370 84,652
Securities, held to maturity at cost
(fair value 2000: $31,466; 1999: $27,877 ) 32,875 29,039
Loans, held for sale
(fair value 2000: $2,157; 1999: $5,380 ) 2,134 5,301
Loans receivable :
Real estate:
Commercial mortgage 115,513 101,550
Construction and land development 25,403 18,458
Residential mortgage 38,523 34,681
Tax-exempt 805 342
Commercial business 24,839 21,228
Consumer 26,327 22,764
Lines of credit 21,479 17,082
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252,889 216,105
Less: Allowance for loan losses 3,278 2,841
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Net loans receivable 249,611 213,264
Premises and equipment, net 15,747 14,408
Accrued interest receivable 2,337 2,105
Other assets 3,525 2,654
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Total assets $ 416,742 $ 378,913
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 74,616 $ 69,495
Interest-bearing 312,910 279,051
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Total deposits 387,526 348,546
Accrued interest payable 686 567
Other liabilities 1,686 1,122
Trust preferred securities 5,000 0
Other borrowed money 0 8,300
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Total liabilities 394,898 358,535
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Stockholders' Preferred stock - Series A noncumulative;
Equity $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 - 2000: 1,652,608; 1999: 1,644,523 1,653 1,644
Surplus 18,320 18,196
Retained earnings 4,733 3,137
Accumulated other comprehensive income (loss) (3,262) (2,999)
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Total stockholders' equity 21,844 20,378
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Total liabilities and stockholders' equity $ 416,742 $ 378,913
=============================================================================================================================
See accompanying notes .
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
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Three Months Six Months
Ended June 30, Ended June 30,
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(in thousands, except per share amounts) 2000 1999 2000 1999
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Interest Loans receivable, including fees:
Income Taxable $ 5,441 $ 3,926 $ 10,306 $ 7,704
Tax - exempt 10 5 20 10
Securities :
Taxable 1,963 1,853 3,906 3,525
Tax - exempt 14 0 16 0
Federal funds sold 126 139 144 265
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Total interest income 7,554 5,923 14,392 11,504
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Interest Deposits 3,256 2,358 6,082 4,639
Expense Other 29 2 66 5
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Total interest expense 3,285 2,360 6,148 4,644
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Net interest income 4,269 3,563 8,244 6,860
Provision for loan losses 255 190 510 370
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Net interest income after provision
for loan losses 4,014 3,373 7,734 6,490
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Noninterest Service charges and other fees 1,128 860 2,104 1,647
Income Other operating income 108 90 215 167
Gain on sale of securities available for sale 0 0 0 1
Gain on sale of loans 87 59 199 287
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Total noninterest income 1,323 1,009 2,518 2,102
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Salaries and employee benefits 1,860 1,553 3,574 2,945
Expenses Occupancy 427 407 844 821
Furniture and equipment 232 232 479 454
Advertising and marketing 420 345 840 690
Data processing 272 229 469 453
Postage and supplies 163 119 322 258
Audits, regulatory fees and assessments 86 48 170 105
Other 570 483 1,072 975
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Total noninterest expenses 4,030 3,416 7,770 6,701
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Income before income taxes 1,307 966 2,482 1,891
Provision for federal income taxes 444 330 846 646
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Net income $ 863 $ 636 $ 1,636 $ 1,245
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Net income per common share: Basic $ 0.51 $ 0.37 $ 0.97 $ 0.74
Diluted 0.48 0.35 0.91 0.68
=================================================================================================================================
See accompanying notes.
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 1998 $ 400 $ 1,557 $ 16,728 $ 1,546 $ 214 $ 20,445
Comprehensive income:
Net income - - - 1,245 - 1,245
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (2,111) (2,111)
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Total comprehensive income (866)
Dividends declared on preferred stock - - - (40) - (40)
Common stock issued under stock option plans - 3 45 - - 48
- -------------------------------------------------------------------------------------------------------------------------------
Balance : June 30, 1999 $ 400 $ 1,560 $ 16,773 $ 2,751 $ (1,897) $ 19,587
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
Comprehensive income:
Net income - - - 1,636 - 1,636
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (263) (263)
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Total comprehensive income 1,373
Dividends declared on preferred stock - - - (40) - (40)
Common stock issued under stock option plans - 4 21 - - 25
Income tax benefit of stock options exercised - - 19 - - 19
Common stock issued under employee stock purchase plan - - 3 - - 3
Proceeds from issuance of common stock
in connection with dividend reinvestment
and stock purchase plan - 5 81 - - 86
- -------------------------------------------------------------------------------------------------------------------------------
Balance : June 30, 2000 $ 400 $ 1,653 $ 18,320 $ 4,733 $ (3,262) $ 21,844
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended
June 30,
( in thousands ) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Operating
Activities Net income $ 1,636 $ 1,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 510 370
Provision for depreciation and amortization 554 569
Deferred income taxes (194) (94)
Amortization of securities premiums and accretion of discounts, net 100 178
Net (gain) on sale of securities available for sale 0 (1)
Net proceeds from sale of loans 11,629 30,159
Loans originated for sale (8,356) (26,673)
Gain on sales of loans and other real estate owned (199) (289)
Stock granted under stock purchase plan 3 0
Increase (decrease) in accrued interest receivable and other assets (753) 122
Increase in accrued interest payable and other liabilities 683 796
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Net cash provided by operating activities 5,613 6,382
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 1,109 1,359
Purchases (4,955) (15,135)
Securities available for sale :
Proceeds from principal repayments and maturities 2,951 8,401
Proceeds from sales 0 5,357
Purchases (158) (11,637)
Proceeds from sale of loans receivable 455 2,534
Net increase in loans receivable (37,220) (29,626)
Purchases of premises and equipment (1,893) (593)
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Net cash (used) by investing activities (39,711) (39,340)
- -----------------------------------------------------------------------------------------------------------------------------
Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 27,703 15,228
Net increase (decrease) in time deposits 11,277 15,028
Proceeds from issuance of Trust Preferred Securities 5,000 0
Increase (Decrease) in borrowed money (8,300) 0
Proceeds from common stock options exercised 25 48
Proceeds from common stock purchase and dividend reinvestment plans 86 0
Cash dividends on preferred stock (40) (40)
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Net cash provided by financing activities 35,751 30,264
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Increase (decrease) in cash and cash equivalents 1,653 (2,694)
Cash and cash equivalents at beginning of year 27,490 23,875
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Cash and cash equivalents at end of period $ 29,143 $21,181
==========================================================================================================
See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries
Commerce Bank/Harrisburg, N.A. ("the Bank") and Commerce Capital Harrisburg
Trust I. All material intercompany accounts and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the six month period ended June 30,
2000, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
For further information, refer to the financial statements and footnotes thereto
included in the Pennsylvania Commerce Bancorp, Inc., Annual Report for the year
ended December 31, 1999.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 21, 2000, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 18, 2000, to stockholders of record
on February 4, 2000. Payment of the stock dividend resulted in the issuance of
78,342 additional common shares and cash of $3,250 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
1999.
Recently Issued FASB Statement
In June 2000, the Financial Accounting Standards Board issued Statement No. 138,
"Accounting
7
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133." Statement No. 138 adds to the guidance of Statement
No. 133. The adoption of the statement is not expected to have a significant
impact on the financial condition or results of operations of the Company.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising in the
ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Future Branch Facilities
The Company has entered into a land lease for 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.
The Company has entered into a land lease for the premises located in the East
Penn Center, on Wertzville Road in East Pennsboro Township, Cumberland County,
Pennsylvania. The Company intends to construct a full-service branch office on
this land in the year 2000. The land lease commenced June 26, 2000 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
$55,000 and will commence the month after final township approvals are complete.
Rent is subject to change on terms set forth in the lease agreement.
The Company has also amended an existing lease (originally dated February 1996)
at the Operations Center located at 3 Crossgate Drive, Mechanicsburg,
Pennsylvania. The amendment expands the square footage under this lease from
3,300 square feet to 5,453 square feet. The initial term of this lease was three
years with three 3-year renewal options. The Company exercised its option to
renew the lease for the first 3-year renewal period in 1999. The amendment will
become effective September 1, 2000 and has the same terms and options as the
original lease. In addition, the Company has an option to renew the building
lease for four additional 2-year terms. Additional annual rent payments equal
$24,760 and will commence on 9/1/00. Rent is subject to change on terms set
forth in the agreement.
Note 4. TRUST CAPITAL SECURITIES
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware
business trust subsidiary of the Company. Proceeds of this offering were
earmarked for additional capitalization of Commerce Bank/Harrisburg, N.A., the
Company's wholly-owned banking subsidiary. All $5.0 million of the Trust Capital
Securities qualify as Tier 1 capital for regulatory capital purposes.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of income. This section should be read in conjunction with the
Company's financial statements and accompanying notes.
OVERVIEW
Net income for the quarter increased 36% to $863,000 as compared to $636,000 for
the second quarter of 1999 and total revenues increased by 22% to $5.6 million
for the quarter. Diluted net income per common share increased 37% to $0.48 from
$0.35 per share in the second quarter a year ago (after adjusting for a 5%
common stock dividend paid in February 2000). At June 30, 2000, the Company had
total assets of $416.7 million, total loans (including loans held for sale) of
$255.0 million, and total deposits of $387.5 million.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The largest source of the Company's income is net interest income. 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. The principal source of funding
for such assets is deposits.
Interest income increased by $1.6 million, or 28%, over the second quarter of
1999. Interest earning assets averaged $371.7 million for the second quarter of
2000 as compared to $312.7 million for the same period in 1999. Approximately
$58.8 million, or 99%, of this increase was in average loans outstanding. The
yield on earning assets for the second quarter of 2000 was 8.17%, an increase of
55 basis points over the comparable period in 1999.
Interest expense for the second quarter of 2000 increased by $925,000, or 39%,
compared to the second quarter of 1999. This increase was primarily attributable
to an increase in the level of average interest-bearing liabilities from $251.8
million during the second quarter of 1999 to $306.2 million during the second
quarter of 2000. Average savings deposits increased $28.6 million over second
quarter a year ago, average public funds deposits increased $25.6 million and
average noninterest bearing demand deposits increased by $5.5 million, while
average time deposits (excluding public funds) decreased by $8.3 million. The
average rate paid on these liabilities for the second quarter of 2000 was 4.31%,
an increase of 56 basis points from the comparable period in 1999. The Company's
aggregate cost of funds was 3.55% for the second quarter of 2000, an increase of
51 basis points over the prior year.
Net interest income for the second quarter of 2000 increased by $706,000, or
20%, over the same period in 1999. 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
9
net interest rate spread was 3.86% during the second quarter of 2000 compared to
3.87% during the same period of the previous year. The net interest margin
increased by 4 basis points from 4.58% for the second quarter 1999 to 4.62%
during the second quarter of 2000.
For the six months ended June 30, 2000, interest income increased by $2.9
million, or 25%, over the same period in 1999. As with the second quarter, the
increase for the first six months was mostly related to the volume increases in
the level of average loans outstanding along with the increase in the level of
yields earned on those assets. Interest earning assets for the first six months
of 2000 averaged $358.0 million versus $304.1 million for the comparable period
in 1999. The yield on those assets increased to 8.08% during the first half of
2000, from 7.63% for the first half of 1999.
Interest expense for the first six months of 2000 totaled $6.1 million, an
increase of $1.5 million, or 32%, over the first six months of 1999. The level
of average interest-bearing liabilities increased from $247.3 million for the
first half of 1999 to $294.7 million for the first six months of 2000. The
Company's cost of funds for the first half of 2000 was 3.45%, up 37 basis points
from 3.08% for the comparable period in the prior year.
Net interest income for the first six months of 2000 increased by $1.4 million,
or 20%, over the same period in 1999. The Company's net interest margin
increased to 4.63% for the first six months of 2000, from 4.55% for the first
half of 1999.
Noninterest Income
Noninterest income for the second quarter of 2000 increased by $314,000, or 31%,
from the same period in 1999. Recurring core noninterest income increased by 24%
from $1.0 million in the second quarter of 1999 to $1.2 million for the same
period in 2000. The increase is attributable to service charges and fees
associated with servicing a higher volume of deposit accounts and transactions.
Included in noninterest income for the first six months of 2000 is nonrecurring
income of $179,000 as a result of an $87,000 gain on the sale of student loans
and $92,000 gain from the sale of Small Business Administration loans. Included
in noninterest income for the first six months of 1999 is nonrecurring income of
$202,000, comprised of a $106,000 gain on the sale of student loans, net
securities gains of $1,000, and $95,000 income from the sale of Small Business
Administration loans. Excluding these transactions, recurring core noninterest
income for the first six months of 2000 totaled $2.3 million as compared to $1.9
million for the first half of 1999, an increase of 23%. The increase is mainly
attributable to additional service charges and fees associated with servicing a
higher volume of deposit accounts and transactions.
Noninterest Expenses
For the second quarter of 2000, noninterest expenses increased by $614,000, or
18%, over the same period in 1999. Staffing levels and related expenses
increased as a result of servicing more deposit and loan customers and
processing a higher volume of transactions. Staffing and occupancy expenses also
increased as a result of opening one branch office in June 2000. A comparison of
noninterest expense for certain categories for the three months ended June 30,
2000, and June 30, 1999, is presented in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest
10
expenses, increased by $307,000, or 20%, for the second quarter of 2000 over the
second quarter of 1999. This increase is consistent with increases in staff
levels necessary to handle Company growth from second quarter 1999 to second
quarter 2000, including the additional staff of the branch office opened in June
2000.
Occupancy and furniture & equipment expenses of $659,000 were $20,000, or 3%,
higher for the second quarter of 2000 than for the three months ended June 30,
1999.
Advertising and marketing expenses totaled $420,000 for the three months ended
June 30, 2000, an increase of $75,000, or 22%, over the second quarter of 1999.
This increase was primarily the result of increased advertising efforts in each
of the Company's markets. These markets will continue to expand as the branch
network grows.
Data processing expenses of $272,000 for the second quarter of 2000 were
$43,000, or 19%, more than the second quarter of 1999. The increase was due to a
combination of increased costs associated with processing additional
transactions (due to growth in number of accounts), and the costs associated
with the increase in volume of users of our Home Banking product which is
offered to our customers at no charge.
Postage and supplies expense of $163,000 represented a $44,000, or 37%, increase
from the second quarter of the prior year. This was due to increased usage of
stationery and supplies, and postage related to growth in volume of customers
and customer transaction statements.
Audits and regulatory fees increased by $38,000, or 79%, from $48,000 for the
second quarter of 1999 to $86,000 for the second quarter of 2000. This increase
is a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of
the Comptroller of the Currency (OCC) assessments, both of which are calculated
on levels of deposits. Another contributing factor for the increase is the
additional requirements for reporting necessary for the Bank Holding Company,
which was formed on July 1, 1999.
Other noninterest expenses increased by $87,000, or 18%, for the three-month
period ended June 30, 2000, as compared to the same period in 1999. The increase
includes higher provisions for non-credit related losses, an increase in
customer/employee relations and entertainment expenses, and costs associated
with processing coin for Penny Arcade Coin counters, installed in first and
second quarters of 2000, which is offered at no charge to our customers.
For the first six months of 2000, total noninterest expenses increased by $1.1
million, or 16% over the comparable period in 1999. A comparison of noninterest
expense for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $629,000, or 21%, over the
first six months of 1999. The increase was due to normal salary adjustments and
additional salary and benefits costs due to an increase in the level of
full-time equivalent employees from 238 at June 30, 1999 to 269 at June 30,
2000.
Occupancy and furniture & equipment expenses for the first six months of 2000
were $48,000, or 4%, higher for the second half of 2000 over the similar period
in 1999.
Advertising and marketing expenses totaled $840,000 for the first six months
ended June 30, 2000, an increase of $150,000, or 22%, over the first half of
1999. This increase was primarily
11
the result of advertising in multiple markets. These markets will continue to
expand as the branch network grows.
Data processing expenses increased $16,000, or 4%, for the first six months of
2000 as compared to the first half of 1999. The increase in data processing is
the result of increased costs associated with processing higher volumes of
customer transactions (due to growth in number of accounts), and the costs
associated with the increase in volume of users of our Home Banking product.
Postage and office supplies increased $64,000, or 25%, over the first six months
of 1999. The increase in postage expenses resulted from the growth in number of
account statements mailed to customers. The increase in supplies expense is a
result of increased usage of such items related to additional staff levels as
well as an increase in the number of accounts serviced.
Other noninterest expenses for the first six months of 2000 were $1.1 million
compared to $975,000 for the similar period in 1999. Loan expenses increased
$18,000 over the first six months in 1999, as result of an increase in volume of
the loan portfolio. The remaining increase was associated with other general
costs over similar expenses during the first six months of 1999.
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 real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio equaled 2.77% for the three months ended June 30, 2000, slightly less
than 2.83% for the three months ended June 30, 1999, and 2.81% for the first six
months of 2000 compared to 2.91% for the comparable period in 1999. 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 nonrecurring gains). For
the quarter ended June 30, 2000, the operating efficiency ratio was 73.10%
compared to 74.63% for the similar period in 1999. For the six months ended June
30, 2000, this ratio was 73.42% compared to 76.46% for the six months ended June
30, 1999.
Provision for Federal Income Taxes
The provision for federal income taxes was $444,000 for the second quarter of
2000 as compared to $330,000 for the same period in 1999. For six months ended
June 30, the provision was $846,000 and $646,000 for 2000 and 1999 respectively.
The effective tax rate, which is the ratio of income tax expense to income
before income taxes, was 34% for the first six months of 1999 and 2000.
Net Income
Net income for the second quarter of 2000 was $863,000, an increase of $227,000,
or 36%, over the $636,000 recorded in the second quarter of 1999. The increase
was due to an increase in net interest income of $706,000, an increase in
noninterest income of $314,000, offset partially by an increase in noninterest
expenses of $614,000, an increase of $65,000 in the provision for loan losses,
and an increase of $114,000 in the provision for income taxes.
Net income for the first six months of 2000 was $1.6 million as compared to $1.2
million recorded in the first six months of 1999. The increase was due to an
increase in net interest income of $1.4 million, an increase in noninterest
income of $416,000, offset partially by an increase in noninterest
12
expenses of $1.1 million, an increase of $140,000 in the provision for loan
losses, and an increase of $200,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2000, increased to $0.51 per common share for the second
quarter of 2000 compared to $0.37 for the same period in 1999. Diluted earnings
per common share were $0.48 for the second quarter of 2000 and $0.35 for the
same period in 1999.
Basic earnings per common share, for the first six months of the year, after
adjusting for a 5% common stock dividend paid in February 2000, increased to
$0.97 per common share as compared to $0.74 per common share for the first half
of 1999. Diluted earnings per common share were $0.91 for the first half of 2000
and $0.68 for the same period in 1999.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the second quarter of
2000 was 0.86% as compared to 0.75% for the second quarter of 1999. The ROA for
the first six months of 2000 and 1999 was 0.85% and 0.76%, respectively. For
purposes of calculating ROA, average assets have been adjusted to exclude gross
unrealized appreciation or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the second quarter of 2000 was
16.36%, as compared to 12.48% for the second quarter of 1999. The annualized ROE
for the first six months of 2000 was 15.82%, as compared to 12.28% for the first
six months of 1999.
FINANCIAL CONDITION
Securities
During the first six months of 2000, securities available for sale decreased by
$3.2 million (net of unrealized depreciation) from $84.6 million at December 31,
1999 to $81.4 million at June 30, 2000 primarily as a result of $3.0 million in
principal repayments on mortgage-backed securities and U.S. Government agency
securities.
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, trust preferred
debt securities, and equity securities. The weighted average life of the
securities available for sale portfolio was 7.6 years at June 30, 2000 with a
weighted average yield of 6.64%.
During the first six months of 2000, securities held to maturity increased from
$29.0 million to $32.9 million primarily as a result of the purchase of $5.0
million in tax-exempt and mortgage-backed securities, offset by principal
repayments of $1.1 million. The securities held in this portfolio include U.S.
Government agency securities, tax-exempt, and mortgage-backed securities. The
weighted average life of the securities held to maturity portfolio was 7.1 years
at June 30, 2000 with a weighted average yield of 6.65%.
13
Federal funds sold increased by $14.1 million during the first six months of
2000 from $0 at December 31, 1999. Total securities and federal funds sold
aggregated $128.3 million at June 30, 2000, and represented 31% of total assets.
The average yield on the combined securities portfolio for the first six months
of 2000 was 6.64%, as compared to 6.38% for the similar period of 1999. The
average yield earned on federal funds sold during the first six months of 2000
was 6.18%, up 154 basis points from 4.64% earned during the first six months of
1999. The large increase in the yield on federal funds sold is a result of five
25 basis point increases and one 50 basis point increase in this rate by the
Federal Reserve Bank between June 30, 1999 and May 16, 2000.
Loans Held for Sale
Loans held for sale are comprised of student loans and residential mortgage
loans that the Company originates with the intention of selling in the future.
During the first six months of 2000, total loans held for sale decreased by $3.2
million from $5.3 million at December 31, 1999, to $2.1 million at June 30,
2000. The decrease was the result of the sale of $6.5 million of student loans
and the sale of $5.0 million of residential loans, offset by originations of
$8.3 million in new loans held for sale. Loans held for sale represented 1% of
total assets at December 31, 1999 and .5% at June 30, 2000.
Loans Receivable
During the first six months of 2000, total loans receivable increased by $36.8
million from $216.1 million at December 31, 1999, to $252.9 million at June 30,
2000. Loans receivable represented 65% of total deposits and 61% of total assets
at June 30, 2000, as compared to 62% and 57%, respectively, at December 31,
1999.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans and other real estate, excluding
loans past due 90 days or more and still accruing interest) at June 30, 2000,
were $526,000, or 0.13%, of total assets as compared to $696,000, or 0.18%, of
total assets at December 31, 1999. Other real estate owned totaled $12,000 at
June 30, 2000, the same as December 31, 1999.
14
The following summary presents information regarding nonperforming loans and
assets as of June 30, 2000 and 1999 and December 31, 1999.
Nonperforming Loans and Assets
- -----------------------------------------------------------------------------------------------
(dollars in thousands) June 30, December 31, June 30,
2000 1999 1999
- -----------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 120 $ 119 $ 35
Consumer 180 244 63
Real estate:
Construction 0 0 30
Mortgage 214 321 132
- -----------------------------------------------------------------------------------------------
Total nonaccrual loans 514 684 260
Restructured loans 0 0 0
- -----------------------------------------------------------------------------------------------
Total nonperforming loans 514 684 260
Other real estate 12 12 92
- -----------------------------------------------------------------------------------------------
Total nonperforming assets 526 696 352
- -----------------------------------------------------------------------------------------------
Loans past due 90 days or more 0 20 0
- -----------------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $ 526 $ 716 $ 352
- -----------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.20% 0.32% 0.13%
Nonperforming assets to total assets 0.13% 0.18% 0.10%
===============================================================================================
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
- -----------------------------------------------------------------------------------------------
(dollars in thousands) June 30, December 31,
2000 1999
- -----------------------------------------------------------------------------------------------
Balance at beginning of period $ 2,841 $ 2,232
Provisions charged to operating expenses 510 762
- -----------------------------------------------------------------------------------------------
3,351 2,994
Recoveries of loans previously charged-off:
Commercial 4 8
Consumer 7 4
Real estate 0 1
- -----------------------------------------------------------------------------------------------
Total recoveries 11 13
Loans charged-off:
Commercial 0 150
Consumer 84 10
Real estate 0 6
- -----------------------------------------------------------------------------------------------
Total charged-off 84 166
- -----------------------------------------------------------------------------------------------
Net charge-offs 73 153
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 3,278 $ 2,841
- -----------------------------------------------------------------------------------------------
Net charge-offs as a percentage of
Average loans outstanding 0.03% 0.08%
Allowance for loan losses as a percentage of
Period-end loans 1.30% 1.31%
===============================================================================================
15
Deposits
Total deposits at June 30, 2000, were $387.5 million, up $39.0 million, or 11%,
over total deposits of $348.5 million at December 31, 1999. The average balances
and weighted average rates paid on deposits for the first six months of 2000 and
1999 are presented in the following table.
- ----------------------------------------------------------------------------------------------
Six months Ended June 30,
2000 1999
- ----------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 68,187 $ 61,249
Interest-bearing (money
market and checking) 69,319 2.88% 54,323 2.32%
Savings 99,133 3.77 74,372 2.80
Time deposits 124,446 5.22 118,406 5.08
- ----------------------------------------------------------------------------------------------
Total deposits $ 361,085 $ 308,350
==============================================================================================
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
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time (GAP), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates,
16
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 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 June 30, 2000, the
Company's income simulation model indicates net income would increase 2.8% and
4.6% in the first year and over a two year time frame, respectively, if rates
decreased as described above, as compared to an increase of 2.2% and 2.3%,
respectively, at June 30, 1999. The model projects that net income would
decrease by 1.9% and 1.45% in the first year and over a two year time frame,
respectively, if rates increased as described above, as compared to a decrease
of 6.7% and 7.8%, respectively, at June 30, 1999. 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 June 30, 2000, the market value of equity
model indicates an acceptable level of interest rate risk.
Liquidity
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Company on an ongoing basis. Liquidity needs are generally met by converting
assets into cash or obtaining sources of additional funding, mainly deposits.
Liquidity sources from asset categories are provided primarily by cash and
federal funds sold, and the cash flow from the amortizing securities and loan
portfolios. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
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 June 30, 2000, the total potential liquidity for the Company
through these secondary sources was $141 million. In view of the primary and
secondary sources as previously mentioned, management believes that the Company
is capable of meeting its anticipated liquidity needs.
17
Capital Adequacy
At June 30, 2000, stockholders' equity totaled $21.8 million, up 7.2% over
stockholders' equity of $20.4 million at December 31, 1999. Stockholders' equity
at June 30, 2000 included $3.3 million in unrealized depreciation, net of income
taxes, on securities available for sale. Excluding this unrealized depreciation,
gross stockholders' equity increased by $1.7 million from $23.4 million at
December 31, 1999, to $25.1 million at June 30, 2000 due principally to retained
net income.
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware
business trust subsidiary of the Company. Proceeds of this offering were
downstreamed to Commerce Bank/Harrisburg, N.A., the Company's wholly-owned
banking subsidiary, to be used for additional capitalization purposes. All $5.0
million of the Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
The table below provides a comparison of the Company's risk-based capital ratios
and leverage ratios to the minimum regulatory requirements for the periods
indicated:
- ---------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
Under Prompt
June 30, December 31, For Capital Adequacy Corrective Action
2000 1999 Purposes Provisions
- ---------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier 1 10.66% 9.91% 4.00% 6.00%
Total 11.82 11.12 8.00 10.00
Leverage Total 7.45 6.28 4.00 5.00
- ---------------------------------------------------------------------------------------------------------------------------
At June 30, 2000, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution.
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.
18
Forward-Looking Statements
The Company may, from time to time, make written or oral "forward-looking
statements, " including statements contained in the Company's filings with the
Securities and Exchange Commission (including the annual report 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.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates, and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words may, could, should, would, believe,
anticipate, estimate, expect, intend, plan, and similar expressions are intended
to identify forward-looking statements. The following factors, among others
could cause the Company's financial performance to differ materially from that
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policy, including interest rate policies of the Board of the Federal Reserve
System; inflation; interest rate, market and monetary fluctuations; the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute competitors' products and services and vice versa; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities, and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk has not changed significantly since
December 31, 1999. The market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising in the
ordinary course of
19
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.
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Company's Shareholders was held on May 19, 2000. The
items of business approved by the shareholders at the Annual Meeting were (i)
the election of eight directors for one-year terms, and (ii) the approval of the
2001 Directors' Stock Option Plan.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share..................................Exhibit 11
Financial Data Schedule..............................................Exhibit 27
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
8/10/00 /s/ James T. Gibson
- ------------------------- --------------------------------------
(Date) James T. Gibson
President/CEO
8/10/00 /s/ Mark A. Zody
- ------------------------- --------------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
22