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 September 30, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File 333-78445
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PENNSYLVANIA COMMERCE BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1834776
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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:
1,655,727 Common shares outstanding at 10/25/00
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Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
PENNSYLVANIA COMMERCE BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)...............................3
September 30, 2000, and December 31, 1999
Consolidated Statements of Income (Unaudited).........................4
Three months ended September 30, 2000 and September 30, 1999
Nine months ended September 30, 2000 and September 30, 1999
Consolidated Statement of Stockholders' Equity (Unaudited)...........5
Nine months ended September 30, 2000 and September 30, 1999
Consolidated Statements of Cash Flows (Unaudited).....................6
Nine months ended September 30, 2000, and September 30, 1999
Notes to Consolidated Financial Statements (Unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................20
Item 6a. Exhibits
Exhibit 11...........................................................20
Exhibit 27...........................................................20
Item 6b. Reports on Form 8-K..................................................20
Signatures...........................................................22
2
<PAGE>
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
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September 30, December 31,
(in thousands, except share amounts) 2000 1999
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<S> <C> <C>
Assets Cash and due from banks $ 16,179 $ 27,490
Federal funds sold 16,525 0
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Cash and cash equivalents 32,704 27,490
Securities, available for sale at fair value 93,528 84,652
Securities, held to maturity at cost
(fair value 2000: $31,324; 1999: $27,877 ) 32,177 29,039
Loans, held for sale
(fair value 2000: $4,369; 1999: $5,380 ) 4,309 5,301
Loans receivable :
Real estate:
Commercial mortgage 123,632 101,550
Construction and land development 29,381 18,458
Residential mortgage 40,964 34,681
Tax-exempt 3,324 342
Commercial business 29,265 21,228
Consumer 28,365 22,764
Lines of credit 23,798 17,082
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278,729 216,105
Less: Allowance for loan losses 3,518 2,841
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Net loans receivable 275,211 213,264
Premises and equipment, net 15,407 14,408
Accrued interest receivable 2,544 2,105
Other assets 3,060 2,654
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Total assets $458,940 $ 378,913
=============================================================================================================================
Liabilities Deposits :
Noninterest-bearing $ 77,956 $ 69,495
Interest-bearing 349,392 279,051
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Total deposits 427,348 348,546
Accrued interest payable 712 567
Other liabilities 1,725 1,122
Trust preferred securities 5,000 0
Other borrowed money 0 8,300
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Total liabilities 434,785 358,535
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Stockholders' Preferred stock - Series A noncumulative;
Equity $10.00 par value; 1,000,000 shares authorized;
40,000 shares issued and outstanding 400 400
Common stock - $1.00 par value; 10,000,000 shares authorized;
issued and outstanding - 2000: 1,655,727; 1999: 1,644,523 1,656 1,644
Surplus 18,388 18,196
Retained earnings 5,727 3,137
Accumulated other comprehensive income (loss) (2,016) (2,999)
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Total stockholders' equity 24,155 20,378
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Total liabilities and stockholders' equity $ 458,940 $ 378,913
=============================================================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
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Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Interest Loans receivable, including fees:
Income Taxable $ 6,078 $ 4,431 $ 16,384 $12,135
Tax - exempt 41 5 61 15
Securities :
Taxable 2,036 1,917 5,942 5,442
Tax - exempt 14 0 30 0
Federal funds sold 296 71 440 336
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Total interest income 8,465 6,424 22,857 17,928
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Interest Deposits 3,801 2,519 9,883 7,158
Expense Other 138 9 204 14
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Total interest expense 3,939 2,528 10,087 7,172
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Net interest income 4,526 3,896 12,770 10,756
Provision for loan losses 255 232 765 602
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Net interest income after provision for loan losses 4,271 3,664 12,005 10,154
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Noninterest Service charges and other fees 1,187 908 3,291 2,555
Income Other operating income 109 97 324 264
Gain on sale of securities available for sale 0 0 0 1
Gain on sale of loans 150 332 349 619
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Total noninterest income 1,446 1,337 3,964 3,439
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Noninterest Salaries and employee benefits 1,939 1,583 5,513 4,528
Expenses Occupancy 460 425 1,304 1,246
Furniture and equipment 293 244 772 698
Advertising and marketing 363 345 1,203 1,035
Data processing 246 244 715 697
Postage and supplies 170 120 492 378
Audits, regulatory fees and assessments 89 33 259 138
Other 671 604 1,743 1,579
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Total noninterest expenses 4,231 3,598 12,001 10,299
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Income before income taxes 1,486 1,403 3,968 3,294
Provision for federal income taxes 472 480 1,318 1,126
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Net income $ 1,014 $ 923 $ 2,650 $ 2,168
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Net income per common share: Basic $ 0.60 $ 0.55 $ 1.57 $ 1.29
Diluted 0.56 0.51 1.47 1.20
====================================================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
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Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
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<S> <C> <C> <C> <C> <C> <C>
Balance : December 31, 1998 $ 400 $ 1,557 $ 16,728 $ 1,546 $ 214 $ 20,445
Comprehensive income:
Net income - - - 2,168 - 2,168
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - (2,206) (2,206)
--------
Total comprehensive income (38)
Dividends declared on preferred stock - - - (60) - (60)
Common stock issued under stock option
plans - 3 49 - - 52
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Balance : September 30, 1999 $ 400 $ 1,560 $ 16,777 $ 3,654 $ (1,992) $ 20,399
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Retained Comprehensive
( in thousands ) Stock Stock Surplus Earnings Income (Loss) Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance : December 31, 1999 $ 400 $ 1,644 $ 18,196 $ 3,137 $ (2,999) $ 20,378
Comprehensive income:
Net income - - - 2,650 - 2,650
Change in unrealized gains
(losses) on securities, net of
reclassification adjustment - - - - 983 983
--------
Total comprehensive income 3,633
Dividends declared on preferred stock - - - (60) - (60)
Common stock issued under stock option
plans - 5 24 - - 29
Income tax benefit of stock options
exercised - - 23 - - 23
Common stock issued under employee stock
purchase plan - - 5 - - 5
Proceeds from issuance of common stock
in connection with dividend reinvestment
and stock purchase plan - 7 140 - - 147
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Balance : September 30, 2000 $ 400 $ 1,656 $ 18,388 $ 5,727 $ (2,016) $ 24,155
==================================================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Pennsylvania Commerce Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
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Nine Months Ended
September 30,
(in thousands) 2000 1999
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<S> <C> <C>
Operating
Activities Net income $ 2,650 $ 2,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 765 602
Provision for depreciation and amortization 866 853
Deferred income taxes (249) (151)
Amortization of securities premiums and accretion of discounts, net 149 253
Net (gain) on sale of securities available for sale 0 (1)
Net proceeds from sale of loans 14,766 36,137
Loans originated for sale (13,659) (33,986)
Gain on sales of loans and other real estate owned (349) (619)
Stock granted under stock purchase plan 5 0
(Increase) in accrued interest receivable and other assets (1,078) (60)
Increase in accrued interest payable and other liabilities 748 1,201
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Net cash provided by operating activities 4,614 6,397
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Investing
Activities Securities held to maturity :
Proceeds from principal repayments and maturities 1,802 1,990
Purchases (4,955) (20,107)
Securities available for sale :
Proceeds from principal repayments and maturities 4,747 11,564
Proceeds from sales 0 5,357
Purchases (12,268) (11,637)
Proceeds from sale of loans receivable 4,196 5,418
Net increase in loans receivable (66,675) (44,053)
Purchases of premises and equipment (1,865) (755)
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Net cash (used) by investing activities (75,018) (52,223)
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Financing
Activities Net increase in demand deposits, interest checking,
money market and savings deposits 67,265 23,191
Net increase (decrease) in time deposits 11,537 13,439
Proceeds from issuance of Trust Preferred Securities 5,000 0
Increase (Decrease) in borrowed money (8,300) 0
Proceeds from common stock options exercised 29 52
Proceeds from common stock purchase and dividend reinvestment plans 147 0
Cash dividends on preferred stock (60) (60)
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Net cash provided by financing activities 75,618 36,622
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Increase (decrease) in cash and cash equivalents 5,214 (9,204)
Cash and cash equivalents at beginning of year 27,490 23,875
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Cash and cash equivalents at end of period $32,704 $ 14,671
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</TABLE>
See accompanying notes.
6
<PAGE>
PENNSYLVANIA COMMERCE BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pennsylvania
Commerce Bancorp, Inc. ("the Company") and its wholly owned subsidiaries
Commerce Bank/Harrisburg, N.A. ("the Bank") and Commerce Capital Harrisburg
Trust I. All material intercompany accounts and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the nine month period ended September
30, 2000, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
For further information, refer to the financial statements and footnotes thereto
included in the Pennsylvania Commerce Bancorp, Inc., Annual Report for the year
ended December 31, 1999.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Stock Dividends and Per Share Data
On January 21, 2000, the Board of Directors declared a 5% stock dividend on
common stock outstanding, paid on February 18, 2000, to stockholders of record
on February 4, 2000. Payment of the stock dividend resulted in the issuance of
78,342 additional common shares and cash of $3,250 in lieu of fractional shares.
The effect of the 5% common stock dividend has been recorded as of December 31,
1999.
7
<PAGE>
Recently Issued FASB Statements
In June 2000, the Financial Accounting Standards Board issued Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133." Statement No. 138 adds to the guidance
of Statement No. 133. The adoption of the statement is not expected to have a
significant impact on the financial condition or results of operations of the
Company.
In September 2000, The Financial Accounting Standards Board issued Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Statement No. 140 replaces Statement No. 125.
This statement shall be effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
adoption of the statement is not expected to have a significant impact on the
financial condition or results of operations of the Company.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising in the
ordinary course of business. It is management's opinion, at this time, that the
ultimate resolution of these claims will not have a material adverse effect on
the Company's financial position and results of operations.
Future Branch Facilities
The Company has entered into a land lease for the premises located in the East
Penn Center, on Wertzville Road in East Pennsboro Township, Cumberland County,
Pennsylvania. The Company intends to construct a full-service branch office on
this land beginning in the fourth quarter of 2000. The land lease commenced June
26, 2000 and has an initial term of 20 years. In addition, the Company has an
option to renew the land lease for four additional 5-year terms. Initial annual
rent payments equal $55,000 and will commence the month after final township
approvals are complete. Rent is subject to change on terms set forth in the
lease agreement.
Note 4. TRUST CAPITAL SECURITIES
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware
business trust subsidiary of the Company. Proceeds of this offering were
earmarked for additional capitalization of Commerce Bank/Harrisburg, N.A., the
Company's wholly-owned banking subsidiary. All $5.0 million of the Trust Capital
Securities qualify as Tier 1 capital for regulatory capital purposes.
8
<PAGE>
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 10% to $1.0 million as compared to $923,000
for the third quarter of 1999 and total revenues increased by 14% to $6.0
million for the quarter. Diluted net income per common share increased 10% to
$0.56 from $0.51 per share in the third quarter a year ago (after adjusting for
a 5% common stock dividend paid in February 2000). At September 30, 2000, the
Company had total assets of $458.9 million, total loans (including loans held
for sale) of $283.0 million, and total deposits of $427.3 million.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The largest source of the Company's income is net interest income. Net interest
income is the difference between interest income earned on assets and interest
expense incurred on liabilities used to fund those assets. Interest earning
assets primarily include loans and securities. The principal source of funding
for such assets is deposits.
Interest income increased by $2.0 million, or 32%, over the third quarter of
1999. Interest earning assets averaged $409.6 million for the third quarter of
2000 as compared to $329.5 million for the same period in 1999. Approximately
$62.7 million, or 78%, of this increase was in average loans outstanding. The
yield on earning assets for the third quarter of 2000 was 8.22%, an increase of
40 basis points over the comparable period in 1999.
Interest expense for the third quarter of 2000 increased by $1.4 million, or
56%, compared to the third quarter of 1999. This increase was primarily
attributable to an increase in the level of average interest-bearing liabilities
from $267.0 million during the third quarter of 1999 to $342.1 million during
the third quarter of 2000. Average savings deposits increased $35.9 million over
third quarter a year ago, average public funds deposits increased $33.1 million
and average noninterest bearing demand deposits increased by $7.6 million, while
average time deposits (excluding public funds) decreased by $3.7 million. The
average rate paid on these liabilities for the third quarter of 2000 was 4.58%,
an increase of 82 basis points from the comparable period in 1999. The Company's
aggregate cost of funds was 3.83% for the third quarter of 2000, an increase of
79 basis points over the prior year.
Net interest income for the third quarter of 2000 increased by $630,000, or 16%,
over the same period in 1999. Changes in net interest income are frequently
measured by two statistics: net interest rate spread and net interest margin.
Net interest rate spread is the difference between the average rate earned on
earning assets and the average rate incurred on interest-bearing liabilities.
Net interest margin represents the difference between interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. The Company's net interest rate spread was 3.64% during the
third quarter of 2000 compared to 4.06% during the same period of the
9
<PAGE>
previous year. The net interest margin decreased by 35 basis points from 4.74%
for the third quarter 1999 to 4.39% during the third quarter of 2000.
For the nine months ended September 30, 2000, interest income increased by $4.9
million, or 27%, over the same period in 1999. As with the third quarter, the
increase for the first nine months was mostly related to the volume increases in
the level of average loans outstanding along with the increase in the level of
yields earned on those assets. Interest earning assets for the first nine months
of 2000 averaged $375.3 million versus $311.0 million for the comparable period
in 1999. The yield on those assets increased to 8.13% during the first nine
months of 2000, from 7.71% for the first nine months of 1999.
Interest expense for the first nine months of 2000 totaled $10.1 million, an
increase of $2.9 million, or 41%, over the first nine months of 1999. The level
of average interest-bearing liabilities increased from $253.9 million for the
first nine months of 1999 to $310.6 million for the first nine months of 2000.
The Company's cost of funds for the first nine months of 2000 was 3.59%, up 52
basis points from 3.07% for the comparable period in the prior year.
Net interest income for the first nine months of 2000 increased by $2.0 million,
or 19%, over the same period in 1999. The Company's net interest margin
decreased to 4.54% for the first nine months of 2000, from 4.60% for the first
nine months of 1999.
Noninterest Income
Noninterest income for the third quarter of 2000 increased by $109,000, or 8%,
from the same period in 1999. Recurring core noninterest income increased by 29%
from $1.0 million in the third quarter of 1999 to $1.3 million for the same
period in 2000. The increase is attributable to service charges and fees
associated with servicing a higher volume of deposit accounts and transactions.
Included in noninterest income for the first nine months of 2000 is nonrecurring
income of $320,000, as a result of an $87,000 gain on the sale of student loans
and $233,000 gain from the sale of Small Business Administration loans. Included
in noninterest income for the first nine months of 1999 is nonrecurring income
of $507,000, comprised of a $106,000 gain on the sale of student loans, net
securities gains of $1,000, and $400,000 income from the sale of Small Business
Administration loans. Excluding these transactions, recurring core noninterest
income for the first nine months of 2000 totaled $3.6 million as compared to
$2.9 million for the first nine months of 1999, an increase of 24%. The increase
is mainly attributable to additional service charges and fees associated with
servicing a higher volume of deposit accounts and transactions.
Noninterest Expenses
For the third quarter of 2000, noninterest expenses increased by $633,000, or
18%, over the same period in 1999. Staffing levels and related expenses
increased as a result of servicing more deposit and loan customers and
processing a higher volume of transactions. Staffing and occupancy expenses also
increased as a result of opening one branch office in June 2000 and the
preparation for another branch which subsequently opened in October 2000. A
comparison of noninterest expense for certain categories for the three months
ended September 30, 2000, and September 30, 1999, is presented in the following
paragraphs.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $356,000, or 22%, for the third quarter of
2000 over the third quarter of 1999. This increase is consistent with increases
in staff levels necessary to handle Company growth from
10
<PAGE>
third quarter 1999 to third quarter 2000, including the additional staff of the
branch offices opened in June 2000 and October 2000.
Occupancy expenses of $460,000 were $35,000, or 8%, higher for the third quarter
of 2000 than for the three months ended September 30, 1999. Increased occupancy
expenses relate to the two branch offices opened in 2000.
Furniture and equipment expenses of $293,000 were $49,000, or 20%, higher for
the third quarter of 2000 than the three months ended September 30, 1999. This
increase was the result of higher levels of depreciation costs for furniture and
equipment incurred with the addition of the branch office opened in June 2000 as
well as the upgrade of computer equipment for platform personnel at the Bank's
other 11 branches.
Advertising and marketing expenses totaled $363,000 for the three months ended
September 30, 2000, an increase of $18,000, or 5%, over the third quarter of
1999. This increase was primarily the result of increased advertising efforts in
each of the Company's markets. These markets will continue to expand as the
branch network grows.
Data processing expenses of $246,000 were similar to those of $244,000 for third
quarter of 1999.
Postage and supplies expense of $170,000 represented a $50,000, or 42%, increase
from the third quarter of the prior year. This was related to growth in the
volume of customers and customer transaction statements.
Audits and regulatory fees increased by $56,000, or 170%, from $33,000 for the
third quarter of 1999 to $89,000 for the third quarter of 2000. This increase is
a result of higher Federal Deposit Insurance Corporation (FDIC) and Office of
the Comptroller of the Currency (OCC) assessments, both of which are calculated
on levels of deposits. Another contributing factor for the increase is the
additional requirements for reporting necessary for the Bank Holding Company,
which was formed on July 1, 1999.
Other noninterest expenses increased by $67,000, or 11%, for the three-month
period ended September 30, 2000, as compared to the same period in 1999. The
increase includes higher provisions for non-credit related losses, an increase
in entertainment expenses, and costs associated with processing coin for Penny
Arcade Coin counters, installed in first and second quarters of 2000, which is
offered at no charge to our customers.
For the first nine months of 2000, total noninterest expenses increased by $1.7
million, or 17% over the comparable period in 1999. A comparison of noninterest
expense for certain categories for these two periods is discussed below.
Salary expense and employee benefits increased by $985,000, or 22%, over the
first nine months of 1999. The increase was due to normal increases in salary
and benefits costs due to an increase in the level of full-time equivalent
employees from September 30, 1999 to September 30, 2000 as well as the addition
of new staff to operate the two new branches opened in June 2000 and October
2000. The additional increase was due to adding new management positions to
facilitate the growth of the Company.
11
<PAGE>
Occupancy and furniture & equipment expenses for the first nine months of 2000
were $132,000, or 7%, higher than the similar period in 1999. The increase is
the result of costs associated with the opening of a new branch office in June
2000.
Advertising and marketing expenses totaled $1.2 million for the first nine
months ended September 30, 2000, an increase of $168,000, or 16%, over the first
nine months of 1999. This increase was primarily the result of advertising new
products and the opening of the new branches. These markets will continue to
expand as the branch network grows.
Data processing expenses increased $18,000, or 3%, for the first nine months of
2000 as compared to the first nine months of 1999. The increase in data
processing is the result of increased costs associated with processing higher
volumes of customer transactions.
Postage and office supplies increased $114,000, or 30%, over the first nine
months of 1999. The increase in postage expenses resulted from the growth in
number of account statements mailed to customers. The increase in supplies
expense is a result of increased usage of such items related to additional staff
levels as well as an increase in the number of accounts serviced.
Audit and regulatory fees increased by $121,000, or 88%, for the first nine
months of 2000 over the same period in 1999. This increase is a result of higher
Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of
the Currency (OCC) assessments, both of which are calculated on levels of
deposits. Another contributing factor for the increase is the additional
requirements for reporting necessary for the Bank Holding Company, which was
formed on July 1, 1999.
Other noninterest expenses for the first nine months of 2000 were $1.7 million
compared to $1.6 million for the similar period in 1999. Loan expenses increased
$60,000 over the first nine months in 1999, as result of an increase in volume
of the loan portfolio. The increase also includes $25,000 of expenses associated
with processing coin for Penny Arcade Coin counters, installed in first and
second quarters of 2000, which is offered at no charge to our customers. The
remaining increase was associated with other general costs over similar expenses
during the first nine months of 1999.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expenses to average assets. Net noninterest expenses
equal noninterest expenses (excluding other real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio equaled 2.65% for the three months ended September 30, 2000, less
than the 2.85% reported for the three months ended September 30, 1999, and 2.73%
for the first nine months of 2000 compared to 2.89% for the comparable period in
1999. Another productivity measure is the operating efficiency ratio. This ratio
expresses the relationship of noninterest expenses (excluding other real estate
expenses) to net interest income plus noninterest income (excluding nonrecurring
gains). For the quarter ended September 30, 2000, the operating efficiency ratio
was 72.48% compared to 72.97% for the similar period in 1999. For the nine
months ended September 30, 2000, this ratio was 73.09% compared to 75.20% for
the nine months ended September 30, 1999.
12
<PAGE>
Provision for Federal Income Taxes
The provision for federal income taxes was $472,000 for the third quarter of
2000 as compared to $480,000 for the same period in 1999. For nine months ended
September 30, the provision was $1.3 million and $1.1 million for 2000 and 1999
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 34.2% for the first nine months of 1999 and
33.2% for the same period in 2000.
Net Income
Net income for the third quarter of 2000 was $1.0 million, an increase of
$91,000, or 10%, over the $923,000 recorded in the third quarter of 1999. The
increase was due to an increase in net interest income of $630,000, an increase
in noninterest income of $109,000, offset partially by an increase in
noninterest expenses of $633,000, an increase of $23,000 in the provision for
loan losses, and a decrease of $8,000 in the provision for income taxes.
Net income for the first nine months of 2000 was $2.7 million as compared to
$2.2 million recorded in the first nine months of 1999. The increase was due to
an increase in net interest income of $2.0 million, an increase in noninterest
income of $525,000, offset partially by an increase in noninterest expenses of
$1.7 million, an increase of $163,000 in the provision for loan losses, and an
increase of $192,000 in the provision for income taxes.
Basic earnings per common share, after adjusting for a 5% common stock dividend
paid in February 2000, increased to $0.60 per common share for the third quarter
of 2000 compared to $0.55 for the same period in 1999. Diluted earnings per
common share were $0.56 for the third quarter of 2000 and $0.51 for the same
period in 1999.
Basic earnings per common share, for the first nine months of the year, after
adjusting for a 5% common stock dividend paid in February 2000, increased to
$1.57 as compared to $1.29 per common share for the first nine months of 1999.
Diluted earnings per common share were $1.47 for the first nine months of 2000
and $1.20 for the same period in 1999.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the third quarter of
2000 was 0.92% as compared to 1.03% for the third quarter of 1999. The ROA for
the first nine months of 2000 and 1999 was 0.87% and 0.85%, respectively. For
purposes of calculating ROA, average assets have been adjusted to exclude gross
unrealized appreciation or depreciation on securities available for sale.
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its stockholders. ROE is
calculated by dividing net income by average stockholders' equity. For purposes
of calculating ROE, average stockholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the third quarter of 2000 was 17.43%,
as compared to 18.32% for the third quarter of 1999. The annualized ROE for the
first nine months of 2000 was 16.49%, as compared to 14.27% for the first nine
months of 1999.
13
<PAGE>
FINANCIAL CONDITION
Securities
During the first nine months of 2000, securities available for sale increased by
$8.9 million (net of unrealized appreciation) from $84.6 million at December 31,
1999 to $93.5 million at September 30, 2000 primarily as a result of the
purchase of $12.3 million in U.S. Government agency securities and
mortgage-backed securities and $4.7 million in principal repayments on
mortgage-backed securities and U.S. Government agency securities.
The securities available for sale portfolio is comprised of U.S. Treasury Notes,
U.S. Government agency securities, mortgage-backed securities, trust preferred
debt securities, and equity securities. The weighted average life of the
securities available for sale portfolio was 7.1 years at September 30, 2000 with
a weighted average yield of 6.73%.
During the first nine months of 2000, securities held to maturity increased from
$29.0 million to $32.2 million primarily as a result of the purchase of $5.0
million in tax-exempt and mortgage-backed securities, offset by principal
repayments of $1.8 million. The securities held in this portfolio include U.S.
Government agency securities, tax-exempt, and mortgage-backed securities. The
weighted average life of the securities held to maturity portfolio was 6.9 years
at September 30, 2000 with a weighted average yield of 6.65%.
Federal funds sold increased by $16.5 million during the first nine months of
2000. Total securities and federal funds sold aggregated $142.2 million at
September 30, 2000, and represented 31% of total assets.
The average yield on the combined securities portfolio for the first nine months
of 2000 was 6.71%, as compared to 6.40% for the similar period of 1999. The
average yield earned on federal funds sold during the first nine months of 2000
was 6.42%, up 172 basis points from 4.70% earned during the first nine months of
1999. The large increase in the yield on federal funds sold is a result of five
25 basis point increases and one 50 basis point increase in this rate by the
Federal Reserve Bank between June 30, 1999 and May 16, 2000.
Loans Held for Sale
Loans held for sale are comprised of student loans and residential mortgage
loans that the Company originates with the intention of selling in the future.
During the first nine months of 2000, total loans held for sale decreased by
$1.0 million from $5.3 million at December 31, 1999, to $4.3 million at
September 30, 2000. The decrease was the result of the sale of $6.5 million of
student loans and the sale of $8.2 million of residential loans, offset by
originations of $13.7 million in new loans held for sale. Loans held for sale
represented 1% of total assets at December 31, 1999 and at September 30, 2000.
Loans Receivable
During the first nine months of 2000, total loans receivable increased by $62.6
million from $216.1 million at December 31, 1999, to $278.7 million at September
30, 2000. Loans receivable represented 65% of total deposits and 61% of total
assets at September 30, 2000, as compared to 62% and 57%, respectively, at
December 31, 1999.
14
<PAGE>
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 September 30,
2000, were $382,000, or 0.08%, of total assets as compared to $696,000, or
0.18%, of total assets at December 31, 1999. Other real estate owned totaled
$42,000 at September 30, 2000, and $12,000 as of December 31, 1999.
The following summary presents information regarding nonperforming loans and
assets as of September 30, 2000 and 1999 and December 31, 1999.
Nonperforming Loans and Assets
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(dollars in thousands) September 30, December 31, September 30,
2000 1999 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial $ 0 $ 119 $ 150
Consumer 160 244 134
Real estate:
Construction 0 0 0
Mortgage 180 321 310
---------------------------------------------------------------------------------------------
Total nonaccrual loans 340 684 594
Restructured loans 0 0 0
---------------------------------------------------------------------------------------------
Total nonperforming loans 340 684 594
Other real estate 42 12 92
---------------------------------------------------------------------------------------------
Total nonperforming assets 382 696 686
---------------------------------------------------------------------------------------------
Loans past due 90 days or more 53 20 0
---------------------------------------------------------------------------------------------
Total nonperforming assets and
Loans past due 90 days or more $ 435 $ 716 $ 686
---------------------------------------------------------------------------------------------
Nonperforming loans to total loans 0.12% 0.32% 0.29%
Nonperforming assets to total assets 0.08% 0.18% 0.19%
=============================================================================================
</TABLE>
15
<PAGE>
The following table sets forth information regarding the Company's provision and
allowance for loan losses.
Allowance for Loan Losses
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
(dollars in thousands) September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 2,841 $ 2,232
Provisions charged to operating expenses 765 762
-------------------------------------------------------------------------------------
3,606 2,994
Recoveries of loans previously charged-off:
Commercial 4 8
Consumer 7 4
Real estate 0 1
-------------------------------------------------------------------------------------
Total recoveries 11 13
Loans charged-off:
Commercial 0 150
Consumer 89 10
Real estate 10 6
-------------------------------------------------------------------------------------
Total charged-off 99 166
-------------------------------------------------------------------------------------
Net charge-offs 88 153
-------------------------------------------------------------------------------------
Balance at end of period $ 3,518 $ 2,841
-------------------------------------------------------------------------------------
Net charge-offs as a percentage of
Average loans outstanding 0.04% 0.08%
-------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
Period-end loans 1.26% 1.31%
=====================================================================================
</TABLE>
Deposits
Total deposits at September 30, 2000, were $427.3 million, up $78.8 million, or
23%, over total deposits of $348.5 million at December 31, 1999. The average
balances and weighted average rates paid on deposits for the first nine months
of 2000 and 1999 are presented in the following table.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2000 1999
---------------------------------------------------------------------------------------------
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits:
Noninterest-bearing $ 70,395 $ 63,245
Interest-bearing (money 75,218 3.10% 57,128 2.37%
market and checking)
Savings 104,560 3.86 76,064 2.80
Time deposits 127,945 5.34 120,386 5.06
---------------------------------------------------------------------------------------------
Total deposits $ 378,118 $ 316,823
=============================================================================================
</TABLE>
16
<PAGE>
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 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 September 30, 2000, the
Company's income simulation model indicates net income would increase 2.8% in
the first year and 4.6% over a two year time frame if rates decreased as
described above. The model projects that net income would decrease by 1.9% in
the first year and 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
17
<PAGE>
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 September 30, 2000, the market value of
equity model indicates an acceptable level of interest rate risk.
Liquidity
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Company on an ongoing basis. Liquidity needs are generally met by converting
assets into cash or obtaining sources of additional funding, mainly deposits.
Liquidity sources from asset categories are provided primarily by cash and
federal funds sold, and the cash flow from the amortizing securities and loan
portfolios. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
Additionally, the Company has established secondary sources of liquidity
consisting of federal funds lines of credit, repurchase agreements, and
borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if
needed. As of September 30, 2000, 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 September 30, 2000, stockholders' equity totaled $24.2 million, up 18.5% over
stockholders' equity of $20.4 million at December 31, 1999. Stockholders' equity
at September 30, 2000 included $2.0 million in unrealized depreciation, net of
income taxes, on securities available for sale. Excluding this unrealized
depreciation, gross stockholders' equity increased by $2.8 million from $23.4
million at December 31, 1999, to $26.2 million at September 30, 2000 due
principally to retained net income.
On June 15, 2000, the Company issued $5.0 million of 11.00% Trust Capital
Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware
business trust subsidiary of the Company. Proceeds of this offering were
downstreamed to Commerce Bank/Harrisburg, N.A., the Company's wholly-owned
banking subsidiary, to be used for additional capitalization purposes. All $5.0
million of the Trust Capital Securities qualify as Tier 1 capital for regulatory
capital purposes.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital may be comprised of total Tier 1 capital
plus limited life preferred stock, qualifying debt instruments, and the
allowance for loan losses.
18
<PAGE>
The table below provides a comparison of the Company's risk-based capital ratios
and leverage ratios to the minimum regulatory requirements for the periods
indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
September 30, December 31, For Capital Adequacy Under Prompt Corrective
2000 1999 Purposes Action Provisions
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios:
Tier 1 9.99% 9.91% 4.00% 6.00%
Total 11.12 11.12 8.00 10.00
Leverage Total 7.12 6.28 4.00 5.00
===========================================================================================================================
</TABLE>
At September 30, 2000, the consolidated capital levels of the Company and of the
subsidiary bank (Commerce) met the definition of a "well capitalized"
institution.
Year 2000
Over the past two years, the Company has described and reported on the progress
of its plans to be ready for the Year 2000 date change. In 1999, the Company
completed all necessary remediation and testing of systems. As a result of the
detailed planning and implementation efforts, we are pleased to report the
Company experienced no disruptions in mission critical or non-mission critical
information and technology systems, and believe those systems successfully
responded to the Year 2000 date change. The Company is not aware of any problems
resulting from Year 2000 issues, either with its internal systems or the
products and services of third parties (including loan and deposit customers).
The total cost of the entire Year 2000 compliance process, including internal
and external personnel and any required hardware or software modifications was
approximately $100,000.
Forward-Looking Statements
The Company may, from time to time, make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including the annual report and Form 10-K
and the exhibits hereto and thereto), in its reports to stockholders and in
other communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates, and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Company's control). The words may, could, should, would, believe,
anticipate, estimate, expect, intend, plan, and similar expressions are intended
to identify forward-looking statements. The following factors, among others
could cause the Company's financial performance to differ materially from that
expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policy, including interest rate policies of the Board of the Federal Reserve
System; inflation; interest rate, market and monetary fluctuations; the timely
19
<PAGE>
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; the willingness of
customers to substitute competitors' products and services and vice versa; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities, and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from
acquisitions being less than expected; the growth and profitability of the
Company's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk has not changed significantly since
December 31, 1999. The market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising in the
ordinary course of business. It is management's opinion, at this time, that the
ultimate resolution of these claims will not have a material adverse effect on
the Company's financial position and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Computation of Net Income Per Share................................Exhibit 11
Financial Data Schedule............................................Exhibit 27
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
20
<PAGE>
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)
11/13/00 /s/ James T. Gibson
------------------------- ----------------------------------
(Date) James T. Gibson
President/CEO
11/13/00 /s/ Mark A. Zody
------------------------- ----------------------------------
(Date) Mark A. Zody
Executive Vice President
Chief Financial Officer
22
