SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2001
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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
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
100 Senate Avenue, P.O. Box 8599, Camp Hill, PA 17001-8599
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(Address of principal executive offices)
(717) 975-5630
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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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:
1,761,295 Common shares outstanding at 4/30/01
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Transitional Small Business Disclosure Format (check one): Yes No X
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PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)...............................3
March 31, 2001, and December 31, 2000
Consolidated Statements of Income (Unaudited).........................4
Three months ended March 31, 2001 and March 31, 2000
Consolidated Statement of Stockholders' Equity (Unaudited)...........5
Three months ended March 31, 2001 and March 31, 2000
Consolidated Statements of Cash Flows (Unaudited).....................6
Three months ended March 31, 2001, and March 31, 2000
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...........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................18
Item 6a. Exhibits
Exhibit 11...........................................................18
Item 6b. Reports on Form 8-K..................................................18
Signatures...........................................................19
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
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March 31, December 31,
( in thousands, except share amounts) 2001 2000
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Assets Cash and due from banks $ 18,868 $ 16,849
Federal funds sold 25,500 22,800
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Cash and cash equivalents 44,368 39,649
Securities, available for sale at fair value 90,776 92,921
Securities, held to maturity at cost
(fair value 2001: $61,516; 2000: $33,661 ) 61,357 33,812
Loans, held for sale
(fair value 2001: $6,583; 2000: $5,409 ) 6,567 5,329
Loans receivable :
Real estate:
Commercial mortgage 128,912 127,931
Construction and land development 32,465 30,776
Residential mortgage 42,794 41,314
Tax-exempt 2,751 2,786
Commercial business 36,030 31,490
Consumer 31,380 30,691
Lines of credit 26,621 25,264
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300,953 290,252
Less: Allowance for loan losses 3,977 3,732
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Net loans receivable 296,976 286,520
Premises and equipment, net 17,090 16,637
Accrued interest receivable 2,527 2,936
Other assets 2,362 2,282
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Total assets $ 522,023 $ 480,086
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 94,251 $ 85,577
Interest-bearing 391,921 361,006
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Total deposits 486,172 446,583
Accrued interest payable 999 834
Other liabilities 1,545 1,001
Long term debt 5,000 5,000
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Total liabilities 493,716 453,418
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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 - 2001: 1,759,910; 2000: 1,749,045 1,760 1,749
Surplus 21,036 20,861
Retained earnings 5,237 4,334
Accumulated other comprehensive income (loss) (126) (676)
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Total stockholders' equity 28,307 26,668
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Total liabilities and stockholders' equity $ 522,023 $ 480,086
=============================================================================================================================
See accompanying notes .
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
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Three Months
Ended March 31,
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(in thousands, except per share amounts) 2001 2000
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Interest Loans receivable, including fees :
Income Taxable $ 6,483 $ 4,865
Tax - exempt 37 10
Securities :
Taxable 2,307 1,943
Tax - exempt 14 2
Federal funds sold 302 18
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Total interest income 9,143 6,838
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Interest Deposits 4,169 2,826
Expense Other borrowed money 0 37
Long-term debt 138 0
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Total interest expense 4,307 2,863
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Net interest income 4,836 3,975
Provision for loan losses 285 255
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Net interest income after provision for loan losses 4,551 3,720
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Noninterest Service charges and other fees 1,345 976
Income Other operating income 126 107
Gain on sale of securities available for sale 52 0
Gain on sale of loans 204 112
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Total noninterest income 1,727 1,195
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Noninterest Salaries and employee benefits 2,298 1,714
Expenses Occupancy 515 417
Furniture and equipment 339 247
Advertising and marketing 390 420
Data processing 311 197
Postage and supplies 212 159
Audits, regulatory fees and assessments 99 84
Other 730 502
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Total noninterest expenses 4,894 3,740
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Income before income taxes 1,384 1,175
Provision for federal income taxes 461 402
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Net income $ 923 $ 773
======================================================================================================================
Net income per common share: Basic $ 0.51 $ 0.44
Diluted 0.47 0.40
======================================================================================================================
See accompanying notes .
4
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
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Balance : December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
Comprehensive income:
Net income - - - 773 - 773
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 86 86
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Total comprehensive income 859
Dividends declared on preferred stock - - - (20) - (20)
Common stock issued under stock option plans - 4 21 - - 25
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 - 3 55 - - 58
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March 31, 2000 $ 400 $ 1,651 $ 18,275 $ 3,890 $ (2,913) $ 21,303
=================================================================================================================================
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance : December 31, 2000 $ 400 $ 1,749 $ 20,861 $ 4,334 $ (676) $ 26,668
Comprehensive income:
Net income - - - 923 - 923
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 550 550
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Total comprehensive income 1,473
Dividends declared on preferred stock - - - (20) - (20)
Common stock issued under stock option plans - 9 44 - - 53
Income tax benefit of stock options exercised - - 59 - - 59
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 - 2 69 - - 71
5% common stock dividend and cash paid in
lieu of fractional shares - - 12 (12) - -
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March 31, 2001 $ 400 $ 1,760 $ 21,048 $ 5,225 $ (126) $ 28,307
=================================================================================================================================
See accompanying notes .
5
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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Three Months Ended
March 31,
( in thousands ) 2001 2000
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Operating
Activities Net income $ 923 $ 773
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 285 255
Provision for depreciation and amortization 343 270
Deferred income taxes (112) (127)
Amortization of securities premiums and accretion of discounts, net 45 52
Net gain on sale of securities available for sale (52) 0
Proceeds from sale of loans 12,286 8,325
Loans originated for sale (13,400) (5,135)
Gain on sales of loans and other real estate owned (204) (111)
Stock granted under stock purchase plan 3 3
Decrease (increase) in accrued interest receivable and other assets 216 (339)
Increase in accrued interest payable and other liabilities 709 642
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Net cash provided by operating activities 1,042 4,608
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 1,133 460
Purchases (28,681) (4,955)
Securities available for sale :
Proceeds from principal repayments and maturities 5,515 1,226
Proceeds from sales 7,497 0
Purchases (10,023) 0
Proceeds from sale of loans receivable 3,282 376
Net increase in loans receivable (13,943) (19,008)
Purchases of premises and equipment (796) (446)
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Net cash (used) by investing activities (36,016) (22,347)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 18,063 26,765
Net increase (decrease) in time deposits 21,526 (9,008)
(Decrease) in borrowed money 0 (8,300)
Proceeds from common stock options exercised 53 25
Proceeds from common stock purchase and dividend reinvestment plans 71 58
Cash dividends on preferred stock (20) (20)
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Net cash provided by financing activities 39,693 9,520
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Increase (decrease) in cash and cash equivalents 4,719 (8,219)
Cash and cash equivalents at beginning of year 39,649 27,490
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Cash and cash equivalents at end of period $ 44,368 $19,271
===========================================================================================================
See accompanying notes .
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(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 three month period ended March 31,
2001, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001.
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 thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates, and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words may, could, should, would, believe,
anticipate, estimate, expect, intend, plan, and similar expressions are intended
to identify forward-looking statements. The following factors, among others
could cause the Company's financial performance to differ materially from that
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policy, including interest rate policies of the Board of the Federal Reserve
System; inflation; interest rate, market and monetary fluctuations; the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute competitors' products and services and vice versa; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities, and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
7
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company. For further information, refer to the financial
statements and footnotes thereto included in the Pennsylvania Commerce Bancorp,
Inc., Annual Report for the year ended December 31, 2000.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 19, 2001, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 16, 2001, to stockholders of record
on February 2, 2001. Payment of the stock dividend resulted in the issuance of
83,492 additional common shares and cash of $6,403 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
2000.
Recently Issued FASB Statements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
(as amended by Statement Nos. 137 and 138), "Accounting for Derivative
Instruments and Hedging Activities". This statement and its amendments establish
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and require that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. The Statement
requires that changes in the fair value of derivatives be recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company adopted the Statement on January 1, 2001. The
adoption of the statement did not have a significant impact on the financial
condition or results of operations of the Company.
In September 2000, the Financial Accounting Standards Board issued Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement replaces SFAS No. 125 of the
same name. It revises the standards of securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. This Statement is to be applied prospectively with
certain exceptions. Other than these exceptions, earlier or retroactive
application of its accounting provision is not permitted. The adoption of the
Statement did not have significant impact on the Company.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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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 19% to $923,000 as compared to $773,000 for
the first quarter of 2000 and total revenues increased by 27% to $6.6 million
for the quarter. Diluted net income per common share increased 17% to $0.47 from
$0.40 per share in the first quarter a year ago (after adjusting for a 5% common
stock dividend paid in February 2001). At March 31, 2001, the Company had total
assets of $522.0 million, total loans (including loans held for sale) of $307.5
million, and total deposits of $486.2 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $459.9 million for the first quarter of 2001 as
compared to $343.7 million for the same period in 2000. Approximately $73.9
million, or 64%, of this increase was in average loans outstanding and $41.2
million, or 35%, was in average securities and federal funds sold. The yield on
earning assets for the first quarter of 2001 was 8.03%, an increase of 3 basis
points over the comparable period in 2000.
The growth in interest earning assets was funded primarily by an increase in the
average balance of deposits of $112.9 million. Interest-bearing liabilities
increased from $283.2 million during the first quarter of 2000 to $386.9 million
during the first quarter of 2001. Average savings deposits increased $24.0
million over first quarter a year ago, average public funds deposits increased
$33.6 million and average time deposits increased by $37.9 million. Also,
average non-interest bearing demand deposits increased by $14.1 million.
The average rate paid on these liabilities for the first quarter of 2001 was
4.51%, an increase of 44 basis points from the comparable period in 2000. The
Company's aggregate cost of funding sources was 3.80% for the first quarter of
2001, an increase of 45 basis points over the prior year. This is the result of
an increase in the average rate paid on total interest bearing deposits as well
as the issuance of long-term debt, which bears interest at a higher rate than
the Company's deposits.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and 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.
Interest income increased by $2.3 million, or 34%, over the first quarter of
2000. Interest expense for the first quarter of 2001 increased by $1.4 million,
or 50%, compared to the first quarter of 2000.
9
Net interest income for the first quarter of 2001 increased by $861,000, or 22%,
over the same period in 2000. Changes in net interest income are frequently
measured by two statistics: net interest rate spread and net interest margin.
Net interest rate spread is the difference between the average rate earned on
earning assets and the average rate incurred on interest-bearing liabilities.
Net interest margin represents the difference between interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. The Company's net interest rate spread was 3.52% during the
first quarter of 2001 compared to 3.93% during the same period of the previous
year. The net interest margin decreased by 41 basis points from 4.64% for the
first quarter 2000 to 4.23% during the first quarter of 2001.
Noninterest Income
Noninterest income for the first quarter of 2001 increased by $532,000, or 45%,
from the same period in 2000. Recurring core noninterest income increased by 36%
from $1.1 million in the first quarter of 2000 to $1.5 million for the same
period in 2001. 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 three months of 2001 is
nonrecurring income of $234,000, as a result of a $102,000 gain on the sale of
student loans, an $80,000 gain from the sale of a Small Business Administration
loan, and a $52,000 gain on the sale of securities available for sale. Included
in noninterest income for the first three months of 2000 is nonrecurring income
of $101,000, comprised of an $88,000 gain on the sale of student loans and a
$13,000 gain from the sale of Small Business Administration loans.
Noninterest Expenses
For the first quarter of 2001, noninterest expenses increased by $1.2 million,
or 31%, over the same period in 2000. 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 three branch offices in June 2000, October
2000, and March 2001, respectively. A comparison of noninterest expense for
certain categories for the three months ended March 31, 2001, and March 31,
2000, is presented in the following paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $584,000, or 34%, for the first quarter of
2001 over the first quarter of 2000. This increase is consistent with increases
in staff levels necessary to handle Company growth from first quarter 2000 to
first quarter 2001, including the additional staff of the branch offices opened
in June 2000, October 2000, and March 2001.
Occupancy expenses of $515,000 were $98,000, or 24%, higher for the first
quarter of 2001 than for the three months ended March 31, 2000. Increased
occupancy expenses primarily are a result of the two branch offices opened in
2000 and one branch opened in 2001. The Bank also opened a loan production
office in Carlisle, PA on January 2, 2001. The Bank leases the office space and
constructed leasehold improvements at its own expense.
Furniture and equipment expenses of $339,000 were $92,000, or 37%, higher for
the first quarter of 2001 than the three months ended March 31, 2000. This
increase was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of the two branch offices opened in 2000
and the Carlisle loan production office as well as the upgrade of computer
equipment at all Commerce locations during the fourth quarter of 2000 and the
first quarter of 2001.
10
Advertising and marketing expenses totaled $390,000 for the three months ended
March 31, 2001, a decrease of $30,000 from the first quarter of 2000.
Data processing expenses of $311,000 were $114,000, or 58%, higher in the first
quarter of 2001 than the three months ended March 31, 2000. The increase was due
to a combination of increased costs associated with processing additional
transactions (due to growth in number of accounts) and an increase in data
processing support costs.
Postage and supplies expense of $212,000 represented a $53,000, or 33%, increase
over the first quarter of the prior year. This was due to a combination of
increased usage of supplies with the addition of three new branches and due to
growth in the volume of customers and customer transaction statements.
Audits and regulatory fees increased by $15,000, or 18%, from $84,000 for the
first quarter of 2000 to $99,000 for the first quarter of 2001. This increase is
a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of
the Comptroller of the Currency (OCC) assessments. Both assessment calculations,
which are based upon deposit size, continue to increase as the Company's deposit
balances grow.
Other noninterest expenses increased by $228,000, or 45%, for the three-month
period ended March 31, 2001, as compared to the same period in 2000. The
increase includes higher loan expenses due to an increase in loan volume,
increased costs associated with the Bank's telephone banking product, telephone
service for four new locations, checkbook printing, customer relations and
higher provisions for non-credit related losses. It also includes 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 all
customers and non-customers.
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 2.72% for the three months ended March 31, 2001, less than
the 3.16% reported for the three months ended March 31, 2000. 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 March 31, 2001, the operating efficiency ratio was 77.2%
compared to 73.8% for the similar period in 2000.
Provision for Federal Income Taxes
The provision for federal income taxes was $461,000 for the first quarter of
2001 as compared to $402,000 for the same period in 2000. The effective tax
rate, which is the ratio of income tax expense to income before income taxes,
was 33.3% for the first three months of 2001 and 34.2% for the same period in
2000.
Net Income and Net Income Per Share
Net income for the first quarter of 2001 was $923,000, an increase of $150,000,
or 19%, over the $773,000 recorded in the first quarter of 2000. The increase
was due to an increase in net interest income of $861,000, an increase in
noninterest income of $532,000, offset partially by an increase in noninterest
expenses of $1.2 million, an increase of $30,000 in the provision for loan
losses, and a increase of $59,000 in the provision for income taxes.
11
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2001, increased to $0.51 per common share for the first quarter
of 2001 compared to $0.44 for the same period in 2000. Diluted earnings per
common share were $0.47 for the first quarter of 2001 and $0.40 for the same
period in 2000.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the first quarter of
2001 was 0.75% as compared to 0.83% for the first quarter of 2000. For purposes
of calculating ROA, average assets have been adjusted to exclude gross
unrealized appreciation or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the first quarter of 2001 was 13.60%,
as compared to 14.92% for the first quarter of 2000.
FINANCIAL CONDITION
Securities
During the first three months of 2001, securities available for sale decreased
by $2.1 million (net of unrealized appreciation) from $92.9 million at December
31, 2000 to $90.8 million at March 31, 2001. This resulted from the purchase of
$10.0 million in mortgage-backed securities, trust preferred debt securities,
and AAA Whole Loan CMO securities, offset by $5.5 million in principal
repayments, and $7.4 million of securities sold. The portfolio also had an
unrealized gain of $833,000 in the quarter. During the first quarter, Bank
management implemented a small portfolio restructuring strategy in response to
the dramatic decrease in interest rates during the quarter. Management sold $7.4
million of 7.00% and 7.50% coupon mortgage-backed securities (MBS's) and
replaced these with 6.00% and 6.50% coupon MBS's to partially mitigate the
Bank's risk to prepayments on the higher coupon securities. The sale of these
securities resulted in a net pre-tax gain of $52,180.
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, and AAA Whole
Loan CMO securities, trust preferred debt securities, and equity securities. The
weighted average life of the securities available for sale portfolio was 7.9
years at March 31, 2001 with a weighted average yield of 6.81%.
During the first three months of 2001, securities held to maturity increased
from $33.8 million to $61.4 million primarily as a result of the purchase of
$28.7 million in securities, offset by principal repayments of $1.1 million. The
securities held in this portfolio include U.S. Government agency securities,
tax-exempt municipal bonds, AAA Whole Loan CMO securities, trust preferred debt
securities, corporate debt securities, and mortgage-backed securities. The
weighted average life of the securities held to maturity portfolio was 8.2 years
at March 31, 2001 with a weighted average yield of 6.73%.
12
Federal funds sold increased by $2.7 million during the first three months of
2001. Total securities and federal funds sold aggregated $177.6 million at March
31, 2001, and represented 34% of total assets.
The average yield on the combined securities portfolio for the first three
months of 2001 was 6.66%, as compared to 6.67% for the similar period of 2000.
The average yield earned on federal funds sold during the first three months of
2001 was 5.43%, down 36 basis points from 5.79% earned during the first three
months of 2000. The decrease in the yield on federal funds sold is a result of
one 50 basis point increase and three 50 basis point decreases in this rate by
the Federal Reserve Bank between March 31, 2000 and March 31, 2001.
Loans Held for Sale
Loans held for sale are comprised of student loans, Small Business
Administration loans, and residential mortgage loans which the Company
originates with the intention of selling in the future. During the first three
months of 2001, total loans held for sale increased by $1.3 million from $5.3
million at December 31, 2000, to $6.6 million at March 31, 2001. The increase
was the result of the sale of $6.8 million of student loans and the sale of $5.3
million of residential loans, offset by originations of $13.4 million in new
loans held for sale. Loans held for sale represented 1% of total assets at
December 31, 2000 and at March 31, 2001.
Loans Receivable
During the first three months of 2001, total loans receivable increased by $10.7
million from $290.3 million at December 31, 2000, to $301.0 million at March 31,
2001. Loans receivable represented 62% of total deposits and 58% of total assets
at March 31, 2001, as compared to 65% and 60%, respectively, at December 31,
2000.
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 March 31, 2001,
were $1.1 million, or 0.22%, of total assets as compared to $875,000, or 0.18%,
of total assets at December 31, 2000. Other real estate owned totaled $42,000 at
March 31, 2001 and as of December 31, 2000.
The summary table on the following page presents information regarding
nonperforming loans and assets as of March 31, 2001 and 2000 and December 31,
2000.
13
Nonperforming Loans and Assets
- ----------------------------------------------------------------------------------------
(dollars in thousands) March 31, December 31, March 31,
2001 2000 2000
- ----------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 299 $ 300 $ 120
Consumer 8 162 230
Real estate:
Construction 0 0 0
Mortgage 794 371 212
- ----------------------------------------------------------------------------------------
Total nonaccrual loans 1,101 833 562
Restructured loans 0 0 0
- ----------------------------------------------------------------------------------------
Total nonperforming loans 1,101 833 562
Other real estate 42 42 12
- ----------------------------------------------------------------------------------------
Total nonperforming assets 1,143 875 574
- ----------------------------------------------------------------------------------------
Loans past due 90 days or more 0 0 0
- ----------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $1,143 $ 875 $ 574
- ----------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.37% 0.29% 0.24%
Nonperforming assets to total assets 0.22% 0.18% 0.15%
========================================================================================
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
- --------------------------------------------------------------------------------
(dollars in thousands) 3 Months Year Ending
Ending December 31,
March 31, 2000
2001
- --------------------------------------------------------------------------------
Balance at beginning of period $3,732 $2,841
Provisions charged to operating expenses 285 1,050
- --------------------------------------------------------------------------------
4,017 3,891
Recoveries of loans previously charged-off:
Commercial 1 6
Consumer 20 8
Real estate 0 0
- --------------------------------------------------------------------------------
Total recoveries 21 14
Loans charged-off:
Commercial 50 1
Consumer 11 95
Real estate 0 77
- --------------------------------------------------------------------------------
Total charged-off 61 173
- --------------------------------------------------------------------------------
Net charge-offs 40 159
- --------------------------------------------------------------------------------
Balance at end of period $3,977 $3,732
- --------------------------------------------------------------------------------
Net charge-offs as a percentage of 0.01% 0.06%
Average loans outstanding
Allowance for loan losses as a percentage of
Period-end loans 1.32% 1.29%
================================================================================
14
Deposits
Total deposits at March 31, 2001, were $486.2 million, up $39.6 million, or 9%,
over total deposits of $446.6 million at December 31, 2000. The average balances
and weighted average rates paid on deposits for the first three months of 2001
and 2000 are presented in the following table.
- --------------------------------------------------------------------------------------------
Three Months Ended March 31,
- --------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 79,389 $ 65,464
Interest-bearing (money market
and checking) 91,332 2.99% 68,401 2.83%
Savings 121,210 3.72 94,128 3.58
Time deposits 169,316 5.71 118,081 5.05
- --------------------------------------------------------------------------------------------
Total deposits $ 461,247 $ 346,074
============================================================================================
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, but also of proposed
strategies for responding to them.
15
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 March 31, 2001, the
Company's income simulation model indicates net income would increase 2.8% in
the first year and 4.3% over a two year time frame if rates decreased as
described above. The model projects that net income would decrease by 2.5% in
the first year and decrease 1.5% over a two year time frame if rates increased
as described above. 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 March 31, 2001, 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 March 31, 2001, the total potential liquidity for the Company
through these secondary sources was $129 million. In view of the primary and
secondary sources as previously mentioned, management believes that the Company
is capable of meeting its anticipated liquidity needs.
Capital Adequacy
At March 31, 2001, stockholders' equity totaled $28.3 million, up 6.1% over
stockholders' equity of $26.7 million at December 31, 2000. Stockholders' equity
at March 31, 2001 included $126,000 unrealized losses, net of income taxes, on
securities available for sale. Excluding this unrealized loss, gross
stockholders' equity increased by $1.1 million from $27.3 million at December
31, 2000, to $28.4 million at March 31, 2001 due principally to retained net
income.
16
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
I, 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 following table 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
March 31, December 31, For Capital Adequacy Corrective Action
2001 2000 Purposes Provisions
- ----------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Tier 1 9.28% 9.90% 4.00% 6.00%
Total 10.38 11.04 8.00 10.00
Leverage Total 6.73 6.92 4.00 5.00
At March 31, 2001, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk has not changed significantly since
December 31, 2000. The market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis above.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share...................................Exhibit 11
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
PENNSYLVANIA COMMERCE BANCORP, INC.
(Registrant)
5/11/01 /s/ James T. Gibson
- ------------------------- -----------------------------------------
(Date) James T. Gibson
President/CEO
5/11/01 /s/ Mark A. Zody
- ------------------------- -----------------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
19