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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File 333-78445
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
(Address of principal executive offices)
(717) 975-5630
(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:
1,982,802 Common shares outstanding at 04/30/02
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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, 2002, and December 31, 2001
Consolidated Statements of Income (Unaudited).......................4
Three months ended March 31, 2002 and March 31, 2001
Consolidated Statements of Stockholders' Equity (Unaudited)........5
Three months ended March 31, 2002 and March 31, 2001
Consolidated Statements of Cash Flows (Unaudited)...................6
Three months ended March 31, 2002, and March 31, 2001
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.........................................................20
2
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
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March 31, December 31,
( in thousands, except share amounts) 2002 2001
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Assets Cash and due from banks $ 17,612 $ 21,555
Federal funds sold 28,700 4,300
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Cash and cash equivalents 46,312 25,855
Securities, available for sale at fair value 108,114 107,315
Securities, held to maturity at cost
(fair value 2002: $103,444; 2001: $102,427 ) 104,610 103,349
Loans, held for sale
(fair value 2002: $3,269; 2001: $7,733 ) 3,253 7,661
Loans receivable :
Real estate:
Commercial mortgage 144,873 142,969
Construction and land development 32,729 32,863
Residential mortgage 57,566 48,415
Tax-exempt 2,882 2,676
Commercial business 45,728 42,399
Consumer 31,685 36,551
Lines of credit 34,893 36,801
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350,356 342,674
Less: Allowance for loan losses 4,785 4,544
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Net loans receivable 345,571 338,130
Premises and equipment, net 21,998 21,587
Accrued interest receivable 3,314 3,542
Other assets 5,917 2,451
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Total assets $ 639,089 $ 609,890
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Liabilities Deposits :
Noninterest-bearing $ 115,262 $ 105,171
Interest-bearing 473,109 456,567
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Total deposits 588,371 561,738
Accrued interest payable 901 837
Other liabilities 2,551 1,722
Long term debt 13,000 13,000
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Total liabilities 604,823 577,297
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Stockholders' Preferred stock - Series A noncumulative; $10.00 par value
Equity 1,000,000 shares authorized; 40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
issued and outstanding - 2002: 1,906,796; 2001: 1,881,960 1,907 1,882
Surplus 25,993 25,263
Retained earnings 6,412 5,159
Accumulated other comprehensive income (loss) (446) (111)
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Total stockholders' equity 34,266 32,593
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Total liabilities and stockholders' equity $ 639,089 $ 609,890
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See accompanying notes.
3
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unadutied)
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Three Months
Ended March 31,
--------------------------------
(in thousands, except per share amounts) 2002 2001
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Interest Loans receivable, including fees :
Income Taxable $ 6,600 $ 6,483
Tax - exempt 22 37
Securities :
Taxable 3,145 2,307
Tax - exempt 27 14
Federal funds sold 79 302
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Total interest income 9,873 9,143
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Interest Deposits 3,236 4,169
Expense Long-term debt 339 138
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Total interest expense 3,575 4,307
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Net interest income 6,298 4,836
Provision for loan losses 435 285
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Net interest income after provision for loan losses 5,863 4,551
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Noninterest Service charges and other fees 1,564 1,345
Income Other operating income 127 126
Gain on sale of securities available for sale 0 52
Gain on sale of loans 132 204
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Total noninterest income 1,823 1,727
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Noninterest Salaries and employee benefits 2,666 2,298
Expenses Occupancy 527 515
Furniture and equipment 347 339
Advertising and marketing 587 390
Data processing 426 311
Postage and supplies 209 212
Audits , regulatory fees and assessments 109 99
Other 876 730
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Total noninterest expenses 5,747 4,894
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Income before income taxes 1,939 1,384
Provision for federal income taxes 649 461
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Net income $ 1,290 $ 923
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Net income per common share : Basic $ 0.67 $ 0.49
Diluted 0.60 0.45
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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, 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
Other - - 12 (12) - -
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March 31, 2001 $ 400 $ 1,760 $ 21,048 $ 5,225 $ (126) $ 28,307
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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, 2001 $ 400 $ 1,882 $ 25,263 $ 5,159 $ (111) $ 32,593
Comprehensive income:
Net income - - - 1,290 - 1,290
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (335) (335)
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Total comprehensive income 955
Dividends declared on preferred stock - - - (20) - (20)
Common stock issued under stock option plans - 14 184 - - 198
Income tax benefit of stock options exercised - - 106 - - 106
Common stock issued under employee stock purchase plan - - 2 - - 2
Proceeds from issuance of common stock in connection
with dividend reinvestment and stock purchase plan - 11 421 - - 432
Other - - 17 (17) - -
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March 31, 2002 $ 400 $ 1,907 $ 25,993 $ 6,412 $ (446) $ 34,266
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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 ) 2002 2001
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Operating
Activities Net income $ 1,290 $ 923
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 435 285
Provision for depreciation and amortization 348 343
Deferred income taxes (87) (112)
Amortization of securities premiums and accretion of discounts, net 143 45
Net gain on sale of securities available for sale 0 (52)
Proceeds from sale of loans 11,147 12,286
Loans originated for sale (6,604) (13,400)
Gain on sales of loans (132) (204)
Stock granted under stock purchase plan 2 3
Decrease (increase) in accrued interest receivable and other assets (2,866) 216
Increase in accrued interest payable and other liabilities 893 709
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Net cash provided by operating activities 4,569 1,042
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 5,720 1,133
Purchases (7,011) (28,681)
Securities available for sale :
Proceeds from principal repayments and maturities 10,500 5,515
Proceeds from sales 0 7,497
Purchases (11,919) (10,023)
Proceeds from sale of loans receivable 0 3,282
Net increase in loans receivable (7,876) (13,943)
Purchases of premises and equipment (759) (796)
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Net cash (used) by investing activities (11,345) (36,016)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 32,469 18,063
Net increase (decrease) in time deposits (5,836) 21,526
Proceeds from common stock options exercised 198 53
Proceeds from common stock purchase and dividend reinvestment plans 432 71
Cash dividends on preferred stock and cash in lieu of fractional shares (30) (20)
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Net cash provided by financing activities 27,233 39,693
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Increase (decrease) in cash and cash equivalents 20,457 4,719
Cash and cash equivalents at beginning of year 25,855 39,649
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Cash and cash equivalents at end of period $ 46,312 $44,368
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See accompanying notes.
6
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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"), Commerce Capital Harrisburg Trust
I, and Commerce Capital Harrisburg Trust II. 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,
2002, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
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, 2001.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 30, 2002, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 25, 2002, to stockholders of record
on February 11, 2002. Payment of the stock dividend resulted in the issuance of
89,805 additional common shares and cash of $9,870 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
2001.
Recently Issued FASB Statements
In July of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations", which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the Company on January 1, 2003.
Adoption of these statements is not expected to have a material impact on the
Company's financial condition or results of operations.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
Future Branch Facilities
The Company has purchased the building at 101 North Second Street, City of
Harrisburg, Dauphin County, Pennsylvania and is currently constructing a
full-service branch office in this building. The Company plans Grand Opening
Ceremonies for this branch in June 2002.
The Company has entered into a land lease for the premises located in front of
the Camp Hill Mall at 32nd Street and Trindle Road in the Borough of Camp Hill,
Cumberland County, Pennsylvania. The Company is currently constructing a
full-service branch office on this land. The land lease commenced in April 2002
and has a term of 20 years. Annual rent payments equal $125,000 and will
commence August 2002. Rent is subject to change on terms set forth in the lease
agreement.
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 40% to $1.3 million as compared to $923,000
for the first quarter of 2001 and total revenues increased by 24% to $8.1
million for the quarter. Diluted net income per common share increased 33% to
$0.60 from $0.45 per share in the first quarter a year ago (after adjusting for
a 5% common stock dividend paid in February 2002). At March 31, 2002, the
Company had total assets of $639.1 million, total loans (including loans held
for sale) of $353.6 million, and total deposits of $588.4 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $579.3 million for the first quarter of 2002 as
compared to $459.9 million for the same period in 2001. Approximately $55.7
million, or 47%, of this increase was in average loans outstanding and $63.7
million, or 53%, was in average investment securities and federal funds sold.
The yield on earning assets for the first quarter of 2002 was 6.88%, a decrease
of 115 basis points (bps) from the comparable period in 2001. This decrease was
mainly the result of eleven decreases in short-term interest rates totaling 475
bps by the Federal Reserve Board during 2001.
The growth in interest earning assets was funded primarily by an increase in the
average balance of deposits of $87.4 million. Interest-bearing liabilities
increased from $386.9 million during the first quarter of 2001 to $482.5 million
during the first quarter of 2002. Average savings deposits increased $49.2
million over first quarter a year ago, average public funds deposits increased
$37.4 million and average non-interest bearing demand deposits increased by
$24.5 million. Average time deposits decreased $16.6 million during the quarter
as compared to the first quarter one year ago.
The average rate paid on these liabilities for the first quarter of 2002 was
3.00%, a decrease of 151 basis points from the comparable period in 2001. The
Company's aggregate cost of funding sources was 2.50% for the first quarter of
2002, a decrease of 130 basis points from the prior year. This is the result of
a decrease in the average rates paid on all interest bearing deposits partially
offset by the issuance of $8.0 million of long-term debt in September 2001,
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, borrowed funds, and long-term debt. Changes in net
interest income and margin result from the interaction between the volume and
composition of earning assets, related yields and associated funding costs.
9
Interest income increased by $730,000, or 8%, over the first quarter of 2001.
Interest expense for the first quarter of 2002 decreased by $733,000, or 17%,
compared to the first quarter of 2001.
Net interest income for the first quarter of 2002 increased by $1.5 million, or
30%, over the same period in 2001. 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 3.88% during the
first quarter of 2002 compared to 3.52% during the same period of the previous
year. The net interest margin increased by 15 basis points from 4.23% for the
first quarter 2001 to 4.38% during the first quarter of 2002.
Noninterest Income
Noninterest income for the first quarter of 2002 increased by $96,000, or 6%,
over the same period in 2001. Recurring core noninterest income increased by 16%
from $1.5 million in the first quarter of 2001 to $1.7 million for the same
period in 2002. 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 2002 is
nonrecurring income of $95,000, as a result of a $95,000 gain on the sale of
student loans. Included in noninterest income for the first three months of 2001
is nonrecurring income of $234,000, comprised of an $102,000 gain on the sale of
student loans, an $80,000 gain from the sale of Small Business Administration
loans, and a $52,000 gain on sale of securities available for sale.
Noninterest Expenses
For the first quarter of 2002, noninterest expenses increased by $853,000, or
17%, over the same period in 2001. 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 two branch offices in March 2001 and October
2001, respectively. In addition, staffing and occupancy expenses increased in
preparation for the spring branch opening of the Downtown Harrisburg branch. A
comparison of noninterest expense for certain categories for the three months
ended March 31, 2002, and March 31, 2001, is presented in the following
paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $368,000, or 16%, for the first quarter of
2002 over the first quarter of 2001. This increase is consistent with increases
in staff levels necessary to handle Company growth from first quarter 2001 to
first quarter 2002, including the additional staff of the branch offices opened
in March 2001 and October 2001.
Occupancy expenses of $527,000 were $12,000 higher for the first quarter of 2001
than for the three months ended March 31, 2001. Increased occupancy expenses
primarily are a result of the two branch offices opened in 2001 and preparation
of the branch opening in spring 2002 offset by rental income earned at the
Downtown Harrisburg location.
10
Advertising and marketing expenses totaled $587,000 for the three months ended
March 31, 2002, an increase of $197,000, or 51% from the first quarter of 2001.
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 $426,000 were $115,000, or 37%, higher in the first
quarter of 2002 than the three months ended March 31, 2001. 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.
Audits and regulatory fees increased by $10,000, or 10%, from $99,000 for the
first quarter of 2001 to $109,000 for the first quarter of 2002. 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 $146,000, or 20%, for the three-month
period ended March 31, 2002, as compared to the same period in 2001. Components
of the increase include telephone services for new branch locations, higher loan
expenses due to an increase in loan volume, higher provisions for non-credit
related losses, an increase in Pennsylvania Shares Tax which is based on the
Bank's equity, and increased insurance costs.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding foreclosed real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio equaled 2.61% for the three months ended March 31, 2002, less than
the 2.77% reported for the three months ended March 31, 2001. Another
productivity measure is the operating efficiency ratio. This ratio expresses the
relationship of noninterest expenses (excluding foreclosed real estate expenses)
to net interest income plus noninterest income (excluding nonrecurring gains).
For the quarter ended March 31, 2002, the operating efficiency ratio was 71.5%,
compared to 77.2% for the similar period in 2001.
Provision for Federal Income Taxes
The provision for federal income taxes was $649,000 for the first quarter of
2002 as compared to $461,000 for the same period in 2001. The effective tax
rate, which is the ratio of income tax expense to income before income taxes,
was 33.5% for the first three months of 2002 and 33.3% for the same period in
2001.
Net Income and Net Income Per Share
Net income for the first quarter of 2002 was $1.3 million, an increase of
$367,000, or 40%, over the $923,000 recorded in the first quarter of 2001. The
increase was due to an increase in net interest income of $1.5 million, an
increase in noninterest income of $96,000, offset partially by an increase in
noninterest expenses of $853,000, an increase of $150,000 in the provision for
loan losses, and an increase of $188,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2002, increased to $0.67 per common share for the first quarter
of 2002 compared to $0.49 for the same period in 2001. Diluted earnings per
common share were $0.60 for the first quarter of 2002 and $0.45 for the same
period in 2001.
11
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
2002 was 0.84% as compared to 0.75% for the first quarter of 2001. 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 2002 was 15.50%,
as compared to 13.60% for the first quarter of 2001.
FINANCIAL CONDITION
Securities
During the first three months of 2002, securities available for sale increased
by $799,000 (net of unrealized depreciation) from $107.3 million at December 31,
2001 to $108.1 million at March 31, 2002. This resulted from the purchase of
$11.9 million in securities, partially offset by $10.5 million in principal
repayments.
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, AAA Whole Loan
CMO securities, corporate debt, and equity securities. The weighted average life
of the securities available for sale portfolio was 6.3 years at March 31, 2002
with a weighted average yield of 6.30%.
During the first three months of 2002, securities held to maturity increased
from $103.3 million to $104.6 million primarily as a result of the purchase of
$7.0 million in securities, offset by principal repayments of $5.7 million. The
securities held in this portfolio include U.S. Government agency securities,
tax-exempt municipal bonds, AAA Whole Loan CMO securities, corporate debt
securities, and mortgage-backed securities. The weighted average life of the
securities held to maturity portfolio was 7.2 years at March 31, 2002 with a
weighted average yield of 6.36%.
Federal funds sold increased by $24.4 million during the first three months of
2002. Total securities and federal funds sold aggregated $241.4 million at March
31, 2002, and represented 38% of total assets.
The average yield on the combined securities portfolio for the first three
months of 2002 was 6.29%, as compared to 6.66% for the similar period of 2001.
The average yield earned on federal funds sold during the first three months of
2002 was 1.64%, down 379 basis points from 5.43% earned during the first three
months of 2001. The decrease in the yield on federal funds sold is a result of
eleven decreases in short-term interest rates by the Federal Reserve Bank for a
total of 475 bps between January 1, 2001 and December 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
12
originates with the intention of selling in the future. During the first three
months of 2002, total loans held for sale decreased by $4.4 million, from $7.7
million at December 31, 2001 to $3.3 million at March 31, 2002. The change was
the result of the sale of $6.3 million of student loans and the sale of $4.7
million of residential loans, offset by originations of $6.6 million in new
loans held for sale. Loans held for sale represented 1% of total assets at
December 31, 2001 and at March 31, 2002.
Loans Receivable
During the first three months of 2002, total loans receivable increased by $7.7
million from $342.7 million at December 31, 2001, to $350.4 million at March 31,
2002. Loans receivable represented 60% of total deposits and 55% of total assets
at March 31, 2002, as compared to 61% and 56%, respectively, at December 31,
2001.
Loan and Asset Quality and Allowance for Loan Losses
Total nonperforming assets (nonperforming loans and foreclosed real estate,
excluding loans past due 90 days or more and still accruing interest) at March
31, 2002, were $1.4 million, or 0.22%, of total assets as compared to $888,000,
or 0.15%, of total assets at December 31, 2001. Foreclosed real estate totaled
$107,000 at March 31, 2002, and $12,000 as of December 31, 2001.
The summary table below presents information regarding nonperforming loans and
assets as of March 31, 2002 and 2001 and December 31, 2001.
Nonperforming Loans and Assets
- ---------------------------------------------------------------------------------------------
((dollars in thousands) March 31, December 31, March 31,
2002 2001 2001
- ---------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 444 $ 127 $ 299
Consumer 15 116 8
Real estate:
Construction 0 0 0
Mortgage 835 633 794
- ---------------------------------------------------------------------------------------------
Total nonaccrual loans 1,294 876 1,101
Restructured loans 0 0 0
- ---------------------------------------------------------------------------------------------
Total nonperforming loans 1,294 876 1,101
Foreclosed real estate 107 12 42
- ---------------------------------------------------------------------------------------------
Total nonperforming assets 1,401 888 1,143
- ---------------------------------------------------------------------------------------------
Loans past due 90 days or more 0 0 0
- ---------------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $1,401 $ 888 $1,143
- ---------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.37% 0.26% 0.37%
Nonperforming assets to total assets 0.22% 0.15% 0.22%
- ---------------------------------------------------------------------------------------------
13
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, 2001
2002
- ---------------------------------------------------------------------------------------------
Balance at beginning of period $ 4,544 $ 3,732
Provisions charged to operating expenses 435 1,469
- ---------------------------------------------------------------------------------------------
4,979 5,201
Recoveries of loans previously charged-off:
Commercial 11 3
Consumer 0 21
Real estate 1 0
- ---------------------------------------------------------------------------------------------
Total recoveries 12 24
Loans charged-off:
Commercial 22 475
Consumer 41 85
Real estate 143 121
- ---------------------------------------------------------------------------------------------
Total charged-off 206 681
- ---------------------------------------------------------------------------------------------
Net charge-offs 194 657
- ---------------------------------------------------------------------------------------------
Balance at end of period $ 4,785 $ 4,544
- ---------------------------------------------------------------------------------------------
Net charge-offs as a percentage of
Average loans outstanding 0.05% 0.21%
- ---------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
Period-end loans 1.37% 1.33%
- ---------------------------------------------------------------------------------------------
Deposits
Total deposits at March 31, 2002 were $588.4 million, up $26.6 million, or 5%,
over total deposits of $561.7 million at December 31, 2001. The average balances
and weighted average rates paid on deposits for the first three months of 2002
and 2001 are presented in the following table.
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------
Demand deposits:
Noninterest-bearing $ 103,911 $ 79,389
Interest-bearing (money 129,423 1.38% 91,332 2.99%
market and checking)
Savings 172,780 2.13 121,210 3.72
Time deposits 167,220 4.58 169,316 5.71
- ---------------------------------------------------------------------------------------------
Total deposits $ 573,334 $ 461,247
- ---------------------------------------------------------------------------------------------
14
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.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net income over the next 24 months in a flat rate scenario versus net
income in alternative interest rate scenarios. Management continually reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a 200 basis
point increase and a 100 basis point decrease during the next year, with rates
remaining constant in the second year.
Historically, the Company's Asset/Liability Committee (ALCO) policy has
established that income sensitivity will be considered acceptable if overall net
income volatility in a plus 200 or minus 200 basis point scenario is within 15%
of net income in a flat rate scenario in the first year and 30% using a two year
planning window. At March 31, 2002, the Company projected its interest rate risk
using a plus 200 and minus 100 basis point scenario. During 2001, the Federal
Reserve lowered short-term interest rates by 475 basis points, pushing the
Federal Funds rate down to 1.75% from 6.5% at year-end 2000, the lowest level in
over 40 years. The Company's ALCO believed it was more realistic to measure
current risk assuming a minus 100 point scenario, as a minus 200 basis point
reduction would be unlikely given that current short-term market interest rates
are already below 2.00%. At March 31, 2002, the Company's income simulation
model indicates net income would increase 0.2% and decrease 1.6% in the first
year and over a two-year time frame, respectively, if rates decreased 100 basis
15
points. The model projects that net income would decrease by 0.8% and increase
0.1% in the first year and over a two-year time frame, respectively, 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. The market
value of equity model reflects certain estimates and assumptions regarding the
impact on the market value of the Company's assets and liabilities given an
immediate 200 basis point change in interest rates. One of the key assumptions
is the market value assigned to the Company's core deposits, or the core deposit
premium. The studies have consistently confirmed management's assertion that the
Company's core deposits have stable balances over long periods of time, and are
generally insensitive to changes in interest rates. Thus, these core deposit
balances provide an internal hedge to market fluctuations in the Company's fixed
rate assets. Management believes the core deposit premiums produced by its
market value of equity model at March 31, 2002 provide an accurate assessment of
the Company's interest rate risk.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model assesses the impact of a change in interest rates on the
market value of all the Company's assets and liabilities, as well as any off
balance sheet items. The model calculates the market value of the Company's
assets and liabilities in excess of book value in the current rate scenario, and
then compares the excess of market value over book value given an immediate 200
basis point increase in rates and a 100 basis point decrease in rates. The
Company's ALCO policy indicates that the level of interest rate risk is
unacceptable if the immediate change would result in the loss of 60% or more of
the excess of market value over book value in the current rate scenario. At
March 31, 2002, the market value of equity 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, 2002, the total potential liquidity for the Company
through these secondary sources was $194 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, 2002, stockholders' equity totaled $34.3 million, up 5.1% over
stockholders' equity of $32.6 million at December 31, 2001. Stockholders' equity
at March 31, 2002 included $446,000 gross unrealized losses, net of income
taxes, on securities available for sale. Excluding this unrealized loss, gross
stockholders' equity increased by $2.0 million from $32.7 million at December
31, 2001, to $34.7 million at March 31, 2002 due principally to retained net
income.
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
16
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.
On September 28, 2001, the Company issued $8.0 million of 10.00% Trust Capital
Securities to Commerce Bancorp, Inc. through Commerce Harrisburg Capital Trust
II, 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. At March 31, 2002, $6.6 million of the Trust Capital
Securities qualify as Tier 1 capital for regulatory capital purposes and the
remaining $1.4 million qualifies as Tier 2 capital.
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 Corrective
March 31, December 31, For Capital Action Provisions
2002 2001 Adequacy Purposes
- -----------------------------------------------------------------------------------------------------------------------------
Risk-Based Capital Ratios:
Total 11.72% 11.78% 8.00% 10.00%
Tier 1 10.34 10.22 4.00 6.00
Leverage ratio 7.43 7.33 4.00 5.00
(to average assets)
- -----------------------------------------------------------------------------------------------------------------------------
At March 31, 2002, 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 principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis section above.
While the fed funds rate and National Prime fell 475 basis points between
January 1, 2001 and December 31, 2001, the Company's net interest margin has
remained fairly stable. Commerce's net interest margin for the first quarter
2002 was 4.38%, up 15 basis points over 4.23% for the first quarter 2001.
Currently, Commerce has 73% of its deposits in non-interest bearing, interest
checking, and saving accounts, which it considers core deposits. Because of
this, these accounts have historically contributed significantly to the net
interest margin.
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
On February 15, 2002, the Company filed a form 8-K announcing the following
information:
Effective February 15, 2002, Gary L. Nalbandian, the current Chairman of the
Board of Directors of Pennsylvania Commerce Bancorp, Inc. and its one
wholly-owned bank subsidiary, Commerce Bank/Harrisburg, N.A., was elected to the
additional positions of President and Chief Executive Officer of the Company and
the Bank.
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)
05/13/02 /s/ Gary L Nalbandian
- ------------------------- ----------------------------------------
(Date) Gary L. Nalbandian
President/CEO
05/13/02 /s/ Mark A. Zody
- ------------------------- ----------------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
20